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 June 30, 1995
-------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 Identification
incorporation or organization) 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 August 1,
1995 was 41,939,292.
The number of shares of Class A Common Stock, $.00001 par value, outstanding as
of August 1, 1995 was 2,002,597.
The number of shares of Class C Common Stock, $1 par value, outstanding as of
August 1, 1995 was 365,335.
No shares of Class D Common Stock, $1 par value, were outstanding as of August
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 and Six Months Ended June 30, 1995 and 1994..................2
Condensed Consolidated Balance Sheets, as of
June 30, 1995(Unaudited) and December 31, 1994.....................3
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1995 and 1994.............................5
Unaudited Notes to Financial Statements...............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................22
Part II. Other Information:
Item 1. Legal Proceedings...............................................40
Item 4. Submission of Matters to a Vote of Security Holders.............40
Item 6. Exhibits........................................................41
1
<PAGE>
<TABLE><CAPTION>
Alexander & Alexander Services Inc. and Subsidiaries
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
Unaudited Consolidated Statements of Operations
For the Three and Six Months Ended June 30 1995 and 1994
--------------------------------------------------------
(in millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues:
Commissions and fees $311.4 $322.8 $619.7 $634.6
Fiduciary investment income 16.7 12.3 32.6 23.5
------ ------ ------ ------
Total 328.1 335.1 652.3 658.1
------ ------ ------ ------
Operating expenses:
Salaries and benefits 186.4 200.5 368.5 401.2
Other 102.5 120.0 202.9 237.1
------ ------ ------ ------
Total 288.9 320.5 571.4 638.3
------ ------ ------ ------
Operating income 39.2 14.6 80.9 19.8
------ ------ ------ ------
Other income (expenses):
Investment income 4.4 1.5 9.3 3.5
Interest expense (5.0) (3.7) (9.5) (7.2)
Other 2.4 (3.3) 32.8 (6.5)
------ ------ ------ ------
Total 1.8 (5.5) 32.6 (10.2)
------ ------ ------ ------
Income before income taxes and
minority interest 41.0 9.1 113.5 9.6
Income taxes (17.2) (4.0) (43.7) (3.8)
------ ------ ------ ------
Income before minority interest 23.8 5.1 69.8 5.8
Minority interest (1.1) (1.3) (5.4) (3.8)
------ ------ ------ ------
Income from continuing operations 22.7 3.8 64.4 2.0
Loss from discontinued operations - (6.0) - (6.0)
------ ------ ------ ------
Income (loss) before cumulative effect of
change in accounting 22.7 (2.2) 64.4 (4.0)
Cumulative effect of change in
accounting - - - (2.6)
------ ------ ------ ------
Net income (loss) 22.7 (2.2) 64.4 (6.6)
Preferred stock dividends (6.3) (2.1) (12.5) (4.2)
------ ------ ------ ------
Earnings (loss) attributable to common
shareholders $ 16.4 $ (4.3) $ 51.9 $(10.8)
====== ====== ====== ======
PER SHARE INFORMATION:
----------------------
Primary earnings per share:
Income (loss) from continuing operations $ 0.37 $ 0.04 $ 1.17 $(0.05)
Loss from discontinued operations - (0.14) - (0.14)
Cumulative effect of change in accounting - - - (0.06)
------ ------ ------ ------
Net income (loss) $ 0.37 $(0.10) $ 1.17 $(0.25)
====== ====== ====== ======
Average common and common equivalent shares
outstanding 44.6 43.6 44.4 $ 43.5
====== ====== ====== ======
Fully diluted earnings per share:
Income (loss) from continuing operations $ 0.36 $ 0.04 $ 1.06 $(0.05)
Loss from discontinued operations - (0.14) - (0.14)
Cumulative effect of change in accounting - - - (0.06)
------ ------ ------ ------
Net income (loss) $ 0.36 $(0.10) $ 1.06 $(0.25)
====== ====== ====== ======
Average common shares outstanding, assuming
full dilution 57.0 43.6 56.9 43.5
====== ====== ====== ======
Cash dividends per common share $0.025 $0.025 $0.050 $0.275
====== ====== ====== ======
See accompanying notes to financial statements.
2
</TABLE>
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Condensed Consolidated Balance Sheets
June 30, 1995 (Unaudited) and December 31, 1994
------------------------------------------------
(in millions)
June 30, December 31,
1995 1994
-------- ------------
ASSETS
------
Current assets:
Cash and cash equivalents:
Operating $ 216.2 $ 248.7
Fiduciary 664.5 428.5
Short-term investments:
Operating 8.7 19.2
Fiduciary 253.9 292.2
Premiums and fees receivable (less
allowance for doubtful accounts
of $24.2 in 1995 and $23.7 in 1994) 1,282.9 1,206.1
Deferred income taxes 24.9 71.5
Other current assets 89.3 120.7
-------- --------
Total current assets 2,540.4 2,386.9
Property and equipment - net 123.1 138.0
Intangible assets - net 173.5 175.1
Deferred income taxes 116.3 87.1
Long-term operating investments 73.1 64.1
Other 99.9 94.5
-------- --------
$3,126.3 $2,945.7
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Premiums payable to insurance companies $2,000.2 $1,738.3
Short-term debt 0.6 1.0
Current portion of long-term debt 12.6 17.1
Deferred income taxes 9.1 8.5
Accrued compensation and related benefits 50.8 60.0
Income taxes payable 43.1 66.3
Other accrued expenses 166.2 258.1
-------- --------
Total current liabilities 2,282.6 2,149.3
-------- --------
Long-term liabilities:
Long-term debt 155.4 132.7
Deferred income taxes 15.9 13.4
Net liabilities of discontinued operations 44.3 56.8
Other 231.7 266.0
-------- --------
Total long-term liabilities 447.3 468.9
-------- --------
Commitments and contingent liabilities
(Notes 6, 7 and 11)
8% Series B cumulative convertible preferred
stock contingency (Note 11) 10.0 10.0
-------- --------
See accompanying notes to financial statements.
-Continued-
3
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Condensed Consolidated Balance Sheets (continued)
June 30, 1995 (Unaudited) and December 31, 1994
----------------------------------------------------
(in millions)
June 30, December 31,
1995 1994
--------- ------------
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, 4.3 and 4.1
shares, respectively, liquidation preference
of $215 million and $205 million, respectively 4.3 4.1
Common stock, authorized 200 shares, $1 par
value; issued and outstanding 41.9
and 41.5 shares, respectively 41.9 41.5
Class A common stock, authorized 26 shares,
$.00001 par value; issued and outstanding
2.0 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 625.4 615.0
Accumulated deficit (237.4) (287.1)
Net unrealized investment gains - net of
deferred income taxes 4.6 1.5
Accumulated translation adjustments (55.1) (60.2)
-------- --------
Total stockholders' equity 386.4 317.5
-------- --------
$3,126.3 $2,945.7
======== ========
See accompanying notes to financial statements.
4
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1995 and 1994
----------------------------------------------------
(in millions)
Six Months Ended
June 30,
-----------------
1995 1994
---- ----
Cash provided (used) by:
Operating activities:
Income from continuing operations $ 64.4 $ 2.0
Adjustments to reconcile to net cash
used by operating activities:
Depreciation and amortization 22.4 26.0
Deferred income taxes 17.1 19.0
Gains on sales of subsidiaries (32.0) --
Other 6.3 6.7
Changes in assets and liabilities (net of
effects from acquisitions and dispositions):
Net fiduciary cash and cash equivalents and
short-term investments (181.5) (128.5)
Premiums and fees receivable (67.7) 34.5
Other current assets (15.5) (9.2)
Other assets (10.3) 14.7
Premiums payable to insurance companies 231.4 113.2
Other accrued expenses (100.9) (74.6)
Other long-term liabilities (3.7) (9.3)
Discontinued operations (net) (12.5) (7.3)
Cumulative effect of change in accounting -- (2.6)
------- -------
Net cash used by operating activities (82.5) (15.4)
------- -------
Investing activities:
Net purchases of property and equipment (7.5) (10.9)
Purchases of businesses (2.0) (0.7)
Proceeds from sales of subsidiaries and
other assets 87.8 0.4
Purchases of operating investments (85.8) (5.1)
Sales/maturities of operating investments 89.2 6.8
------- -------
Net cash provided (used) by investing
activities 81.7 (9.5)
------- -------
See accompanying notes to financial statements.
-Continued-
5
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries
PART I. FINANCIAL INFORMATION (continued)
----------------------
Item 1. Financial Statements (continued)
Unaudited Consolidated Statements of Cash Flows (Continued)
For the Six Months Ended June 30, 1995 and 1994
-----------------------------------------------------------
(in millions)
Six Months Ended
June 30,
-------------------
1995 1994
---- ----
Financing activities:
Cash dividends $ (6.4) $(16.1)
Proceeds from issuance of short-term debt 0.1 11.4
Payments of short-term debt (0.6) (14.5)
Proceeds from issuance of long-term debt 0.4 0.7
Repayments of long-term debt (30.2) (1.8)
Issuance of common stock 0.1 0.3
------ ------
Net cash used by financing activities (36.6) (20.0)
------ ------
Effect of exchange rate changes on operating
cash and cash equivalents 4.9 3.2
Operating cash and cash equivalents at
beginning of year 248.7 151.5
------ ------
Operating cash and cash equivalents at end
of period $216.2 $109.8
====== ======
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 9.1 $ 8.0
Income taxes 59.9 24.6
Non-cash investing and financing activities:
Notes payable issued for contingency
settlements $ 45.7 $ --
Series B cumulative convertible preferred
stock dividends-in-kind 8.4 --
Common stock issued for employee benefit and
stock plans 2.1 1.3
Common stock issued for non-employee stock
plans 0.3 --
Note receivable established for
contingency settlement 1.3 --
See accompanying notes to financial statements.
6
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Notes to Financial Statements
---------------------------------------
(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 six 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 were 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. Of these amounts, $5.9
million will be paid from various pension plans of the Company. During the
first six months of 1995, the Company paid $10 million of these liabilities.
The Company expects to pay an additional $9.3 million of the remaining
balance of $22.5 million throughout the remainder of 1995 with the remaining
balance paid in the form of annuities, generally over periods of fifteen
years or less.
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 six
months of 1995, the Company paid $5 million of these liabilities and
wrote-off assets of $1 million. The Company, expects to pay an additional
$4.9 million of the remaining $14.2 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 $4.2 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)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Notes to Financial Statements
---------------------------------------
(in millions, except per share information)
4. Dispositions
In the second quarter of 1995, the Company sold two small operations for
gross proceeds of $1.9 million with total pre-tax gains of $1.4 million.
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:
Three Months Ended Six Months Ended
June 30, 1995 June 30,
------------------- ----------------
1995 1994 1995 1994
---- ---- ---- ----
Gains on sales of subsidiaries
(See Note 4) $1.4 $ -- $32.0 $ --
Litigation costs -- (2.9) (0.1) (5.4)
Other 1.0 (0.4) 0.9 (1.1)
---- ----- ----- -----
$2.4 $(3.3) $32.8 $(6.5)
==== ===== ===== =====
Litigation costs in 1994 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 such years 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, excluding interest and penalties. 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)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Notes to Financial Statements
---------------------------------------
(in millions, except per share information)
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, excluding interest
and penalties. 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:
As of As of
June 30, 1995 December 31, 1994
------------- -----------------
Liabilities:
Insurance liabilities $272.7 $277.6
Other 16.5 31.4
------ ------
Total liabilities 289.2 309.0
------ ------
Assets:
Recoverable under finite risk contracts:
Insurance liabilities 133.4 135.7
Premium adjustment 10.8 10.8
Reinsurance recoverables 60.1 64.2
Cash and investments 21.5 23.6
Other 12.1 10.9
------ ------
Total assets 237.9 245.2
------ ------
Total net liabilities of discontinued
operations 51.3 63.8
Less current portion classified as
other accrued expenses 7.0 7.0
------ ------
Remainder classified as net liabilities
of discontinued operations $ 44.3 $ 56.8
====== ======
9
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Notes to Financial Statements
----------------------------------------
(in millions, except per share information)
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
June 30, 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 June 30, 1995, recoveries were limited to $112
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,
the occurrence of which is currently considered to be remote by the Company,
to terminate that contract.
10
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Notes to Financial Statements
---------------------------------------
(in millions, except per share information)
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 $189 million, net of estimated amounts recoverable for paid
losses under the finite risk contracts of $117 million, could amount to $72
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 six
months ended June 30, 1995 are as follows:
Beginning balance $ 63.8
Claims and expense payments (12.1)
Other (0.4)
------
Ending balance $ 51.3
======
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 shareholders 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 Cumulative Convertible Preferred Stock are not Common Stock
equivalents.
Fully diluted earnings per share are computed by dividing earnings
attributable to common shareholders plus preferred dividends and interest
expense, net of tax, on the convertible subordinated debentures by the
weighted average number of common shares outstanding during the period after
giving effect to the exercise of stock options, the conversion of preferred
stock and the conversion of convertible subordinated debentures (in each
instance if dilutive). The computations of fully diluted earnings per share
for the three and six months ended June 30, 1994 were antidilutive;
therefore, the amounts for primary and fully diluted earnings per share were
the same.
11
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Notes to Financial Statements
---------------------------------------
(in millions, except per share information)
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 June 30, 1995, net unrealized holding gains totaled
$4.6 million, net of deferred income taxes of $1.6 million, and are reported
as a separate component of Stockholders' Equity. During the six months ended
June 30, 1995, the net unrealized holding gains increased by approximately
$3.1 million and proceeds from sales of securities totaled $58.6 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 June 30, 1995 are
summarized below:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ---------- ---------
U.S. Government agencies/
state issuances $ 6.8 $ - $ - $ 6.8
Other interest-bearing
securities 91.9 - - 91.9
Mortgage-backed securities 23.0 - - 23.0
Equity securities 3.7 5.8 - 9.5
Financial instruments - used
as hedges - 0.7 (0.3) 0.4
--------- -------- --------- --------
Total $ 125.4 $ 6.5 $ (0.3) $ 131.6
========= ======== ========= ========
The above debt and equity securities and financial instruments used as
hedges are classified in the Consolidated Balance Sheet at June 30, 1995 as
follows:
Cash and cash equivalents:
Operating $ 14.7
Fiduciary 65.3
Short-term investments:
Operating 0.9
Fiduciary 22.6
Long-term operating investments 28.1
--------
Total $ 131.6
========
The amortized cost and estimated fair value of debt securities at June 30,
1995 by contractual maturity are summarized below:
Estimated
Amortized Fair
Cost Value
--------- ---------
Due in one year or less $ 93.5 $ 93.5
Due after one year through five years 4.9 4.9
Due after five years through ten years 0.2 0.2
Due after ten years 0.1 0.1
--------- ---------
98.7 98.7
Mortgage-backed securities 23.0 23.0
--------- ---------
Total debt securities $ 121.7 $ 121.7
========= =========
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)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Notes to Financial Statements
---------------------------------------
(in millions, except per share information)
10. Debt
On March 27, 1995, the Company's then existing credit agreement was replaced
by a new $200 million three-year facility with various banks which expires
in March 1998. The agreement provides for unsecured borrowings, including up
to $100 million of letters of credit, 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 June 30, 1995, this ratio
was 8.86 to 1. In addition, the occurrence of a "Special Event" under the
AIG Agreement, which if not waived by AIG, would constitute an event of
default under the new agreement. Interest rates charged on amounts drawn on
this credit agreement 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. During the second quarter of 1995, the Company arranged a $10
million letter of credit under the agreement. The Company has full and
immediate access to the remaining $190 million credit line at June 30, 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 was subsequently approved by
the courts and which terminated the rehabilitator's litigation and released
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 cash and note were released
from escrow on June 9, 1995. The note is payable in six equal, consecutive
annual installments, commencing on or before the first day of April 1996. A
partial payment of $0.3 million was paid on the note in June 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 which was 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). In June 1995,
the $14 million note payable was prepaid in whole, as well as $1.8 million
of the contingent notes payable. In addition, $1.3 million of cash was
received for payment of the contingent note receivable. The remaining
contingent note payable of $4 million is due within five years of the
agreement date and payable on demand.
(See Note 11 of the Unaudited Notes to Financial Statements.)
13
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Notes to Financial Statements
---------------------------------------
(in millions, except per share information)
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)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Notes to Financial Statements
---------------------------------------
(in millions, except per share information)
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 sought compensatory and punitive damages, alleged 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 was subsequently approved by the courts and
which terminated the rehabilitator's litigation and released the Company and
Shand from any further claims by the rehabilitator. Under the terms of the
settlement, the Company had 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 were released from escrow on
June 9, 1995. In addition, Shand has returned $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 up to $32.5 million (Alexander & Alexander Services Inc.
and Alexander & Alexander Inc., plaintiffs, against those certain
underwriters at Lloyd's, London, England, subscribing to insurance
evidenced by policy numbers 879/P. 31356 and 879/P. 35349 and
Assicurazioni Generali, S.P.A., defendants No. 92 Civ. 6319 (S.D.N.Y.)).
All required documents in this case have been submitted to the court, and
the Company is awaiting a decision on this matter. In the fourth quarter of
1994, the Company increased its previously established reserves of $10
million for Mutual Fire 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)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Notes to Financial Statements
---------------------------------------
(in millions, except per share information)
11. Contingencies (continued)
Starting in late 1992, the purchaser of Shand had 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 with
the purchasers of Shand, 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
from the purchasers of Shand 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. In June 1995, the $14
million note payable was prepaid in whole, as well as $1.8 million of the
contingent notes payable. In addition, $1.3 million of cash was received
for payment of the contingent note receivable. The remaining contingent
note payable of $4 million is due within five years of the agreement date
and payable on demand.
Notwithstanding these settlements with the purchasers of Shand, 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 this 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 that 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.
16
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Notes to Financial Statements
---------------------------------------
(in millions, except per share information)
11. Contingencies (continued)
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.
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, were 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 June 30, 1995 was $2.1 million.
17
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Notes to Financial Statements
---------------------------------------
(in millions, except per share information)
12. Financial Instruments (continued)
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. At June 30, 1995, the Company had $20
million notional principal of written foreign exchange options outstanding.
Based on foreign exchange rates at June 30, 1995, the Company recognized a
current liability of $0.4 million, consisting of unamortized premiums,
representing the estimated cost to settle these options at that date. At
December 31, 1994, the Company's foreign exchange options could have been
exercised at a nominal cost to the Company.
At June 30, 1995, the Company had approximately $89 million notional
principal of forward exchange contracts outstanding, primarily to exchange
U.S. dollars into U.K. pounds sterling, and approximately $33.1 million
notional principal outstanding, primarily to exchange U.K. pounds
sterling into U.S. dollars. In addition, at June 30, 1995, the Company had
no foreign exchange contracts outstanding related to intercompany loans.
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 June 30, 1995, an unrealized
gain 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.
18
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Notes to Financial Statements
---------------------------------------
(in millions, except per share information)
12. Financial Instruments (continued)
At June 30, 1995 and December 31, 1994 the Company had the following
interest rate swaps and forward rate agreements in effect, by year of final
maturity:
June 30, 1995
------------------------------------------------------
Gross Net Weighted Gross Net Weighted
Receiving Average Paying Average
Year Fixed Interest Rate Fixed Interest Rate
---- --------- ------------- ------ -------------
1995 $345.9 7.38% $445.9 6.68%
1996 434.9 7.31 144.0 6.55
1997 124.0 6.90 - -
1998 46.0 7.24 - -
------ ---- ------ ----
Total $950.8 7.28% $589.9 6.65%
====== ==== ====== ====
December 31, 1994
------------------------------------------------------
Gross Net Weighted Gross Net Weighted
Receiving Average Paying Average
Year Fixed Interest Rate Fixed Interest Rate
---- --------- ------------- ------ -------------
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%
====== ==== ====== ====
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.
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 June 30, 1995, the estimated cost to settle these
options was nominal. At December 31, 1994, the Company recognized a current
liability of $1.3 million, representing the estimated cost to settle these
options at that date. 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.
19
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Notes to Financial Statements
---------------------------------------
(in millions, except per share information)
12. Financial Instruments (continued)
At June 30, 1995 and December 31, 1994, the Company had the following
written interest rate option agreements outstanding, by year of final
maturity:
June 30, 1995
------------------------------------------------------
Gross Net Weighted Gross Net Weighted
Receiving Average Paying Average
Year Fixed Interest Rate Fixed Interest Rate
---- --------- ------------- ------ -------------
1996 $44.0 5.43% $10.0 4.60%
1997 16.0 8.50 - -
1998 10.0 8.50 - -
----- ---- ----- ---
Total $70.0 6.57% $10.0 4.60%
===== ==== ===== ====
December 31, 1994
-----------------------------------------------------
Gross Net Weighted Gross Net Weighted
Receiving Average Paying Average
Year Fixed Interest Rate Fixed Interest Rate
---- --------- ------------- ------ -------------
1995 $15.6 5.27% $ - - %
1996 43.4 5.42 10.0 4.60
----- ---- ----- ----
Total $59.0 5.38% $10.0 4.60%
===== ==== ===== ====
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 applicable period-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.
20
<PAGE>
Alexander & Alexander Services Inc. and Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 1. Financial Statements (continued)
Unaudited Notes to Financial Statements
---------------------------------------
(in millions, except per share information)
12. Financial Instruments (continued)
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.
As of June 30, 1995 As of December 31, 1994
------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Long-term debt, including
current portion $168.0 $168.7 $149.8 $146.4
Foreign exchange forward
contracts 2.1 2.1 1.6 2.6
Interest rate swaps and
forward rate agreements 0.4 3.2 (2.8) (8.2)
21
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. 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. The Company's investment income
earned on fiduciary funds is generally affected by short-term interest rate
levels. A downward trend in interest rates occurred in the early 1990's.
However, short-term interest rates have risen since the latter half of 1994.
The Company's 1994 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.
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 slightly lower revenue growth in 1995
as a result of the restructuring program, including a decline in the number
of U.S.-based consultants.
Overall comparable operating expenses are expected to decline in 1995,
resulting from implementing the plan of restructuring and other expense
initiatives, including certain employee benefit cost reductions, tightening
of travel and entertainment practices, 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.
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.
THREE MONTHS ENDED JUNE 30, 1995 vs. 1994
-----------------------------------------
Consolidated
The Company reported net income of $22.7 million, or $0.37 per share on
consolidated operating revenues of $328.1 million for the three months ended
June 30, 1995. Fully diluted earnings per share for the quarter were $0.36.
For the same period of 1994, the Company reported a net loss of $2.2
million, or $0.10 per share on a primary and fully diluted basis, on
consolidated operating revenues of $335.1 million. These results include a
$6 million, or $0.14 per share, charge to discontinued operations.
22
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
--------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1995 vs. 1994 (continued)
-----------------------------------------
Operating Revenues
Consolidated operating revenues were $328.1 million for the second quarter
of 1995 compared to $335.1 million for the same period in 1994. Excluding
the impact of both foreign currency fluctuations and the effects of
dispositions, total revenues increased $15.1 million, or 4.9 percent over
the 1994 second quarter.
Commissions and Fees
Total commissions and fees were $311.4 million for the second quarter of
1995 compared to $322.8 million for the same period in 1994. The sale of
non-core operations reduced revenues in the second quarter of 1995 by $28.2
million and foreign exchange rates had a positive impact of $6.4 million.
When adjusted for these items, total commissions and fees increased by $10.4
million, or 3.5 percent.
Fiduciary Investment Income
Investment income earned on fiduciary funds for the second quarter of 1995
increased by $4.4 million, or 36 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. The
effect of these interest rate swap and forward rate agreements and interest
rate options on the Company's fiduciary investment income was not
significant in the second quarters 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 $288.9 million for the second quarter
of 1995, a decrease of $31.6 million or 9.9 percent, versus the comparable
quarter of 1994. After adjusting for a $28.4 million decrease resulting from
the sale of non-core operations and an unfavorable foreign currency
variance of $7.9 million, including hedging contracts gains and losses,
operating expenses decreased $11.1 million, or 3.8 percent on a comparable
basis.
23
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1995 vs. 1994 (continued)
-----------------------------------------
Operating Expenses (continued)
Salaries and Benefits
Consolidated salaries and benefits decreased by $14.1 million, or 7 percent
in the second quarter of 1995 versus the same period in 1994. Excluding the
$4.5 million unfavorable effect of changes in foreign exchange rates and an
$16.3 million decrease resulting from operations sold, total salaries and
benefits decreased $2.3 million versus the comparable quarter of 1994.
Contributing to this decrease was an 8.5 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 second quarter decrease were lower
employee benefit costs resulting from the Company's expense reduction
initiatives. Somewhat offsetting these decreases was an increase in
incentives attributable to improved sales and profit performance coupled
with new long-term incentive compensation plans.
Other Operating Expenses
Consolidated other operating expenses decreased by $17.5 million, or 14.6
percent, in the second quarter of 1995 compared to 1994. Excluding the
unfavorable impact of changes in foreign exchange rates, including hedging
contracts gains and losses, and reductions resulting from dispositions of
non-core businesses, other operating expenses decreased by $8.7 million, or
8.1 percent, in 1995 versus 1994. This decline has resulted from
implementing the 1994 plan of restructuring and other expense initiatives,
including tightening of travel and entertainment practices and the
elimination of certain employee perquisites.
Other Income (Expenses)
Investment Income
Investment income earned on operating funds increased in the second quarter
of 1995 by $2.9 million, or 193 percent over the comparable period in 1994.
The increase is primarily due to interest income earned on the remaining
proceeds from the July 1994 issuance and sale of the Company's 8% Series B
cumulative convertible preferred stock.
Interest Expense
Interest expense increased by $1.3 million, or 35.1 percent, in the second
quarter of 1995 versus 1994. 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 and Mutual Fire contingencies during
the first quarter of 1995.
24
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1995 vs. 1994 (continued)
-----------------------------------------
Other Income (Expenses) (continued)
Other
Other non-operating income (expenses) consists of the following:
Three Months Ended June 30,
---------------------------
1995 1994
---- ----
Gains on sales of businesses $ 1.4 $ -
Litigation costs - (2.9)
Other 1.0 (0.4)
------ -----
$ 2.4 $(3.3)
====== =====
During the second quarter of 1995, the Company sold two small operations for
gross proceeds of $1.9 million and resulting pre-tax gains totaling $1.4
million.
Litigation costs in 1994 are associated primarily with the Mutual Fire
lawsuit described in Note 11 of the Unaudited Notes to Financial Statements.
Income Taxes
The Company reported income tax expense of $17.2 million on pre-tax income
of $41 million in the second quarter of 1995. The expense is higher than the
expected tax expense of $14.3 million based on the U.S. statutory rate of 35
percent, primarily due to U.S. taxes on income earned by foreign
subsidiaries and to state and local income taxes. Certain expenses which are
not deductible, including amortization of goodwill also negatively affected
the tax rate. Partially offsetting these factors is the favorable impact of
foreign tax rates which were lower than the U.S. statutory rate.
The Company reported income tax expense of $4 million on pre-tax income of
$9.1 million in the second quarter of 1994. This compared to an expected tax
expense of $3.2 million based upon the U.S. statutory rate of 35 percent.
The tax rate was negatively impacted by the non-deductibility of certain
expenses for tax purposes; including amortization of goodwill and
entertainment expenses. Partially offsetting these factors were foreign tax
rates which were lower than the U.S. statutory rate.
25
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
--------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1995 vs. 1994 (continued)
-----------------------------------------
SEGMENT INFORMATION
Insurance Services
Operating results for the Insurance Services segment of the Company's
operations are summarized below:
Three Months Ended June 30,
---------------------------
1995 1994
---- ----
Operating revenues:
Risk management and insurance services
broking $187.2 $206.4
Specialist insurance and reinsurance
broking 70.8 60.9
Fiduciary investment income 16.6 12.2
------ ------
Total operating revenues 274.6 279.5
Operating expenses 229.9 254.1
------ ------
Operating income $ 44.7 $ 25.4
====== ======
Risk Management and Insurance Services Broking Revenues
Worldwide risk management and insurance services broking commissions and
fees decreased $19.2 million, or 9.3 percent, for the second quarter of 1995
compared to 1994. Reflected in this decrease are the impact of sold
operations which reduced revenues by $28.2 million and a favorable foreign
exchange rate variance of $4.4 million. After adjusting for these items,
commissions and fees increased $4.6 million, or 2.6 percent.
Increased commissions and fees of $2.3 million, $1.3 million and $0.5
million were reported in the U.S., Canadian and Asia-Pacific operations,
respectively. These increases reflect new business production and higher
client retention levels and include $1.7 million of non-recurring revenues
in the U.S. operations.
Specialist Insurance and Reinsurance Broking Revenues
Total second quarter 1995 broking commissions and fees for the specialist
insurance and reinsurance broking operations increased $9.9 million, or 16.3
percent, versus 1994 levels. Changes in foreign exchange rates increased
second quarter 1995 broking revenues by $1 million. After adjusting for the
effect of foreign exchange rates, commissions and fees increased $8.9
million or 14.6 percent. Of this increase, the U.K. operations and the U.S.
operations reported gains of $2.2 million and $3.5 million, respectively.
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.
26
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
--------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1995 vs. 1994 (continued)
-----------------------------------------
Fiduciary Investment Income
For the second 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 $8.3 million and $8.3 million, respectively, versus
$7.3 million and $4.9 million, respectively, for the comparable period in
1994. Total Insurance Services investment income increased by $4.4 million,
or 36.1 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
second quarter of 1995 decreased $31.4 million, or 15.6 percent, versus the
same period in 1994. Foreign exchange rate changes, including hedging
contracts gains and losses increased expenses by $2.2 million in 1995. The
effect of sold operations reduced operating expenses by $28.4 million in
1995. After adjusting for these items, total operating expenses decreased
$5.2 million, or 3 percent. The U.S. operations reported decreased expenses
of $7.1 million primarily resulting from the aforementioned restructuring
and other expense initiatives undertaken in 1994. Partially offsetting this
reduction were increases reported by the Asia-Pacific and Latin America
operations of $0.7 and $1 million, respectively. The Asia-Pacific operations
increased expenses were primarily due to the acquisition of a small
brokerage business.
Second quarter of 1995 operating expenses for the specialist and reinsurance
broking operations increased $7.2 million, or 13.8 percent, versus 1994
levels. Foreign exchange rate variances, including hedging gains and losses,
negatively impacted expenses by $4.7 million in 1995. Excluding the impact
of foreign exchange rate variances, total operating expenses increased $2.5
million, or 4.8 percent, which includes expenses for new long-term incentive
compensation plans.
Human Resource Management Consulting
Operating results for the Human Resource Management Consulting segment of
the Company's operations are summarized below:
For the Three Months Ended
June 30,
---------------------------
1995 1994
-------- ---------
Operating revenues:
Commissions and fees $ 53.4 $ 55.5
Fiduciary investment income 0.1 0.1
-------- --------
Total operating revenues 53.5 55.6
-------- --------
Operating expenses 50.5 54.9
-------- --------
Operating income $ 3.0 $ 0.7
======== ========
Human resource management consulting commissions and fees decreased by $2.1
million, or 3.8 percent, in the second quarter of 1995 compared to the same
period in 1994. The impact of changes in foreign exchange rates on such
revenues was an increase of $1 million in 1995. After adjusting for the
favorable effect of changes in foreign exchange rates, commissions and fees
decreased by $3.1 million, or 5.6 percent. This decrease is primarily
attributable to consulting revenue shortfalls in the U.S. operations.
27
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
--------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1995 vs. 1994 (continued)
-----------------------------------------
Human Resource Management Consulting (continued)
Operating expenses decreased by $4.4 million, or 8 percent, for the second
quarter of 1995 compared to 1994. Reflected in this decrease were operating
expense reductions of $3.6 million, $0.8 million and $0.8 million in the
U.S., U.K. and Canadian operations, respectively, as a result of the
aforementioned restructuring and other expense initiatives undertaken in
1994, partially offset by an unfavorable effect from changes in foreign
exchange rates of $1 million.
28
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1995 vs. 1994
---------------------------------------
Consolidated
The Company reported net income of $64.4 million, or $1.17 per share on
consolidated operating revenues of $652.3 million for the six months ended
June 30, 1995. Fully diluted earnings per share for the six months ended
June 30, 1995 were $1.06. 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.
For the six months ended June 30, 1994, the Company reported a net loss of
$6.6 million, or $0.25 per share on a primary and fully diluted basis, on
consolidated operating revenues of $658.1 million. These results included a
$6 million, or $0.14 per share, loss from discontinued operations and 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."
Operating Revenues
Consolidated operating revenues were $652.3 million for the first half of
1995, a decrease of $5.8 million, or 0.9 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 $32.2 million, or 5.4 percent.
Commissions and Fees
Total commissions and fees were $619.7 million for the first half of 1995, a
decrease of $14.9 million, or 2.1 percent, compared to the same period in
1994. The sale of non-core operations reduced revenues in the comparable
periods by $48.6 million and changes in foreign exchange rates had a
positive impact of $10.8 million. When adjusted for these items, total
commissions and fees increased by $22.9 million, or 4 percent.
Fiduciary Investment Income
Investment income earned on fiduciary funds for the first half of 1995
increased by $9.1 million, or 38.7 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 $1.2 million in the
first six months of 1995 and had a nominal effect on the same period in
1994. For additional information relating to the Company's interest rate
financial instruments, see Note 12 of Unaudited Notes to Financial
Statements.
29
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1995 vs. 1994 (continued)
---------------------------------------
Operating Expenses
Consolidated operating expenses were $571.4 million for the first half of
1995, a decrease of $66.9 million or 10.5 percent, versus the comparable
first six months of 1994. After adjusting for the $49.1 million decrease
resulting from the sale of non-core operations and the $10.4 million
unfavorable effect of changes in foreign currency rates, including hedging
contracts gains and losses, operating expenses decreased $28.2 million, or
4.8 percent.
Salaries and Benefits
Consolidated salaries and benefits decreased by $32.7 million, or 8.2
percent in the first six months of 1995 versus the same period in 1994.
Excluding the $7.3 million unfavorable effect of changes in foreign exchange
rates and an $28.1 million decrease resulting from operations sold, total
salaries and benefits decreased $11.9 million, or 3.2 percent, versus 1994
levels. Contributing to this decrease was an 8.5 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 half decrease were lower
employee benefit costs resulting from the Company's expense reduction
initiatives. Somewhat offsetting these favorable variances is an increase in
incentives attributable to improved sales and profit performance coupled
with the implementation of several new long-term incentive compensation
plans.
Other Operating Expenses
Consolidated other operating expenses decreased by $34.2 million, or 14.4
percent, in the first six months of 1995 compared to 1994. Excluding the
unfavorable impact of changes in foreign exchange rates, including hedging
contracts gains and losses, and dispositions of non-core businesses, other
operating expenses decreased by $16.3 million, or 7.7 percent, in 1995
versus 1994. This decline has resulted from implementing the 1994 plan of
restructuring and other expense initiatives, including tightening of travel
and entertainment practices, 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 half of
1995 by $5.8 million, or 165.7 percent. The increase is primarily due to
interest income earned on the remaining proceeds from the July 1994 issuance
and sale of the Company's 8% Series B cumulative convertible preferred
stock.
Interest Expense
Interest expense increased by $2.3 million, or 31.9 percent, in the first
six months of 1995 versus 1994. 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 and Mutual Fire contingencies during
the first quarter of 1995.
30
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1995 vs. 1994 (continued)
---------------------------------------
Other Income (Expenses) (continued)
Other
Other non-operating income (expenses) consists of the following:
Six Months Ended June 30,
-------------------------
1995 1994
---- ----
Gains on sales of businesses $ 32.0 $ -
Litigation costs (0.1) (5.4)
Other 0.9 (1.1)
------ -----
$ 32.8 $(6.5)
====== =====
During the second quarter of 1995, the Company sold two small operations for
gross proceeds of $1.9 million and resulting pre-tax gains totaling $1.4
million.
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 in 1994 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 $ 43.7 million on pre-tax income of
$113.5 million in the first half of 1995. The expense is higher than the
expected tax expense of $39.7 million based on the U.S. statutory rate of 35
percent, primarily due to U.S. taxes on income earned by foreign
subsidiaries and to state and local income taxes. Certain expenses which are
not deductible, including amortization of goodwill also negatively affected
the tax rate. 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 which were lower than the U.S. statutory rate.
The Company's effective tax rate in the first half of 1994 was 39.6%. The
rate was higher than the U.S. statutory rate of 35% primarily due to
amortization of goodwill and certain other non-deductible expenses. These
factors were offset in part by the favorable impact of state and local tax
benefits on losses generated in the U.S. operations as well as foreign tax
rates which were lower than the U.S. statutory rate.
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 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 such years and charged the tax and net interest totaling $ 35.6 million
against previously established reserves.
31
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
--------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1995 vs. 1994 (continued)
---------------------------------------
Income Taxes (continued)
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, excluding interest and penalties. 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, excluding interest
and penalties. 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).
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.
32
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1995 vs. 1994 (continued)
---------------------------------------
Discontinued Operations (continued)
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 June 30, 1995,
the recoveries were limited to $112 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. As a
result of this transaction, the Company recorded a $6 million charge in the
second quarter of 1994 which represented the cost of the premium and
deductible that exceeded existing reserves for covered exposures at that
time.
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 $189 million, net of estimated amounts recoverable for paid
losses under the finite risk contracts of $117 million, could amount to $72
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.
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.
33
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1995 vs. 1994 (continued)
---------------------------------------
SEGMENT INFORMATION
Insurance Services
Operating results for the Insurance Services segment of the Company's
operations are summarized below:
Six Months Ended June 30,
-------------------------
1995 1994
---- ----
Operating revenues:
Risk management and insurance services
broking $376.0 $401.4
Specialist insurance and reinsurance
broking 139.5 128.6
Fiduciary investment income 32.4 23.4
------ ------
Total operating revenues 547.9 553.4
Operating expenses 456.7 509.5
------ ------
Operating income $ 91.2 $ 43.9
====== ======
Risk Management and Insurance Services Broking Revenues
Worldwide risk management and insurance services broking commissions and
fees decreased $25.4 million, or 6.3 percent, for the first half of 1995
compared to 1994. Reflected in this decrease are the net impact of sold
operations which reduced revenues by $48.6 million and a favorable foreign
exchange rate variance of $6.8 million. After adjusting for these items,
commissions and fees increased $16.4 million, or 4.8 percent.
Contributing to this increase were higher revenues of $5 million in the
European operations particularly in Germany, France and the Netherlands.
These increases reflect increased commission rates and the acquisition of a
small brokerage business. Also, tax legislation enacted in Mexico during the
first quarter of 1995 has led to an acceleration in revenues of
approximately $2.4 million. In addition, increased revenues of $2.9 million,
$2.4 million and $2.1 million were reflected in the results of the U.S.,
Asia-Pacific and Canada operations, respectively, due to new business
production and higher client retention levels.
Specialist Insurance and Reinsurance Broking Revenues
For the first six months of 1995 total broking commissions and fees for the
specialist insurance and reinsurance broking operations increased $10.9
million, or 8.5 percent, versus 1994 levels. Changes in foreign exchange
rates increased 1995 broking revenues by $2.3 million. After adjusting for
the effect of foreign exchange rates, commissions and fees increased $8.6
million, or 6.7 percent. Increased revenues of $8.9 million in the U.S.
operations were partially offset by a $0.3 million decrease in the Company's
international operations. The international operations decrease includes a
revenue shortfall of $3.2 million in the Company's U.K. operations which was
substantially offset by strong new business in other markets, particularly
Mexico, the Middle East and France.
34
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1995 vs. 1994 (continued)
---------------------------------------
Specialist Insurance and Reinsurance Broking Revenues (continued)
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.
Fiduciary Investment Income
For the first six months 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 $15.8 million and $16.6 million,
respectively, versus $13.2 million and $10.2 million, respectively, for the
comparable period in 1994. Total Insurance Services investment income
increased by $9 million, or 38.5 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 half of 1995 decreased $61.3 million, or 15.2 percent, versus the same
period in 1994. Foreign exchange rate changes, including hedging contracts
gains and losses, increased expenses by $3.6 million in 1995. The net effect
of sold operations reduced operating expenses by $49.1 million in 1995.
After adjusting for these items, total operating expenses decreased $15.8
million, or 4.6 percent. Contributing to this decline were reductions in the
operating expenses of the U.S. and Canadian operations of $18.2 million and
$0.8 million, respectively. These decreases were the result of the
aforementioned restructuring and other expense initiatives undertaken in
1994 somewhat offset by an increase in incentives attributable to improved
sales and profit performance coupled with the implementation of several new
long-term incentive compensation plans. Additionally, partially offsetting
the operating expense reductions reported in the U.S. and Canadian
operations were increases in the European and Asia-Pacific operations of $1
million and $2 million, respectively, primarily due to acquisitions of small
brokerage businesses.
First six months of 1995 operating expenses for the specialist and
reinsurance broking operations increased $8.5 million, or 8 percent, versus
1994. Foreign exchange rate variances, including hedging gains and losses,
negatively impacted expenses by $5.1 million in 1995. Additionally,
contributing to the increase were additional incentives due to improved
operating profit in the U.K. and U.S. operations.
35
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1995 vs. 1994 (continued)
---------------------------------------
Human Resource Management Consulting
Operating results for the Human Resource Management Consulting segment of
the Company's operations are summarized below:
For the Six Months Ended
June 30,
------------------------
1995 1994
-------- --------
Operating revenues:
Commissions and fees $ 104.2 $ 104.6
Fiduciary investment income 0.2 0.1
-------- --------
Total operating revenues 104.4 104.7
-------- --------
Operating expenses 100.3 107.9
-------- --------
Operating income (loss) $ 4.1 $ (3.2)
======== ========
Human resource management consulting commissions and fees decreased by $0.4
million, or 0.4 percent, in the first half of 1995 compared to 1994. The
impact of changes in foreign exchange rates on such revenues was an increase
of $1.7 million in 1995. Excluding the impact of changes in foreign exchange
rates, these revenues decreased $2.1 million, or 2 percent. This decrease
was due to revenue declines of $3 million and $0.7 million in the U.S. and
U.K. operations, respectively, partially offset by increased revenues of
$1.4 million and $0.2 million in the Canadian and other international
operations, respectively.
Operating expenses decreased by $7.6 million, or 7 percent, for the first
six months of 1995 compared to 1994. Reflected in this decrease were
reductions of $7.2 million, $1.1 million and $1.2 million in the operating
expenses of the U.S., U.K. and Canadian operations, primarily as a result of
the aforementioned restructuring and other expense initiatives undertaken in
1994, partially offset by a $1.7 million unfavorable effect from changes in
foreign exchange rates.
36
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1995, the Company's operating cash and cash equivalents
totaled $216.2 million, a $32.5 million decrease over the 1994 year-end
balance. In addition, the Company had $81.8 million of operating funds
invested in short-term and long-term investments at June 30, 1995, a $1.5
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 six months of 1995, the Company's
operating activities used $82.5 million of operating funds, including the
following items.
The 1994 charges for restructuring required $15 million of cash payments
during the first six months of 1995. The Company anticipates that
approximately $14.2 million of the remaining balance of $46.8 million will
be funded during the remainder of 1995.
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 such years and charged the tax
and net interest totaling $35.6 million against previously established
reserves.
During the first quarter of 1995, the Company made a cash payment of $14
million under the terms of the settlement relating to Shand. A $12 million
cash payment was made on April 1, 1995 in accordance with the Mutual Fire
settlement agreement. These payments were applied against the 1994 special
charges reserve and the Company's previously established reserves.
During the first quarter of 1995, the Company made cash payments of
approximately $19.5 million relating to the settlement of certain large
litigation matters. These payments were applied against the Company's
previously established reserves.
Investing Activities
The Company's net capital expenditures for property and equipment were $7.5
million and $10.9 million during the six months ended June 30, 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 Mexican 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 Mexican peso during the first six months of 1995
has increased this unrealized loss to $8.8 million at June 30, 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.
37
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
-------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (continued)
Investing Activities (continued)
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 in February 1995 from the sale of Alexsis.
During 1995, the Company has evaluated and will continue to evaluate
domestic and international geographical market expansion possibilities and
further industry specialization. Additionally, the Company is considering
possible niche and substantial strategic acquisitions relating to its core
businesses, as well as other opportunities in the financial services
industry. 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
During the first quarter of 1995, the Company 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 the second quarter of 1995, $15.8
million of this long-term debt was prepaid and $1.3 million of cash was
received in payment of the note receivable. 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%. A partial payment $0.3 million was made on this note in June
1995. The first quarter activity was applied against the 1994 special
charges reserve and the Company's previously established reserves.
The decline in cash dividend payments reflects the reduction in the
Company's Common Stock dividend by 90 percent. The estimated 1995 savings
from this action will approximate $10 million. In addition, dividends on the
Company's Series B Cumulative Convertible Preferred Shares (Series B
Convertible Preferred Shares) are payable in kind (additional preferred
shares) until December 15, 1996 and thereafter, at the election of 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.
38
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries (the Company)
PART I. FINANCIAL INFORMATION (continued)
-----------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
--------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (continued)
Financing Activities (continued)
On March 27, 1995, the Company's then existing credit agreement was replaced
by a new $200 million three-year facility with various banks which expires
in March 1998. The agreement provides for unsecured borrowings, including up
to $100 million of letters of credit. During the second quarter of 1995, the
Company arranged a $10 million letter of credit under this agreement.
The Company has full and immediate access to the remaining $190 million
credit line at June 30, 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 $93.7 million, of
which $93.3 million were unused at June 30, 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
which was due August 1995.
Other
In the first six months 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 $5.1 million. The increase resulted from the
weakening of the U.S. dollar against most of the major currencies of the
Company's overseas operations.
At June 30, 1995, the Company has an accumulated deficit of $237.4 million.
The Company's current financial position satisfies Maryland law
requirements for the payment of dividends. At June 30, 1995, the current
maximum amount of unrestricted funds the Company has available to pay Common
Stock dividends under Maryland law equaled approximately $271.4 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 dividend declarations. 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, 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. In addition, the Company is currently
reviewing its options with respect to refinancing certain debt obligations.
39
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries
--------------------------------------------------
PART II. OTHER INFORMATION
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 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 18, 1995. At
the meeting, the Company's stockholders acted upon the following matters:
All fourteen nominees for director named in the Company's Proxy Statement,
dated April 11, 1995, were elected to the Board of Directors to hold office
until the next Annual Meeting of Stockholders and until their respective
successors are elected and qualified. The vote for election of directors was
as follows:
FOR WITHHELD
--- --------
Robert E. Boni 38,385,819 473,292
W. Peter Cooke 38,382,983 476,128
E. Gerald Corrigan 38,387,930 471,181
Joseph L. Dionne 38,387,978 471,133
Gerald R. Ford 38,328,104 531,007
Peter C. Godsoe 38,369,517 489,594
Angus M.M. Grossart 38,245,981 613,130
Maurice H. Hartigan II 38,379,817 479,294
James B. Hurlock 38,386,378 472,733
Ronald A. Iles 38,391,357 467,754
Edward F. Kosnik 38,391,560 467,551
Vincent R. McLean 38,297,970 561,141
James D. Robinson III 38,377,970 481,141
Frank G. Zarb 38,392,348 466,763
There were no abstentions or broker non-votes with respect to the election
of directors.
The proposal to ratify the appointment of Deloitte & Touche LLP as
independent auditors of the Company for 1995 was duly adopted. The vote was
as follows: 38,171,869 votes were cast for adoption of the proposal; 475,690
votes were cast against the adoption of the proposal; and there were 211,552
abstentions and broker non-votes with respect to the proposal.
The proposal to approve and adopt the Company's 1995 Long-Term Incentive
Plan was duly adopted. The vote was as follows: 26,702,641 votes were cast
for adoption of the proposal; 8,562,492 votes were cast against the adoption
of the proposal; and there were 3,593,978 abstentions and broker non-votes
with respect to the proposal.
The proposal to approve and adopt the Company's Employee Discount Stock
Purchase Plan was duly adopted. The vote was as follows: 32,854,282 votes
were cast for adoption of the proposal; 2,491,118 votes were cast against
the adoption of the proposal; and there were 3,513,711 abstentions and
broker non-votes with respect to the proposal.
The proposal to approve and adopt the Non-Employee Director Deferred Stock
Ownership Program was duly adopted. The vote was as follows: 33,051,108
votes were cast for adoption of the proposal; 2,178,338 votes were cast
against the adoption of the proposal; and there were 3,629,665 abstentions
and broker non-votes with the respect to the proposal.
40
<PAGE>
Alexander & Alexander Services Inc. & Subsidiaries
--------------------------------------------------
PART II. OTHER INFORMATION (continued)
Item 4. Submission of Matters to a Vote of Security Holders (continued)
The stockholder proposal to approve and adopt the Performance Bonus Plan for
Executive Officers was duly adopted. The vote was as follows: 32,795,112
votes were cast for adoption of the proposal; 2,433,226 votes were cast
against the adoption of the proposal; and there were 3,630,773 abstentions
and broker non-votes with respect to the proposal.
The stockholder proposal to permit cumulative voting in the election of
directors was not adopted. The vote was as follows: 11,999,152 votes were
cast for adoption of the proposal; 19,915,795 votes were cast against the
adoption of the proposal; and there were 6,944,164 abstentions and broker
non-votes with respect to the proposal.
The stockolder proposal to require stockholder approval of severance
arrangements for executives in charge of control situations was not adopted.
The vote was as follows: 11,702,095 votes were cast for adoption of the
proposal; 22,715,920 votes were cast against the adoption of the proposal;
and there were 4,441,096 abstentions and broker non-votes with respect to
the proposal.
Item 6. Exhibits
(a) Exhibits
Exhibit No. Item
---------- ----
4.0 Alexander & Alexander Services Inc. Employee
Discount Stock Purchase Plan (incorporated
herein by reference to the Company's Registration
Statement on Form S-8 Registration No. 33-60783
filed with the Commission on June 30, 1995).
11.0 Statement Re: Computation of per Common Share
Earnings
27.0 Financial Data Schedule
41
<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 14th day of August, 1995.
ALEXANDER & ALEXANDER SERVICES INC.
----------------------------------
(Registrant)
BY:/s/ Edward F. Kosnik August 14, 1995
-------------------------------------------------
Edward F. Kosnik Date
Executive Vice President &
Chief Financial Officer
42
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC.
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 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 44
27.0 Financial Data Schedule 45
43
<TABLE><CAPTION>
(UNAUDITED)
EXHIBIT 11.0
Alexander & Alexander Services Inc.
Computation of per Common Share Earnings
Three and Six Months Ended June 30, 1995
and 1994 (millions except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY
Earnings (Loss) Attributable to Common
Shareholders:
Income (loss) before cumulative effect of
change in accounting $ 22.7 $ (2.2) $ 64.4 $ (4.0)
Cumulative effect of change in accounting 0.0 0.0 0.0 (2.6)
------ ------ ------ ------
Net income (loss) 22.7 (2.2) 64.4 (6.6)
Less: Preferred stock dividends (6.3) (2.1) (12.5) (4.2)
------ ------ ------ ------
Earnings (loss) attributable to common
shareholders $ 16.4 $ (4.3) $ 51.9 $(10.8)
====== ====== ====== ======
Average Common and Common Equivalent Shares
Outstanding:
Average common shares outstanding 44.3 43.6 44.3 43.5
Add shares of common stock assumed issued on
exercise of stock options 0.3 0.0 0.1 0.0
------ ------ ------ ------
Average common and common equivalent shares
outstanding 44.6 43.6 44.4 43.5
====== ====== ====== ======
FULLY DILUTED
Fully Diluted Earnings Per Share:
Income (loss) before cumulative effect of
change in accounting $ 22.7 $ (2.2) $ 64.4 $ (4.0)
Cumulative effect of change in accounting 0.0 0.0 0.0 (2.6)
------ ------ ------ ------
Net income (loss) 22.7 (2.2) 64.4 (6.6)
Less: Preferred stock dividends (6.3) (2.1) (12.5) (4.2)
------ ------ ------ ------
Earnings (loss) attributable to common
shareholders 16.4 (4.3) 51.9 (10.8)
Add: Series B preferred stock dividends 4.2 0.0 8.4 0.0
------ ------ ------ ------
Net income available to common shareholders $ 20.6 $ (4.3) $ 60.3 $(10.8)
====== ====== ====== ======
Average Common Shares Outstanding, Assuming
Full Dilution:
Average common shares outstanding 44.3 43.6 44.3 43.5
Add shares of common stock assumed issued on:
Exercise of stock options 0.3 0.0 0.3 0.0
Conversion of Series B preferred stock 12.4 0.0 12.3 0.0
------ ------ ------ ------
Average common shares outstanding, assuming
full dilution 57.0 43.6 56.9 43.5
====== ====== ====== ======
44
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 881
<SECURITIES> 263
<RECEIVABLES> 1,307
<ALLOWANCES> 24
<INVENTORY> 0
<CURRENT-ASSETS> 2,540
<PP&E> 409
<DEPRECIATION> 286
<TOTAL-ASSETS> 3,126
<CURRENT-LIABILITIES> 2,283
<BONDS> 0
<COMMON> 42
0
7
<OTHER-SE> 337
<TOTAL-LIABILITY-AND-EQUITY> 3,126
<SALES> 0
<TOTAL-REVENUES> 652
<CGS> 0
<TOTAL-COSTS> 571
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 114
<INCOME-TAX> 44
<INCOME-CONTINUING> 64
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.06
</TABLE>
