<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8282
Alexander & Alexander Services Inc.
(Exact name of registrant as specified in its charter)
Maryland 52-0969822
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
1211 Avenue of the Americas
New York, New York 10036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 840-8500
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
The number of shares of Common Stock, $1 par value, outstanding as of May 1,
1994 was 40,766,215.
The number of shares of Class A Common Stock, $.00001 par value, outstanding as
of May 1, 1994 was 2,366,690.
The number of shares of Class C Common Stock, $1 par value, outstanding as of
May 1, 1994 was 385,594.<PAGE>
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements:
Unaudited Consolidated Statements of Operations for the
Three Months Ended March 31, 1994 and 1993.......................... 2
Condensed Consolidated Balance Sheets, as of
March 31, 1994 (Unaudited) and December 31, 1993.................... 3
Unaudited Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1994 and 1993.......................... 4
Unaudited Notes to Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................13
Part II. Other Information
Item 1. Legal Proceedings...............................................17
Item 6. Exhibit and Reports on Form 8-K.................................18<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
Alexander & Alexander Services Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
For the Three Months Ended March 31, 1994 and 1993
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
Operating revenues:
Commissions and fees $311.8 $311.0
Fiduciary investment income 11.2 13.8
Total 323.0 324.8
Operating expenses:
Salaries and benefits 200.7 195.5
Other 117.1 110.4
Total 317.8 305.9
Operating income 5.2 18.9
Other income (expenses):
Investment income 2.0 2.5
Interest expense (3.5) (4.2)
Other (3.2) 2.0
Total (4.7) 0.3
Income before income taxes and
minority interest 0.5 19.2
Income (taxes) benefit 0.2 (7.3)
Income before minority interest 0.7 11.9
Minority interest (2.5) (2.0)
Income (loss) before cumulative effect
of change in accounting (1.8) 9.9
Cumulative effect of change in
accounting (2.6) 3.3
Net income (loss) (4.4) 13.2
Preferred stock dividends (2.1) -
Earnings (loss) attributable to common
& equivalent shares $ (6.5) $ 13.2
Per share of common stock:
Income (loss) before cumulative effect
of change in accounting $ (.09) $ .22
Cumulative effect of change in
accounting (.06) .08
Earnings (loss) per share $ (.15) $ .30
Cash dividends $ .25 $ .25
Weighted average number of shares 43.5 43.5
</TABLE>
See accompanying notes to financial statements.<PAGE>
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 1994 and December 31, 1993
(in millions)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 604.3 $ 642.2
Short-term investments 276.0 246.5
Premiums and fees receivable (less
allowance for doubtful accounts of $20.1
in 1994 and $20.3 in 1993) 1,081.9 1,172.3
Prepaid expenses and other current assets 141.2 140.6
Total current assets 2,103.4 2,201.6
Property and equipment - net 147.2 152.4
Intangible assets - net 185.1 188.8
Other 217.8 251.0
$2,653.5 $2,793.8
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Premiums payable to insurance companies $1,714.2 $1,744.0
Short-term debt and current portion of
long-term debt 21.5 29.2
Accounts payable and accrued expenses 217.0 312.3
Total current liabilities 1,952.7 2,085.5
Long-term liabilities:
Long-term debt 110.1 111.8
Deferred income taxes 17.2 17.9
Net liabilities of discontinued operations 109.5 106.5
Other 202.6 195.9
Total long-term liabilities 439.4 432.1
Contingent liabilities
Stockholders' equity:
Series A junior participating preferred
stock, issued and outstanding, none - -
$3.625 Series A convertible preferred stock
issued and outstanding, 2.3 and 2.3 shares,
respectively 2.3 2.3
Common stock,issued and outstanding 40.7
and 40.7 shares, respectively 40.7 40.7
Class A common stock, issued and outstanding
2.4 and 2.4 shares, respectively - -
Class C common stock, issued and outstanding
0.4 and 0.4 shares, respectively 0.4 0.4
Paid-in capital 424.2 423.4
Accumulated deficit (136.4) (119.0)
Net unrealized investment gains - net of
deferred income taxes 1.4 -
Accumulated translation adjustments (71.2) (71.6)
Total stockholders' equity 261.4 276.2
$2,653.5 $2,793.8
</TABLE>
See accompanying notes to financial statements.<PAGE>
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1994 and 1993
(in millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
Cash provided (used) by:
Operating activities:
Income (loss) before cumulative effect of
change in accounting $ (1.8) $ 9.9
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 13.3 13.2
Deferred income taxes 19.2 (1.0)
Gains on disposition of subsidiaries
and other assets - (3.3)
Other 1.7 2.7
Changes in assets and liabilities (net of
effects from acquisitions and dispositions):
Premiums and fees receivable 93.0 97.9
Prepaid expenses and other current assets 5.2 (2.2)
Other assets 0.7 0.3
Premiums payable to insurance companies (34.3) 70.1
Accounts payable and accrued expenses (95.4) (48.6)
Other liabilities 5.7 5.8
Discontinued operations (net) (0.3) -
Cumulative effect of change in accounting (2.6) 3.3
Net cash provided by operating activities 4.4 148.1
Investing activities:
Net purchases of property and equipment (4.5) (4.7)
Purchases of businesses (0.1) (0.1)
Proceeds from sales of subsidiaries and
other assets 0.4 4.1
Purchases of investments (177.4) (241.4)
Sales or maturities of investments 157.6 246.1
Net cash provided (used) by investing
activities (24.0) 4.0
</TABLE>
See accompanying notes to financial statements.
-Continued-<PAGE>
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows (continued)
For the Three Months Ended March 31, 1994 and 1993
(in millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
Financing activities:
Cash dividends $(13.0) $(10.3)
Net change in short-term debt (9.3) -
Additions to long-term debt 0.5 0.2
Repayments of long-term debt (1.5) (1.7)
Issuance of preferred and common stock 1.3 112.1
Distribution of earnings of pooled entity - (1.6)
Net cash provided (used) by financing
activities (22.0) 98.7
Effect of exchange rate changes on cash and
cash equivalents 3.7 2.7
Cash and cash equivalents at beginning
of period 642.2 582.5
Cash and cash equivalents at end of period $604.3 $836.0
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 3.5 $ 2.6
Income taxes 20.1 10.9
Non-cash investing and financing activities:
Note received on disposition of business - $ 2.0
</TABLE>
See accompanying notes to financial statements.<PAGE>
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements
1. Interim Financial Presentation
In the opinion of the Company, all adjustments necessary for a fair
presentation have been included in the financial statements. The results of
operations for the first three months of the year are not necessarily
indicative of results for the year. Certain prior period amounts have been
reclassified to conform with the current year presentation.
2. Dispositions
In the first quarter of 1993, the Company sold two small operations for gross
proceeds of $3.8 million. Pre-tax gains of $3.3 million have been
recognized on the sales with resulting after-tax gains totaling $2.0 million
or $0.05 per share.
The pre-tax gains for 1993 are included in Other Income (Expenses) in the
Consolidated Statements of Operations.
3. Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes." The
cumulative effect of adopting this standard increased net income in the
first quarter of 1993 by $3.3 million or $0.08 per share. Tax benefits of
$3.2 million were also allocated to paid-in capital representing the
difference in the tax bases over the book bases of the net assets of taxable
business combinations accounted for as pooling of interests. These benefits
would have been recognized at the respective dates of combination if SFAS
No. 109 had been applied at that time.
During 1993, the Company reached an agreement with the Appeals Office of the
Internal Revenue Service on settlement of tax issues arising out of the
years 1980 through 1986, most of which related to issues arising out of the
acquisition of Alexander Howden Group, plc. (Alexander Howden). The
settlement agreement is subject to final review by the staff of the Joint
Committee on Taxation (Joint Committee).
On May 12, 1994, the Company was advised by the IRS that the Joint Committee
review has been completed and that written confirmation would be received
that the Company's settlement with the IRS had been approved. Thus, with
the Joint Committee approval, the IRS may now process the case and issue an
assessment letter for the tax and interest due. It is believed that the
settlement is within the Company's previously established reserves. Upon
receipt from the IRS of the assessment letter, the Company will determine the
amount of tax reserves, if any, which may be restored to income during 1994.
The Company is also under examination by the IRS for the years 1987 through
1991. It is believed that adequate provision has been made to cover
liabilities which may arise on final settlement of these examinations.
4. Discontinued Operations
In March 1985, the Company discontinued the insurance underwriting operations
acquired in 1982 as part of the Alexander Howden acquisition. In 1987, the
Company sold Sphere Drake Insurance Group (Sphere Drake) and is currently
running-off the Atlanta and Bermuda insurance companies.
The 1987 Sphere Drake sales agreement provides indemnities by the Company
for various potential liabilities including provisions covering future
losses on the insurance pooling arrangements from 1953 to 1967 between
Sphere Drake and Orion Insurance Company (Orion), a U.K.-based insurance
company and future losses pursuant to a stop loss reinsurance contract
between Sphere Drake and Lloyd's Syndicate 701.<PAGE>
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
4. Discontinued Operations (continued)
The types of claims being reported on the Orion insurance pooling
arrangement are primarily asbestosis, environmental pollution and latent
disease claims in the U.S. and are coupled with substantial litigation
expenses. Liabilities for these claims cannot be estimated by conventional
actuarial reserving techniques because the available historical experience
is not sufficient to apply such techniques for these types of claims and
case law, which will ultimately determine the extent of these liabilities,
is still evolving. To date, U.S. case law has already altered the intent
and scope of these policies to some extent. Therefore, the Company has
obtained advice from an independent actuarial firm who used available
exposure information and various projection techniques in estimating the
Company's ultimate exposure. The Company has provided as it's ultimate
exposure the actuarial firm's latest available point estimate, which
approximates the mid-point within their range of expected loss, and a
provision for Sphere Drake's share of uncollectible reinsurance
recoverables. The $70 million difference between the low and high
estimates of their range is quite wide due to the expansion of coverage and
liability by certain state courts and legislatures for environmental
pollution and other losses in the past and the possibility of similar
interpretations in the future, as well as the uncertainty in determining
what scientific standards will be acceptable for measuring site cleanup.
Sphere Drake's appeal of a lawsuit against the Names on Lloyd's Syndicate
701 seeking payment of funds due Sphere Drake pursuant to a stop-loss
reinsurance contract with Syndicate 701 and a determination of continuing
stop-loss coverage protecting Sphere Drake under that contract was heard in
October 1993 with the U.K. Court of Appeal upholding the adverse decision
of the lower court. The Company has provided $45.4 million as its ultimate
exposure under this indemnity based on the latest available estimate by an
independent actuarial firm. However, unlike the Orion indemnity, the
Company's opinion is that this indemnity is limited in amount pursuant to
the terms of the stop-loss reinsurance contract. The maximum remaining
exposure beyond what the Company has currently provided is $18.7 million.
Zero coupon notes with interest at 10 percent to 12 percent and warrants to
purchase five percent of Sphere Drake stock, which were acquired in
connection with the sale of Sphere Drake, are subject to offset for
indemnities regarding the adequacy of loss reserves and recoverability of
reinsurance receivables on the books of Sphere Drake at December 31, 1986.
Based on estimates of an independent actuarial firm, there has been
deterioration in loss reserves and uncollectible reinsurance balances that
will offset substantially all of the interest income of the zero coupon
notes. The remaining exposure for this indemnity is limited to the
discounted carrying amount of the notes which is 19.3 million pounds
sterling ($28.6 million and $28.5 million at March 31, 1994 and December
31, 1993, respectively) plus the realized proceeds of $6.5 million from
the 1993 exercise of the warrants.
The Sphere Drake indemnities and other liabilities arising out of the
discontinued operations are expected to be settled and paid over many years
and could extend over a 20 to 30 year period.<PAGE>
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
4. Discontinued Operations (continued)
Reinsurance agreements provide the Atlanta and Bermuda insurance companies
with insurance coverage for their reserves as of December 31, 1988, and for
up to $50 million of insurance coverage for potential losses in excess of
those reserves, subject to a deductible for one of the Atlanta companies of
$12.5 million. At March 31, 1994, based on an estimate by an independent
actuarial firm, the Company has recorded $5.7 million of the deductible,
which approximates the midpoint of the actuarial firm's range of expected
loss, and has utilized $21 million out of the $50 million of insurance
coverage. The remaining unrecognized deductible of $6.8 million is within
the actuarial firm's range of expected loss. The agreements also provide
for a reinsurance premium adjustment whereby at any time after January 1,
2001, the reinsurance agreements can be terminated and any excess funds,
net of any reinsurance premium paid to a substitute reinsurance company,
would be returned to the Company. The reinsurance premium adjustment is
currently estimated to be $10.9 million.
In addition, the Company is exposed to a number of other indemnities,
exposures and contingencies primarily related to the sale of Sphere Drake.
The Company believes that, based on current estimates of exposures, the
established claim and other liabilities, the estimated reinsurance premium
adjustment and the interest income on the zero coupon notes, will be
sufficient to cover any future indemnifications and offset related to the
Sphere Drake agreement, the future run-off expenses net of any investment
income of the Atlanta and Bermuda operations, and any other expenses
associated with its discontinued operations. However, there is no
assurance that further adverse developments may not occur due to variables
inherent in the estimation process, including estimating insurance reserves
for environmental pollution, latent disease and other exposures, the
collectibility of reinsurance recoverable balances, the effect of future
legislation and other matters described above. It is possible that future
developments with respect to these matters could have a material effect on
future interim or annual results of operations. However, the Company
presently believes that such impact will not be material to the Company's
financial condition.
5. Employees' Retirement Plans and Benefits
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" for its U.S.
plans. This statement requires the Company to accrue the estimated cost of
future retiree benefit payments during the years the employee provides
services. The Company previously expensed the cost of these benefits, which
are principally health care and life insurance, as premiums or claims were
paid. The statement allows recognition of the cumulative effect of the
liability in the year of the adoption or the amortization of the obligation
over a period of up to twenty years. The Company has elected to recognize
the initial postretirement benefit obligation of $14 million over a period
of twenty years. The Company's cash flows are not affected by
implementation of this statement and the impact to the results of operations
for the first quarter of 1993 was not significant.
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." This statement requires that
certain benefits provided to former or inactive employees after employment
but prior to retirement, including disability benefits and health care
continuation coverage, be accrued based upon the employees' service already
rendered. The cumulative effect of this accounting change was an after-tax
charge of $2.6 million or $0.06 per share in the first quarter of 1994.
The increase to the annual cost of providing such benefits will not be
significant.<PAGE>
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
6. Long-Term Debt
The Company has a long-term credit agreement with various banks which expires
in July 1995. The agreement provides for unsecured borrowings and contains
various covenants including limits on minimum net worth, maximum
consolidated debt, minimum interest coverage and minimum consolidated cash
flow from operations.
At March 31, 1994, the Company was not in compliance with one of the financial
covenants of the long-term credit agreement. The Company's bank group
granted a waiver of this covenant requirement for the first quarter of 1994.
In addition, effective as of March 31, 1994, the long-term credit agreement
was amended to reduce the amount of the agreement from $150 million to $75
million. The amendment also requires that the Company be in compliance with
all of the credit agreement's financial covenants for two consecutive
quarters, without giving effect to any waiver of compliance which may have
been granted, prior to making committed borrowings under the long-term
credit agreement. Based upon current financial projections, the Company
presently believes that it may not be in compliance with the terms of the
financial covenants contained in the agreement at the end of the second
quarter of 1994. In this event, the Company would be precluded from
borrowing under the committed borrowing facility until the first quarter of
1995, at the earliest.
The Company has no borrowings outstanding under this agreement, and does not
anticipate a need to borrow under the agreement for the foreseeable future.
The Company believes that it has adequate cash resources to meet operating
needs through the first quarter of 1995.
7. Per Share Data
Primary earnings per share are computed by dividing earnings (loss)
attributable to common stockholders by the weighted average number of Common
Stock and their equivalents (Class A and Class C Common Stock) outstanding
during the period and, if dilutive, shares issuable upon the exercise of
stock options and upon conversion of the convertible subordinated
debentures. The $3.625 Series A Convertible Preferred Stock issued in March
1993 is not a common stock equivalent. The computation of fully diluted
earnings per share for the periods presented was antidilutive; therefore,
the amounts for primary and fully diluted earnings are the same.
8. Contingent Liabilities
The Company and its subsidiaries are subject to various claims and lawsuits
from both private and governmental parties, which includes claims and
lawsuits in the ordinary course of business, consisting principally of
alleged errors and omissions in connection with the placement of insurance
and in rendering consulting services. In some of these cases, the remedies
that may be sought or damages claimed are substantial. Additionally, the
Company and its subsidiaries are subject to the risk of losses resulting
from the potential uncollectibility of insurance and reinsurance balances
and claims advances made on behalf of clients and indemnifications connected
with the sales of certain businesses.<PAGE>
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
8. Contingent Liabilities (continued)
Following the acquisition of Alexander Howden in January 1982, certain claims,
relating primarily to the placement of reinsurance by Alexander Howden
subsidiaries and questionable broking and underwriting practices of former
Alexander Howden officials and others, were asserted. In particular, claims
have been asserted against the Company and certain of its subsidiaries
alleging, among other things, that certain of the Company's subsidiaries
accepted, on behalf of certain insurance companies, insurance or reinsurance
at premium levels not commensurate with the level of underwriting risks
assumed and retroceded or reinsured those risks with financially unsound
reinsurance companies. In three pending actions, plaintiffs seek
compensatory and punitive damages totaling $147 million based on treble
damage claims under the Racketeer Influenced and Corrupt Organizations Act
(RICO). Management of the Company believes that there are valid defenses to
all the claims that have been made with respect to these activities and the
Company is vigorously defending the pending actions.
In 1987, the Company sold Shand Morahan & Company, Inc. (Shand), its domestic
underwriting management subsidiary. The Company has agreed to indemnify the
purchasers of Shand against certain contingencies, including the Mutual
Fire, Marine and Inland Insurance company contingency described below.
Prior to its sale in 1987, Shand and its subsidiaries provided underwriting
management services for and placed insurance and reinsurance with and on
behalf of Mutual Fire. Mutual Fire was placed in rehabilitation by the
Courts of the Commonwealth of Pennsylvania in December 1986. In January
1990, the Supervisory Court approved a plan of rehabilitation for Mutual
Fire. The rehabilitator, in February 1991, filed a complaint in the
commonwealth court against Shand and the Company. The case was subsequently
removed to the U.S. District Court for the Eastern District of Pennsylvania.
The complaint alleges that Shand, and in certain respects the Company,
breached duties to, and agreements with, Mutual Fire. In addition to
claiming compensatory damages, the complaint seeks punitive damages and
recovery of certain commissions paid to Shand and the Company. The
complaint does not specify, to any meaningful degree, the amount of alleged
damages incurred or sought. The rehabilitator, through an updated expert's
report, has indicated to Shand and the Company that the damages alleged are
in the amount of $232.5 million. The Company and Shand strongly disagree
with the alleged damages in the updated report and have substantial
arguments to sustain their position. The Company and Shand are in the
process of finalizing a series of expert reports that rebut the damage
amount alleged in the rehabilitator's report.
The case is likely to be placed on the trial calendar in the summer of 1994.
Management believes that there are valid defenses to the allegations set
forth in the complaint and the Company intends to vigorously defend against
this action.
Also, the sales contract between the Company and Shand's purchasers
obligates the Company to certain indemnities with respect to transactions
involving Mutual Fire. In November 1992, the purchaser asserted
indemnification claims related to reinsurance recoverables due from Mutual
Fire. In February 1993, the Company agreed to settle certain of these
claims. The Company has estimated its exposure under this settlement, net
of anticipated recoveries from certain trusteed assets held for Shand's
benefit of $10.8 million and net of $4.6 million of set-offs, and
established a reserve in 1992. The Mutual Fire rehabilitator has
challenged Shand's right to recover these assets and utilization of such
set-offs.<PAGE>
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
8. Contingent Liabilities (continued)
The purchaser of Shand has also notified the Company of claims relating to
reinsurance recoverables based on alleged errors and omissions of Shand in
placing reinsurance. To date, these claims have led to the institution of
four arbitration proceedings involving certain reinsurers in an amount
presently estimated to be $33 million. These claims are potentially
subject to indemnification by the Company under the terms of the sales
agreement. Shand is actively disputing these allegations. However,
pursuant to the terms of the indemnity, the Company may be responsible for
the costs of these proceedings and related expenses. Until there is a
final determination that a reinsurer has a right to withhold payment of a
reinsurance recoverable, based on an actual error or omission of Shand, the
Company believes that its exposure under the indemnity is limited to the
above-mentioned costs and expenses. The Company intends to vigorously
dispute these claims.
On November 4, 1993, a class action suit was filed against the Company and
two of its directors and officers in the United States District Court for
the Southern District of New York. In response to the defendant's motion
to dismiss, an amended complaint was filed on February 16, 1994,
purportedly on behalf of a class of persons who purchased the Company's
Common Stock during the period May 1, 1991 to September 28, 1993, alleging
that during said period the Company's financial statements contained
material misrepresentations as a result of inadequate reserves established
by the Company's subsidiary, Alexander Consulting Group Inc., for
unbillable work in progress. The amended complaint seeks damages in an
unspecified amount, as well as attorneys' fees and other costs, for alleged
violations of the federal securities laws. The Company intends to
vigorously dispute this claim.
These contingent liabilities involve significant amounts. While it is not
possible to predict with certainty the outcome of such contingent
liabilities, the applicability of coverage for such matters under the
Company's professional indemnity insurance program, or their financial
impact on the Company, management presently believes that such impact will
not be material to the Company's financial condition. However, it is
possible that future developments with respect to these matters could have
a material effect on future interim or annual results of operations.
9. Investments
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." In accordance with the
Statement, the Company has classified all debt and equity securities as
available for sale. As of January 1, 1994, net unrealized holding gains
totalled $5.5 million net of deferred income taxes of $3.6 million. At
March 31, 1994, net unrealized holding gains totalled $1.4 million, net of
deferred income taxes of $1.1 million, and are reported as a separate
component of stockholders' equity. During the first three months of 1994,
proceeds from sales of securities totalled $15.4 million with gross realized
gains totalling $0.4 million.<PAGE>
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
9. Investments (continued)
The amortized cost and estimated fair value of debt and equity securities and
financial instruments used to hedge these investments as of March 31, 1994
are summarized below:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
<S> <C> <C> <C> <C>
Equity securities $ 1.8 $4.9 $ 0.0 $ 6.7
Bankers acceptance 16.5 0.0 0.0 16.5
Euro-time deposits 53.5 0.0 (0.1) 53.4
Certificates of deposit 128.8 0.0 (0.1) 128.7
U.S. Government agencies/
state issuances 120.4 0.0 0.0 120.4
Other 19.4 0.0 0.0 19.4
Financial instruments -
used as hedges 0.0 1.8 (4.0) (2.2)
Total debt & equity
securities $340.4 $6.7 $(4.2) $342.9
</TABLE>
The amortized cost and estimated fair value of debt securities at March 31,
1994 by contractual maturity are summarized below:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
<S> <C> <C>
Due in one year or less $ 278.4 $ 278.2
Due after one year through five years 14.1 14.1
Due after 5 years through 10 years 0.1 0.1
292.6 292.4
Mortgage backed securities 46.0 46.0
Total debt securities $ 338.6 $ 338.4
/TABLE
<PAGE>
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Three Months ended March 31, 1994 vs. 1993
The net loss for the three months ended March 31, 1994 was $4.4 million or
$0.15 per share. Included in these results was a $2.6 million after-tax
charge, or $0.06 per share, for the cumulative effect of a change in
accounting principle relating to the adoption of SFAS No. 112 "Employers'
Accounting for Postemployment Benefits."
This compares to net income of $13.2 million, or $0.30 per share, in the
first quarter of 1993. These results included after-tax gains of $2.0
million, or $0.05 per share, from the sale of two small operations and a
gain of $3.3 million, or $0.08 per share, from the cumulative effect
adjustment relating to the adoption of SFAS No. 109, "Accounting for Income
Taxes."
Operating Revenues
Consolidated operating revenues were $323.0 million for the first quarter of
1994 compared to $324.8 million for the same period in 1993. This decrease
included lower foreign exchange rates which negatively impacted operating
revenues by $3.5 million or 1.1 percent in the 1994 first quarter.
Total commissions and fees in the first three months of 1994 were
essentially equal to the comparable period in 1993, as a 1.3 percent
increase from operations was largely offset by lower foreign exchange rates.
Broking commissions and fees in the risk management and insurance services
operations decreased by $3.3 million, or 1.7 percent, when compared to the
first quarter of 1993, most of which resulted from lower foreign exchange
rates. Broking revenues in the U.S. decreased by $10.7 million in the first
quarter of 1994 compared to 1993. In addition to the continuing softness in
certain insurance markets, the effect of recent management changes and the
implementation of a business segmentation process in the U.S. had a negative
impact on broking revenues. Partially offsetting the U.S. decline was a
$3.3 million increase in revenues due to the third quarter 1993 acquisition
of a retail broking operation in Mexico and a $1.3 million increase in the
U.S.-based claims administration operation.
Specialist insurance broking commissions and fees in the first quarter of
1994 were essentially equal with the corresponding 1993 quarter as new
business and selected rate increases were offset by lower contingent
commissions.
Reinsurance broking commissions and fees increased by $5.0 million or 13.2
percent in the first three months of 1994 versus 1993 primarily due to
selected premium rate increases and new business.
Human resource management consulting commissions and fees increased by $0.9
million or 1.9 percent in the first quarter of 1994 compared to 1993.
Revenue growth of $2.6 million or 8.9 percent was reflected in the U.S.
operations due to new business efforts. Partially offsetting this increase
was a $2.0 million decrease in the Canadian operations due to lower foreign
exchange rates and a decline in the expected realization of consulting
services.
Total fiduciary investment income decreased by $2.6 million or 18.8 percent
for the first three months of 1994 versus 1993 due to lower interest rates
and lower average investment levels, particularly in the U.S.<PAGE>
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Results of Operations (continued)
Three Months ended March 31, 1994 vs. 1993
Operating Expenses
Consolidated operating expenses were $317.8 million for the first three
months of 1994, an increase of $11.9 million or 3.9 percent compared to the
comparable quarter of 1993. The effect of changes in foreign exchange rates
and hedging contract gains and losses was minimal for the comparative
period.
Salaries and related benefits increased by $5.2 million or 2.7 percent,
including $2.0 million relating to the 1993 acquisition in Mexico. Staff
costs in 1994 include normal salary progressions and higher benefit costs
partially offset by a 3.3 percent decline in headcount.
Other operating expenses increased by $6.7 million or 6.1 percent in the
first quarter of 1994 compared to 1993. This increase reflects higher
systems development expenses and insurance costs.
Other Income (Expenses)
Investment income earned on operating funds decreased by $0.5 million due to
lower interest rates and investment levels.
Interest expense decreased by $0.7 million due to lower interest rates and
debt levels.
Other income (expenses) in 1994 includes a $1.2 million provision for
estimated indemnities to the purchasers of Shand related to the Mutual Fire
rehabilitation and in 1993 included pre-tax gains of $3.3 million on the
sales of two small operations in the U.S., including a retail brokerage
office and a small claims administration operation.
Income Taxes
The Company reported a tax benefit of $0.2 million on pre-tax income of $0.5
million in the first quarter of 1994. This compares to an expected tax
expense of $0.2 million based upon the U.S. statutory rate of 35 percent.
The tax rate was favorably impacted by state and local tax benefits on
losses generated in the U.S. operations in the first three months of 1994 as
well as foreign tax rates lower than the U.S. statutory rate. Partially
offsetting these factors are certain expenses which are not deductible,
including amortization of goodwill.
The Company's effective tax rate in the first quarter of 1993 was 38
percent. This rate is higher than the U.S. rate of 34 percent primarily due
to amortization of goodwill and other non-deductible expenses. The tax rate
was favorably impacted by the results of Clay & Partners, a U.K.-based
actuarial consulting operation acquired in 1993 in a pooling of interests
transaction. Prior to the merger, Clay & Partners operated as a partnership
and accordingly, their results do not reflect corporate income taxes of
approximately $0.5 million.
As discussed in Note 3, on May 12, 1994, the Company was advised by the IRS
that the Joint Committee review has been completed and that written
confirmation would be received that the Company's settlement with the IRS had
been approved. Thus, with the Joint Committee approval, the IRS may now
process the case and issue an assessment letter for the tax and interest due.
It is believed that the settlement is within the Company's previously
established reserves. Upon receipt from the IRS of the assessment letter,
the Company will determine the amount of tax reserves, if any, which may be
restored to income during 1994.
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Liquidity and Capital Resources
During the first three months of 1994, cash and cash equivalents decreased
by $37.9 million. Of this amount, operating funds decreased by $59.7
million and fiduciary funds, which are generally not available for operating
needs, increased by $21.8 million. At March 31, 1994, the Company's
operating cash and cash equivalents balances were $91.8 million.
The net cash used by operating activities, excluding the change in fiduciary
balances, was $37.9 million. This represents primarily the payment of
incentives as well as the settlement of certain litigation matters.
The Company's net capital expenditures for property and equipment was $4.5
million in the first three months of 1994. Capital expenditures are
expected to increase from this level throughout the year as the Company
continues with its investment in the redesign of work processes and
enhancement of systems technology.
The Company has a long-term credit agreement with various banks which
expires in July 1995. The agreement provides for unsecured borrowings and
contains various covenants including limits on minimum net worth, maximum
consolidated debt, minimum interest coverage and minimum consolidated cash
flow from operations.
At March 31, 1994, the Company was not in compliance with one of the
financial covenants of the long-term credit agreement. The Company's bank
group granted a waiver of this covenant requirement for the first quarter of
1994.
In addition, effective as of March 31, 1994, the long-term credit agreement
was amended to reduce the amount of the agreement from $150 million to $75
million. The amendment also requires that the Company be in compliance with
all of the credit agreement's financial covenants for two consecutive
quarters, without giving effect to any waiver of compliance which may have
been granted, prior to making committed borrowings under the long-term
credit agreement. Based upon current financial projections, the Company
presently believes that it may not be in compliance with the financial
covenants contained in the agreement at the end of the second quarter of
1994. In this event, the Company would be precluded from borrowing under
the committed borrowing facility until the first quarter of 1995, at the
earliest.
In addition to the committed borrowing facility, the credit agreement
contains a provision which allows the Company to request borrowings under a
money market facility. However, such facility is on an uncommitted basis.
The Company has no borrowings outstanding under this agreement, and does not
anticipate a need to borrow under the agreement for the foreseeable future.
The Company believes that it has adequate cash resources to meet operating
needs through the first quarter of 1995.
Supplementing the credit agreement, the Company has unsecured lines of
credit available for general corporate purposes totaling $140.5 million, of
which $140 million were unused at March 31, 1994. These lines consist of
uncommitted cancellable facilities in the U.S. and other countries. If
drawn, the lines bear interest at market rates and carry an annual
commitment fee of not greater than 1/2% of the line.
At March 31, 1994, the Company has an accumulated deficit of $136.4 million.
The Company's current financial position satisfies Maryland law requirements
for the payment of dividends. The Board of Directors will continue to take
into consideration the Company's financial performance and projections in
connection with future decisions with respect to dividends.<PAGE>
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Liquidity and Capital Resources (continued)
As described in Notes 4 and 8 of Unaudited Notes to Financial Statements,
the Company has significant litigation and other exposures which may require
cash resources. In addition, as described in Note 3 of Unaudited Notes to
Financial Statements, on May 12, 1994, the Company was advised by the IRS
that the Joint Committee review has been completed and that written
confirmation would be received, that the Company's settlement with the IRS
had been approved. The settlement, which approximates $38 million in tax and
net interest, does not require any cash resources until the years 1987
through 1989 are finalized with the IRS. This is expected to occur in the
second half of 1994. The Company has substantial arguments and legal defenses
against its litigation exposures; however, the timing and ultimate outcome of
these issues cannot be predicted with certainty. When funds are required on
the settlement with the IRS and in the event additional funds are required to
meet litigation exposures, the Company believes it has sufficient resources,
including credit capacity, to cover those tax liabilities and other
potential liabilities which are likely to arise on settlement of other
issues.
The Company believes that cash flow from operations, along with current
operating cash balances, will be sufficient to fund working capital and
other operating requirements. In the event additional funds are required,
the Company believes it will have sufficient resources, including borrowing
capacity, to meet such requirements. In addition, the Company is currently
reviewing its options with respect to selling certain non-core businesses
and other assets.<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Alexander & Alexander Services Inc. & Subsidiaries
Item 1. Legal Proceedings
The Company and its subsidiaries are subject to various claims and
lawsuits from both private and governmental parties, which include
claims and lawsuits in the ordinary course of business, consisting
principally of alleged errors and omissions in connection with the
placement of insurance and in rendering consulting services. In some of
these cases, the remedies that may be sought or damages claimed are
substantial. Additionally, the Company and its subsidiaries are subject
to the risk of losses resulting from the potential uncollectibility of
insurance and reinsurance balances and claims advances made on behalf of
clients and indemnifications connected with the sales of certain
businesses.
Reference is made to the discussion under the caption "Item 3. Legal
Proceedings" of the Company's Report on Form 10-K for the fiscal year
ended December 31, 1993 as to the legal proceeding captioned Constance B.
Foster v. Alexander & Alexander Services Inc. et al. (Civil Action No.
91-1179) (E.D.Pa.) which is incorporated in its entirety herein, except
as amended as follows. The rehabilitator in this case, through an
updated expert's report, has indicated to Shand and the Company that the
alleged damages are in the amount of $232.5 million. The expert's report
previously alleged damages in the amount of $238.5 million. The Company
and Shand strongly disagree with the alleged damages in the updated
report and have substantial arguments to sustain their position.
Reference is made to the discussion under the caption "Item 3. Legal
Proceedings" of the Company's Report on Form 10-K for the fiscal year
ended December 31, 1993 as to the legal proceeding captioned The Highway
Equipment Company, et al. v. Alexander Howden Limited, et al. (Case No.
1-85-01667, U.S. Bankruptcy Court, So. Dist. Ohio, Western Div.) which is
incorporated in its entirety herein, except as amended as follows. In
April 1993, the bankruptcy court ordered a directed verdict in the
Company's favor. That verdict was affirmed in March 1994 in a decision
by the U.S. District Court for the Southern District Ohio and plaintiffs
have appealed the decision to the U.S. Court of Appeals for the Sixth
Circuit.
Reference is made to the discussion under the caption "Item 3. Legal
Proceedings" of the Company's Report on Form 10-K for the fiscal year
ended December 31, 1993 as to the legal proceeding captioned Harry
Glickman v. Alexander & Alexander Services Inc., et al. (Civil Action No.
93 Civ. 7594) (S.D.N.Y.) which is incorporated in its entirety herein,
except as amended as follows. Following a conference with the U.S.
District Court for the Southern District of New York in March 1994,
counsel for the plaintiffs is considering whether to further amend the
second amended complaint. Pending a decision by plaintiffs' counsel, the
Company's time to move or answer the amended complaint is in abeyance.<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Alexander & Alexander Services Inc. & Subsidiaries
Item 6. Exhibit and Reports on Form 8-K
Current Report on Form 8-K was filed on January 17, 1994 regarding a press
release noticing that the Company made certain management and corporate
governance changes, including the appointment of Robert E. Boni as
chairman of the Board of Directors of the Company and the pending
retirement of T.H. Irvin, chairman and chief executive officer.
Current Report on Form 8-K was filed on February 25, 1994 regarding a
press release noticing that the Company reported earnings for the year
ended and the quarter ended December 31, 1993.
Current Report on Form 8-K was filed on April 21, 1994 regarding a press
release noticing that the Company expected to report a loss for the
quarter ended March 31, 1994 of approximately $0.15 per share. The
report also noticed the retirement of T.H. Irvin as chief executive
officer of the Company effective April 1, 1994.<PAGE>
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, on the 13th day of May,
1994.
ALEXANDER & ALEXANDER SERVICES INC.
(Registrant)
DATE: May 13, 1994 BY:/s/ Paul E. Rohner
Paul E. Rohner
Senior Vice President &
Chief Financial Officer
