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, 1995
--------------------------
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
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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
incorporation or organization) Identification No.)
1185 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, 1995 was 41,868,060.
The number of shares of Class A Common Stock, $.00001 par value,
outstanding as of May 1, 1995 was 2,037,798.
The number of shares of Class C Common Stock, $1 par value,
outstanding as of May 1, 1995 was 366,904.
No shares of Class D Common Stock, $1 par value, were outstanding
as of May 1, 1995.
<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, 1995 and 1994........................2
Condensed Consolidated Balance Sheets, as of
March 31, 1995(Unaudited) and December 31, 1994...................3
Unaudited Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1995 and 1994.........................5
Unaudited Notes to Financial Statements..............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............21
Part II. Other Information:
Item 1. Legal Proceedings..............................................32
Item 6. Exhibits and Reports on Form 8-K...............................32
1
<PAGE>
PART I. FINANCIAL INFORMATION
------------------------------
Alexander & Alexander Services Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
For the Three Months Ended March 31, 1995 and, 1994
-------------------------------------------------------
(in millions, except per share amounts)
<TABLE><CAPTION>
Three Months Ended
March 31,
------------------
1995 1994
---- ----
<S> <C> <C>
Operating revenues:
Commissions and fees $308.3 $311.8
Fiduciary investment income 15.9 11.2
------ -------
Total 324.2 323.0
------ -------
Operating expenses:
Salaries and benefits 182.1 200.7
Other 100.4 117.1
------ -------
Total 282.5 317.8
------ ------
Operating income 41.7 5.2
------ -------
Other income (expenses):
Investment income 4.9 2.0
Interest expense (4.5) (3.5)
Other 30.4 (3.2)
------ ------
Total 30.8 (4.7)
------ ------
Income before income taxes and
minority interest 72.5 0.5
Income taxes (benefit) 26.5 (0.2)
------ ------
Income before minority interest 46.0 0.7
Minority interest (4.3) (2.5)
------ ------
Income (loss) before cumulative effect of
change in accounting 41.7 (1.8)
Cumulative effect of change in
accounting - (2.6)
------ ------
Net income (loss) 41.7 (4.4)
Preferred stock dividends (6.2) (2.1)
------ ------
Earnings (loss) attributable to common
shareholders $ 35.5 $ (6.5)
====== ======
PER SHARE INFORMATION:
----------------------
Primary earnings per share:
Income (loss) before cumulative effect of
change in accounting $ 0.80 $(0.09)
Cumulative effect of change in
accounting - (0.06)
------ ------
Net income (loss) $ 0.80 $(0.15)
====== ======
Average common and common equivalent shares outstanding 44.3 43.5
====== ======
Fully diluted earnings per share:
Income (loss) before cumulative effect of
change in accounting $ 0.69 $(0.09)
Cumulative effect of change in
accounting - (0.06)
------ ------
Net income (loss) $ 0.69 $(0.15)
====== ======
Average common shares outstanding, assuming full dilution 61.9 43.5
====== ======
Cash dividends per common share $0.025 $ 0.25
====== =======
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 1995 (Unaudited) and December 31, 1994
-------------------------------------------------------
(in millions)
<TABLE><CAPTION>
March 31, December 31,
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents:
Operating $ 209.3 $ 248.7
Fiduciary 589.3 428.5
Short-term investments:
Operating 5.7 19.2
Fiduciary 237.6 292.2
Premiums and fees receivable (less
allowance for doubtful accounts
of $24.5 in 1995 and $23.7 in 1994) 1,175.4 1,206.1
Deferred income taxes 38.2 71.5
Other current assets 110.3 120.7
-------- ---------
Total current assets 2,365.8 2,386.9
Property and equipment - net 124.8 138.0
Intangible assets - net 175.7 175.1
Deferred income taxes 104.9 87.1
Long-term operating investments 75.9 64.1
Other 97.3 94.5
-------- --------
$2,944.4 $2,945.7
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Premiums payable to insurance companies $1,822.7 $1,738.3
Short-term debt 0.6 1.0
Current portion of long-term debt 3.4 17.1
Deferred income taxes 8.7 8.5
Accrued compensation and related benefits 35.6 60.0
Income taxes payable 32.5 66.3
Other accrued expenses 188.4 258.1
-------- --------
Total current liabilities 2,091.9 2,149.3
-------- --------
Long-term liabilities:
Long-term debt 180.7 132.7
Deferred income taxes 15.1 13.4
Net liabilities of discontinued operations 45.1 56.8
Other 236.4 266.0
-------- --------
Total long-term liabilities 477.3 468.9
-------- --------
Commitments and contingent liabilities
(Notes 6, 7 and 11)
8% Series B cumulative convertible preferred
stock contingency 10.0 10.0
-------- --------
</TABLE>
See accompanying notes to financial statements.
-Continued-
3
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
March 31, 1995 (Unaudited) and December 31, 1994
-------------------------------------------------------
(in millions)
<TABLE><CAPTION>
March 31, December 31,
1995 1994
------------- ------------
<S> <C> <C>
Stockholders' equity:
Preferred stock, authorized 15 shares, $1 par
value:
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, liquidation preference of
$115 million 2.3 2.3
8% Series B cumulative convertible preferred
stock, issued and outstanding, 4.2 and 4.1
shares, respectively, liquidation preference
of $210 million and $205 million, respectively 4.2 4.1
Common stock, authorized 200 shares, $1 par
value; issued and outstanding 41.8
and 41.5 shares, respectively 41.8 41.5
Class A common stock, authorized 26 shares,
$.00001 par value; issued and outstanding
2.1 and 2.3 shares, respectively - -
Class C common stock, authorized 11 shares,
$1 par value; issued and outstanding
0.4 and 0.4 shares, respectively 0.4 0.4
Class D common stock, authorized 40 shares,
$1 par value; issued and outstanding,
none - -
Paid-in capital 620.1 615.0
Accumulated deficit (252.7) (287.1)
Net unrealized investment gains - net of
deferred income taxes 3.4 1.5
Accumulated translation adjustments (54.3) (60.2)
-------- --------
Total stockholders' equity 365.2 317.5
-------- --------
$2,944.4 $2,945.7
======== ========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1995 and 1994
---------------------------------------------------------
(in millions)
<TABLE><CAPTION>
Three Months Ended
March 31,
-------------------
1995 1994
---- ----
<S> <C> <C>
Cash provided (used) by:
Operating activities:
Income (loss) before cumulative effect
of change in accounting $ 41.7 $ (1.8)
Adjustments to reconcile to net cash
used by operating activities:
Depreciation and amortization 11.5 13.3
Deferred income taxes 14.9 19.2
Gains on dispositions of subsidiaries and
other assets (30.6) -
Other 1.8 1.6
Changes in assets and liabilities (net of
effects from acquisitions and dispositions):
Net fiduciary cash and cash equivalents and
short-term investments (89.2) (43.3)
Premiums and fees receivable 42.3 93.2
Other current assets (27.1) 5.4
Other assets (5.5) 0.7
Premiums payable to insurance companies 50.9 (34.1)
Other accrued expenses (111.4) (95.9)
Other long-term liabilities 1.8 5.7
Discontinued operations (net) (11.7) (0.3)
Cumulative effect of change in accounting - (2.6)
------- -------
Net cash used by operating activities (110.6) (38.9)
------- -------
Investing activities:
Net purchases of property and equipment (1.9) (4.5)
Purchases of businesses (1.7) (0.1)
Proceeds from sales of subsidiaries and
other assets 85.9 0.4
Purchases of operating investments (28.3) (0.2)
Sales/maturities of operating investments 30.6 3.7
------- -------
Net cash provided (used) by investing
activities 84.6 (0.7)
------- -------
</TABLE>
See accompanying notes to financial statements.
-Continued-
5
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows (Continued)
For the Three Months Ended March 31, 1995 and 1994
-------------------------------------------------------------
(in millions)
<TABLE><CAPTION>
Three Months Ended
March 31,
-------------------
1995 1994
----- -----
<S> <C> <C>
Financing activities:
Cash dividends $ (3.2) $ (13.0)
Proceeds from issuance of short-term debt 0.1 0.4
Payments of short-term debt (0.5) (9.7)
Proceeds from issuance of long-term debt 0.4 0.5
Repayments of long-term debt (13.8) (1.5)
Issuance of common stock 0.1 1.3
------- -------
Net cash used by financing activities (16.9) (22.0)
------- -------
Effect of exchange rate changes on operating
cash and cash equivalents 3.5 1.9
Operating cash and cash equivalents at
beginning of year 248.7 151.5
------- -------
Operating cash and cash equivalents at end
of period $ 209.3 $ 91.8
======= =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 4.2 $ 3.5
Income taxes 50.9 20.1
Non-cash investing and financing activities:
Notes payable issued for contingency
settlements $ 45.7 $ -
Series B cumulative convertible preferred
stock dividends-in-kind 4.1 -
Common stock issued for employee benefit and
stock plans 1.1 0.5
Common stock issued for non-employee stock
plans 0.2 -
Note receivable established for contingency
settlement 1.3 -
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements
---------------------------------------
(Dollars in millions, except per share information)
1. Interim Financial Presentation
Unless otherwise indicated, all amounts are stated in millions of
U.S. dollars. Certain prior period amounts have been reclassified
to conform with the current year presentation. In the opinion of
the Company, all adjustments necessary for a fair presentation
have been included in the consolidated financial statements. The
results of operations for the first three months of the year are
not necessarily indicative of results for the year.
2. Employees' Retirement Plans and Benefits
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' services 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.
3. Restructuring Charges
In the fourth quarter of 1994, management committed to a formal
plan of restructuring the Company's operations and recorded a
$69 million pre-tax charge ($45.1 million after-tax, or $1.03
per share). The restructuring charge included $25.2 million to
consolidate real estate space requirements at 48 offices
worldwide, and $43.8 million for voluntary early retirement
programs and involuntary workforce reductions involving
approximately 1,100 positions, of which 650 are in the U.S.
The involuntary severance portion of the charge amounted to
$22.9 million and reflected the elimination of 898 positions
worldwide. The voluntary early retirement program was accepted
by 208 employees prior to December 31, 1994 and amounted to
$20.9 million of the charge. During the first quarter of 1995,
the Company paid $6.8 million of these liabilities. The Company
expects to pay an additional $18 million of the remaining
balance of $31.8 million throughout the remainder of 1995.
The charge associated with real estate activities relates to the
closure, abandonment and downsizing of office space globally,
including 34 locations in the U.S. The Company anticipates that
these actions will be completed by the end of 1995. The costs
include primarily remaining lease obligations and write-offs of
leasehold improvements and fixed assets. During the first
quarter of 1995, the Company paid $1.7 million of these
liabilities and wrote-off assets of $0.6 million. The Company,
expects to pay an additional $7.1 million of the remaining $17.2
million cash portion of these liabilities throughout the
remainder of 1995. The cash portion of the remaining
liabilities, excluding the fixed asset and leasehold improvement
write-offs of approximately $4.6 million, will be paid out over
the remaining lease periods, which range from one to ten years.
7
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
---------------------------------------------------
4. Dispositions
On February 28, 1995 the Company completed the sale of Alexsis,
its U.S.-based third party claims administrator, for total cash
proceeds of $47.1 million. The pre-tax gain on this transaction
was $30.3 million ($20.8 million after-tax or $0.47 per share).
Under certain circumstances, pursuant to the terms of the purchase
agreement, the transaction is subject to a post-closing adjustment
in the purchase price. The Company currently believes that such
adjustment, if any, will not be material to the Company's financial
position or results of operations.
In January 1995, the Company sold its minority interest in a
U.K. merchant bank for cash proceeds of $7.2 million and a pre-tax
gain of $0.3 million.
These gains are included in Other Income (Expenses) in the
Consolidated Statements of Operations.
5. Other Income and Expenses
Other non-operating income (expenses) is comprised of the following:
<TABLE><CAPTION>
Three Months Ended
March 31,
------------------
1995 1994
---- ----
<S> <C> <C>
Gains on sales of subsidiaries (See Note 4) $30.6 $ -
Litigation costs (0.1) (2.5)
Other (0.1) (0.7)
----- ------
$30.4 $(3.2)
===== =====
</TABLE>
Litigation costs are associated primarily with the Mutual Fire
lawsuit described in Note 11 of the Unaudited Notes to
Financial Statements.
6. Income Taxes
During 1994, the Company was advised that the Joint Committee on
Taxation had approved the agreement reached in 1993 by the
Company and the Appeals Office of the Internal Revenue
Service(IRS) on settlement of tax issues with respect to years
1980 through 1986. Also during 1994, the Company reached an
agreement with the IRS on settlement of the examination of years
1987 through 1989. On February 28, 1995, the Company paid the
amounts due for years 1980 through 1989 and charged the tax and
net interest totaling $35.6 million against previously
established reserves.
In 1994, the Company received a Notice of Proposed Adjustment
from the IRS in connection with the examination of its 1990 and
1991 U.S. federal income tax returns, proposing an increase in
taxable income for the 1991 year which, if sustained, would
result in additional tax liability estimated by the Company at
$50 million. This proposed adjustment relates to intercompany
transactions involving the stock of a United Kingdom subsidiary.
The Company disagrees with the IRS position on this issue.
Although the ultimate outcome of the matter cannot be predicted
with certainty, the Company and its independent tax counsel
believe there are meritorious defenses to the proposed
adjustment and substantial arguments to sustain the Company's
position and that the Company should prevail in the event this
issue is litigated.
8
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
---------------------------------------------------
6. Income Taxes (continued)
A similar set of transactions occurred in 1993 for which the IRS
could propose an increase in taxable income which would result
in an additional tax liability estimated by the Company at $25
million. The Company's 1993 tax return is not currently under
examination. The Company believes it should prevail in the
event this similar issue is raised by the IRS. Accordingly, no
provision for any liability with respect to the 1991 and 1993
transactions has been made in the consolidated financial
statements. The Company believes that its current tax reserves
are adequate to cover its tax liabilities.
7. Discontinued Operations
In 1985, the Company discontinued its insurance underwriting
operations. In 1987 the Company sold Sphere Drake Insurance Group
(Sphere Drake). The Sphere Drake sales agreement provides indemnities
by the Company to the purchaser for various potential liabilities
including provisions covering future losses on certain 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 (Syndicate 701).
In addition, the sales agreement requires the Company to assume
any losses in respect of actions or omissions by Swann & Everett
Underwriting Agency (Swann & Everett), an underwriting
management company previously managed by Alexander Howden Group
plc (Alexander Howden).
The net liabilities of discontinued operations shown in the
accompanying Consolidated Balance Sheets include insurance liabilities
associated with the above indemnities, liabilities of insurance
underwriting subsidiaries currently in run-off and other related
liabilities.
A summary of the net liabilities of discontinued operations is
as follows:
<TABLE><CAPTION>
As of As of
March 31, 1995 December 31, 1994
-------------- -----------------
<S> <C> <C>
Liabilities:
Insurance liabilities $279.5 $277.6
Other 19.7 31.4
------ ------
Total liabilities 299.2 309.0
------ ------
Assets:
Recoverable under finite risk contracts:
Insurance liabilities 137.7 135.7
Premium adjustment 10.8 10.8
Reinsurance recoverables 64.2 64.2
Cash and investments 23.6 23.6
Other 10.8 10.9
------ ------
Total assets 247.1 245.2
------ ------
Total net liabilities of discontinued
operations 52.1 63.8
Less current portion classified as
other accrued expenses 7.0 7.0
------ ------
Remainder classified as net liabilities
of discontinued operations $ 45.1 $ 56.8
====== ======
</TABLE>
9
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
---------------------------------------------------
7. Discontinued Operations (continued)
The insurance liabilities represent estimates of future claims
expected to be made under occurrence-based insurance policies and
reinsurance business written through Lloyd's and the London market
covering primarily asbestosis, environmental pollution, and latent
disease risks in the United States which are coupled with substantial
litigation expenses. These claims are expected to develop and be
settled over the next twenty to thirty years.
Liabilities stemming from these claims cannot be estimated
using conventional actuarial reserving techniques because the
available historical experience is not adequate to support the
use of such techniques and because case law, as well as scientific
standards for measuring the adequacy of site cleanup (both of which
have had, and will continue to have, a significant bearing on the
ultimate extent of the liabilities) is still evolving.
Accordingly, the Company's independent actuaries have combined
available exposure information with other data and have used various
projection techniques to estimate the insurance liabilities,
consisting principally of incurred but not reported losses.
In 1994, Orion, which has financial responsibility for sharing
certain of the indemnity liabilities, was placed in provisional
liquidation by order of the English Courts. Based on current
facts and circumstances, the Company believes that the
provisional liquidation will not have a material adverse effect
on the net liabilities of discontinued operations.
The Company has certain protection against adverse developments
of the insurance liabilities through two finite risk contracts issued
by Centre Reinsurance (Bermuda) Limited (reinsurance company). A
contract entered into in 1989 provides the insurance underwriting
subsidiaries currently in run-off with recoveries of recorded
liabilities of $76 million, and for up to $50 million of
additional recoveries in excess of those liabilities subject to
a deductible for one of the run-off companies of $15 million. At
March 31, 1995, the Company had recorded $8 million of the
deductible.
On July 1, 1994, the Company entered into an insurance-based
financing contract (finite risk contract) providing protection
primarily for exposures relating to Orion, Syndicate 701 and Swann
& Everett. The contract provided for a payment by the Company of $80
million ($50 million of which was borrowed from the reinsurance
company) to the reinsurance company and for payment by the Company of
the first $73 million of paid claims. The contract entitles the
Company to recover paid claims in excess of the Company's $73
million retention. At March 31, 1995, recoveries were limited
to $110 million, which includes the Company's payment of $80
million. In addition, commencing December 31, 1996, depending on
the timing and amount of paid loss recoveries under the
contract, the Company may be entitled to receive a payment from
the reinsurance company in excess of the amounts recovered for
paid losses if the contract is terminated. The contract is
accounted for under the deposit method of accounting and the
accounting requirements for discontinued operations.
The Company's right to terminate the contract entered into in
1994 is subject to the consent of American International Group, Inc.
(AIG) as long as AIG is the holder of certain shares of the
Company's stock. In addition, the reinsurance company also has
the right, under certain circumstances, currently considered to
be remote by the Company, to terminate that contract.
10
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
---------------------------------------------------
7. Discontinued Operations (continued)
The insurance liabilities set forth above represent the
Company's best estimates of the probable liabilities based on
independent actuarial estimates. The recoverable amounts under
the finite risk contracts, which are considered probable of
realization based on independent actuarial estimates of losses
and pay out patterns, represent the excess of such liabilities
over the Company's retention levels. The premium adjustment
represents the recoverable amount considered probable of
realization at the earliest date the Company can exercise its
right to terminate the finite risk contract covering the
insurance underwriting subsidiaries currently in run-off.
Insurance liabilities in excess of recorded liabilities could
develop in the future. Based on independent actuarial estimates of the
amount and timing of claim payments, it is reasonably possible
that such additional liabilities of $191 million, net of
estimated amounts recoverable for paid losses under the finite
risk contracts of $117 million, could amount to $74 million.
However, management currently believes that such additional
insurance liabilities are not likely to develop.
Changes in the total net liabilities of discontinued operations
for the three months ended March 31, 1995 are as follows:
Beginning balance $ 63.8
Claims and expense payments (11.4)
Other (0.3)
------
Ending balance $ 52.1
======
The Company believes that, based on current estimates, the
established total net liabilities of discontinued operations are
sufficient to cover its exposures. However, there is no assurance
that further adverse development may not occur due to variables
inherent in the estimation processes and other matters described
above. The Company currently believes that the effect of such adverse
development, if any, will not be material to the Company's
financial position and results of operations.
8. Per Share Data
Primary earnings per share are computed by dividing earnings
(loss) attributable to common stockholders by the weighted
average number of shares of Common Stock and their equivalents
(Class A and Class C Common Stock) outstanding during the
period and, if dilutive, shares issuable upon exercise of stock
options. The $3.625 Series A Convertible Preferred Stock and
the 8% Series B Convertible Preferred Stock are not common
stock equivalents. Fully diluted earnings per share are
computed by dividing earnings attributable to common
stockholders plus preferred dividends and interest expense, net
of tax, on the convertible subordinate debentures by the
weighted average number of common shares outstanding during the
period after giving effect to the exercise of stock options,
conversion of preferred stock and convertible subordinate
debentures. The computation of fully diluted earnings per
share for March 31, 1994 was antidilutive; therefore, the
amounts for primary and fully diluted earnings per share are
the same.
11
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
---------------------------------------------------
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. At March 31, 1995,
net unrealized holding gains totaled $3.4 million, net of deferred
income taxes of $1.1 million, and are reported as a separate
component of Stockholders' Equity. During the quarter ended
March 31, 1995, the net unrealized holding gains increased by
approximately $1.9 million and proceeds from sales of securities
totaled $6.3 million with gross realized gains totaling $0.4 million.
The amortized cost and estimated fair value of the Company's
debt and equity securities and financial instruments used to hedge
the existing and anticipated fiduciary portion of such investments
as of March 31, 1995 are summarized below:
<TABLE><CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government agencies/
state issuances $ 42.7 $ - $ - $ 42.7
Other interest-bearing
securities 91.7 - - 91.7
Mortgage-backed securities 67.9 - - 67.9
Equity securities 3.4 4.9 - 8.3
Financial instruments - used
as hedges - 0.4 (0.8) (0.4)
--------- -------- --------- --------
Total $ 205.7 $ 5.3 $ (0.8) $ 210.2
========= ======== ========= ========
</TABLE>
The above debt and equity securities and financial instruments
used as hedges are classified in the Consolidated Balance Sheet
at March 31, 1995 as follows:
Cash and cash equivalents:
Operating $ 22.5
Fiduciary 54.1
Short-term investments:
Operating 0.5
Fiduciary 84.1
Long-term operating investments 49.0
---------
Total $ 210.2
=========
The amortized cost and estimated fair value of debt securities
at March 31, 1995 by contractual maturity are summarized below:
<TABLE><CAPTION>
Estimated
Amortized Fair
Cost Value
--------- ----------
<S> <C> <C>
Due in one year or less $ 97.9 $ 97.9
Due after one year through five years 26.2 26.2
Due after five years through ten years 0.2 0.2
Due after ten years 10.1 10.1
--------- ---------
134.4 134.4
Mortgage-backed securities 67.9 67.9
--------- ---------
Total debt securities $ 202.3 $ 202.3
========= =========
</TABLE>
Certain of the above investments with maturities greater than
one year are classified as short-term and included in current
assets as they represent fiduciary investments that will be utilized
during the normal operating cycle of the business to pay premiums
payable to insurance companies that are included in current
liabilities.
12
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
---------------------------------------------------
10. Debt
On March 27, 1995, the Company's previously existing credit
agreement was replaced by a new $200 million three-year facility
with various banks which expires in March 1998. The new
agreement provides for unsecured borrowings and contains various
covenants, including minimum consolidated tangible capital funds,
minimum consolidated tangible net worth, maximum leverage and
minimum cash flow requirements. The Company currently believes
that the covenant regarding minimum cash flow coverage is the
most restrictive. This covenant requires that the ratio of
earnings before interest, taxes, depreciation and amortization to
interest expense and cash dividends exceed 4.25 to 1. At March
31, 1995, this ratio was 10.94 to 1. In addition, the occurrence
of a "Special Event" under the AIG Agreement which is not waived
would constitute an event of default under the new agreement.
Interest rates charged on amounts drawn on this line of credit
are dependent upon numerous variables, including the Company's
credit ratings, the duration of the borrowings and whether such
borrowings are made by the Company or its domestic or foreign
subsidiaries. Interest rates are based upon various published
rates, including the prime lending rate, certificate of deposit
rates, federal funds borrowing rates and LIBOR. The Company has
full and immediate access to the $200 million credit line and has
no borrowings outstanding under this agreement at March 31, 1995.
On March 27, 1995, the Company, Shand Morahan and Company, Inc.
(Shand) and the rehabilitator of Mutual Fire Marine and Inland
Insurance Company (Mutual Fire) entered into a settlement
agreement which, if approved by the courts, would terminate the
rehabilitator's litigation and release the Company and Shand from
any further claims by the rehabilitator. Under the terms of the
settlement, the Company paid $12 million in cash into an escrow
account on April 1, 1995 and issued a $35 million six-year zero-
coupon note with a present value of $25.9 million, secured by a
letter of credit, using a discount rate of 9.3%. The note is
payable in six equal, consecutive annual installments,
commencing on or before the first day of April 1996. The cash
and note will be released from escrow 31 days after final court
approval, which was given on May 10, 1995. (See Note 11 of the
Unaudited Notes to Financial Statements).
In March 1995, a U.S. subsidiary prepaid an unsecured $10 million
term loan with a bank due August 1995.
In January 1995, the Company negotiated the settlement of certain
obligations relating to the 1987 sale of Shand. Under the terms
of the settlement, the Company paid $14 million in cash, issued a
five year interest bearing note in the principal amount of $14
million and expects to pay a net contingent obligation of $4.5
million ($5.8 million contingent notes payable less $1.3 million
contingent note receivable). The $14 million note payable is due
on January 25, 2000 or may be prepaid in whole, or from time to
time in part, without premium or penalty and bears interest at a
rate of 10.6%. Interest is payable on the unpaid principal
amount on the first day of June and December of each year
commencing June 1, 1995. The contingent obligations are due
within five years and payable on demand. (See Note 11 of the
Unaudited Notes to Financial Statements).
13
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
----------------------------------------------------
11. Contingencies
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.
Certain claims asserted against the Company and certain of its
subsidiaries alleging, among other things, that certain Alexander
Howden 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.
Claims asserting these allegations are pending in suits filed in
New York and Ohio. In a New York action brought in 1985, claims
were asserted against the Company and certain subsidiaries (Pine
Top Insurance Company, Ltd. v. Alexander & Alexander Services
Inc., et al., 85 Civ. 9860 (RPP) (S.D.N.Y.)). The plaintiff
sought compensatory and punitive, as well as treble damages
under RICO totalling approximately $87 million, arising from
alleged RICO violations, common law fraud, breach of contract
and negligence. Two subsidiaries counterclaimed for breach of
certain reinsurance contracts with the plaintiff. This action
was settled as of January 12, 1995 and the action was
voluntarily dismissed in February 1995. The settlement amount
was $4.5 million. The Company's portion was $2.1 million which
was previously reserved under its professional indemnity
program. In a similar New York action brought in 1988 against
the Company and certain subsidiaries (Certain Underwriters at
Lloyd's of London Subscribing to Insurance Agreements ML8055801,
et al. v. Alexander & Alexander Services Inc., et al., formerly
captioned Dennis Edward Jennings v. Alexander & Alexander Europe
plc, et al., 88 CIV. 7060 (RO) (S.D.N.Y.)), plaintiffs seek
compensatory and punitive damages, as well as treble damages
under RICO totaling $36 million. The defendants have counterclaimed
against some of the plaintiffs for contribution. Discovery in this
case remains to be concluded and no trial date has been set. In the
Ohio action brought in 1985 (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.)), plaintiffs
seek compensatory and punitive damages, as well as treble damages
under RICO totaling $24 million. A directed verdict in the Company's
favor was affirmed on March 14, 1994 in a decision by the U.S.
District Court for the Southern District of Ohio. The plaintiffs have
appealed this decision to the U.S. Court of Appeals for the
Sixth Circuit. Management of the Company believes 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. These actions are covered under
the Company's professional indemnity program, except for
possible damages under RICO. The Company currently believes the
reasonably possible loss that might result from these actions,
if any, would not be material to the Company's financial
position or results of operations.
14
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
----------------------------------------------------
11. Contingencies (continued)
In 1987, the Company sold Shand, its domestic underwriting
management subsidiary. Prior to the sale, Shand and its subsidiaries
had 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 February 1991, the
rehabilitator 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 and is captioned Foster v. Alexander & Alexander
Services Inc., 91 Civ. 1179. The complaint, which seeks
compensatory and punitive damages, alleges that Shand and, in
certain respects, the Company breached duties to and agreements
with, Mutual Fire. The rehabilitator, through an expert's
report, indicated that the alleged damages are approximately
$234 million, a conclusion with which the Company, based on
substantial arguments, strongly disagreed.
On March 27, 1995, the Company, Shand and the rehabilitator
entered into a settlement agreement which, if approved by the
courts, would terminate the rehabilitator's litigation and
release the Company and Shand from any further claims by the
rehabilitator. Under the terms of the settlement, the Company
paid $12 million in cash into an escrow account on April 1, 1995
and issued a $35 million six-year zero-coupon note with a
present value of $25.9 million, secured by a letter of credit,
using a discounted rate of 9.3%. The cash and note will be
released from escrow 31 days after final court approval, which was
given on May 10, 1995. In addition, Shand is required to return
$4.6 million of trusteed assets to the rehabilitator and the
rehabilitator has eliminated any right of set-offs previously
estimated to be $4.7 million. The Mutual Fire settlement agreement
includes certain features protecting the Company from potential
exposure to claims for contribution brought by third parties and
expenses arising out of such claims. Although the Company's
professional liability underwriters have denied coverage for the
Mutual Fire lawsuit, the Company has instituted a declaratory
judgment action attempting to validate coverage (Alexander & Alexander
Services Inc. and Alexander & Alexander Inc. plaintiffs against those
certain underwriters at Lloyd's, London, England subscribing to
insurance evidence by policy numbers 879/P. 31356 and 879/P. 35349 and
Assicurazioni Generali, S.P.A., defendants No. 92 Civ. 6319
(F.D.N.Y.)). In the fourth quarter of 1994, the Company increased
its previously established reserves of $10 million based on an
estimated settlement amount, and recorded a pre-tax charge of $37.2
million ($24.2 million after-tax or $0.55 per share).
Under the 1987 agreement with the purchaser of Shand, the
Company agreed to indemnify the purchaser against certain
contingencies, including, among others, (i) losses arising out of
pre-sale transactions between Shand or Shand's subsidiaries, on the
one hand, and Mutual Fire, on the other, and (ii) losses arising out
of pre-sale errors or omissions by Shand or Shand's subsidiaries.
The Company's obligations under the indemnification provisions in
the 1987 sales agreement were not limited as to amount or duration.
15
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
----------------------------------------------------
11. Contingencies (continued)
Starting in late 1992, the purchaser of Shand has asserted a
number of claims under both the Mutual Fire indemnification
provision and the errors-and-omissions indemnification provision
of the sales agreement. Most of those claims have been resolved
by a series of settlement agreements, involving the settlement
or release of (a) claims relating to reinsurance recoverables
due to Shand's subsidiaries from Mutual Fire, (b) claims
relating to deterioration of reserves for business written by
Mutual Fire and ceded to Shand's subsidiaries, and (c) a number
of errors-and-omissions claims by third-party reinsurers against
Shand. Under the settlement agreement entered into in January
1995, covering the errors-and-omissions claims by third-party
reinsurers, the Company obtained a release and limitation of
indemnification obligations relating to certain third-party
errors-and-omissions claims, and restructured the contractual
relationship with the purchaser so that the parties' future
interests as to third-party claims are more closely aligned. The
Company paid $14 million in cash, issued a five-year interest
bearing note in the principal amount of $14 million and expects
to pay a net contingent obligation of $4.5 million. In the
fourth quarter of 1994, the Company recorded a pre-tax charge of
$32.5 million ($21.1 million after-tax, or $0.48 per share)
associated with this settlement. Notwithstanding these
settlements, the limitation of certain contract obligations and
the restructuring of the parties' relationship, some of the
Company's indemnification provisions under the 1987 agreement are
still in effect. As a result, there remains the possibility of
substantial exposure under the indemnification provisions of the
1987 agreement, although the Company, based on current facts and
circumstances, believes the possibility of a material loss
resulting from these exposures is remote.
In November 1993, a class action suit was filed against the
Company and two of its directors and officers, Tinsley H. Irvin
and Michael K. White, in the United States District Court for the
Southern District of New York under the caption Harry Glickman v.
Alexander & Alexander Services Inc., et al. (Civil Action No. 93
Civ. 7594). On January 6, 1995, the plaintiff filed a second
amended complaint which, among other things, dropped Mr. White
as a defendant. The second amended complaint purports to assert
claims on behalf of a class of persons who purchased the
Company's Common Stock during the period May 1, 1991 to November
4, 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 second amended complaint seeks damages in
an unspecified amount, as well as attorneys' fees and other
costs, for alleged violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The defendants have filed a
motion to dismiss the second amended complaint. Management of
the Company believes there are valid defenses to the allegations
set forth in the complaint and the Company intends to vigorously
dispute this claim. The Company currently believes that this
action is covered by the Company's insurance program and that
the reasonably possible loss that might result, if any, would
not be material to the Company's financial position or results
of operations.
These contingent liabilities involve significant amounts. While
it is not possible to predict with certainty the outcome of such
contingent liabilities, the applicability or availability of
coverage for such matters under the Company's professional
indemnity insurance program, or their financial impact on the
Company, management currently believes that such impact will not
be material to the Company's financial position. 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.
16
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
----------------------------------------------------
11. Contingencies (continued)
Under the AIG Agreement, the Company has agreed to make certain
payments to AIG pursuant to indemnifications given with respect to
the Company's balance sheet as of March 31, 1994. Pursuant to an
amendment to the AIG Agreement, dated November 10, 1994, the
Company's potential exposures under the indemnification,
individually or in the aggregate, was limited to $10 million.
Pursuant to a second amendment, dated March 16, 1995, the
indemnification was further limited to cover only tax payments and
reserves in excess of recorded tax reserves as of March 31, 1994.
As a result of this indemnification, the Company has classified
$10 million of the proceeds from the issuance of the Series B
Convertible Preferred Shares outside stockholders' equity until
such time as the indemnification, if any, is satisfied or terminated.
12. Financial Instruments
The Company enters into foreign exchange forward contracts and
foreign exchange option agreements primarily to provide risk
management against existing firm commitments as well as anticipated
future exposures that will arise at its London-based specialist
insurance and reinsurance broking operations. The exposures
arise because a significant portion of the revenues of these
operations are denominated in U.S. dollars, while their
expenses are primarily denominated in U.K. pounds sterling.
The Company generally sells forward U.S. dollars and purchases
U.K. pounds sterling for periods of up to two years in the future.
Such contracts provide risk management against future anticipated
transactions which are not firm commitments. In addition, the
Company enters into foreign exchange contracts to manage market
risk associated with foreign exchange volatility on intercompany
loans and expected intercompany dividends. Finally, the Company
enters into foreign exchange contracts to effectively offset
existing contracts when anticipated exchange rate movements
would benefit the Company.
Gains and losses on contracts which are designated as hedges of
firm commitments are deferred until the settlement dates.
Contracts which are not designated as hedges are marked to market at
each balance sheet date and are included in other current assets or
liabilities, with the resulting gain or loss recorded as a component
of other operating expenses. The fair market value of all foreign
exchange contracts at March 31, 1995 was $3.2 million.
Foreign exchange options written by the Company are marked to
market at each balance sheet date and the resulting gain or loss is
recorded as a component of other operating expenses. Future cash
requirements may exist if the option is exercised by the holder.
Based on foreign exchange rates at March 31, 1995, these options
could have been exercised at a nominal cost to the Company.
At March 31, 1995, the Company had approximately $89.2 million
notional principal of forward exchange contracts outstanding,
primarily to exchange U.S. dollars into U.K. pounds sterling, and
approximately $24.7 million notional principal outstanding,
primarily to exchange U.K. pounds sterling into U.S. dollars. In
addition, at March 31, 1995, the Company had no foreign exchange
contracts outstanding related to intercompany loans.
17
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
----------------------------------------------------
12. Financial Instruments (continued)
The Company has entered into interest rate swaps and forward
rate agreements, which are accounted for as hedges, as a means
to limit the earnings volatility associated with changes in
short-term interest rates on its existing and anticipated
fiduciary investments with maturities of three months or less.
These instruments are contractual agreements between the Company
and financial institutions which exchange fixed and floating
interest rate payments periodically over the life of the
agreements without exchanges of the underlying principal
amounts. The notional principal amounts of such agreements are
used to measure the interest to be paid or received and do not
represent the amount of exposure to credit loss. The Company
records the difference between the fixed and floating rates of
such agreements as a component of its fiduciary investment
income. Interest rate swaps and forward rate agreements which
relate to debt securities are marked to market in accordance
with SFAS No. 115. At March 31, 1995, an unrealized loss of $0.4
million on interest rate swaps and forward rate agreements which
hedge existing and anticipated fiduciary investments with
maturities of three months or less was reflected in fiduciary
cash and equivalents in the Consolidated Balance Sheet.
At March 31, 1995 and December 31, 1994 the Company had the
following interest rate swaps and forward rate agreements in
effect, by year of final maturity:
<TABLE><CAPTION>
March 31, 1995
------------------------------------------------------
Gross Net Weighted Gross Net Weighted
Receiving Average Paying Average
Year Fixed Interest Rate Fixed Interest Rate
---- --------- ------------- ------ -------------
<S> <C> <C> <C> <C>
1995 $412.2 7.17% $246.1 7.50%
1996 295.3 7.33 32.1 8.85
1997 98.0 6.65 - -
1998 10.0 8.00 - -
------ ---- ------ ----
Total $815.5 7.18% $278.2 7.66%
====== ==== ====== ====
<CAPTION>
December 31, 1994
------------------------------------------------------
Gross Net Weighted Gross Net Weighted
Receiving Average Paying Average
Year Fixed Interest Rate Fixed Interest Rate
---- --------- ------------- ------ -------------
<S> <C> <C> <C> <C>
1995 $457.0 6.84% $257.0 6.83%
1996 291.9 7.30 31.2 8.85
1997 97.8 6.65 - -
------ ---- ------ ----
Total $846.7 6.98% $288.2 7.05%
====== ==== ====== ====
</TABLE>
The Company generally enters into interest rate swap agreements
with a final maturity of three years or less. The floating rate on
these agreements is generally based upon the six-month LIBOR
rate on the relevant six-month reset dates. The Company also
generally uses six-month LIBOR as the floating rate index for
its forward rate agreements. Forward rate agreements generally
have a final maturity date that is less than two years.
18
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
----------------------------------------------------
12. Financial Instruments (continued)
In addition, as part of its interest rate management program,
the Company utilizes various types of interest rate options,
including caps, collars, floors and interest rate guarantees.
The Company generally writes covered interest rate options under
which the Company receives a fixed interest rate.
The options are marked to market at each balance sheet date,
based on the Company's estimated cost to settle the options. The
estimated cost to settle the options, less any premium deferred by
the Company, is recognized as a reduction to fiduciary investment
income in the period when such changes in market value occur. At
March 31, 1995, the Company recognized a current liability of
$0.5 million, representing the estimated cost to settle these
options at that date. The estimated cost to settle these
options was $1.3 million at December 31, 1994. The estimated
cost to settle these agreements was determined by obtaining
quotes from banks and other financial institutions which make a
market in these instruments.
At March 31, 1995 and December 31, 1994, the Company had the
following written interest rate option agreements outstanding,
by year of final maturity:
<TABLE><CAPTION>
March 31, 1995
------------------------------------------------------
Gross Net Weighted Gross Net Weighted
Receiving Average Paying Average
Year Fixed Interest Rate Fixed Interest Rate
---- --------- ------------- ------ -------------
<S> <C> <C> <C> <C>
1995 $16.0 5.27% $ - - %
1996 44.1 5.43% 10.0 4.60
1997 16.0 8.50% - -
1998 10.0 8.50 - -
----- ---- ----- ----
Total $86.1 6.33% $10.0 4.60%
===== ==== ===== ====
<CAPTION>
December 31, 1994
------------------------------------------------------
Gross Net Weighted Gross Net Weighted
Receiving Average Paying Average
Year Fixed Interest Rate Fixed Interest Rate
---- --------- ------------- ------ -------------
<S> <C> <C> <C> <C>
1995 $15.6 5.27% $ - - %
1996 43.4 5.42 10.0 4.60
----- ---- ----- ----
Total $59.0 5.38% $10.0 4.60%
===== ==== ===== ====
</TABLE>
19
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
Unaudited Notes to Financial Statements (continued)
----------------------------------------------------
12. Financial Instruments (continued)
The above financial instruments are purchased from large
international banks and financial institutions with strong credit
ratings. Credit limits are established based on such credit ratings
and are monitored on a regular basis. Management does not
anticipate incurring any losses due to non-performance by these
institutions. In addition, the Company monitors the market risk
associated with these agreements by using probability analyses,
external pricing systems and information from banks and brokers.
The following methods and assumptions were used in estimating
the fair value of each class of financial instrument. The fair
values of short-term and long-term investments were estimated based
upon quoted market prices for the same or similar instruments. The
fair value of long-term debt, including the current portion, was
estimated on the basis of market prices for similar issues at
current interest rates for the applicable period. The fair value
of interest rate swaps and forward rate agreements was estimated
by discounting the future cash flows using rates currently
available for agreements of similar terms and maturities. The
fair value of foreign exchange forward contracts and foreign
exchange option agreements was estimated based upon year-end
exchange rates. The fair value of interest rate options was
estimated based upon market quotes of the cost to settle these
agreements. The carrying amounts of the Company's other
financial instruments approximate fair value due to their short-
term maturities.
The following table presents the carrying amounts and the
estimated fair value of the Company's financial instruments that
are not carried at fair value.
<TABLE><CAPTION>
As of March 31, 1995 As of December 31, 1994
-------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Long-term debt, including
current portion $184.1 $182.3 $149.8 $146.4
Foreign exchange forward
contracts 3.2 3.2 1.6 2.6
Interest rate swaps and
forward rate agreements (0.4) (2.4) (2.8) (8.2)
</TABLE>
20
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
Management's Discussion and Analysis of Financial Condition
and Results of Operations
---------------------------------------------------------------
OVERVIEW
The Company's insurance broking revenues are generally affected
by premium rates charged by insurance companies in the property
and casualty markets and the overall available market capacity.
Since the mid-to-late 1980s, commission and fee growth has been
constrained due to soft pricing and excess capacity and the
resultant intense competition among insurance carriers and
brokers for market share. Lower interest rates have reduced
investment income earned on fiduciary funds.
The Company's restructuring and related initiatives in part
reflect management's view that insurance premium pricing will
not improve significantly in the foreseeable future. Revenue
growth will depend increasingly on the development of new
products and services and new business generation. In addition,
interest rates are expected to increase moderately in the U.S.
and U.K.
Revenue growth from the Company's human resource management
consulting operations was impacted by uncertainty over health
care reform in the U.S. Many clients postponed or reduced
planned employee benefit reviews while waiting to analyze the
impact of the potential governmental health care proposals. The
Company anticipates moderate revenue growth in 1995 as
corporations recognize that any such proposals are not likely to
affect their efforts to redesign and streamline employee benefit
packages.
Overall comparable operating expenses are expected to decline in
1995 resulting from implementing the plan of restructuring and
other expense initiatives, including employee benefit cost
reductions, stringent travel and entertainment policies,
elimination of certain employee perquisites and the
consolidation of vendor and supply management. The Company has
estimated that approximately $100 million of expense savings
will be realized from these efforts; however, approximately one-
half of such savings will be offset by investments in new
technology, products and personnel to support revenue growth as
well as normal inflationary increases.
SUMMARY
The Company reported net income of $41.7 million, or $0.80 per
share ($0.69 per share on a fully diluted basis)for the three
months ended March 31, 1995. Included in the results is an
after-tax gain of $20.8 million, or $0.47 per share, from the
sale of Alexsis, the Company's U.S.-based third party
administrator operation.
In the first quarter of 1994, the Company reported a net loss of
$4.4 million, or $0.15 per share on a primary and fully diluted
basis. These results include 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."
The following discussion and analysis of significant factors
affecting the
Company's operating results and liquidity and capital resources
should be read in conjunction with the accompanying consolidated
financial statements and related notes.
21
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
---------------------------------------------------------------------
CONSOLIDATED
Operating Revenues
Consolidated operating revenues were $324.2 million for the
first quarter of 1995, an increase of $1.2 million, or 0.4
percent, from the corresponding period in 1994. Revenue
comparisons were impacted by both foreign currency fluctuations
and the effects of dispositions. After adjusting for the effect
of these items, total revenues increased $17.2 million, or 5.9
percent.
Commissions and Fees
Total commissions and fees were $308.3 million for the first
quarter of 1995, a decrease of $3.5 million, or 1.1 percent,
compared to the same period in 1994. The sale of non-core
operations reduced revenues in the comparable periods by $20.4
million and foreign exchange rates had a positive impact of $4.4
million. When adjusted for these items, total commissions and
fees increased by $12.5 million, or 4.5 percent.
Fiduciary Investment Income
Investment income earned on fiduciary funds for the first
quarter of 1995 increased by $4.7 million, or 42 percent, versus
1994 levels primarily due to higher average investment levels,
particularly in the U.K. and higher worldwide interest rates,
particularly in the U.S. and U.K.
The Company enters into interest rate swaps and forward rate
agreements to limit the earnings volatility associated with changes
in short-term interest rates on its existing and anticipated
fiduciary investments with maturities of three months or less. In
addition, as part of its interest rate management program, the
Company utilizes various types of interest rate options, including
caps, collars, floors and interest rate guarantees. These interest
rate swap and forward rate agreements and interest rate options
increased the Company's fiduciary investment income by $ 1 million and
$ 0.2 million in the first three months of 1995 and 1994,
respectively. For additional information relating to the Company's
interest rate financial instruments, see Note 12 of Unaudited Notes
to Financial Statements.
Operating Expenses
Consolidated operating expenses were $282.5 million for the
first quarter of 1995, a decrease of $35.3 million or 11.1
percent, versus the comparable quarter of 1994. After adjusting
for a $20.7 million decrease resulting from the sale of non-core
operations and an unfavorable foreign currency adjustment of
$2.6 million, operating expenses decreased $17.2 million, or 5.9
percent.
Salaries and Benefits
Consolidated salaries and benefits decreased by $18.6 million,
or 9.3 percent in the first quarter of 1995 versus the same
period in 1994. Excluding the $2.8 million unfavorable effect
of changes in foreign exchange rates and an $11.8 million
decrease resulting from operations sold, total salaries and
benefits decreased $9.6 million versus 1994 levels.
Contributing to this decrease was a 9.7 percent decline in
headcount, excluding the impact of sold operations, primarily
due to early retirement programs and worldwide workforce
reductions pursuant to the 1994 plan of restructuring. Also
reflected in the first quarter decrease were lower employee
benefit costs resulting from the Company's expense reduction
initiatives.
22
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
---------------------------------------------------------------------
Other Operating Expenses
Consolidated other operating expenses decreased by $16.7
million, or 14.3 percent, in the first quarter of 1995 compared
to 1994. Excluding the favorable impact of changes in foreign exchange
rates and dispositions of non-core businesses, other operating
expenses decreased by $7.6 million in 1995 versus 1994. This
decline has resulted from implementing the 1994 plan of
restructuring and other expense initiatives, including stringent
travel and entertainment policies, elimination of certain
employee perquisites and the consolidation of vendor supply
management.
Other Income (Expenses)
Investment Income
Investment income earned on operating funds increased for the
first quarter of 1995 by $2.9 million, or 145 percent. The
increase is primarily due to interest income earned on the
remaining proceeds from the July 1994 sale of 8% Series B
cumulative convertible preferred stock.
Interest Expense
Interest expense increased by $1 million, or 28.6 percent, in the
first quarter of 1995. The increase is due to a higher average
debt level resulting from the $50 million borrowing in mid-1994
relating to a contract with a reinsurance company and the
issuance of long-term notes payable upon settlement of the Shand
contingencies in the first quarter of 1995.
Other
Other non-operating income (expenses) consists of the following:
<TABLE><CAPTION>
Three Months Ended March 31,
-----------------------------
1995 1994
---- ----
<S> <C> <C>
Gains on sales of businesses $ 30.6 $ -
Litigation costs (0.1) (2.5)
Other (0.1) (0.7)
------ -----
$ 30.4 $(3.2)
====== =====
</TABLE>
On February 28, 1995, the Company completed the sale of Alexsis,
Inc., its U.S.-based third party claims administrator. The total
proceeds from the sale were $47.1 million with a resulting pre-
tax gain of $30.3 million ($20.8 million after-tax or $0.47 per
share). In January 1995, the Company sold its minority interest
in a U.K. merchant bank for cash proceeds of $7.2 million and a
pre-tax gain of $0.3 million.
Litigation costs are associated primarily with the Mutual Fire
lawsuit described in Note 11 of the Unaudited Notes to Financial
Statements.
Income Taxes
The Company reported net tax expense of $26.5 million on pre-tax
income of $72.5 million in the first quarter of 1995. This rate
is higher than the expected tax expense of $25.4 million based
on the U.S. statutory rate of 35 percent, primarily due to
state and local income taxes and to certain expenses which are
not deductible, including amortization of goodwill. Partially
offsetting these factors is the favorable impact of the amount
of gain recognized on the sale of Alexsis for tax purposes as
well as foreign tax rates lower than the U.S. statutory rate.
23
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
---------------------------------------------------------------------
In the first quarter of 1994, the Company reported a tax benefit
of $0.2 million on pre-tax income of $0.5 million. This
compares to an expected tax expense of $0.2 million at the U.S.
rate of 35 percent. The tax rate was favorably impacted by
state and local tax benefits on losses generated in the U.S.
operations as well as foreign tax rates lower than the U.S.
statutory rate. These factors were offset in part by
amortization of goodwill and certain other non-deductible
expenses.
As discussed in Note 6 of the Unaudited Notes to Financial
Statements, during 1994, the Company was advised that the Joint
Committee on Taxation had approved the agreement reached in 1993
by the Company and the Appeals Office of the Internal Revenue
Service (IRS) on settlement of tax issues with respect to years
1980 throught 1986. Also during 1994, the Company reached an
agreement with the IRS on settlement of the examination of years
1987 through 1989. On February 28, 1995, the Company paid the
amounts due for years 1980 through 1989 and charged the tax and
net interest totaling $35.6 million against previously
established reserves.
In 1994, the Company received a Notice of Proposed Adjustment
from the IRS in connection with the examination of its 1990 and
1991 U.S. federal income tax returns, proposing an increase in
taxable income for the 1991 year which, if sustained, would
result in additional tax liability estimated by the Company at
$50 million. This proposed adjustment relates to intercompany
transactions involving the stock of a United Kingdom subsidiary.
As discussed in Note 6 of the Unaudited Notes to Financial
Statements, the Company disagrees with the IRS position on this
issue. Although the ultimate outcome of the matter cannot be
predicted with certainty, the Company and its independent tax
counsel believe there are meritorious defenses to the proposed
adjustment and substantial arguments to sustain the Company's
position and that the Company should prevail in the event this
issue is litigated.
A similar set of transactions occurred in 1993 for which the IRS
could propose an increase in taxable income which would result
in an additional tax liability estimated by the Company at $25
million. The Company's 1993 tax return is not currently under
examination. The Company believes it should prevail in the
event this similar issue is raised by the IRS. Accordingly, no
provision for any liability with respect to the 1991 and 1993
transactions has been made in the consolidated financial
statements.
The Company believes that its current tax reserves are adequate
to cover its tax liabilities.
Discontinued Operations
In 1985, the Company discontinued its insurance underwriting
operations. In 1987 the Company sold Sphere Drake Insurance Group
(Sphere Drake). The Sphere Drake sales agreement provides
indemnities by the Company to the purchaser for various potential
liabilities including provisions covering future losses on certain
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 (Syndicate 701).
In addition, the sales agreement requires the Company to assume
any losses in respect of actions or omissions by Swann & Everett
Underwriting Agency (Swann & Everett), an underwriting
management company previously managed by Alexander Howden Group
plc (Alexander Howden).
24
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
---------------------------------------------------------------------
The net liabilities of discontinued operations shown in the
accompanying Consolidated Balance Sheets include insurance liabilities
associated with the above indemnities, liabilities of insurance
underwriting subsidiaries currently in run-off and other related
liabilities.
The insurance liabilities represent estimates of future claims
expected to be made under occurrence-based insurance policies and
reinsurance business written through Lloyd's and the London market
covering primarily asbestosis, environmental pollution, and latent
disease risks in the United States which are coupled with
substantial litigation expenses. These claims are expected to
develop and be settled over the next twenty to thirty years.
Liabilities stemming from these claims cannot be estimated using
conventional actuarial reserving techniques because the
available historical experience is not adequate to support the
use of such techniques and because case law, as well as
scientific standards for measuring the adequacy of site cleanup
(both of which have had, and will continue to have, a
significant bearing on the ultimate extent of the liabilities)
is still evolving. Accordingly, the Company's independent
actuaries have combined available exposure information with
other data and have used various projection techniques to
estimate the insurance liabilities, consisting principally of
incurred but not reported losses.
On July 1, 1994, the Company entered into a finite risk contract
providing protection primarily for exposures relating to Orion,
Syndicate 701 and Swann & Everett. The contract provided for a
payment by the Company of $80 million ($50 million of which was
borrowed from the reinsurance company) to the reinsurance company
and for payment by the Company of the first $73 million of paid
claims. The contract entitles the Company to recover paid claims in
excess of the Company's $73 million retention. At March 31,
1995, the recoveries were limited to $110 million, which
includes the Company's payment of $80 million. In addition,
commencing December 31, 1996, depending on the timing and amount
of paid loss recoveries under the contract, the Company may be
entitled to receive a payment from the reinsurance company in
excess of the amounts recovered for paid losses if the contract
is terminated. The contract is accounted for under the deposit
method of accounting and the accounting requirements for
discontinued operations.
Insurance liabilities in excess of recorded liabilities could
develop in the future. Based on independent actuarial estimates of
the amount and timing of claim payments, it is reasonably possible
that such additional liabilities of $191 million, net of
estimated amounts recoverable for paid losses under the finite
risk contracts of $117 million, could amount to $74 million.
However, management currently believes that such additional
insurance liabilities are not likely to develop.
The Company believes that, based on current estimates, the
established total net liabilities of discontinued operations are
sufficient to cover its exposures. However, there is no assurance
that further adverse development may not occur due to variables
inherent in the estimation processes and other matters described
above. The Company currently believes that the effect of such adverse
development, if any, will not be material to the Company's
financial position and results of operations.
25
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
---------------------------------------------------------------------
Cumulative Effect Adjustments
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.
26
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
----------------------------------------------------------------
SEGMENT INFORMATION
Insurance Services
Operating results for the Insurance Services segment of the
Company's operations are summarized below:
<TABLE><CAPTION>
Three Months Ended March 31,
----------------------------
1995 1994
---- ----
<S> <C> <C>
Operating revenues:
Risk management and insurance services
broking $188.8 $194.9
Specialist insurance and reinsurance
broking 68.7 67.8
Fiduciary investment income 15.8 11.1
------ ------
Total operating revenues 273.3 273.8
Operating expenses 226.8 255.4
------ ------
Operating income $ 46.5 $ 18.4
====== ======
</TABLE>
Risk Management and Insurance Services Broking Revenues
Worldwide risk management and insurance services broking
commissions and fees decreased $6.1 million, or 3.1 percent, for
the first quarter of 1995 compared to 1994. Reflected in this
decrease are the net impact of sold operations which reduced
revenues by $20.4 million and a favorable foreign exchange rate
variance of $2.3 million. After adjusting for these items,
commissions and fees increased $12 million, or 7.4 percent.
Contributing to this increase were seasonably higher revenues of
$5.7 million in the European operations, particularly in Germany,
France and the Netherlands. Recently enacted tax legislation in
Mexico also led to an acceleration in revenues of approximately
$2 million. Furthermore, increased revenues of $1.9 million,
$0.8 million and $0.6 million were reflected in the results of
the Asia-Pacific, Canada and U.S. operations, respectively, due
to new business production and higher client retention levels.
Specialist Insurance and Reinsurance Broking Revenues
Total first quarter 1995 broking commissions and fees for the
specialist insurance and reinsurance broking operations
increased $0.9 million, or 1.3 percent, versus 1994 levels.
Changes in foreign exchange rates increased first quarter 1995
broking revenues by $1.3 million. The $3.8 million decline in
the revenues of the Company's U.K. operations were substantially
offset by an increase of $3.4 million in the revenues of its
U.S. operations.
The Company enters into foreign exchange forward contracts and
foreign exchange option agreements primarily to provide risk
management against future exposures that arise at its London-based
specialist insurance and reinsurance broking operations. The
exposures arise because a significant portion of the revenues of
these operations are denominated in U.S. dollars, while their
expenses are primarily denominated in U.K. pounds sterling. For
additional information relating to the Company's foreign
exchange financial instruments, see Note 12 of the Unaudited
Notes to Financial Statements.
27
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
----------------------------------------------------------------
Fiduciary Investment Income
For the first quarter of 1995 investment income earned on
fiduciary funds, held by the Company in connection with its
broking services for the risk management and insurance services
broking and the specialist and reinsurance broking operations
was $7.5 million and $8.3 million, respectively, versus $5.8
million and $5.3 million, respectively, for the comparable
period in 1994. Total Insurance Services investment income
increased by $4.7 million, or 42.3 percent, versus 1994 levels.
The increase was primarily due to higher average investment
levels, particularly in the U.K., and higher worldwide interest
rates, particularly in the U.S. and U.K.
Operating Expenses
Worldwide risk management and insurance services operating
expenses for the first quarter of 1995 decreased $29.9 million,
or 14.9 percent, versus the same period in 1994. Foreign
exchange rate changes, including hedging contracts gains and
losses increased expenses by $1.4 million in 1995. The net
effect of sold operations reduced operating expenses by $20.7
million in 1995. After adjusting for these items, total
operating expenses decreased $10.6 million, or 6.1 percent.
Contributing to this decline were reductions in the operating
expenses of the U.S. and Canadian operations of $11.1 million
and $0.9 million, respectively. These decreases were the result
of the aforementioned restructuring and other expense
initiatives undertaken in 1994. Partially offsetting these
reductions to operating expenses were increases reported by the
European and Asia-Pacific operations of $0.8 million and $1.2
million, respectively, primarily due to acquisitions of small
brokerage businesses.
First quarter of 1995 operating expenses for the specialist and
reinsurance broking operations increased $1.3 million, or 2.3
percent, versus 1994. Foreign exchange rate variances,
including hedging gains and losses, negatively impacted expenses
by $0.5 million in 1995.
Human Resource Management Consulting
Operating results for the Human Resource Management Consulting
segment of
the Company's operations are summarized below:
<TABLE><CAPTION>
For the Month Ended
March 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Operating revenues:
Commissions and fees $ 50.8 $ 49.1
Fiduciary investment income 0.1 0.1
-------- ---------
Total operating revenues 50.9 49.2
-------- --------
Operating expenses 49.8 53.0
-------- --------
Operating income (loss) $ 1.1 $ (3.8)
======== ========
</TABLE>
Human resource management consulting commissions and fees
increased by $1.7 million, or 3.5 percent, in the first quarter
of 1995 compared to 1994. The impact of changes in foreign
exchange rates on such revenues was an increase of $0.7 million
in 1995. The remaining increase was primarily attributable to higher
consulting revenues in the Canadian and U.S. operations.
Operating expenses decreased by $3.2 million, or 6 percent, for
the first quarter of 1995 compared to 1994. Reflected in this
decrease was a $3.5 million reduction in the operating expenses
of the U.S. operations, as a result of the aforementioned
restructuring and other expense initiatives undertaken in 1994,
partially offset by a $0.7 million unfavorable effect from
changes in foreign exchange rates.
28
<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
At March 31, 1995, the Company's operating cash and cash
equivalents totaled $209.3 million, a $39.4 million decrease over
the 1994 year-end balance. In addition, the Company had $81.6
million of operating funds invested in short-term and long-term
investments at March 31, 1995, a $1.7 million decrease compared to
December 31, 1994.
Operating Activities
The Company's funds from operating activities consist primarily
of net income adjusted for non-cash items, including depreciation and
amortization, deferred income taxes, gains on sales of business and
changes in working capital balances. In addition, the net cash flows
relating to discontinued operations are included. In the first
quarter of 1995, the Company's operating activities used $108.3
million of operating funds.
The 1994 charges for restructuring required $8.5 million of cash
payments during the first quarter of 1995. The Company anticipates
that approximately $25.1 million of the remaining balance of $53.7
million will be funded during the remainder of 1995.
During the first quarter of 1995, the Company made a cash
payment of $14 million, increased long-term debt by $19.8
million and recorded a note receivable of $1.3 million under the
terms of the settlement relating to Shand. In accordance with
the Mutual Fire settlement agreement, the Company increased
long-term debt in the first quarter of 1995 by $25.9 million,
representing the present value of a $35 million zero coupon
note, secured by a letter of credit, using a discount rate of
9.3%, and made a $12 million cash payment into an escrow account
on April 1, 1995. This activity was applied against the 1994
special charges reserve and the Company's previously established
reserves.
As described in Note 6 of the Unaudited Notes to Financial
Statements, during 1994, the Company was advised that the Joint
Committee on Taxation had approved the agreement reached in 1993
by the Company and the Appeals Office of the IRS on settlement
of tax issues with respect to the years 1980 through 1986. Also
during 1994, the Company reached an agreement with the IRS on
settlement of the examination of years 1987 through 1989. In
February 1995 the Company paid the amounts due for the years
1980 through 1989 and charged the tax and net interest totaling
$35.6 million against previously established reserves.
Additionally, the Company paid approximately $40 million of
performance-based incentive costs in the first quarter of 1995.
Investing Activities
The Company's net capital expenditures for property and
equipment were $1.9 million and $4.5 million during the three
months ended March 31, 1995 and 1994, respectively. These
expenditures decreased as a result of the Company's
restructuring and other expense initiatives undertaken in 1994.
As a result of the devaluation of the Mexico peso in late 1994,
the Company's accumulated translation adjustment balance for its
Mexican operation reflected an unrealized loss of $ 6.2 million at
December 31, 1994. Further devaluation of the Mexico peso during the
first three months of 1995 has increased this unrealized loss to
$ 9.2 million at March 31, 1995. However, the Company expects to
maintain its strategic investment in Mexico for the long-term and
further anticipates that its Mexican operation will remain profitable.
Accordingly, the Company does not consider its investment in Mexico to
be permanently impaired.
In January 1995, the Company received the remaining proceeds of
$29.2 million from the November 1994 sale of the U.S.-based
personal lines business. In addition, the Company received $7.2
million in January 1995 from the sale of its minority interest
in a U.K. merchant bank and $47.1 million from the sale of
Alexsis in February 1995.
29
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
----------------------------------------------------------------
During 1995, the Company will also explore geographical market
expansion and further industry specialization as well as consider
possible niche and substantial strategic acquisitions. As part of
its evaluation of opportunities, the Company engages with interested
parties in discussions concerning possible transactions. The Company
has evaluated and is evaluating such opportunities and prospects and
will continue to do so throughout 1995. The Company cannot predict
if any transaction will be consummated, nor the terms or form of
consideration required.
Financing Activities
The decline in cash dividend payments reflects the reduction in
the Company's common stock dividend by 90 percent. The estimated
1995 annualized savings from this action will approximate $10
million for the comparable period. In addition, dividends on the
Company's Series B Preferred Shares are payable in kind
(additional preferred shares) until December 15, 1996 and
thereafter, at the election by the Board of Directors, until
December 15, 1999.
Under the terms of the AIG Agreement, the declaration or payment
of dividends on common stock in excess of prescribed amounts may
require the Company to purchase all or part of the then outstanding
Series B Convertible Preferred Shares. Dividends on the Series B
Convertible Preferred Shares will reduce the amount of earnings
otherwise available for common stockholders by approximately $17
million in the first year after issuance, and by approximately $23
million in the fifth year after issuance, assuming dividends on
the Series B Convertible Preferred Shares were to be paid in
kind throughout the first five years after issuance.
On March 27, 1995, the Company's previously existing credit
agreement was replaced by a new $200 million three-year facility
with various banks which expires in March 1998. The Company has
full and immediate access to the $200 million credit line and
has no borrowings outstanding under this agreement at March 31,
1995. See Note 10 of the Unaudited Notes to Financial
Statements for further information regarding this credit
agreement.
Supplementing the credit agreement, the Company has unsecured
lines of credit available for general corporate purposes totaling
$87.8 million, of which $84.9 million were unused at March 31, 1995.
These lines consist of uncommitted cancellable facilities in
foreign countries. If drawn, the lines bear interest at market
rates and carry annual commitment fees of not greater than 1/2
percent of the line.
In March 1995, a U.S. subsidiary prepaid an unsecured $10
million term loan due August 1995.
Other
In the first quarter of 1995, the Accumulated Translation
Adjustments, which represent the cumulative effect of
translating the Company's international operations to U.S.
dollars, positively impacted total Stockholders' Equity by $5.9
million. The increase resulted from the weakening of the U.S.
dollar against most of the major currencies of the Company's
overseas operations.
30
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
----------------------------------------------------------------
At March 31, 1995, the Company has an accumulated deficit of
$252.7 million. The Company's current financial position satisfies
Maryland law requirements for the payment of dividends. At March 31,
1995, the current maximum amount of unrestricted funds the Company
has available to pay Common Stock dividends under Maryland law equaled
approximately $ 250.2 million. The Board of Directors will continue
to take into consideration the Company's financial performance and
projections, as well as the provisions of the AIG Agreement pertaining
to dividends described in Note 11 of the Unaudited Notes to Financial
Statements, in connection with future decisions with respect to
dividends. In addition, no dividends may be declared or paid on the
Company's Common Stock unless an equivalent amount per share is
declared and paid on the dividend-paying shares associated with the
Class A and Class C Common stock.
As described in Notes 7 and 11 of the Unaudited Notes to
Financial Statements, the Company believes its most significant
litigation matters and other contingencies have been settled.
The Company believes that cash flow from operations, along with
current cash balances, supplemented by the remaining proceeds
from the sale of the Series B Convertible Preferred Shares and
asset sales, will be sufficient to fund working capital as well
as all other obligations on a timely basis. In the event
additional funds are required, the Company believes it will have
sufficient resources, including borrowing capacity, to meet such
requirements.
31
<PAGE>
PART II. OTHER INFORMATION
Alexander & Alexander Services Inc. & Subsidiaries
--------------------------------------------------
Item 1. Legal Proceedings
Reference is made to Part I, Note 11 of the Unaudited Notes to
Financial Statements and to MD&A hereof as to the Company's discussion
of the Mutual Fire litigation and related contingencies which is
incorporated herein by reference in its entirety.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Item
----------- ----
11.0 Statement Re: Computation of per Common
Share Earnings
27.0 Financial Data Schedule
(b) Current Reports on Form 8-K
Current Report on Form 8-K was filed on March 15, 1995
regarding (i) earnings for the year ended and the quarter ended
December 31, 1994; (ii) completion of Sphere Drake
transaction, (iii) settlement with the Shand/Evanston Group,
Inc.; (iv) sale of the Company's minority interest in Noble
Grossart Holdings Limited; (v) sale of Alexsis, Inc.; (vi)
adoption of Non-Employee Director Deferred Compensation
Program (the "NEDD Plan"); and (vii) election of E. Gerald
Corrigan and Ronald A. Iles to the Company's board of
directors.
Current Report on Form 8-K was filed on March 28, 1995
regarding (i) Company's new credit facility; (ii) settlement
of the Mutual Fire litigation and related disputes; and (iii)
election of Edward F. Kosnik to the Company's board of
directors.
32
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized, on the
15th day of May, 1995.
ALEXANDER & ALEXANDER SERVICES INC.
-----------------------------------
(Registrant)
BY:/s/ Edward F. Kosnik May 15, 1995
----------------------------------------------
Edward F. Kosnik Date
Executive Vice President &
Chief Financial Officer
33
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 1995
INDEX TO EXHIBITS
Certain exhibits to this Report on Form 10-Q have been
incorporated by reference. For a list of these Exhibits see Item
6 hereof. The following exhibits are being filed herewith:
Exhibit Page No.
------- --------
11.0 Statement RE: Computation of per Common
Share Earnings 35
27.0 Financial Data Schedule 36
34
EXHIBIT 11.0
Statement RE: Computation of per Common Share Earnings
Alexander & Alexander Services Inc.
(in millions, except per share information)
<TABLE><CAPTION>
Three months ended
March 31,
-------------------------
1995 1994
------- -------
<S> <C> <C>
PRIMARY
- --------
Earnings (Loss) Attributable to Common Shareholders:
---------------------------------------------------
Income (loss) before cumulative effect of change in accounting $41.7 ($1.8)
Cumulative effect of change in accounting - (2.6)
--------- ---------
Net income (loss) 41.7 (4.4)
Less: Preferred stock dividends (6.2) (2.1)
--------- ---------
Earnings (loss) attributable to common shareholders $35.5 ($6.5)
========= =========
Average Common and Common Equivalent Shares Outstanding:
--------------------------------------------------------
Average common shares outstanding 44.2 43.5
Add shares of common stock assumed issued on:
Exercise of stock options 0.1 -
--------- ---------
Average common and common equivalent shares outstanding 44.3 43.5
========= =========
FULLY DILUTED
- -------------
Fully Diluted Earnings Per Share:
---------------------------------
Income (loss) before cumulative effect of change in accounting $41.7 ($1.8)
Cumulative effect of change in accounting - (2.6)
--------- ---------
Net income (loss) 41.7 (4.4)
Less: Preferred stock dividends (6.2) (2.1)
--------- ---------
Earnings (loss) attributable to common shareholders 35.5 (6.5)
Add:Preferred stock dividends 6.2 -
Interest on debentures 1.1 -
--------- ---------
Net income available to common shareholders $42.8 ($6.5)
========= =========
Average Common Shares Outstanding, Assuming Full Dilution:
----------------------------------------------------------
Average common shares outstanding 44.2 43.5
Add shares of common stock assumed issued on:
Exercise of stock options 0.3 -
Conversion of convertible debentures 1.6 -
Conversion of preferred stock 15.8 -
--------- ---------
Average common shares outstanding, assuming full dilution 61.9 43.5
========= =========
</TABLE>
Note: Fully diluted earnings per share for the quarter ended March 31,1994
was antidilutive; therefore, the amounts for primary and fully diluted
earnings per share computations were the same.
35
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000003449
<NAME> ALEXANDER & ALEXANDER SERVICES INC.
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 799
<SECURITIES> 243
<RECEIVABLES> 1,200
<ALLOWANCES> 25
<INVENTORY> 0
<CURRENT-ASSETS> 2,366
<PP&E> 411
<DEPRECIATION> 286
<TOTAL-ASSETS> 2,944
<CURRENT-LIABILITIES> 2,092
<BONDS> 0
<COMMON> 42
0
7
<OTHER-SE> 316
<TOTAL-LIABILITY-AND-EQUITY> 2,944
<SALES> 0
<TOTAL-REVENUES> 324
<CGS> 0
<TOTAL-COSTS> 283
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 73
<INCOME-TAX> 27
<INCOME-CONTINUING> 42
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42
<EPS-PRIMARY> .80
<EPS-DILUTED> .69
</TABLE>
