<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
ALEXANDER & ALEXANDER SERVICES INC.
(Name of Registrant as Specified In Its Charter)
ALEXANDER & ALEXANDER SERVICES INC.
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $1.00 per share
(2) Aggregate number of securities to which transaction applies:
11,023,636 shares*
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$17.50 (the cash consideration per share of Common Stock to be
received in the Merger)
(4) Proposed maximum aggregate value of transaction:
$192,913,630*
*Includes all outstanding shares as of the date of this filing that are
not owned by Aon Corporation or a subsidiary thereof, and assumes the
exercise of all stock options to purchase shares of Common Stock issued
under the 1982 Stock Option Plan, the 1988 Long-Term Incentive
Compensation Plan, the 1995 Long-Term Incentive Plan, the Performance
Bonus Plan for Executive Officers, the Non-Employee Director Deferred
Stock Ownership Plan and the 1995 Employee Discount Stock Purchase Plan
and all shares issuable upon conversion of the Class A Common Stock,
par value $.00001 per share, the Class C Common Stock, par value $1.00
per share, and the $3.625 Series A Convertible Preferred Stock, par
value $1.00 per share, which are outstanding as of such date.
(5) Total fee paid:
$38,583 (all of which was previously paid)
[_] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
$193,610
(2) Form, Schedule or Registration Statement No.:
Schedule 14D-1 and Schedule 13D
(3) Filing Party:
Alexander & Alexander Services Inc.
(4) Date Filed:
December 16, 1996
Notes:
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 20, 1997
To the Stockholders of ALEXANDER & ALEXANDER SERVICES INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the Stockholders (the
"Special Meeting") of Alexander & Alexander Services Inc., a Maryland
corporation (the "Company"), will be held at the offices of the Company, 1185
Avenue of the Americas, 21st Floor Boardroom, New York, New York 10036, on
Thursday, February 20, 1997, at 10:00 a.m., Eastern time, for the following
purposes:
1. To consider and vote upon a proposal (the "Merger Proposal") to
approve the merger of Subsidiary Corporation, Inc. ("Merger Sub"), a
wholly-owned subsidiary of Aon Corporation ("Aon"), into the Company (the
"Merger") in accordance with the Agreement and Plan of Merger, as amended
(the "Merger Agreement"), attached as Annex I to the accompanying Proxy
Statement, among the Company, Aon and Merger Sub, pursuant to which each
outstanding share of Common Stock, par value $1.00 per share, together with
the related preferred stock purchase right (the "Right"), of the Company
(other than stock of the Company owned by the Company, Aon or any of their
respective subsidiaries), will be converted into the right to receive
$17.50 in cash.
2. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
Only stockholders of record at the close of business on February 3, 1997,
will be entitled to notice of, and to vote at, the Special Meeting.
The Company's Board of Directors has unanimously approved the Merger and the
Merger Agreement, has determined that the terms of the Merger are fair to and
in the best interests of the Company's common stockholders and recommends that
common stockholders vote "FOR" the Merger Proposal.
Under Maryland law, stockholders of the Company are not entitled to
appraisal rights in connection with the Merger Agreement and the consummation
of the transactions contemplated thereby.
Reed Stenhouse Companies Limited, a subsidiary of the Company ("RSC"), has
elected to redeem each outstanding Class 1 Share of RSC (the "RSC Shares") for
one share of Common Stock. The mandatory redemption will be effected on
February 17, 1997, at which time the related shares of the Class A Common
Stock of the Company (the "Class A Stock") will be repurchased by the Company
for cash in the amount of $.00001 per share from the trustee which holds them.
The Company has also elected to require the conversion of each outstanding
share of Class C Common Stock of the Company (the "Class C Stock") into one
share of Common Stock. The conversion will be effected on February 17, 1997,
at which time the related Dividend Shares of Alexander & Alexander UK plc (the
"Dividend Shares") will be mandatorily redeemed for cash in the amount of 2
pence per share.
By Order of the Board of Directors
Alice L. Russell Corporate Secretary
Dated: February 6, 1997
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC.
PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY................................................................... i
INTRODUCTION.............................................................. 1
Purpose of the Special Meeting.......................................... 1
Voting at the Special Meeting........................................... 1
Proxies................................................................. 2
Proxy Solicitation...................................................... 3
Other Matters to Be Considered.......................................... 3
THE MERGER................................................................ 3
Background of the Merger................................................ 3
Recommendation of the Company's Board of Directors...................... 5
Opinion of Financial Advisor............................................ 6
Interests of Certain Persons............................................ 19
Certain Effects of the Consummation of the Offer on the Shares.......... 12
The Merger Agreement.................................................... 12
Financing of the Merger................................................. 15
Aon's Reasons for the Merger; Plans for the Company After the Merger.... 16
Accounting Treatment of the Merger...................................... 16
Regulatory Matters...................................................... 16
RIGHTS OF OBJECTING STOCKHOLDERS.......................................... 16
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................... 17
SELECTED CONSOLIDATED FINANCIAL DATA...................................... 18
SUPPLEMENTARY CONSOLIDATED FINANCIAL INFORMATION.......................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 21
PRICE RANGE OF SHARES..................................................... 48
BUSINESS OF THE COMPANY................................................... 49
CERTAIN SECURITY HOLDINGS................................................. 51
CERTAIN INFORMATION CONCERNING AON AND MERGER SUB......................... 52
INDEPENDENT ACCOUNTANTS................................................... 52
STOCKHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING......................... 52
OTHER MATTERS............................................................. 52
ADDITIONAL INFORMATION.................................................... 53
INDEX TO FINANCIAL STATEMENTS............................................. F-1
ANNEXES
I. Agreement and Plan of Merger, as amended January 7, 1997 (Composite
Conformed)............................................................... I-1
II. Opinion of Credit Suisse First Boston................................. II-1
</TABLE>
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC.
1185 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
(212) 444-4500
----------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD FEBRUARY 20, 1997
----------------
SUMMARY
This summary has been prepared to assist stockholders of Alexander &
Alexander Services Inc., a Maryland corporation (the "Company"), in their
review of the proposal (the "Merger Proposal"), described in detail in the
attached Proxy Statement, to adopt and approve the merger of Subsidiary
Corporation, Inc., a Maryland corporation ("Merger Sub") and a wholly-owned
subsidiary of Aon Corporation, a Delaware corporation ("Aon"), into the
Company (the "Merger"), in accordance with an Agreement and Plan of Merger,
dated as of December 11, 1996, as amended (the "Merger Agreement"), by and
among the Company, Aon and Merger Sub, as a result of which (i) the Company
will be the surviving corporation and will become a wholly-owned subsidiary of
Aon, and (ii) each outstanding share of Common Stock, par value $1.00 per
share (the "Common Stock"), together with the related preferred stock purchase
right of the Company (the "Rights," and, together with the shares of the
Common Stock, the "Shares") (other than stock of the Company owned by the
Company, Aon or any of their respective subsidiaries ("Canceled Shares")) will
be converted into the right to receive $17.50 in cash.
The Proxy Statement and the accompanying notice of special meeting and form
of proxy are first being mailed on or about February 6, 1997 to stockholders
entitled to notice of and to vote at the Special Meeting of Stockholders of
the Company to be held on Thursday, February 20, 1997 (the "Special Meeting").
This summary is not intended to be a complete explanation of the matters
relating to the Merger Agreement or the proposed Merger and is qualified in
all respects by reference to the detailed explanation contained in the Proxy
Statement and the Annexes thereto. Stockholders are urged to review carefully
the entire Proxy Statement, including the Annexes. Cross references in this
summary are to captions in the Proxy Statement.
Purpose of Special Meeting..... To vote upon the Merger Proposal. See
"INTRODUCTION-- Purpose of the Special
Meeting."
Date and Time of Special Thursday, February 20, 1997 at 10:00 a.m.,
Meeting........................ Eastern time
Place of Meeting............... Alexander & Alexander Services Inc.
1185 Avenue of the Americas
21st Floor Boardroom
New York, New York 10036
Record Date.................... February 3, 1997
Number of Outstanding Shares
of Stock Entitled to Vote.....
43,378,647 shares of Common Stock (excluding
shares issuable
upon the exchange of Series B Preferred Stock
(as defined below))
59,307 shares of Class A Common Stock (the
"Class A Common Stock")
54,188 shares of Class C Common Stock (the
"Class C Common Stock")
4,846,232 shares of 8% Series B Cumulative
Convertible Preferred Stock (the "Series B
Preferred Stock"), entitled to vote with
respect to 14,247,922 shares of Common Stock
issuable upon the exchange of such shares of
Series B Preferred Stock
i
<PAGE>
Reed Stenhouse Companies Limited, a
subsidiary of the Company ("RSC"), has
elected to redeem each outstanding Class 1
Share of RSC (the "RSC Shares") for one share
of Common Stock. The mandatory redemption
will be effected on February 17, 1997, at
which time the related shares of the Class A
Stock will be repurchased by the Company for
cash in the amount of $.00001 per share from
the trustee which holds them.
The Company has also elected to require the
conversion of each outstanding share of Class
C Stock into one share of Common Stock. The
conversion will be effected on February 17,
1997, at which time the related Dividend
Shares of Alexander & Alexander UK plc (the
"Dividend Shares") will be mandatorily
redeemed for cash in the amount of 2 pence
per share. See "INTRODUCTION--Voting at the
Special Meeting."
Approximate Number of Owners
of Record of Shares of Stock..
1,000 of the Common Stock
One of the Class A Stock
700 of the Class C Stock
One of the Series B Preferred Stock
Merger Terms................... In the Merger, the Company will become a
wholly-owned subsidiary of Aon, and each
outstanding Share (other than Canceled
Shares) will be converted into the right to
receive $17.50 per Share in cash (the "Merger
Consideration"). See "THE MERGER."
Required Vote.................. The affirmative vote of the holders of a
majority of the voting power of the
outstanding shares of Common Stock, Class A
Stock and Class C Stock (collectively, the
"Common Capital Stock") and the Series B
Preferred Stock, voting together as a single
class, is required for approval of the Merger
Proposal. See "INTRODUCTION--Voting at the
Special Meeting."
AT THE CLOSE OF BUSINESS ON THE RECORD DATE,
AON BENEFICIALLY OWNED, DIRECTLY AND THROUGH
MERGER SUB, 58,541,474 SHARES, OR APPROXI-
MATELY 98%, OF THE AGGREGATE VOTING POWER OF
THE OUTSTANDING COMMON CAPITAL STOCK AND SE-
RIES B PREFERRED STOCK. ACCORDINGLY, AON HAS
THE POWER TO APPROVE THE MERGER PROPOSAL
WITHOUT THE AFFIRMATIVE VOTE OF ANY OTHER
SHARES OF COMMON CAPITAL STOCK. AON AND
MERGER SUB WILL VOTE ALL OF SUCH SHARES IN
FAVOR OF THE MERGER PROPOSAL. APPROVAL OF THE
MERGER PROPOSAL IS THEREFORE ENSURED. SEE
"CERTAIN SECURITY HOLDINGS."
Recommendation of the
Company's Board of Directors..
The Company's Board of Directors has
unanimously approved the Merger and the
Merger Agreement, has determined that the
Merger is fair to and in the best interests
of the Company's common stockholders and
recommends that common stockholders vote
"FOR" the Merger Proposal. See "THE MERGER--
Recommendation of the Company's Board of
Directors."
ii
<PAGE>
Opinion of Financial Advisor... Credit Suisse First Boston Corporation, the
Company's financial advisor ("Credit Suisse
First Boston") (formerly named CS First
Boston), has determined that the
consideration to be received by common
stockholders of the Company in the Merger is
fair to such stockholders from a financial
point of view. See "THE MERGER--Opinion of
Financial Advisor."
Rights of Objecting Stockholders of the Company are not entitled
Stockholders................... to appraisal rights under Maryland law in
connection with the Merger Agreement and the
consummation of the transactions contemplated
thereby. See "RIGHTS OF OBJECTING
STOCKHOLDERS" in the Proxy Statement.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT COMMON STOCK- HOLDERS
VOTE "FOR" THE MERGER PROPOSAL.
Stockholders are urged to read and consider carefully the information
contained in this Proxy Statement and to consult with their personal financial
and tax advisors.
This Proxy Statement and the accompanying form of proxy are first being
mailed to stockholders on or about February 6, 1997.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN
THE PROXY CARD IN THE ENCLOSED POSTAGE PAID ENVELOPE.
NO PERSON IS AUTHORIZED BY THE COMPANY TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT IMPLY THAT
THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS
OF THE COMPANY OR AON SINCE THE DATE HEREOF.
iii
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC.
1185 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
(212) 444-4500
--------
PROXY STATEMENT
--------
INTRODUCTION
This Proxy Statement is being furnished to the stockholders of the Company
in connection with the solicitation of proxies on behalf of the Board of
Directors of the Company for use at the Special Meeting.
This Proxy Statement and accompanying Notice of Special Meeting of
Stockholders and form of proxy are being mailed on or about February 6, 1997
to stockholders entitled to notice of, and to vote at, the Special Meeting.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, the stockholders of the Company are being asked to
consider and vote upon the approval of the Merger. Under the terms of the
Merger Agreement, at the Effective Time (as hereinafter defined), (i) Merger
Sub will be merged with and into the Company, (ii) the Company will be the
corporation surviving the Merger (the "Surviving Corporation"), (iii) the
separate existence of Merger Sub will cease, (iv) the Company will become a
wholly-owned subsidiary of Aon, and (v) each outstanding share of Common
Stock, together with the related Right (other than Canceled Shares), will be
converted into the right to receive $17.50 in cash (the "Merger
Consideration"), and holders of Shares immediately prior to the consummation
of the Merger will possess no further interest in, or rights as stockholders
of, the Company.
VOTING AT THE SPECIAL MEETING
The Board of Directors of the Company has fixed the close of business on
February 3, 1997 as the record date (the "Record Date") for the determination
of stockholders entitled to notice of, and to vote at, the Special Meeting.
Accordingly, only holders of record of the Common Stock, Class A Stock, Class
C Stock and the Series B Preferred Stock at the close of business on the
Record Date will be entitled to vote at the Special Meeting. At the close of
business on the Record Date, there were 43,378,647 shares of Common Stock
outstanding and entitled to vote, held by approximately 1,000 stockholders of
record, 59,307 shares of Class A Stock outstanding and entitled to vote, held
by one stockholder of record, 54,188 shares of Class C Stock outstanding and
entitled to vote, held by approximately 700 stockholders of record, and
4,846,232 shares of Series B Preferred Stock outstanding and entitled to vote
(with respect to 14,247,922 shares of Common Stock issuable upon the exchange
of such shares of Series B Preferred Stock), held by one stockholder of
record.
RSC has elected to redeem each outstanding RSC Share for one share of Common
Stock. The mandatory redemption will be effected on February 17, 1997, at
which time the related shares of the Class A Stock will be repurchased by the
Company for cash in the amount of $.00001 per share from the trustee which
holds them.
The Company has also elected to require the conversion of each outstanding
share of Class C Stock into one share of Common Stock. The conversion will be
effected on February 17, 1997, at which time the related Dividend Shares will
be mandatorily redeemed for cash in the amount of 2 pence per share.
Holders of shares of Common Capital Stock and Series B Preferred Stock on
the Record Date are entitled to one vote per share, exercisable in person or
by properly executed proxy, at the Special Meeting. Although all shares of
Class A Stock and Class C Stock will have been repurchased or redeemed by the
Company prior to the date of the Special Meeting, the holders of record of
such shares as of the Record Date are nevertheless entitled to vote with
respect to the Merger Proposal. The presence, in person or by properly
executed proxy, of the holders of a majority of the outstanding shares of
Common Capital Stock and Series B Preferred Stock as of the date of the
Special Meeting is necessary to constitute a quorum at the Special Meeting.
1
<PAGE>
If a stockholder is the beneficial owner of the Class A Stock as of the
Record Date, a direction and proxy will be delivered to Montreal Trust
Company, as trustee, in connection with the shares beneficially owned by said
stockholder and held by the trustee. The trustee will be entitled to vote the
shares of Class A Stock (which, as noted above, will be repurchased by the
Company on February 17, 1997 in connection with the conversion of the related
RSC Shares into shares of Common Stock) in accordance with the directions
received from the beneficial owners.
The affirmative vote of the holders of at least a majority of the
outstanding shares of Common Capital Stock and Series B Preferred Stock,
voting together as a single class, is required by the Maryland General
Corporation Law (the "Maryland GCL") and the Charter of the Company for
approval of the Merger Proposal. AT THE CLOSE OF BUSINESS ON THE RECORD DATE,
AON BENEFICIALLY OWNED, DIRECTLY AND THROUGH MERGER SUB, 58,541,474 SHARES, OR
APPROXIMATELY 98%, OF THE AGGREGATE VOTING POWER OF THE OUTSTANDING COMMON
CAPITAL STOCK AND SERIES B PREFERRED STOCK. ACCORDINGLY, AON HAS THE POWER TO
APPROVE THE MERGER PROPOSAL WITHOUT THE AFFIRMATIVE VOTE OF ANY OTHER SHARES
OF COMMON CAPITAL STOCK. AON AND MERGER SUB WILL VOTE ALL OF SUCH SHARES IN
FAVOR OF THE MERGER PROPOSAL. APPROVAL OF THE MERGER PROPOSAL IS THEREFORE
ENSURED. SEE "CERTAIN SECURITY HOLDINGS."
On December 10, 1996, the Company's Board of Directors elected to exempt Aon
from Sections 3-601 et seq. (relating to certain business combinations) of the
Maryland GCL in connection with the Offer (as hereinafter defined), the Merger
Agreement, the Merger and the Stock Purchase and Sale Agreement (as
hereinafter defined).
As of January 17, 1997, the Company's directors and executive officers
beneficially owned an aggregate of 187,461 Shares (not including 116,200
Shares subject to currently exercisable options), constituting less than 1% of
the Shares issued and outstanding on such date. The Company believes that all
of the Company's directors and executive officers intend to vote all such
Shares held by them in favor of the Merger Proposal at the Special Meeting.
An abstention or broker non-vote will have the effect of a vote "AGAINST"
the Merger Proposal.
PROXIES
Stockholders of the Company are requested to complete, date, sign and
promptly return the accompanying form of proxy in the enclosed envelope.
Shares represented by properly executed proxies received by the Company and
not revoked will be voted at the Special Meeting in accordance with the
instructions contained herein. If instructions are not contained therein,
proxies will be voted FOR approval of the Merger Proposal.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted (a) by filing with the Secretary of
the Company written notice of such revocation bearing a later date than the
proxy, (b) by duly executing a subsequent proxy relating to the same shares
and delivering it to the Secretary of the Company, or (c) by attending the
Special Meeting and voting in person. Attendance at the Special Meeting will
not in and of itself constitute revocation of a proxy. Any written notice
revoking a proxy should be sent to the attention of Alice L. Russell,
Corporate Secretary, Alexander & Alexander Services Inc., 10461 Mill Run
Circle, Owings Mills, Maryland 21117.
PROXY SOLICITATION
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement, will be borne by the Company. No solicitation in
addition to this solicitation by use of the mails will be made.
In connection with this solicitation, brokers, nominees, fiduciaries and
other custodians have been requested to forward soliciting material to
beneficial owners of Shares held of record by them, and such custodians will
be reimbursed for their expenses.
All information in this Proxy Statement concerning Aon and Merger Sub has
been supplied by Aon. All other information herein has been supplied by the
Company.
2
<PAGE>
OTHER MATTERS TO BE CONSIDERED
It is not anticipated that any matter other than approval of the Merger
Proposal will be brought before the Special Meeting. If any other matter
should properly come before the meeting, proxies will be voted in the
discretion of the persons named in the enclosed proxy.
THE MERGER
BACKGROUND OF THE MERGER
During 1994, 1995 and 1996, the Chief Executive Officers of the Company and
of Aon discussed from time to time the possibility of a business combination
involving Aon and the Company. Throughout the period, each Board of Directors
was kept informed of the discussions. During the past two years the Company
communicated with five other insurance brokerage companies concerning various
forms of possible business combinations. The most recent of these
communications took place approximately eleven weeks ago. Three of the five
companies signed confidentiality agreements with the Company; however, none of
the five companies engaged in a detailed due diligence investigation of the
Company or agreed to mutual due diligence, and none of the five companies
provided an indication of interest in merging with, being acquired by or
acquiring the Company. Approximately twelve months ago a special committee of
the Board of Directors of the Company, made up of six outside directors, was
formed and since then has met from time to time to consider possible business
combinations. Credit Suisse First Boston worked with the Company throughout
this two year period concerning possible business combinations and was
formally retained by the Company on December 6, 1996.
The discussions between the Company and Aon began during the Spring of 1994,
at which time the Company was also engaged in discussions with American
International Group, Inc. ("AIG") regarding the significant investment that
AIG ultimately made in the Series B Preferred Stock of the Company. At that
time, the Board of Directors of the Company concluded that the investment by
AIG and the recruiting of a new chief executive officer were in the best
interests of the Company's stockholders and should be pursued.
Further discussion of a business combination between Aon and the Company
resumed in the Spring of 1995. At that time, a confidentiality agreement
between the two companies was executed and confidential information was
shared. The conversations in the Spring of 1995 principally concerned a
possible stock-for-stock transaction. Representatives of the Company and Aon
met from time to time in connection therewith to explore such a transaction as
well as to discuss the financial and other prospects of the Company and of
Aon. In addition, because of the right of AIG to require a repurchase of the
Series B Preferred Stock in connection with a change-in-control of the Company
at a substantial premium to its liquidation value, Mr. Patrick G. Ryan,
Chairman, President and Chief Executive Officer of Aon, discussed the
possibility of such a transaction with Mr. Maurice R. Greenberg, Chairman of
the Board, Chief Executive Officer and President of AIG. (Subsequent to the
Spring of 1995, Messrs. Ryan and Greenberg had conversations from time to
time.) The discussions concerning the possible transaction terminated in May
of 1995 when the Company and Aon concluded that the two companies were not
likely to agree on financial terms.
From January to May of 1996 and again in July and August of 1996, Mr. Ryan
and Mr. Frank G. Zarb, former Chairman, President and Chief Executive Officer
of the Company, discussed a possible business combination, including the
possibility of an all-stock merger or an all or partial-cash acquisition by
Aon of the outstanding equity securities of the Company. During the Summer of
1996, the confidentiality agreement between the two companies was reconfirmed
and confidential information was furnished to Aon by the Company. Each time
the conversations were terminated when the parties concluded that the two
companies were not likely to agree on financial terms.
In the Fall of 1996, Mr. Ryan and Mr. Zarb continued to discuss from time to
time the possibility of a business combination. On November 24, 1996, Messrs.
Zarb and Ryan met in New York City and discussed the possible business
combination. Mr. Ryan indicated to Mr. Zarb that Aon would prefer to pursue an
all-cash
3
<PAGE>
transaction assuming that a satisfactory arrangement could be made with AIG
and that a reasonably acceptable valuation of the Company could be agreed upon
between Aon and the Company. Thereafter, Messrs. Ryan, Greenberg and, for the
initial period of the meeting, Mr. Zarb met to discuss a possible transaction.
Messrs. Zarb and Ryan, and Messrs. Ryan and Greenberg, engaged in repeated
conversations during the period of November 27 through December 10, 1996 (the
day preceding the date of execution of the Merger Agreement) relating to the
possible transaction.
On November 29, 1996, certain representatives of the Company and its legal
advisors met with certain representatives of Aon and its legal advisors to
exchange certain information, to discuss the process by which discussions
between the Company and Aon might proceed and to reexecute a confidentiality
agreement between the Company and Aon. The Company continued to make financial
and other information available to representatives of Aon and its advisors.
On December 4, 1996, representatives of Aon furnished representatives of the
Company with a draft of the Merger Agreement.
On December 4, 1996, Mr. Zarb met with the special committee of the Board of
Directors of the Company to discuss the progress of discussions between the
Company and Aon and to request a determination from the special committee of
the Board as to whether the Company should continue discussions with Aon and
whether a special meeting of the Board should be held to consider the possible
transaction. The special committee of the Board recommended that discussions
with Aon be continued and that the Board consider the possible transaction.
Representatives of the two companies and their legal advisors met on
December 5, 1996 in New York City to discuss the draft of the Merger
Agreement.
On December 6, 1996, a special meeting of the Board of Directors of the
Company was held to consider the possible transaction. The Board carefully
considered the possible transaction together with the advice of its legal and
financial advisors. As a result of such review, the Board unanimously
determined that it would be in the best interests of the Company and its
common stockholders for discussions to continue with Aon and authorized and
instructed Mr. Zarb to continue discussions with Aon.
Representatives of Aon and the Company and their legal advisors met again on
December 7, 1996 to discuss a revised draft of the Merger Agreement. The terms
of the Merger Agreement were finalized in telephone conversations on December
9 and 10, 1996 between the representatives and advisors.
During the period of November 27 through December 10, 1996, Mr. Ryan held
several conversations with Mr. Greenberg regarding a possible purchase by Aon
of the shares of Series B Preferred Stock held by AIG and its subsidiaries.
Although a business combination involving Aon and the Company would, according
to the terms of the Series B Preferred Stock, entitle AIG and its subsidiaries
to require the purchase of the Series B Preferred Stock for approximately $350
million in cash, Mr. Ryan indicated during these conversations that Aon would
not pursue the business combination if the repurchase for that amount were
required. Ultimately Messrs. Ryan and Greenberg reached an understanding
regarding the purchase by Aon of the Series B Preferred Stock from AIG and its
subsidiaries for cash in the amount of $317.5 million, subject to the terms
and conditions reflected in the Stock Purchase and Sale Agreement. A draft of
that agreement was provided by AIG's representatives to Aon's representatives
on December 10, following which its terms were finalized.
At two meetings of the Board of Directors of the Company held in the morning
and the evening of December 10, 1996, the Board met with management of the
Company, the Company's financial advisor, Credit Suisse First Boston, and the
Company's legal advisors to review the business, financial condition and
prospects of the Company, the terms and conditions of the Offer and various
matters related thereto, including reports by the Company's financial advisor
on the financial condition and performance, strategic alternatives and
potential value of the Company. Based on the proposed terms of the draft
Merger Agreement presented to the Board on December 10, 1996, at the second
December 10 meeting and after receiving advice from management, Credit
4
<PAGE>
Suisse First Boston and its legal advisors, the Board of Directors of the
Company unanimously determined that the Offer and Merger Agreement are fair
to, and in the best interests of, the common stockholders of the Company.
During the morning of December 11, 1996, the Company and Aon executed the
Merger Agreement, and AIG and Aon executed the Stock Purchase and Sale
Agreement (the "Stock Purchase and Sale Agreement"). A joint press release by
the Company and Aon announcing the execution of such Agreements was then
issued.
Pursuant to the terms of the Merger Agreement, on December 16, 1996, Merger
Sub commenced a tender offer to purchase all outstanding Shares at $17.50 per
Share (the "Offer").
On January 7, 1997, the Merger Agreement was amended in certain technical
respects.
The Offer expired at 12:00 midnight (New York City time) on Tuesday, January
14, 1997, at which time 44,293,552 shares, or approximately 97%, of the
outstanding Shares had been validly tendered and were accepted for payment.
On January 17, 1997, Aon purchased all of the Series B Preferred Stock from
certain subsidiaries of AIG pursuant to the Stock Purchase and Sale Agreement.
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
A special committee of the Board of Directors of the Company met on December
4, 1996 to consider the possible transaction with Aon. The Board met on
December 6, 1996 to receive a report on the possible transaction with Aon from
management of the Company, the Company's financial advisor, Credit Suisse
First Boston, and legal advisors. At two meetings of the Board held in the
morning and the evening of December 10, 1996, the Board met with its financial
advisors and legal advisors to review the business, financial condition and
prospects of the Company, the terms and conditions of the Offer and various
matters related thereto, including reports by Credit Suisse First Boston on
the financial condition and performance, strategic alternatives and potential
value of the Company. Based on the proposed terms of the draft Merger
Agreement presented to the Board on December 10, 1996, at the second December
10, 1996 meeting and after receiving advice from management of the Company,
Credit Suisse First Boston and its legal advisors, the Board unanimously
determined that the Offer and Merger Agreement are fair to, and in the best
interest of, the common stockholders of the Company. The Board then
recommended that common stockholders accept the Offer and tender their shares.
The form of letter to stockholders communicating the Board's recommendation
and the press release announcing such recommendation were exhibits to the
Solicitation/Recommendation Statement on Schedule 14D-9 filed by the Company
with the SEC on December 16, 1996 (the "Schedule 14D-9") and are available as
described in "BUSINESS OF THE COMPANY." The Board now recommends that common
stockholders vote "FOR" the Merger Proposal.
In reaching its determination and recommendations described in the preceding
paragraph, the Board considered a number of factors including the following:
(i) the terms and conditions of the Offer and the Merger Agreement and the
course of negotiations thereof;
(ii) the directors' knowledge of the Company's business, financial
condition, and results of operations, current business strategy, strategic
alternatives and future prospects, the nature of the markets in which the
Company operates, including pricing pressures and the trend toward
consolidation in such markets, and the Company's position in such markets;
(iii) the Board's belief, based on the lack of any indications of interest
from the five other companies with which the Company had discussions during
the past two years concerning possible business combinations, together with
its view that an acquisition of the Company would be particularly attractive
to Aon, that a proposal that could provide greater value to the Company's
common stockholders than the Offer would not be forthcoming;
5
<PAGE>
(iv) the presentations of the Company's financial advisor, Credit Suisse
First Boston, at the Board meetings held on December 6 and December 10, 1996
and Credit Suisse First Boston's written opinion (the "Credit Suisse First
Boston Opinion") orally presented to the Board on December 10, 1996 and
confirmed in writing December 11, 1996 that, based upon and subject to the
information contained therein, as of the date of the opinion, the
consideration to be received by the common stockholders of the Company (other
than Aon and Sub) in the Offer and the Merger is fair to such stockholders
from a financial point of view;
(v) that the Merger Agreement permitted the Company to terminate the Merger
Agreement (subject to the payment of a breakup fee) if, prior to Sub's
purchase of Shares in the Offer, the Board reasonably determined that a
proposal or offer by a third party to acquire a substantial equity interest
in, or a substantial portion of the assets of, the Company and its
subsidiaries on terms which a majority of the members of the Board of
Directors of the Company, having received the advice of an independent
financial advisor, determined in their good faith reasonable judgment to be
more favorable to the Company's common stockholders than the transactions
contemplated by the Merger Agreement;
(vi) the downward trend in the price of the Company's Common Stock;
(vii) the premium over the price at which the Company's Common Stock was
trading represented by the Offer price at the time of the Board's
determination; and
(viii) the Board's determination that, pursuant to the Merger Agreement,
there was a substantial likelihood that the transaction will be completed.
The Board did not assign relative weights to the foregoing factors or
determine that any factor was of particular importance. Rather, the Board
viewed its position and recommendations as being based on the totality of the
information presented and considered by it.
OPINION OF FINANCIAL ADVISOR
As described under "THE MERGER--Background of the Merger; Recommendation of
the Company's Board of Directors" above, the Company engaged Credit Suisse
First Boston to act as its exclusive financial advisor in connection with the
Company's review of strategic and financial planning matters including the
possible merger of the Company with Aon. In connection with the engagement,
the Company requested that Credit Suisse First Boston evaluate the fairness to
the holders of the Company's Common Stock, from a financial point of view, of
the consideration to be received by such holders in connection with the
Merger. On December 10, 1996, Credit Suisse First Boston delivered to the
Board of Directors its oral opinion to the effect that, as of such date and
based upon and subject to certain matters described to the Board of Directors,
the consideration to be received by the Company's common stockholders is fair
from a financial point of view. The Credit Suisse First Boston Opinion is
directed to the Board of Directors of the Company and does not constitute a
recommendation to any stockholder of the Company as to how such stockholder
should vote with respect to the Merger Proposal at the Special Meeting.
On December 11, 1996, Credit Suisse First Boston delivered a written opinion
to the Board of Directors confirming the oral opinion rendered on December 10,
1996. A copy of the Credit Suisse First Boston Opinion, which sets forth the
assumptions made and matters considered in, and limits on the review
undertaken, is attached to this Proxy Statement as Annex II and should be read
by stockholders carefully in its entirety.
In connection with its opinion, Credit Suisse First Boston reviewed, among
other things, the Agreement and Plan of Merger dated as of December 11, 1996;
the Annual Reports on Form 10-K of the Company for the three years ended
December 31, 1995; certain interim reports to stockholders and Quarterly
Reports on Form 10-Q; certain other communications from the Company to its
stockholders; and certain internal financial analyses for the Company prepared
by its management. Credit Suisse First Boston also had discussions with
members of the senior management of the Company regarding its past and current
business operations, financial condition and future prospects. In addition,
Credit Suisse First Boston reviewed the reported price and trading activity
for the
6
<PAGE>
Common Stock; compared certain financial and stock market information for the
Company with similar information for certain other companies engaged in
businesses similar to the Company's and the securities of which are publicly
traded; reviewed the financial terms of certain recent business combination
transactions and performed such other studies and analyses as Credit Suisse
First Boston considered appropriate. Credit Suisse First Boston relied without
independent verification upon the accuracy and completeness of all of the
financial and other information reviewed by it for purposes of its opinion.
Credit Suisse First Boston assumed that the financial analyses for the Company
have been reasonably prepared on a basis reflecting the best currently
available judgments and estimates of the management of the Company. In
addition, Credit Suisse First Boston made no independent evaluation or
appraisal of the assets and liabilities of the Company or any of its
subsidiaries, and Credit Suisse First Boston was not furnished with any such
evaluation or appraisal.
The preparation of a fairness opinion is a complex process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances.
In arriving at its opinion, Credit Suisse First Boston considered each of the
analyses described below, among other things, and did not assign any
particular weight to the results of any particular analysis. The analyses were
prepared for the purpose of enabling Credit Suisse First Boston to evaluate
whether the consideration to be received by the Company's common stockholders
is fair to such common stockholders from a financial point of view, and do not
purport to be appraisals or to necessarily reflect the prices at which
businesses or securities of the Company actually may be sold. Analyses based
upon forecasts of future results are not necessarily indicative of actual
future results, which may be significantly more or less favorable than
suggested by such analyses. Accordingly, such analyses are subject to inherent
uncertainty.
The following is a summary of the material financial analyses performed by
Credit Suisse First Boston in arriving at its oral opinion delivered December
10, 1996 and its written opinion dated December 11, 1996, but does not purport
to be a complete description of the analyses performed by Credit Suisse First
Boston for such purposes.
Analysis of the Aon Proposal. Credit Suisse First Boston reviewed the Aon
proposal and the aggregate value that it represented in comparison to certain
other information. In particular, Credit Suisse First Boston noted that the
Aon proposal of $17.50 in cash per share of the Company's Common Stock
represented a 25.0% premium to the Company's last reported sale price of
$14.00 per share on the New York Stock Exchange Composite Transactions Tape as
of December 9, 1996. Credit Suisse First Boston further compared the multiples
of latest twelve months ("LTM") earnings per share and projected earnings per
share ("EPS") that the Company's December 9, 1996 closing stock price and the
Aon proposal represented. The $17.50 per share Aon proposal represented a
multiple of 19.7x the Company's LTM EPS, 22.4x management's projections of
1996 EPS and 22.2x management's projections of 1997 EPS. In comparison, the
Company's December 9, 1996 closing stock price represented a multiple of 15.7x
the Company's LTM EPS, 17.9x projected 1996 EPS and 17.7x projected 1997 EPS.
Credit Suisse First Boston calculated the "Enterprise Value" (defined as
aggregate equity value plus debt and preferred stock, net of operating cash,
cash equivalents and investments) for the Company based on the December 9,
1996 closing stock price and the Aon proposal, assuming in each case the
Series B Preferred Stock was valued at liquidation value, and calculated the
Enterprise Value multiple of LTM revenues and LTM earnings before interest,
taxes, depreciation and amortization ("EBITDA") excluding non-recurring items.
The Aon proposal, assuming the Series B Preferred Stock was valued at
liquidation value, represented 0.8x the Company's LTM revenues and 5.6x the
Company's LTM EBITDA. In comparison, based on the Company's December 9, 1996
closing stock price, the Company's Enterprise Value represented 0.7x LTM
revenues and 5.1x EBITDA.
Comparable Public Company Analysis. Credit Suisse First Boston reviewed and
compared certain actual and estimated financial, operating and stock market
information for the Company with similar information for the following
publicly traded insurance brokerage companies: Acordia, Inc.; Aon Corporation;
Arthur J. Gallagher & Co.; E.W. Blanch Holdings, Inc.; Hilb, Rogal and
Hamilton Company; Marsh & McLennan Companies, Inc. and Poe & Brown, Inc. (the
"Comparable Companies"). The Comparable Companies were selected because they
are publicly traded companies that derive a significant portion of their
revenues from
7
<PAGE>
insurance brokerage and risk management services. Credit Suisse First Boston
reviewed the Comparable Companies in terms of various historical financial
measures and in terms of various multiples that certain of this information
represents in comparison to certain other information. In particular, such
analysis indicated that, as of December 9, 1996, the market price of shares of
common stock of such companies as a multiple of latest twelve month ("LTM")
earnings, equity research analysts' consensus 1996 estimated earnings (as
reported by First Call Corporation) and equity research analysts' consensus
1997 estimated earnings, ranged from 11.2x to 18.6x, 11.2x to 17.7x and 10.2x
to 16.1x, respectively, for the Comparable Companies versus multiples of
historical actual and management's projections of future earnings of 15.7x,
17.9x and 17.7x, respectively, for the Company based on the December 9, 1996
closing stock price and 19.7x, 22.4x and 22.2x, respectively, for the Company
based on the Aon proposal. Based on the Comparable Companies data, Credit
Suisse First Boston selected a relevant multiple range of 12.0x to 16.0x LTM
EPS, 11.0x to 15.0x 1996 estimated EPS and 11.0x to 14.0x 1997 estimated EPS,
and applied these multiples to the Company's LTM and forecasted EPS to
estimate an unaffected stock price range for the Company in order to calculate
the implied premium of the Aon proposal above the Company's unaffected stock
price. Based on the LTM and forecasted EPS data for the Company and the
relevant multiple ranges of such data, Credit Suisse First Boston calculated
an unaffected stock price range of $10.00 to $12.50 per common share. The Aon
proposal represented a 40% to 75% premium above the unaffected stock price
range.
Historical Trading and Valuation Comparisons. Credit Suisse First Boston
examined the history during 1995 and 1996 of the trading prices for the
Company's Common Stock, and the relationship between the trading price of the
Company's Common Stock and equity research analyst's consensus estimates of
the Company's EPS for the next fiscal year, as reported to the Institutional
Brokers Estimate Service ("IBES"). Credit Suisse First Boston calculated the
multiple of the trading price of the Company's Common Stock to the IBES
consensus EPS estimate for the following fiscal year, and arrived at a range
of 10.7x to 15.3x, with mean and median values of 12.7x and 12.7x,
respectively. Credit Suisse First Boston noted that the multiple implied by
the Aon proposal of the next fiscal year's (1997) EPS was 22.2x.
Comparable Acquisitions Analysis. Credit Suisse First Boston analyzed recent
acquisitions of businesses similar to the Company (the "Comparable
Acquisitions"), and calculated the price, aggregate transaction value
(Enterprise Value) and implied multiples of selected financial data for such
acquisitions. The Comparable Acquisitions were selected by Credit Suisse First
Boston because they involved acquisitions of companies that derive a
significant portion of their revenues from insurance brokerage and risk
management services. In its analysis, Credit Suisse First Boston gave
particular emphasis to recent transactions. The Comparable Acquisitions used
in the analysis included: Aon Corporation's acquisition of Bain Hogg Group
plc; Liverpool Victoria Friendly Society's acquisition of the Frizzell Group
Ltd. (subsidiary of the Marsh & McLennan Companies, Inc.); Alexander &
Alexander Services Inc.'s acquisition of JIB Group plc's U.S. Retail Insurance
Broking Operations; AJK Acquisition Company's acquisition of H.W. Kaufman
Financial Group, Inc.; Old Lyme Holding Corp.'s acquisition of Kaye
International L.P.; Acordia, Inc.'s acquisition of Bain Hogg Robinson, Inc.;
Inchcape plc's acquisition of Bain Hogg Group plc; Acordia, Inc.'s acquisition
of American Business Insurance, Inc.; Marsh & McLennan Companies, Inc.'s
acquisition of the Frizzell Group Ltd.; Poe & Associates' acquisition of Brown
& Brown Inc.; Aon Corporation's acquisition of Frank B. Hall & Company; Marsh
& McLennan Companies, Inc.'s acquisition of Faugere et Jutheau S.A.; and
Willis Faber plc's acquisition of Corroon & Black Corporation. From the
Comparable Acquisitions, Credit Suisse First Boston derived a relevant
multiple range of 13.0x to 18.0x LTM net income, 0.8x to 1.0x LTM revenues,
5.2x to 7.4x LTM EBITDA and 6.8x to 9.0x LTM earnings before interest and
taxes ("EBIT"). Applying these multiples to the Company's financial data
resulted in a range of values for the Company's equity (common and preferred)
of $1.0 to $1.2 billion, and after adjusting for preferred stock and proceeds
from the exercise of stock options, $12.11 to $16.29 per common share.
Discounted Cash Flow Analysis. Credit Suisse First Boston projected the
Company's financial results for a ten-year period, and discounted to present
value the free cash flow before financing costs generated in each year and the
terminal value in the final projection year employing discount rates of 12%,
13% and 14%. Terminal values were estimated by Credit Suisse First Boston
based on multiples of final year's net income of 13.0x, 15.5x and 18.0x. The
Company's future performance was analyzed using two sets of assumptions. In
the Improved
8
<PAGE>
Margins Case, the Company's future operating margins were assumed to be 8.6%
in 1997, rising to 10.7% in 2005. In the Flat Margins Case, future operating
margins were assumed to be 8.6% for all of the periods analyzed. In each case,
revenue growth was assumed to be 2.4% in 1997, rising to 3.8% in 2005. Fully
diluted EPS were projected to be $0.79 in 1997, rising in 2005 to $1.71 in the
Improved Margins Case and $1.32 in the Flat Margins Case. Credit Suisse First
Boston calculated a range of discounted cash flow values per share of Common
Stock on a fully-diluted basis of from $12.48 to $19.38 using the Improved
Margins Case and $9.76 to $15.27 using the Flat Margins Case.
Other Analyses. Credit Suisse First Boston reviewed and analyzed selected
investment research reports on the Company and the insurance brokerage
industry and analyzed certain publicly available information regarding the
foregoing.
Credit Suisse First Boston has advised the Company that, in the ordinary
course of business, it may actively trade the securities of the Company and
Aon for its own account or for the account of its customers and, accordingly,
may at any time hold a long or short position in such securities.
Credit Suisse First Boston was selected by the Company as its financial
advisor based on its reputation, experience and expertise. Credit Suisse First
Boston is an internationally recognized investment banking firm that is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwriting, competitive
bids, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. Credit
Suisse First Boston is familiar with the Company, having provided advisory and
other investment banking services to the Company over a period of years,
including acting as lead placement agent in the offering of the Company's
Series A Preferred Stock in March 1993, financial advisor in connection with
AIG's investment in the Company's Series B Preferred Stock in June 1994, sole
placement agent for 1,120,900 shares of the Company's Common Stock for certain
selling stockholders in April 1995, and other advisory assignments. Mr. Frank
G. Zarb, former Chairman of the Board, President and Chief Executive Officer
of the Company, is a director of Credit Suisse First Boston.
The Company has retained Credit Suisse First Boston as its financial advisor
with respect to Aon's interest in acquiring the Company and other matters
arising in connection therewith. Pursuant to a letter agreement dated December
6, 1996 between the Company and Credit Suisse First Boston (the "Engagement
Letter"), the Company has agreed to pay Credit Suisse First Boston a total fee
of $5,750,000. The Company has also agreed to reimburse Credit Suisse First
Boston for all out-of-pocket expenses, including the fees and expenses of
Credit Suisse First Boston legal counsel, if any, and any other advisor
retained by Credit Suisse First Boston.
Pursuant to a letter agreement dated December 6, 1996 between the Company
and Credit Suisse First Boston, the Company has indemnified Credit Suisse
First Boston against certain expenses and liabilities if incurred in
connection with its engagement.
INTERESTS OF CERTAIN PERSONS
In considering the recommendation of the Board with respect to the Merger
Agreement, the stockholders of the Company should be aware that the persons
who are, or since January 1, 1996 have been, executive officers of the Company
have interests in the Merger and the Offer in addition to their interests as
shareholders of the Company.
Long-Term Incentive Plans. Frank G. Zarb, Lawrence E. Burk, Elliot S.
Cooperstone, Kenneth J. Davis, James S. Horrick, Ronald A. Iles, R. Alan
Kershaw, Edward F. Kosnik, Dennis L. Mahoney, Stephen H. Meyers, Dan R.
Osterhout, Mark J. Schneiderman, Donald L. Seeley, Albert A. Skwiertz, Jr.,
Richard P. Sneeder, Jr. and Alan E. Williams each held outstanding stock
options and limited stock appreciation rights granted under any or all of the
1995 Long Term Incentive Plan (the "1995 LTIP"), the 1988 Long Term Incentive
Compensation Plan (the "1988 LTIP") or the 1982 Key Employee Stock Option Plan
that became fully exercisable upon the commencement of the Offer. Pursuant to
the terms of the Merger Agreement, Messrs. Zarb, Iles, Mahoney, Williams,
Davis, Osterhout, Horrick and Schneiderman entered into an agreement with the
Company prior to the consummation of the Offer to exercise such outstanding
options and to receive, with respect to each share of
9
<PAGE>
Common Stock subject to such options, a cash payment from the Company equal to
the difference between the Merger Consideration and the exercise price of such
share. Similarly, restrictions on bonus equity awards and restricted stock
granted to each of Messrs. Zarb, Burk, Cooperstone, Davis, Horrick, Iles,
Kershaw, Kosnik, Mahoney, Meyers, Osterhout, Schneiderman, Seeley, Skwiertz,
Sneeder and Williams under either or both of the 1995 LTIP and the 1988 LTIP
lapsed upon the commencement of the Offer.
Supplemental Retirement and Deferred Compensation Plans. Upon the
consummation of the Offer, each of Messrs. Zarb, Burk, Cooperstone, Kershaw,
Kosnik, Meyers, Schneiderman, Seeley, Skwiertz and Sneeder became a
participant in the Supplemental Executive Retirement Plan for Senior
Management (the "SERP"), if such executive was not already a participant
thereunder, and became entitled to a supplemental retirement benefit that is
not less than the benefit such executive would have received upon retirement
at age 55. Upon the consummation of the Offer, the Company was required to
contribute assets to a grantor trust to facilitate the payment of benefits
under the SERP. The Company's right to amend the SERP is restricted following
the consummation of the Offer.
Under the Company's Deferred Compensation Plan, if the employment of either
Messrs. Burk or Osterhout is terminated within two years after the
commencement of the Offer, either by the Company for a reason other than the
executive's acts of dishonesty or fraud or his conviction of a felony, or by
the executive for good reason, the executive's plan account will be credited
with earnings based on the same rate of interest that would have applied if
the executive had retired, and the executive is entitled to receive a lump sum
payment of such account balance within ten business days of his termination of
employment. For purposes of the Deferred Compensation Plan, "good reason"
includes a reduction in the executive's salary, responsibilities or benefits,
a relocation of the executive or any other event having a material adverse
effect on the executive. The Company's right to amend the Deferred
Compensation Plan is restricted during the three-year period following the
commencement of the Offer.
Termination Protection Agreement. A termination protection agreement between
the Company and each of Messrs. Zarb, Kosnik and Osterhout provides that in
the event that (i) such executive's employment is terminated under certain
circumstances within three years following the consummation of the Offer and
(ii) benefits are not paid under the terms of the Company's Senior Executive
Severance Plan or any other employee benefit or compensation plan, program or
arrangement in which the executive participates, the Company will pay the
executive such benefits as would have been paid under the termination
provisions of any applicable plan, program or arrangement. An executive will
be entitled to payment of such benefits under his agreement if the executive's
employment is terminated either by the Company for a reason other than the
executive's conviction of a felony or by the executive for good reason (as
defined in the Senior Executive Severance Plan). If any amount payable to an
executive is subject to excise tax as an excess parachute payment, the
executive is entitled to an additional payment from the Company in an amount
necessary to provide him with the amount he would have received had such tax
not been imposed. The employment of Messrs. Zarb and Kosnik was terminated
without cause by the Company effective as of the close of business on January
17, 1997 under circumstances that would entitle each such executive to the
benefits described herein.
Employment Continuation Agreement. The Company has entered into an
employment continuation agreement with each of Messrs. Cooperstone, Iles,
Kosnik, Mahoney, Burk, Kershaw, Meyers, Schneiderman, Seeley, Skwiertz,
Sneeder and Williams that became effective upon the commencement of the Offer.
If any such executive's employment is terminated under certain circumstances
within three years following the commencement of the Offer, such executive
will be entitled under such agreement to a severance benefit equal to three
times the executive's annual compensation (two times the executive's
compensation in the case of Messrs. Burk, Kershaw, Meyers, Schneiderman,
Seeley, Skwiertz, Sneeder and Williams), continued coverage under certain
employee benefit plans for a period of up to three years and a cash payment in
respect of the value of certain foregone retirement benefits. The benefits
provided under each of these agreements are in lieu of, and not in addition
to, other severance benefits. An executive will be entitled to payment of
severance benefits under the employment continuation agreement if his
employment is terminated either by the Company for a reason other than the
executive's conviction of a felony, an act of dishonesty or gross misconduct
by the executive or repeated violations of the executive's obligations under
the agreement or by the executive for good reason. For
10
<PAGE>
purposes of the agreement, "good reason" is defined as any reduction in the
executive's then annual compensation and benefits, a relocation of the
executive by more than 35 miles and, in the case of Mr. Cooperstone, the
cessation of Mr. Zarb's service as the Company's Chief Executive Officer or
Chairman of the Company's Board of Directors at any time prior to June 16,
1997 for reasons other than death. Payments by the Company under an agreement
are reduced if necessary to avoid excise taxes on such payments as excess
parachute payments. Under the agreement, the Company also is required to
indemnify the executive to the maximum extent permitted by law for any claim,
loss or cause of action arising out of the executive's services for the
Company or a subsidiary. Mr. Kosnik's employment was terminated without cause
by the Company effective as of the close of business on January 17, 1997 under
circumstances that entitle him to the benefits described herein.
Other Employment Agreements.
Frank G. Zarb. Under the employment agreement dated as of June 16, 1994
between the Company and Mr. Zarb, if Mr. Zarb's employment is terminated under
certain circumstances at any time after the commencement of the Offer and
prior to the last day of the month in which he attains age 65, Mr. Zarb will
be entitled to receive a lump cash payment of $12,000,000. Mr. Zarb will be
entitled to such payment if his employment is terminated either by the Company
for reasons other than repeated acts of gross negligence, failure to fulfill
material employment obligations, willful and serious acts of misconduct or
commission of a felony, or by Mr. Zarb for good reason. "Good reason" includes
the diminution of Mr. Zarb's duties or title, a reduction in compensation,
relocation outside of New York City or a material breach of the agreement by
the Company. If any amount payable to Mr. Zarb is subject to excise tax as an
excess parachute payment, he is entitled to an additional payment from the
Company in an amount necessary to provide Mr. Zarb with the amount he would
have received had such tax not been imposed. Mr. Zarb's employment was
terminated without cause by the Company effective as of the close of business
on January 17, 1997 under circumstances that entitle him to benefits described
herein.
Lawrence E. Burk. Under the employment agreement dated as of October 25,
1993, and amended as of May 22, 1996, between the Company and Mr. Burk, if Mr.
Burk's employment is terminated under circumstances that entitle him to
benefits under his employment continuation agreement, described above, Mr.
Burk may elect to receive, in lieu of such benefits, continued salary
payments, coverage under the Company's employee benefit plans and credited
service under the SERP for a period of 36 months. These optional benefits
would be computed and administered in accordance with the Company's Senior
Executive Severance Plan.
Elliot S. Cooperstone. Under the employment agreement dated as of February
13, 1996, and amended as of February 16, 1996, between the Company and Mr.
Cooperstone, if Mr. Cooperstone's employment is terminated prior to his
attaining age 55 under circumstances that entitle him to benefits under his
employment continuation agreement, described above, Mr. Cooperstone will be
immediately vested in his benefit under the SERP, described above, and his
SERP benefit will be calculated as if Mr. Cooperstone had remained employed by
the Company for an additional five years. In addition, if Mr. Cooperstone dies
while receiving benefits under his employment continuation agreement and prior
to attaining age 55, his spouse will receive a monthly preretirement survivor
benefit, calculated under the terms of the SERP, payable until the month
following the date Mr. Cooperstone would have attained age 55. The amount of
such survivor benefit would be determined as if Mr. Cooperstone had terminated
employment five years after his date of death and lived to age 55. As of the
consummation of the Offer, the Company was required to contribute assets to a
grantor trust to facilitate the payment of the supplemental retirement
benefits under Mr. Cooperstone's agreement.
James S. Horrick. Under the employment agreement dated as of August 29, 1990
between Reed Stenhouse Limited and RSC, Canadian subsidiaries of the Company,
and Mr. Horrick, if Mr. Horrick's employment is terminated either by his
employer at any time without cause or by Mr. Horrick for good reason
(including a diminution in Mr. Horrick's duties or title, a reduction in his
salary or benefits or a relocation of his employment) within the three-year
period following the consummation of the Offer, Mr. Horrick is entitled to a
lump-sum cash payment equal to three times the sum of his base salary then in
effect plus his target annual bonus for that year. In addition, Mr. Horrick
will be credited with 36 additional months of deemed employment under the
pension plans maintained by Mr. Horrick's employer, and will receive payment
in an amount equal to 34 times
11
<PAGE>
the aggregate amount of his employer's monthly cost for his life, health and
disability insurance, certain club membership dues and certain other
perquisites.
Edward F. Kosnik. Under the employment agreement dated as of February 15,
1996, and amended as of February 16, 1996, between the Company and Mr. Kosnik,
if Mr. Kosnik's employment is terminated prior to his attaining age 55 under
circumstances that entitle him to benefits under his employment continuation
agreement, described above, Mr. Kosnik's benefit under the SERP, described
above, will be calculated as if Mr. Kosnik had remained employed by the
Company until he attains or would have attained age 55. In addition, if Mr.
Kosnik dies while receiving benefits under his employment continuation
agreement and prior to attaining age 55, his spouse will receive a monthly
preretirement survivor benefit, calculated under the terms of the SERP,
payable until the month following the date Mr. Kosnik would have attained age
55. The amount of such survivor benefit would be determined as if Mr. Kosnik
had lived to age 55. As of the consummation of the Offer, the Company was
required to contribute assets to a grantor trust to facilitate the payment of
the supplemental retirement benefits under Mr. Kosnik's agreement. Mr.
Kosnik's employment was terminated without cause by the Company effective as
of the close of business on January 17, 1997 under circumstances that entitle
him to the benefits described herein.
CERTAIN EFFECTS OF THE CONSUMMATION OF THE OFFER ON THE SHARES
Upon the expiration of the Offer, Merger Sub accepted for payment 44,293,552
Shares that had been validly tendered and not withdrawn before such
expiration, giving Aon beneficial ownership of 58,541,474 Shares or
approximately 98% of the Shares outstanding on the Record Date (taking into
account the Shares issuable upon the exchange of the shares of Series B
Preferred Stock acquired by Aon pursuant to the Stock Purchase Agreement). See
"CERTAIN SECURITY HOLDINGS".
Since the consummation of the Offer, the Shares have continued to be listed
on the New York Stock Exchange (the "NYSE"). Upon consummation of the Merger,
the Company intends to delist the Shares, to terminate the registration of
Shares under the Exchange Act and to terminate the duty of the Company to file
reports under the Exchange Act. In addition, if the Shares are not listed on
the NYSE or any other national exchange, the Shares will no longer constitute
"margin securities" under the rules of the Federal Reserve Board, with the
result, among others, that lenders may no longer extend credit on collateral
of the Shares.
In addition, as described under "INTRODUCTION--Purpose of the Special
Meeting," at the Effective Time, each outstanding Share (other than Canceled
Shares) will be converted into the right to receive the Merger Consideration
and the holders of Shares immediately before the consummation of the Merger
will possess no further interest in, or rights as stockholders of, the
Company.
THE MERGER AGREEMENT
The following is a summary of certain provisions of the Merger Agreement and
is qualified in its entirety by reference to the Merger Agreement, a copy of
which is attached hereto as Annex I.
General. The Merger Agreement provided for the making of the Offer and the
submission of the Merger Proposal to the Company's stockholders as promptly as
practicable after the consummation of the Offer. The closing of the Merger
will take place at 10:00 a.m. on a date to be specified by Aon or Merger Sub,
which shall be no later than the second business day after satisfaction or
waiver of the conditions set forth under "Conditions Precedent" below. The
Merger shall become effective when Articles of Merger, executed in accordance
with the relevant provisions of the Maryland GCL, are accepted for record by
the State Department of Assessments and Taxation of Maryland (the time of such
filing being referred to as the "Effective Time"). It is anticipated that the
Merger will become effective on February 21, 1997.
The Merger. The Merger Agreement provides that, upon the terms and subject
to the conditions of the Merger Agreement, and in accordance with the Maryland
GCL, Merger Sub shall be merged with and into the Company at the Effective
Time. Following the Merger, the separate corporate existence of Merger Sub
shall cease and the Company shall continue as the Surviving Corporation and
shall succeed to and assume all the rights and obligations of Merger Sub in
accordance with the Maryland GCL. At the Effective Time, the Charter and By-
Laws of the Company shall be the Charter and By-Laws of the Surviving
Corporation. The directors of
12
<PAGE>
Merger Sub shall become the directors of the Surviving Corporation and the
officers of the Company shall become the officers of the Surviving
Corporation.
Conversion of Securities. As of the Effective Time, by virtue of the Merger
and without any action on the part of the holder of any shares of stock of
Merger Sub or rights to acquire any such stock, each holder of a share of the
Common Stock, together with the related Right, that is issued and outstanding
(other than stock of the Company owned by any subsidiary of the Company, Aon,
Merger Sub, or any other subsidiary of Aon, or stock with respect to which
appraisal rights are available and properly exercised under Maryland law)
shall be paid by the Surviving Corporation as consideration for the conversion
of each share in cash, without interest and without any further action by such
holder, the Merger Consideration. The Merger Agreement provided equivalent
treatment for the shares of Class A Common Stock (together with the related
RSC Shares) and the shares of Class C Stock (together with the related
Dividend Shares). However, by reason of the mandatory conversion, repurchase
or redemption (as applicable) of all of such securities prior to the Effective
Time, such provisions are no longer applicable. At the Effective Time, the
holder of each share of Series A Convertible Preferred Stock will have the
right to convert such share only into cash in the amount of $52.84. Each share
of stock of Merger Sub issued and outstanding immediately prior to the
Effective Time shall, at the Effective Time, by virtue of the Merger and
without any action on the part of the holder of any shares of stock of Merger
Sub, be converted into and become 600,000 fully paid and nonassessable shares
of Common Stock, par value $1.00 per share, of the Surviving Corporation.
Payment for Shares of Common Stock. Prior to the Effective Time, Aon shall
make available, or cause the Surviving Corporation to make available, to First
Chicago Trust Company of New York (the "Paying Agent") cash in amounts
necessary for the payment of the Merger Consideration upon surrender of
certificates representing shares of Common Stock as part of the Merger. If the
amount of cash deposited with the Paying Agent is insufficient to pay all of
the amounts required to be paid, Aon from time to time after the Effective
Time shall take all steps necessary to enable or cause the Surviving
Corporation to deposit with the Paying Agent additional cash in an amount
sufficient to make all such payments.
Concurrently with or immediately prior to the Effective Time, Aon or Merger
Sub shall deposit in trust with the Paying Agent cash in United States dollars
in an aggregate amount equal to the product of (A) the number of shares of
Common Stock outstanding immediately prior to the Effective Time (other than
Canceled Shares or a person known at the time of such deposit to be an
Objecting Stockholder), and (B) the Merger Consideration (such amount being
hereinafter referred to as the "Payment Fund"). As soon as reasonably
practicable after the Effective Time, the Paying Agent shall mail to each
holder of record of a certificate or certificates that immediately prior to
the Effective Time represented shares of Common Stock (the "Certificates"),
(i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Paying Agent and shall be in a form and
have such other provisions as Aon may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration. Upon surrender of a Certificate for
cancellation to the Paying Agent or to such other agent or agents as may be
appointed by Aon, together with such letter of transmittal, duly executed, and
such other documents as may reasonably be required by the Paying Agent, the
holder of such Certificate shall be entitled to receive in exchange therefor
the amount of cash into which the shares of Common Stock theretofore
represented by such Certificate shall have been converted, and the Certificate
so surrendered shall forthwith be canceled. In the event of a transfer of
ownership of shares of Common Stock that is not registered in the transfer
records of the Company, payment may be made to a person other than the person
in whose name the Certificate so surrendered is registered, if such
Certificate shall be properly endorsed or otherwise be in proper form for
transfer and the person requesting such payment shall pay any transfer or
other taxes required by reason of the payment to a person other than the
registered holder of such Certificate or establish to the satisfaction of the
Surviving Corporation that such tax has been paid or is not applicable. Until
surrendered, each Certificate (other than Certificates representing Objecting
Shares) shall be deemed at any time after the Effective Time to represent only
the right to receive upon such surrender the amount of cash, without interest,
into which the shares of stock theretofore represented by such Certificate
shall have been converted. No interest will be paid or will accrue on the cash
payable upon the surrender of any Certificate.
13
<PAGE>
At the Effective Time, the stock transfer books of the Company shall be
closed, and there shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of the shares of Common Stock that
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation or the
Paying Agent for any reason, they shall be canceled and exchanged as provided
in the preceding paragraph.
Representations and Warranties. In the Merger Agreement, the Company has
made customary representations and warranties to Aon and Merger Sub,
including, but not limited to, representations and warranties as to
organization and qualification, subsidiaries, capital structure, authority to
enter into the Merger Agreement and to consummate the transactions
contemplated thereby, required consents and approvals, filings made by the
Company with the Securities and Exchange Commission (the "Commission") under
the Securities Act or the Exchange Act (including financial statements
included in the documents filed by the Company under these acts), absence of
material adverse change, compliance with laws, licenses and permits, tax
matters, liabilities, the inapplicability of certain state takeover statutes
and the execution of an amendment to the Rights Agreement.
Merger Sub and Aon have also made customary representations and warranties
to the Company, including, but not limited to, representations and warranties
as to organization, authority to enter into the Merger Agreement and to
consummate the transactions contemplated thereby, required consents and
approvals and financing.
Covenants Relating to the Conduct of Business. The Merger Agreement
contained various conduct of business covenants of the Company applicable
during the period from the date of the Merger Agreement to such time as Aon's
designees constituted a majority of the Board of Directors of the Company.
Such covenants terminated on January 27, 1997, at which time Aon designated a
majority of the Board of Directors of the Company.
Indemnification. From and after the Effective Time, Aon agrees to cause the
Surviving Corporation to exculpate, indemnify and hold harmless all past and
present officers and directors of the Company and its subsidiaries to the same
extent such persons are currently exculpated and indemnified by the Company
pursuant to the Company's Charter and By-Laws for acts or omissions occurring
at or prior to the Effective Time. Aon will cause the Surviving Corporation to
provide, for an aggregate period of not less than six years from the Effective
Time, the Company's current directors and officers an insurance and
indemnification policy that provides coverage for events occurring prior to
the Effective Time (the "D&O Insurance") that is no less favorable than the
Company's existing policy or, if substantially equivalent insurance coverage
is unavailable, the best available coverage; provided, however, that the
Surviving Corporation shall not be required to pay an annual premium for the
D&O Insurance in excess of 175% of the last annual premium paid prior to the
date hereof, but in such case shall purchase as much coverage as possible for
such amount.
Employee Benefits. Aon has agreed that it will cause the Company, and each
subsidiary of the Company, to honor from and after the Effective Time, the
employee benefits plans of the Company and its subsidiaries ("Company Plans");
provided, however, that Aon may cause the Company to amend or terminate any
such plan in accordance with its terms and applicable law. To the extent that
after consummation of the Offer Aon shall cause the amendment, modification or
termination of any Company Plan, Aon shall cause the affected employees,
former employees and retirees to receive benefits of the type affected by such
amendment, modification or termination no less favorable than the comparable
type of benefits provided to similarly situated employees, former employees
and retirees of Aon or its affiliates ("Aon-Provided Plans").
For purposes of eligibility to participate, vesting and eligibility for and
accrual of benefits under the Company Plans and Aon-Provided Plans, all
service of any individual who is an employee of the Company or a subsidiary of
the Company immediately prior to the Effective Time (a "Company Employee")
with the Company and/or any subsidiaries of the Company prior to the Effective
Time shall, after the Effective Time, be treated as service with the Company,
all subsidiaries of the Company, Aon and/or subsidiaries of Aon (as
applicable); provided, however, that with respect to a Company Employee's
service prior to the Effective Time Aon shall not be required to provide any
benefit under any defined benefit pension plan to such Company
14
<PAGE>
Employee in an amount greater than the benefit such Company Employee has
accrued as of the Effective Time, except that in determining the amount of
such accrued benefit, compensation paid to such Company Employee on or after
the Effective Time shall be counted to the extent that the compensation of
such Company Employee after the Effective Time remains a factor used in
determining such accrued benefit under such plan. The Company, the
subsidiaries of the Company, Aon and the subsidiaries of Aon have agreed to
cause all Company Plans and Aon-Provided Plans to (x) waive any pre-existing
condition limitations otherwise applicable on and after the Effective Time to
employees of the Company who are not subject to pre-existing condition
limitations immediately prior to the Effective Time, and (y) provide that any
expenses incurred by employees of the Company (and their dependents) during
any plan year within which the Effective Time occurs shall be taken into
account for purposes of satisfying applicable deductible, coinsurance and
maximum out-of-pocket provisions under the Company Plans and Aon-Provided
Plans.
At the Effective Time, the employment of Frank G. Zarb with the Surviving
Corporation will be terminated without cause.
Board Representation. As provided in the Merger Agreement, Aon has
designated four individuals to act as directors of the Company (the
"Designated Directors"). In connection therewith, the information required by
Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder was
mailed to the Company's stockholders on or about January 17, 1997. The
Designated Directors will take office effective as early as January 27, 1997,
at which time the Designated Directors will constitute a majority of the Board
of Directors of the Company.
Conditions Precedent. The respective obligations of each party to effect the
Merger shall be subject to the fulfillment at or prior to the Effective Time
of the following conditions: (a) if required by applicable law, the
stockholders of the Company shall have approved the Merger; provided, however,
that Aon and Merger Sub shall vote all of their shares of capital stock of the
Company entitled to vote thereon in favor of the Merger, (b) no statute, rule,
regulation, executive order, decree, temporary restraining order, preliminary
or permanent injunction or other order issued by any court of competent
jurisdiction or other governmental entity preventing the consummation of the
Merger shall be in effect; provided, however, that each of the parties shall
have used its reasonable best efforts to prevent the entry of any such
temporary restraining order, injunction or other order and to appeal as
promptly as possible any injunction or other order that may be entered, (c)
Merger Sub shall have previously accepted for payment and paid for Shares
pursuant to the Offer; provided, however, that this condition will be deemed
satisfied with respect to the obligations of Aon or Merger Sub if Merger Sub
fails to accept for payment and pay for any Shares pursuant to the Offer in
violation of the terms of the Merger Agreement, and (d) any waiting period
(and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), applicable to the Merger shall have
expired or been terminated.
Termination. The Merger Agreement provides that it may be terminated at any
time prior to the Effective Time, whether before or after the approval of the
stockholders of the Company: (a) by mutual written consent of Aon and the
Company or (b) by either Aon or the Company if any governmental entity shall
have issued an order, decree or ruling or taken any other action permanently
enjoining, restraining or otherwise prohibiting the transactions contemplated
by the Merger Agreement and such order, decree or ruling or other action shall
have become final and nonappealable; provided, however, that Aon shall, if
necessary to prevent any such issuance or the taking of such action, offer to
accept an order to divest such of the Company's or Aon's assets and businesses
as may be necessary to forestall such injunction or order and to hold separate
such assets and business pending such divestiture, but only if the amount of
such assets and businesses is not material to the assets or profitability of
the Company and its subsidiaries taken as a whole or Aon and its subsidiaries
taken as a whole, respectively. The Merger Agreement contained other
provisions regarding termination that are no longer applicable.
FINANCING THE MERGER
The total amount of funds required by Merger Sub to consummate the Offer and
the Merger will be approximately $800 million, excluding (i) related fees and
expenses, (ii) funds needed to purchase any shares of Series A Convertible
Preferred Stock converted into Shares prior to the consummation of the Merger
or to pay
15
<PAGE>
cash into which the holders of Series A Convertible Preferred Stock may
convert such shares from and after the Merger, and (iii) funds needed to
purchase the Series B Preferred Stock pursuant to the Stock Purchase and Sale
Agreement. Merger Sub obtained approximately $775 million needed to consummate
the Offer and plans to obtain the approximately $20.5 million needed for the
Merger through capital contributions. Aon obtained the funds necessary for
such capital contribution from cash on hand and the proceeds of approximately
$800 million from the sale of preferred equity securities of a subsidiary of
Aon.
AON'S REASON FOR THE MERGER; PLANS FOR THE COMPANY AFTER THE MERGER
The purpose of the Offer, the Merger, the Merger Agreement and the Stock
Purchase and Sale Agreement is to enable Aon to acquire control of, and the
entire equity interest in, the Company. The transaction was structured as a
tender offer followed by a merger in order to expedite the acquisition of
control of the Company by Aon and to provide the Company's stockholders with
an opportunity to expedite the receipt of cash in exchange for their Shares.
The purpose of the Merger is for Aon to acquire all the remaining outstanding
Shares not acquired by Merger Sub in the Offer. As a result of the Merger, the
Company will become a wholly-owned subsidiary of Aon.
Aon will continue to evaluate the business and operations of the Company.
Aon also will continue to review the Company's business, operations,
capitalization and management with a view to optimizing exploitation of the
Company's potential in conjunction with Aon's business.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for under the "purchase" method of accounting
whereby the purchase price will be allocated based on the fair values of
assets acquired and liabilities assumed.
REGULATORY MATTERS
No federal or state regulatory requirements remain to be complied with in
order to consummate the Merger.
RIGHTS OF OBJECTING STOCKHOLDERS
Stockholders of the Company are not entitled to appraisal rights under the
Maryland GCL in connection with the Merger Agreement and the consummation of
the transactions contemplated thereby.
16
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain United States federal income tax
consequences of the Merger to holders whose Shares are converted to cash in
the Merger. The discussion is for general information only and does not
purport to consider all aspects of federal income taxation that may be
relevant to holders of Shares. The discussion is based on current provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), existing,
proposed and temporary regulations promulgated thereunder and administrative
and judicial interpretations thereof, all of which are subject to change. The
discussion applies only to holders of Shares in whose hands Shares are capital
assets within the meaning of Section 1221 of the Code, and may not apply to
Shares received pursuant to the exercise of employee stock options or
otherwise as compensation, or to certain types of holders of Shares (such as
insurance companies, tax-exempt organizations and broker-dealers) who may be
subject to special rules. This discussion does not discuss the federal income
tax consequences to a holder of Shares who, for United States federal income
tax purposes, is a non-resident alien individual, a foreign corporation, a
foreign partnership or a foreign estate or trust, nor does it consider the
effect of any foreign, state or local tax laws.
BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH HOLDER OF SHARES SHOULD
CONSULT SUCH HOLDER'S OWN TAX ADVISOR TO DETERMINE THE APPLICABILITY OF THE
RULES DISCUSSED BELOW TO SUCH HOLDER AND THE PARTICULAR TAX EFFECTS TO SUCH
HOLDER OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND
OTHER INCOME TAX LAWS.
17
<PAGE>
The receipt of cash for Shares pursuant to the Merger will be a taxable
transaction for federal income tax purposes. In general, for federal income
tax purposes, a holder of Shares will recognize gain or loss equal to the
difference between the holder's adjusted tax basis in the Shares converted to
cash in the Merger and the amount of cash received therefor. Gain or loss must
be determined separately for each block of Shares (i.e., Shares acquired at
the same cost in a single transaction) converted to cash in the Merger. Such
gain or loss will be a capital gain or loss and will be a long-term capital
gain or loss if the holder held the Shares for more than one year on the date
of the Effective Time of the Merger. Long-term capital gain of individuals
currently is taxed at a maximum rate of 28%.
Payments in connection with the Merger may be subject to "backup
withholding" at a rate of 31%, unless a holder of Shares (a) is a corporation
or comes within certain exempt categories and, when required, demonstrates
this fact or (b) provides a correct tax identification number ("TIN") to the
payor, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding
rules. A holder who does not provide a correct TIN may be subject to penalties
imposed by the Internal Revenue Service. Any amount paid as backup withholding
does not constitute an additional tax and will be creditable against the
holder's federal income tax liability. Each holder of Shares should consult
with his or her own tax advisor as to his or her qualification for exemption
from backup withholding and the procedure for obtaining such exemption.
Holders who convert their Shares into cash in the Merger may prevent backup
withholding by completing a Substitute Form W-9 or, in the case of foreign
holders, a Form W-8 and submitting it to the Paying Agent for the Merger.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company set forth below
(millions, except per share data) for each of the years in the five-year
period ended December 31, 1995 have been derived from the Company's audited
consolidated financial statements for such periods. The selected consolidated
financial data of the Company set forth below (millions, except per share
data) for the nine months ended September 30, 1995 and 1996 are derived from
unaudited financial statements. More comprehensive financial information for
the three-year period ended December 31, 1995 is included in reports on Form
10-K for such years filed by the Company with the Commission, which are
available as described in "ADDITIONAL INFORMATION." A copy of the Company's
1995 audited financial statements appear elsewhere in this Proxy Statement.
See "INDEX TO FINANCIAL STATEMENTS." The following summary is qualified by
reference to, and should be read in conjunction with, such audited financial
statements.
18
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FOR YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1995 1994 1993 1992 1991 1996 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Operating Revenues...... $1,282.4 $1,323.9 $1,341.6 $1,369.5 $1,385.1 $ 967.4 $ 952.0
Operating Income
(Loss)(1).............. 122.7 (82.9) 52.3 85.5 16.4 88.3 108.5
Other Income
(Expenses)(2).......... 33.3 (63.9) (20.4) 17.4 (22.8) (0.6) 33.8
Income (Loss) from
Continuing Operations.. 89.4 (107.2) 23.6 57.1 (9.5) 47.7 81.9
Loss from Discontinued
Operations(3).......... -- (28.9) -- (145.0) -- -- --
Cumulative Effect of
Change in Accounting... -- (2.6) 3.3 -- (2.2) -- --
Net Income (Loss)....... 89.4 (138.7) 26.9 (87.9) (11.7) 47.7 81.9
Earning (Loss)
Attributable to Common
Shareholders........... 64.0 (153.8) 20.7 (87.9) (11.7) 27.8 63.0
PER SHARE INFORMATION:
Primary Earnings Per
Share:
Income (Loss) from
Continuing Operations. $ 1.44 $ (2.79) $ .40 $ 1.32 $ (.22) $ .62 $ 1.42
Loss from Discontinued
Operations............ -- (.66) -- (3.35) -- -- --
Cumulative Effect of
Change in Accounting.. -- (.06) .08 -- (.05) -- --
-------- -------- -------- -------- -------- -------- --------
Net Earnings (Loss).... $ 1.44 $ (3.51) $ .48 $ (2.03) $ (.27) $ .62 $ 1.42
======== ======== ======== ======== ======== ======== ========
Fully Diluted Earnings
Per Share:
Income (Loss) from
Continuing Operations. $ 1.42 $ (2.79) $ .40 $ 1.32 $ (.22) $ .62 $ 1.33
Loss from Discontinued
Operations............ -- (.66) -- (3.35) -- -- --
Cumulative Effect of
Change in Accounting.. -- (.06) .08 -- (.05) -- --
-------- -------- -------- -------- -------- -------- --------
Net Earnings (Loss).... $ 1.42 $ (3.51) $ .48 $ (2.03) $ (.27) $ .62 $ 1.33
======== ======== ======== ======== ======== ======== ========
Cash Dividends Per
Common Share........... .10 .325 1.00 1.00 1.00 .075 .075
FINANCIAL POSITION:
Total Assets............ $2,942.4 $2,945.7 $2,793.8 $2,609.6 $2,737.8 $2,922.0 $2,881.5
Working Capital......... 251.5 237.6 186.2 191.7 172.6 308.4 283.6
Long-term Debt.......... 126.2 132.7 111.8 125.1 169.9 142.4 156.4
Stockholders' Equity.... 402.6 317.5 276.2 185.5 370.1 462.5 401.8
OTHER DATA:
Average Common and
Common Equivalent
Shares Outstanding..... 44.6 43.8 43.4 43.2 43.1 45.1 44.5
Average Common and
Common Equivalent
Shares Outstanding
Assuming Full Dilution. 57.1 43.8 43.4 43.2 43.1 45.1 57.1
Cash Dividends Paid(4):
Common Stock........... $ 4.4 $ 14.3 $ 41.7 $ 40.9 $ 40.6 3.3 3.3
Series A Preferred..... 8.3 8.3 6.2 -- -- 6.3 6.3
</TABLE>
- - --------
(1) Includes restructuring and special charges of $17.6 million and $69
million in 1995 and 1994, respectively and $45.5 million in 1991 (see Note
3 of Notes to Financial Statements appearing elsewhere herein).
(2) Includes special charges primarily related to contingency settlements and
other indemnity costs of $69.7 million in 1994, $16.5 million in 1992 and
$13 million in 1991. Also includes gains on sales of non-core businesses
of $30.4 million in 1995, $20.2 million in 1994, $3.9 million in 1993 and
$43.8 million in 1992 (see Notes 2 and 3 of Notes to Financial Statements
appearing elsewhere herein).
(3) Includes $145.0 million in 1992 relating to an increase in the estimated
liabilities under indemnities provided to the purchasers of discontinued
businesses. (See Note 6 of Notes to Financial Statements for a description
of the Company's discontinued operations appearing elsewhere herein).
(4) Dividends on the Series B Cumulative Convertible Preferred Stock are
payable in kind (additional Series B Preferred Shares) until December 15,
1996 and thereafter, at the Board of Directors' discretion, until December
15, 1999.
19
<PAGE>
SUPPLEMENTARY CONSOLIDATED FINANCIAL INFORMATION
Summarized quarterly consolidated results of operations for the Company and
its subsidiaries for the years 1995 and 1996 and for the first three quarters
of 1996 are shown below (in millions, except per share amounts). Such
information is unaudited and includes all adjustments which the Company
considers necessary for a fair presentation of such quarterly results. Such
information should be read in conjunction with the Company's historical
consolidated financial statements, including the notes thereto, contained
elsewhere herein. See "INDEX TO FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
EARNINGS PER
SHARE
-------------------
OPERATING OPERATING NET FULL
REVENUE INCOME INCOME PRIMARY DILUTED
--------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1994
1st quarter............. $ 323.0 $ 5.2 $ (4.4) $ (.15) $ (.15)
2nd quarter............. 335.1 14.6 (2.2)(b) (.10)(b) (.10)
3rd quarter............. 332.6 4.2 (20.8)(c) (.58)(c) (.58)
4th quarter............. 333.2 (106.9) (111.3)(d) (2.66)(d) (2.66)
-------- ------ ------- ------ ------
$1,323.9 $(82.9) $(138.7) $(3.51) $(3.51)
======== ====== ======= ====== ======
1995
1st quarter............. $ 324.2 $ 41.7 $ 41.7 $ .80 $ .69
2nd quarter............. 328.1 39.2 22.7 .37 .36
3rd quarter............. 299.7 27.6 17.5 .25 .25
4th quarter............. 330.4 14.2 7.5(a) .02 .02
-------- ------ ------- ------ ------
$1,282.4 $122.7 $ 89.4 $ 1.44 $ 1.42(c)
======== ====== ======= ====== ======
1996
1st quarter............. $ 314.3 $ 28.5 $ 13.1 $ .15 $ .15
2nd quarter............. 335.2 38.1 21.5 .33 .33
3rd quarter............. 317.9 21.7 13.1 .14 .14
-------- ------ ------- ------ ------
$ 967.4 $ 88.3 $ 47.7 $ .62 $ .62
======== ====== ======= ====== ======
</TABLE>
- - --------
(a) Includes a charge of $17.6 million ($11.2 million after-tax or $0.25 per
share), for restructuring and other special charges related primarily to
the acquisition of certain U.S. operations from Jardine Insurance Brokers,
Inc. (see Note 3 of Notes to Financial Statements appearing elsewhere
herein).
(b) Includes a charge of $6 million, or $.14 per share, relating to the
Company's discontinued operations (see Note 6 of Notes to Financial
Statements appearing elsewhere herein).
(c) Includes a loss from discontinued operations of $20.9 million, or $0.47
per share, relating to an agreement in principle to resolve certain
indemnity obligations to Sphere Drake (see Note 6 of Notes to Financial
Statements appearing elsewhere herein).
(d) Includes charges of $163.6 million ($106.6 million after-tax or $2.43 per
share) for restructuring, contingency settlements and other reserves.
(e) Full year earnings per share amounts do not equal the sum of the quarterly
amounts due to changes in weighted average shares during the periods.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
Set forth below are the sections entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the forms set
forth in the Company's Annual Report on Form 10-K for the year ended December
31, 1995 and the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1996, respectively, without modification (except for defined
terms). The discussion below does not address the effect of the consummation
of the acquisition of the Company by Aon, or Aon's plans for the Company
following the acquisition, on the Company's liquidity, capital resources, or
results of operations.
FISCAL YEARS 1995, 1994 AND 1993
Overview
The Company provides professional risk management consulting, insurance
brokerage and human resource management consulting services from offices in
more than 80 countries. The Company's principal industry segments are (i)
insurance services, comprised of risk management and insurance broking
services and specialist and reinsurance broking, and (ii) human resource
management consulting.
Since mid-1994, management of the Company has implemented significant
changes, including a restructuring program aimed at expense reduction and
process improvement, a broad-based cash and stock compensation program tied to
individual performance and increasing stockholder value, as well as
investments in the Company's information technology systems and training
programs. In addition, the Company reduced its financial exposures to various
longstanding litigation and other contingencies and sold various non-core
businesses.
Management believes that such actions were necessary in order to stabilize
the Company, to improve margins and financial performance, and to effectively
reposition the Company to meet the challenges of an increasingly competitive
business environment, the evolving needs and demands of its clients, including
a trend toward fee based remuneration, and the renewed trend towards industry
consolidation.
The Company's revenues are generally derived from commissions and fees and
can be affected by pricing and seasonality. The Company's insurance broking
revenues are generally impacted by overall available market capacity and
premium rates charged by insurance companies. Fee arrangements are becoming
more prevalent on large risk management accounts. Insurance broking
commissions and fee growth continue to be constrained, particularly in the
U.S., due to soft pricing and excess market capacity and the resultant intense
competition among insurance carriers and brokers for market share. These
market conditions are becoming increasingly evident in the U.K., Continental
Europe and in other parts of the world. In addition, changing client demands
and needs in the U.S. have resulted in higher account turnover rates within
the industry.
During 1996, soft market conditions are expected to continue in most
liability coverages. Partially offsetting this trend are anticipated hardening
conditions for selected catastrophe coverages. The Company anticipates modest
broking revenue growth for its insurance broking operations in 1996.
Revenue growth from the Company's human resource management consulting
operations was constrained in 1995 by the impact of the Company's
restructuring initiatives. Moderate growth is expected for this segment in
1996.
The timing and realization of revenues are also affected by the timing of
renewal cycles in different parts of the world and lines of business. This
produces a degree of seasonality in the Company's results. Broking revenues
for risk management and insurance broking services are strongest during the
first quarter for Continental Europe and strongest in the U.S. and Asia-
Pacific during the fourth quarter. Specialist and reinsurance broking revenues
are strongest in the first and second quarters. Revenues for human resource
management consulting are typically strongest in the fourth quarter and
weakest in the first quarter.
21
<PAGE>
In addition to commissions and fees, the Company derives revenues from
investment income earned on fiduciary funds. Despite a rise in worldwide
interest rates in 1995, the trend in recent years has been downward. There is
also pressure from insurance companies to shorten the time that fiduciary
funds are held prior to remittance to carriers. Investment income earned on
fiduciary funds during 1996 is anticipated to remain near 1995 levels.
Revenue growth of the Company's industry segments will depend increasingly
on the development of new products and services, new business generation and
selective acquisitions.
In October 1995, the Company purchased most of the U.S. insurance broking
and consulting business of Jardine Insurance Brokers, Inc. (the JIB
acquisition). The Company will continue to evaluate domestic and international
geographical market expansion possibilities and further industry
specialization. Furthermore, the Company is considering additional 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 will continue to
evaluate such opportunities and prospects. However, the Company cannot predict
if any transaction will be consummated, nor the terms or form of consideration
required. Nor can the Company predict, if any such transaction is consummated,
what the financial benefit, if any, will be to the Company.
Overall, comparable operating expenses declined significantly in 1995,
resulting from implementing the 1994 plan of restructuring and other expense
initiatives. The Company realized over $100 million of expense savings from
these efforts. Approximately one-half of these savings were reinvested in the
Company in the form of new technology, products and personnel to support
revenue growth, or absorbed through inflationary increases in costs. The
Company plans to continue such investments in 1996 which will slow short-term
profit growth.
Summary
The Company reported net income of $89.4 million, or $1.44 per share for
1995. Fully diluted earnings per share for the period were $1.42. Included in
the results is an after-tax gain of $18.7 million, or $0.42 per share, from
the sale of Alexsis Inc., the Company's U.S.-based third party claims
administrator and a pre-tax charge of $17.6 million ($11.2 million after-tax
or $0.25 per share) primarily associated with the JIB acquisition in the
fourth quarter.
In 1994, the Company reported a net loss of $138.7 million, or $3.51 per
share on a primary and fully diluted basis. Included in the results were
after-tax charges for restructuring, contingency settlements and other
reserves of $106.6 million, or $2.43 per share, an after-tax gain of $12.5
million, or $0.28 per share, from the sale of the Company's U.S.-based
personal lines insurance broking business, and after-tax charges of $28.9
million, or $0.66 per share, relating to certain indemnity obligations and
exposures of the Company's discontinued operations.
In 1993, net income was $26.9 million, or $0.48 per share on a primary and
fully diluted basis, including after-tax gains of $2.3 million, or $0.05 per
share, from the sale of three small operations and a gain relating to a
cumulative effect adjustment of $3.3 million, or $0.08 per share, from a
change in accounting for income taxes.
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 financial statements and related notes.
CONSOLIDATED
Operating Revenues
Consolidated operating revenues for 1995 were $1,282.4 million compared to
$1,323.9 million for 1994. The sale of non-core businesses reduced revenues by
approximately $109 million in 1995 compared to 1994.
22
<PAGE>
Partially offsetting this decline was $8.5 million from the favorable effects
of changes in foreign currency rates. The JIB acquisition in the fourth
quarter of 1995 increased revenues by approximately $11.5 million.
Excluding the effects of these items, total revenues increased by $47.5
million, or 3.9 percent, on a comparable basis. Consolidated operating
revenues decreased in 1994 by $17.7 million, or 1.3 percent, versus 1993.
Commissions and Fees
Total 1995 commissions and fees were $1,219.5 million compared to $1,272.3
million in 1994, a decrease of $52.8 million, or 4.1 percent. Total 1994
commissions and fees decreased from 1993 levels by $15.4 million, or 1.2
percent. The sale of non-core businesses reduced such revenues in the 1995 and
1994 comparable periods by approximately $106.5 million and $8.4 million,
respectively. The favorable effects of changes in foreign currency rates
increased commissions and fees by $7.9 million and $0.5 million in 1995 and
1994, respectively. Additionally, the impact of acquisitions increased these
revenues by $11.2 million and $7.2 million in 1995 and 1994, respectively.
After adjusting for the effects of these items, total commissions and fees
increased by $34.6 million, or 3 percent, in 1995 versus a decrease of $14.7
million, or 1.3 percent, in 1994 versus 1993.
Fiduciary Investment Income
Investment income earned on fiduciary funds increased by $11.3 million, or
21.9 percent, in 1995 primarily due to higher annual average yields achieved,
particularly on its U.S. dollar and U.K. pound sterling portfolios.
In 1994, fiduciary investment income declined by $2.3 million, or 4.3
percent, versus 1993 primarily due to a reduction in the average size of
portfolios, particularly in the U.S.
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. 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 financial instruments increased the Company's fiduciary
investment income by $1 million in 1995, $0.2 million in 1994 and $2.2 million
in 1993. For additional information relating to the Company's interest rate
financial instruments, see Note 12 of Notes to Financial Statements.
The majority of the Company's fiduciary funds investment portfolio is
invested in securities with short-term maturities; as a result, the Company's
level of fiduciary investment income is closely associated with changes in
short-term, worldwide interest rates, primarily in the United States and
United Kingdom. Excluding the impact of derivative financial instruments, a
one percentage point change in worldwide interest rates could affect the
Company's level of fiduciary investment income by approximately $8 million.
The Company generally enters into derivative instruments to hedge its
exposure to interest rate changes up to a three year period. The approximate
net amount of the fiduciary investment portfolio that has been hedged using
derivative instruments, and the effective fixed rate of return the Company
will receive on those hedges, is summarized below:
<TABLE>
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31, 1996 1997 1998
------ ------ -----
Net Value Hedged...................................... $138.6 $184.2 $68.7
Effective Interest Rate............................... 8.9% 7.2% 7.2%
</TABLE>
Because these derivative instruments have effectively locked in a fixed
interest rate on a portion of the fiduciary funds portfolio, the Company's
fiduciary investment income is not as impacted by short-term interest rates as
would otherwise be the case. For example, a one percentage point change in
worldwide market interest
23
<PAGE>
rates would, as cited above, affect fiduciary investment income and related
cash flows by approximately $8 million; however, the impact is reduced to
approximately $7 million in 1996 when the financial hedging instruments are
included.
A change in the level of short-term, worldwide interest rates would also
result in a change in the fair market value of the Company's portfolio of
derivative financial instruments. At December 31, 1995, the fair market value
of all interest rate derivative financial instruments was approximately $6.8
million, representing the economic gain the Company could have realized if the
Company terminated all interest rate derivatives on that date. If interest
rates at December 31, 1995 had been one percentage point higher, the fair
market value of all interest rate derivatives would have been approximately $3
million. Likewise, if interest rates had been one percentage point lower, the
fair market value of all interest rate derivatives would have been
approximately $10 million.
Operating Expenses
Consolidated operating expenses for 1995 were $1,159.7 million compared to
$1,406.8 million in 1994. Excluding the 1995 special charges and the 1994
restructuring charges and the 1994 non recurring charges described below,
total operating expenses declined by $150.9 million, or 11.7 percent.
Reflected in this decrease was the effect of the sale of non-core businesses
which reduced total operating expenses by approximately $102.8 million on a
comparable basis. Partially offsetting this decline was the negative impact of
changes in foreign currency rates, and the fourth quarter JIB acquisition
which increased total expenses by $9.3 million and $11.2 million,
respectively.
Excluding the effects of these items, total expenses decreased $68.6
million, or 5.6 percent, on a comparable basis.
Consolidated operating expenses increased by $117.5 million, or 9.1 percent,
in 1994 versus 1993. Excluding the restructuring charges described below,
total operating expenses increased in 1994 by $48.5 million, or 3.8 percent.
In 1994, total operating expenses increased by $50.3 million after adjusting
for foreign currency fluctuations and the effects of acquisitions and
dispositions.
Salaries and Benefits
Consolidated salaries and benefits decreased by $79.2 million, or 9.7
percent, in 1995 versus 1994. Excluding the effect of changes in foreign
currency rates, a $59.2 million decrease resulting from the sale of non-core
businesses, the fourth quarter JIB acquisition and the 1994 increase due to
additional incentive and benefit expenses, total salaries and benefits
decreased by $24.5 million, or 3.3 percent, versus 1994. Contributing to this
decrease was a 3.9 percent decline in headcount, excluding the impact of
acquisitions and dispositions, primarily due to early retirement programs and
worldwide workforce reductions pursuant to the Company's 1994 plan of
restructuring. Also reflected in the decrease were lower employee benefit
costs resulting from the Company's expense reduction initiatives. Somewhat
offsetting these items was an increase in incentives attributable to improved
sales and profit performance coupled with the implementation of several new
long-term incentive compensation plans and normal salary progressions.
Consolidated salaries and related benefits increased by $29 million, or 3.7
percent, in 1994 versus 1993. The increase reflects $10.1 million of
additional incentive and benefit expenses in 1994 representing a combination
of amendments to existing incentive plans, payments required to certain
employees in the U.K. due to the modification of employment terms and a
special compensation award to a director.
Also contributing to the 1994 change was an additional $9.1 million of
salaries and benefits resulting from the 1993 Mexico acquisition and from the
November 1993 pooling of interests acquisition of Clay & Partners ("Clay").
24
<PAGE>
Excluding the effects of these items and a decrease due to the effect of
sold operations, salaries and benefits increased $16.4 million over 1993
levels. Staff costs for 1994 also reflected normal salary progressions and
higher benefit costs, partially offset by a decline in headcount of 8.3
percent in 1994. Performance-based incentive costs declined by $4.8 million in
1994.
The Company will adopt SFAS No. 123, "Accounting for Stock Based
Compensation," in 1996. The Company has elected to continue to measure
compensation costs using APB Opinion No. 25 and accordingly will provide the
disclosures required by SFAS No. 123.
Other Operating Expenses
Consolidated other operating expenses for 1995 were $407 million compared to
$523.5 million for 1994, a decrease of $116.5 million, or 22.3 percent. The
sale of non-core businesses reduced expenses by approximately $43.6 million in
the comparable periods. Partially offsetting this decline was the negative
impact of changes in foreign currency rates, including hedging contracts gains
and losses, and the fourth quarter JIB acquisition which increased other
operating expenses by $2.6 million and $3.3 million, respectively.
After adjusting for the effects of these items, total other operating
expenses decreased $78.8 million, or 16.5 percent, in 1995 versus 1994 on a
comparable basis.
Contributing to this decline was the implementation of 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 and supply management. Additionally, this decrease
reflects lower insurance costs primarily related to the Company's professional
indemnity programs.
In 1994, the Company provided $29.2 million, including $24.9 million in the
fourth quarter, of additional reserves relating to the settlement of certain
large litigation matters and reserve strengthening. In addition, higher system
development costs were reflected in 1994 due to the standardization and
automation efforts underway in the U.S.
Consolidated other operating expenses increased by $19.5 million, or 3.9
percent, in 1994 versus 1993. Excluding the negative impact of changes in
foreign exchange rates and acquisitions and dispositions, other operating
expenses increased by $19.3 million, or 4.3 percent, in 1994 versus 1993.
Insurance costs reflect third-party insurance premiums and self-insurance
reserves for the Company's professional indemnity programs. The Company
believes its insurance-related reserves are sufficient to cover potential
claims and liabilities; however, there is no assurance that escalating
litigation costs and awards, as well as insurance company insolvencies, will
not have an adverse impact on the future overall cost of insurance coverages.
The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions" effective January 1, 1993 for its U.S. plans and
effective January 1, 1995 for its international plans. This statement requires
the Company to accrue the estimated cost of future retiree benefit payments
during the years the employee provides services. The Company previously
expensed the cost of these benefits, which are principally health care and
life insurance, as premiums or claims were paid. The Company elected to
recognize the initial postretirement benefit obligation of $14 million and
$5.9 million for its U.S. plans and international plans, respectively, over a
period of twenty years.
Restructuring and Special Charges
In the fourth quarter of 1995, the Company recorded a $17.6 million pre-tax
charge ($11.2 million after-tax or $0.25 per share) related primarily to the
JIB acquisition. The JIB portion of this charge amounted to $13 million of
which $12.5 million reflects the anticipated costs associated with the
abandonment of certain of the Company's office space and the remaining balance
reflects the anticipated costs associated with involuntary
25
<PAGE>
workforce reductions. The lease liability will be paid out through the year
2007. The remaining $4.6 million of the charge primarily represents costs
associated with other involuntary workforce reductions in the U.S.
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.
At December 31, 1995 the remaining liabilities associated with the 1994
restructuring program amounted to $21.4 million, of which $9 million is
included in current liabilities in the Company's 1995 consolidated balance
sheet. The remaining long-term liabilities will be paid out in the form of
annuity payments for certain early retirees as well as lease payments through
the year 2020.
Other Income and Expenses
Investment Income
Investment income earned on operating funds increased by $8.3 million, or
76.1 percent, in 1995 compared to an increase of $1.3 million, or 13.5 percent
in 1994. Contributing to the 1995 increase were higher average operating cash
and investment levels during 1995 primarily resulting from the Company's
improved operating performance and the proceeds from the July 1994 issuance of
the Company's Series B Preferred Stock coupled with slightly higher worldwide
interest rates. In 1994 the increase was primarily attributable to interest
income earned on the proceeds from the aforementioned July 1994 preferred
stock issuance.
Interest Expense
Interest expense increased by $2.6 million, or 16.3 percent, in 1995
compared to an increase of $1.6 million, or 11.1 percent, in 1994. The 1995
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 Morahan &
Company ("Shand") and Mutual Fire, Marine & Inland Insurance Company ("Mutual
Fire") contingencies during the first quarter of 1995. The 1994 increase is
due primarily to a higher debt level associated with the aforementioned $50
million borrowing.
Other
Other income (expenses) consists of the following:
<TABLE>
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
----- ----- ------
Gains on sales of businesses........................... $30.4 $20.2 $ 3.9
Litigation costs....................................... (0.1) (9.1) (20.2)
Other.................................................. 2.4 (0.2) 0.7
----- ----- ------
$32.7 $10.9 $(15.6)
===== ===== ======
</TABLE>
During 1995 and 1994, as part of its efforts to streamline its operations
and concentrate on its core businesses, the Company disposed of certain
operations. On February 28, 1995, the Company completed the sale of Alexsis
Inc., its U.S.-based third party claims administrator, for total cash proceeds
of $47.1 million resulting in a pre-tax gain of $28.7 million ($18.7 million
after-tax or $0.42 per share).
During 1995, the Company sold three small operations for gross proceeds of
$9.1 million resulting in pre-tax gains totaling $1.7 million ($1.1 million
after-tax or $0.02 per share).
On November 10, 1994, the Company completed the sale of its U.S.-based
personal lines insurance broking business. The total proceeds from the sale
were $30.2 million with a resulting pre-tax gain of $20.2 million ($12.5
million after-tax or $0.28 per share).
26
<PAGE>
During 1993, the Company sold three small operations for gross proceeds of
$9.6 million. Pre-tax gains of $3.9 million were recognized on the sales with
resulting after-tax gains totaling $2.3 million or $0.05 per share.
Litigation costs are associated primarily with the Mutual Fire lawsuit
described in Note 14 of Notes to Financial Statements as well as a 1993
settlement of certain other litigation matters.
Special Charges
In the fourth quarter of 1994, the Company recorded pre-tax special charges
of $69.7 million ($45.3 million after-tax or $1.03 per share). These charges,
which were reflected in non-operating results, included a $32.5 million
settlement in January 1995 which resolved certain indemnification obligations
relating to the 1987 sale of Shand and a $37.2 million increase to the
Company's pre-existing reserves. The latter was based on settlement
discussions which led to a March 1995 settlement agreement, subsequently
approved by the courts, relating to lawsuits and other disputes brought
against the Company and others by the rehabilitator of Mutual Fire. The
resolution of these contingencies reflected management's view that negotiated
settlements would be more cost-effective than protracted litigation. For
further information relating to these matters, see Note 14 of Notes to
Financial Statements.
Income Taxes
The Company's effective tax rates were 39 percent, 29 percent and 20 percent
in 1995, 1994 and 1993, respectively. These rates compare to the U.S.
statutory rate of 35 percent. The effective rates were negatively impacted by
certain expenses, including entertainment and amortization of goodwill, which
were not deductible in certain jurisdictions in which the Company conducts
business. Offsetting these factors were foreign tax rates lower than the U.S.
statutory rate and state and local tax benefits on losses generated in the
U.S. operations in 1994 and 1993.
The Company's 1993 effective tax rate was favorably impacted by the
recognition of a $3.5 million tax benefit associated with a prior year capital
loss. The rate was also favorably affected by the results of Clay, a U.K.-
based actuarial consulting operation acquired in 1993 in a pooling of
interests transaction. Prior to the merger, Clay operated as a partnership and
accordingly, its results did not reflect corporate income taxes of
approximately $1.9 million.
The Company files a consolidated U.S. federal income tax return which
includes the losses of its U.S. discontinued operations. A reconciliation of
the book to taxable income (loss) for the Company's U.S. operations is as
follows:
<TABLE>
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
------ ------- ------
Income (loss) before taxes......................... $ 37.4 $(200.9) $(74.2)
Amortization of goodwill.......................... 4.4 4.2 4.8
Depreciation...................................... 1.0 6.6 5.4
Tax leases........................................ 8.3 7.0 7.6
Dispositions of subsidiaries/businesses........... 27.8 (19.2) (8.5)
Contingency settlements........................... (83.9) 69.7 --
Restructuring expenses............................ (11.4) 25.8 (2.9)
Repatriation of foreign earnings.................. 0.9 9.3 131.0
Other, including accruals not currently
deductible....................................... (4.4) 18.9 39.9
------ ------- ------
Taxable income (loss) from continuing operations... (19.9) (78.6) 103.1
Taxable income (loss) from discontinued operations. (5.4) (4.8) 4.6
------ ------- ------
U.S. taxable income (loss)......................... $(25.3) $ (83.4) $107.7
====== ======= ======
</TABLE>
27
<PAGE>
The Company recorded an $8.8 million benefit with regard to the 1995 U.S.
taxable loss, which will be carried back. The Company carried back $38.4
million of the 1994 U.S. taxable loss, and received a tentative refund of
federal income tax in the amount of $16.3 million in February 1996. The amount
carried back relates primarily to the deductions claimed for interest incurred
in connection with the settlement of the examination by the Internal Revenue
Service ("IRS") of years 1987 through 1989 and for payments on various
contingency settlements. The remaining 1994 U.S. taxable loss, $45 million,
will be carried forward. As discussed in Note 5 of Notes to Financial
Statements, the Company is currently under examination by the IRS for years
1990 and 1991. It is not expected that the examination will have any effect on
realization of the 1994 carryforward.
At December 31, 1995, the Company has a net deferred tax asset balance of
$97.1 million which is comprised of net deferred tax assets in the U.S. of
$118.6 million offset by net deferred tax liabilities of $21.5 million outside
the U.S. The deferred tax asset is net of a $35.2 million valuation allowance
primarily relating to foreign and U.S. state net operating loss and capital
loss carryforwards. The valuation allowance represents approximately 85
percent of these carryforwards. At this time the Company believes that it is
more likely than not that this portion of these deferred tax assets will not
be realized. The valuation allowance decreased in 1995 by a net amount of $1.5
million, principally due to the utilization for tax purposes of foreign
capital loss carryforwards, offset by increases in foreign and U.S. state net
operating losses.
A substantial portion of the net deferred tax asset relates to various
financial statement expenses and accruals, primarily in the U.S., that will
not be tax deductible until paid. These costs, which will be paid in future
years, principally include restructuring costs, deferred compensation
expenses, professional indemnity costs, and pension and other employee benefit
expenses. The net deferred tax asset also includes $15.8 million relating to
the $45 million carryforward of the 1994 U.S. taxable loss which will expire
in the year 2009, U.S. federal foreign tax credits totaling $11.8 million
which expire in years 1998 through 2000, and U.S. federal alternative minimum
tax credits of $7.5 million which can be carried forward indefinitely. The
Company expects that sufficient taxable income will be generated in future
years to realize these carryforwards, and therefore, the Company believes a
valuation allowance is not necessary for these amounts.
Although future earnings cannot be predicted with certainty, management
currently believes that realization of the net deferred tax asset is more
likely than not. The net U.S. deferred tax asset would be realized with
average future annual earnings equivalent to 1995 results excluding non-
recurring items and sold subsidiaries and businesses.
As discussed in Note 5 of Notes to Financial Statements, the Company was
advised during 1994 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 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 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 proposed adjustment and has requested advice
from the IRS National Office on this issue. The Company currently believes
that the National Office review should be completed in the first half of 1996.
Although the ultimate outcome of the matter cannot be predicted with
certainty, the Company and its independent tax counsel believe there are
substantial arguments in support of the Company's position and that the
Company should prevail in the event that the issue was to be litigated.
A similar set of transactions occurred in 1993. Depending on the outcome of
the IRS National Office review of the 1991 issue, the IRS could propose an
increase in 1993 taxable income which would result in an additional
28
<PAGE>
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
Limited ("Alexander Howden").
In 1994, Orion, which has financial responsibility for sharing certain of
the insurance pool 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 net liabilities of discontinued operations shown in the accompanying
Consolidated Balance Sheets include insurance liabilities associated with the
above indemnities, liabilities of insurance underwriting subsidiaries
currently in run-off and other related liabilities.
The insurance liabilities represent estimates of future claims expected to
be made under occurrence-based insurance policies and reinsurance business
written through Lloyd's and the London market covering primarily asbestosis,
environmental pollution, and latent disease risks in the United States, which
are coupled with substantial litigation expenses. These claims are expected to
develop and be settled over the next twenty to thirty years.
Liabilities stemming from these claims cannot be estimated using
conventional actuarial reserving techniques because the available historical
experience is not adequate to support the use of such techniques and because
case law, as well as scientific standards for measuring the adequacy of site
cleanup (both of which have had, and will continue to have, a significant
bearing on the ultimate extent of the liabilities) is still evolving.
Accordingly, the Company's independent actuaries have combined available
exposure information with other relevant industry 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 with a
reinsurance company, 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, 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 December 31, 1995, the
recoveries were limited to $115.2 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.
29
<PAGE>
During the third quarter of 1994, the Company recorded a $20.9 million
charge relating to an agreement that resolved certain indemnity obligations to
Sphere Drake. Under terms of the Sphere Drake agreement, the Company received
a cash payment of $5 million in settlement of the zero coupon notes receivable
and related indemnities as well as certain income tax liabilities.
While the insurance liabilities represent the Company's best estimate of the
probable liabilities within a range of independent actuarial estimates of
reasonably probable loss amounts, there is no assurance that further adverse
development may not occur due to variables inherent in the estimation
processes and other matters described above. Based on independent actuarial
estimates of a range of reasonably possible loss amounts, liabilities could
exceed recorded amounts by approximately $170 million. However, in the event
of such adverse development, based on the independent actuarial estimate of
pay out patterns, up to approximately $130 million of this excess would be
recoverable under the finite risk contracts.
The Company believes that, based on current estimates, the established total
net liabilities of discontinued operations are sufficient to cover its
exposures.
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.
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." The cumulative effect of adopting this standard increased net
income in the first quarter of 1993 by $3.3 million or $0.08 per share. Tax
benefits of $3.2 million were also allocated to paid-in capital representing
the difference in the tax bases over the book bases of the net assets of
taxable business combinations accounted for as pooling of interests. These
benefits would have been recognized at the respective dates of combination if
SFAS No. 109 had been applied at that time.
SEGMENT INFORMATION
Insurance Services
Operating results for the Insurance Services segment of the Company's
operations are summarized below:
<TABLE>
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
-------- -------- --------
Operating revenues:
Risk management and insurance services broking. $ 739.8 $ 816.4 $ 832.7
Specialist insurance and reinsurance broking... 269.4 245.4 242.3
Fiduciary investment income.................... 62.6 51.4 53.6
-------- -------- --------
Total operating revenue......................... 1,071.8 1,113.2 1,128.6
-------- -------- --------
Operating expenses:
Operating expenses............................. 912.7 1,069.1 1,035.7
Restructuring/special charges.................. 15.7 56.3 --
-------- -------- --------
Total operating expenses....................... 928.4 1,125.4 1,035.7
-------- -------- --------
Operating income (loss)......................... $ 143.4 $ (12.2) $ 92.9
======== ======== ========
</TABLE>
30
<PAGE>
Risk Management and Insurance Services Broking Revenues
Worldwide risk management and insurance services broking commissions and
fees were $739.8 million, which decreased $76.6 million, or 9.4 percent, in
1995 compared to a $16.3 million, or 2 percent, decrease in 1994. Reflected in
the 1995 decrease are the net impact of sold operations which reduced revenues
by $106.5 million, a favorable foreign exchange rate variance of $4.9 million
and an increase in revenues of $11.2 million relating to the fourth quarter
JIB acquisition.
Excluding the effect of these items, 1995 commissions and fees increased
$13.8 million, or 2 percent.
In 1995, the Continental Europe, Latin America, and Asia-Pacific operations
reported increased commissions and fees of $1.4 million, $7 million and $5.1
million, respectively. The European operations favorable variance reflects
increased commissions and fees, particularly in Germany, the Netherlands and
France, partially offset by a decrease for such revenues in the U.K. The
Continental Europe increases are primarily attributable to increased
commission rates and the acquisition of a small brokerage business. The U.K.
decrease reflects weakened pricing resulting from a softening insurance
market. The increases in the Latin American operations are primarily due to
new business production and favorable client retention levels. The increase in
the Asia-Pacific operations reflects the acquisition of a small brokerage
business.
Broking revenues in the U.S. decreased by $29.7 million in 1994 compared to
1993 reflecting the continued softness in certain insurance markets and lost
business. Partially offsetting the U.S. decline were revenue increases for
certain of the Company's international risk management and insurance services
operations. Particularly, there was an increase of $13.2 million in the Latin
American operations, primarily from the 1993 Mexico acquisition, and also
increases of $5.3 million and $3.7 million in the European and Canadian
operations, respectively. These increases were due primarily to new business
production. Furthermore, sold operations served to reduce 1994 broking
revenues by $8.4 million and changes in foreign currency rates negatively
impacted such revenues by $1 million.
Specialist Insurance and Reinsurance Broking Revenues
To achieve operational efficiencies, in late 1994 the specialist insurance
broking and reinsurance broking operations committed to merge their operations
into one business unit, headquartered in London effective January 1, 1995.
Prior to the merger, they operated as independent business units.
Total 1995 broking commissions and fees of $269.4 million increased $24
million, or 9.8 percent, versus 1994 levels. This compares to an increase of
$3.1 million, or 1.3 percent, in 1994. These increases were primarily due to
reported new business increases of $22.2 million and $3.2 million in the U.S.
and overseas operations, respectively.
In 1994, selected premium revenues and new business in the Company's
international operations, particularly in Canada, France, Asia-Pacific and
Latin America were substantially offset by a decline in the U.S.
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. In the event the
U.S. dollar's value was to change by $0.10 per U.K. pound sterling, the annual
operating income and cash flow of the specialist and reinsurance broking
operation would change by approximately $4 million.
The fair market value of foreign exchange contracts is impacted by changes
in the spot foreign exchange rate. At December 31, 1995, the fair market value
of all foreign exchange hedging instruments was a liability of $0.7 million.
If the dollar appreciated by $0.10 against the U.K. pound sterling, the fair
value of these foreign exchange instruments would be a liability of $4.7
million. If the dollar depreciated by $0.10, the fair value would be an asset
of $2.5 million.
31
<PAGE>
Foreign exchange contracts 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. If these
contracts had been terminated at December 31, 1995 and December 31, 1994, the
results would have been a liability of $0.7 million and an asset of $2.6
million, respectively. For additional information relating to the Company's
foreign exchange financial instruments, see Note 12 of Notes to Financial
Statements.
These foreign exchange contracts are purchased from large international
banks and financial institutions with strong credit ratings. Credit limits are
established based upon the credit ratings of such institutions 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 foreign exchange and options
contracts by using probability analysis, external pricing systems and
information from banks and brokers.
Fiduciary Investment Income
During 1995, investment income earned on fiduciary funds, increased by $11.2
million, or 21.8 percent, versus 1994 levels. The increase was primarily due
to higher worldwide interest rates, particularly in the U.S. and U.K.
Investment income earned on fiduciary funds decreased by $2.2 million in
1994 primarily due to lower average investment levels, particularly in the
U.S.
Operating Expenses
Operating expenses were $928.4 million in 1995. Excluding a $15.7 million
special charge in 1995 primarily associated with the JIB acquisition and $40.2
million of restructuring charges in 1994, worldwide risk management and
insurance services operating expenses decreased by $154.3 million, or 18.5
percent, in 1995 compared to an increase of $14.6 million, or 1.8 percent, in
1994. The effect of changes in foreign currency rates increased expenses by
$2.1 million and $6 million in 1995 and 1994, respectively. The fourth quarter
JIB acquisition increased expenses $11.2 million in 1995. Reflected in the
1995 decrease is a reduction of expenses of approximately $102.8 million due
to the sale of non-core businesses.
After adjusting for the effects of changes in foreign currency rates and
acquisitions and dispositions, total 1995 operating expenses decreased $64.8
million, or 8.9 percent, on a comparable basis.
The U.S. and European operations reported decreased operating expenses of
$67 million and $2.1 million, respectively. The U.S. favorable operations
variance primarily reflects the implementation of 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 and supply management. In addition, 1994 expenses
included $24.9 million of additional reserves relating to the settlement of
certain large litigation matters and reserve strengthening. The European
operations favorable variance reflects reduced operating expenses in the U.K.
substantially offset by increased operating expenses in Continental Europe.
Furthermore, increased operating expenses of $3.9 million and $3.4 million
were reported in the Asia-Pacific and Latin American operations, respectively.
The reported reductions were primarily 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. The reported increase in the Asia-Pacific operations was
primarily due to an acquisition of a small brokerage business.
Contributing to the 1994 increase were higher insurance costs and increased
operating expenses of $13 million in the Latin American operations, primarily
due to the 1993 Mexico acquisition, somewhat offset by a decline in expenses
of $15.2 million for operations sold in 1994 and 1993.
Operating expenses, excluding $16.1 million of 1994 restructuring charges,
for the specialist insurance and reinsurance broking operations decreased by
$2.1 million, or 0.9 percent, in 1995 compared to an increase of
32
<PAGE>
$18.8 million, or 8.8 percent, in 1994. Foreign exchange rate variances,
including hedging contracts gains and losses, negatively impacted 1995
expenses by $5.3 million and had a minimal impact on 1994 expenses.
Excluding the impact of foreign exchange rate variances, total operating
expenses decreased by $7.4 million, or 3.2 percent, in 1995.
Contributing to the 1995 decrease were lower expenses of $18.4 million in
the U.K. operations partially offset by higher expenses of $5.6 million in the
U.S. operations. The reported reduction in the U.K. operations was primarily
the result of the aforementioned restructuring and other expense initiatives
undertaken in 1994. Both of these variances reflect additional incentives
during 1995 due to improved operating performance.
A significant portion of the 1994 operating expense increase was due to
certain additional incentive and benefit expenses in the U.K. operations
arising from amendments to existing incentive plans and payments required to
its employees as a result of modification of employment terms.
Human Resource Management Consulting
Operating results for the Human Resource Management Consulting segment of
the Company's operations are summarized below:
<TABLE>
<S> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
------ ------ ------
Operating revenues:
Commissions and fees................................ $210.3 $210.5 $212.7
Fiduciary investment income......................... 0.3 0.2 0.3
------ ------ ------
Total operating revenues............................ 210.6 210.7 213.0
------ ------ ------
Operating expenses:
Operating expenses.................................. 199.2 221.5 220.5
Restructuring/Special charges....................... 1.4 8.3 --
------ ------ ------
Total operating expenses............................ 200.6 229.8 220.5
------ ------ ------
Operating income (loss).............................. $ 10.0 $(19.1) $ (7.5)
====== ====== ======
</TABLE>
Human resource management consulting commissions and fees of $210.3 million
decreased by $0.2 million, or 0.1 percent, in 1995 compared to a decrease of
$2.2 million, or 1 percent in 1994. After adjusting for the effects of changes
in foreign exchange rates, these revenues decreased by $2.1 million, or 1
percent, and by $2.8 million, or 1.3 percent, in 1995 and 1994, respectively.
The 1995 decrease is primarily attributable to revenue shortfalls in the
U.S. operations partially offset by increases in the Canadian operations.
Contributing to the 1994 decrease was a shortfall in the U.K. operations
primarily due to the enactment of legislation requiring commission disclosure
to clients on financial services products.
Operating expenses, excluding $1.4 million of special charges in 1995 and
$8.3 million of 1994 restructuring charges, decreased by $22.3 million, or
10.1 percent, in 1995 compared to an increase of $1 million, or 0.5 percent,
in 1994.
After adjusting for the effect of changes in foreign exchange rates,
operating expenses decreased by $24.2 million, or 10.9 percent, in 1995
compared to an increase of $0.8 million, or 0.4 percent, in 1994.
Reflected in the 1995 decrease were reductions of $18 million, $4.2 million
and $2.4 million in the operating expenses of the U.S., U.K., and Canadian
operations, respectively, primarily a result of the aforementioned
restructuring and other expense initiatives undertaken in 1994. Contributing
to the 1994 increase were higher salary costs in the U.K. from the Clay
acquisition, which operated as a partnership in 1993, partially offset by
33
<PAGE>
decreases in the total operating expenses of the U.S. operations due primarily
to one-time expenses reflected in their 1993 results.
Liquidity and Capital Resources
At December 31, 1995, the Company's operating cash and cash equivalents
totaled $241.2 million, a $7.5 million decrease over the 1994 year-end
balance. In addition, the Company had $42.2 million of operating funds
invested in short-term and long-term investments at December 31, 1995, a $41.1
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, and gains on sales of business. The net cash flows
relating to discontinued operations and changes in working capital balances
are also included, as well as, certain items such as 1995 special charges and
1994 restructure and special charges. In 1995, the Company's operating
activities used $10.3 million of operating funds, including the items
described below.
The 1994 charges for restructuring required $26.4 million of cash payments
during 1995. The Company anticipates that approximately $9 million will be
funded during 1996.
As described in Note 5 of Notes to Financial Statements, in February 1995,
the Company paid to the IRS the amount due in settlement of the examinations
of the years 1980 through 1989. Tax and net interest totaling $35.6 million
was charged 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 $21.8 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 and
acquisitions were $52.1 million and $26.2 million during 1995 and 1994,
respectively. These expenditures increased primarily as a result of the
Company's fourth quarter JIB acquisition.
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 Inc.
On October 12, 1995, the Company acquired most of the U.S. retail insurance
broking and consulting business of JIB for a purchase price not to exceed
$48.3 million. The Company paid $21.1 million at closing and issued two 6.375%
promissory notes totaling $21.2 million with payments of $10.6 million due on
April 9 and October 12, 1996, respectively. During the fourth quarter of 1995,
the October promissory note was revalued to $8.1 million as a result of
certain revenue retention criteria with respect to former JIB offices. The
remaining purchase price of approximately $6 million is contingent on the
retention of specific accounts over a four-year period ending October 12,
1999. The acquired offices generated revenues of approximately $53 million in
1994.
34
<PAGE>
The acquisition was accounted for as a purchase. Of the purchase price,
$44.3 million has been allocated to identifiable intangible assets (expiration
lists) and goodwill. In completing its integration plans, the Company incurred
a one-time charge of $13 million in the fourth quarter relating to the closing
of certain of its offices and workforce reductions.
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. The remaining contingent note
payable of $4 million was paid in full in September 1995.
As a result of the Mutual Fire settlement, the Company issued a $35 million
zero coupon note in March 1995, payable in six annual installments. Using a
discount rate of 9.3%, the present value of the note was recorded as a $25.9
million long-term debt obligation. The present value of the outstanding
principal balance of the note payable was $27.5 million at December 31, 1995.
The decline in cash dividend payments reflects the reduction in the
Company's Common Stock dividend by 90 percent in the second quarter of 1994,
resulting in annualized cash flow improvement of $40 million. The 1995 cash
flow improvement from this action was approximately $10 million compared to
1994. In addition, dividends on the Company's Series B Preferred Stock are
payable in kind (additional shares of Series B Preferred Stock) until December
15, 1996, and thereafter, at the discretion of the Board of Directors, until
December 15, 1999.
Under the terms of the Series B Preferred Stock purchase agreement ("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 shares of Series B Preferred Stock. Dividends on shares of
the Series B Preferred Stock reduced the amount of earnings otherwise
available for common stockholders by approximately $17 million in the first
year after issuance, and will reduce earnings by approximately $23 million in
the fifth year after issuance, assuming dividends on the shares of Series B
Preferred Stock were to be paid in kind throughout the first five years after
issuance.
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 and for the
issuance of 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. On October 13, 1995, the Company redeemed all $60.2 million of its
outstanding 11% Convertible Subordinated Debentures, due 2007, together with
accrued interest and a $0.9 million redemption premium. This redemption was
primarily funded by the Company through the borrowing of $60 million under its
revolving credit facility. In December 1995, the Company repaid $30 million of
its revolving credit facility borrowings. The interest rate on the remaining
$30 million was 6.3125% as of December 31, 1995. The Company borrowed $10
million under this agreement in January 1996 and an additional $20 million in
February 1996. See Note 8 of Notes to Financial Statements for further
information regarding this credit agreement.
Supplementing the credit agreement, the Company has unsecured lines of
credit available for general corporate purposes totaling $87.9 million, of
which $87.8 million were unused at December 31, 1995. These lines consist of
uncommitted cancellable facilities in foreign countries. If drawn, the lines
bear interest at market rates and carry annual 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
As a result of the devaluation of the Mexican peso in late 1994, the
Company's accumulated translation adjustment balance for its Mexican
operations reflected an unrealized loss of $6.2 million at December 31, 1994.
35
<PAGE>
Further devaluation of the Mexican peso during 1995 has increased this
unrealized loss to $9.5 million at December 31, 1995. However, the Company
expects to maintain its strategic investment in Mexico for the long term and
further anticipates that its Mexican operation will remain profitable.
Accordingly, the Company does not consider its investment in Mexico to be
impaired.
In 1995, the Accumulated Translation Adjustments, which represent the
cumulative effect of translating the Company's international operations to
U.S. dollars, negatively impacted total Stockholders' Equity by an additional
$2.9 million. The decrease primarily reflects the weakening of the U.K. pound
against the U.S. dollar despite the strengthening of most of the other major
European currencies and the Canadian dollar against the U.S. dollar.
At December 31, 1995, the Company had an accumulated deficit of $227.5
million. The Company's current financial position satisfies Maryland law
requirements for the payment of dividends. At December 31, 1995, the current
maximum amount of unrestricted funds the Company has available to pay Common
Stock dividends under Maryland law equaled approximately $287.6 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 10 of 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
Stock.
As described in Notes 6 and 14 of 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.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 VS 1995
Overview
The Company provides professional risk management consulting, insurance
brokerage and human resource management consulting services from offices in
more than 80 countries. The Company's principal industry segments are (i)
insurance services, comprised of risk management and insurance broking
services and specialist and reinsurance broking, and (ii) human resource
management consulting.
The Company's insurance services revenues are generally derived from
commissions and fees and can be affected by pricing and seasonality. The
Company's insurance broking revenues are generally impacted by overall
available market capacity and premium rates charged by insurance companies.
Insurance broking commissions and fee growth continue to be constrained,
particularly in North America and the London-based specialist and reinsurance
operations, due to soft pricing and excess market capacity and the resultant
intense competition among insurance carriers and brokers for market share.
These market conditions are evident in the risk management and insurance
broking operations in the U.K., Continental Europe and in other parts of the
world. Soft market conditions were prevalent in the first nine months of 1996
and are expected to continue in most insurance coverages throughout 1996 and
1997. In addition, an increasing number of companies are securing competitive
bids for their insurance needs resulting in higher account turnover rates.
Moderate revenue growth is expected from the Company's human resource
management consulting operations during 1996, excluding the impact of the
transfer of a business unit to the insurance services segment.
The timing and realization of revenues are also affected by the timing of
renewal cycles in different parts of the world and lines of business. This
produces a degree of seasonality in the Company's results. Broking
36
<PAGE>
revenues for risk management and insurance broking services are strongest
during the first quarter for Continental Europe and strongest in the U.S. and
Asia-Pacific during the fourth quarter. Specialist and reinsurance broking
revenues are strongest in the first and second quarters. Revenues for human
resource management consulting are typically strongest in the fourth quarter
and weakest in the first quarter.
In addition to commissions and fees, the Company derives revenues from
investment income earned on fiduciary funds. Contributing to the decline in
investment income is lower average interest rates during the first nine months
of 1996 versus the same period in 1995. There is also pressure from insurance
companies to shorten the time that fiduciary funds are held prior to
remittance to carriers. The approximate four percent decline in investment
income earned on fiduciary funds during the first nine months of 1996 compared
to 1995 is anticipated to continue for the full year.
The Company anticipates operating margins for its insurance broking
operations to remain under considerable pressure and are unlikely to improve
for the foreseeable future. Future earnings growth will be dependent on both
revenue growth from the development of new products and services, new business
generation and selective acquisitions, and the continued emphasis on expense
reductions.
Over the past two years, the Company has invested significant resources in
information technology to improve client service, increase productivity and
lower administrative costs. The Company is also streamlining various aspects
of account handling and easing administrative burdens on its sales and service
teams.
These efforts will produce further cost-reduction opportunities,
particularly in the U.S. retail operations. The Company expects to report a
fourth quarter 1996 charge associated with staff reductions and the
consolidation of operations at certain locations.
The Company is also reorganizing certain of its specialty market practices
around a global focus within the Alexander Howden Group. This structure will
take advantage of Howden's strength in these markets and aligns the Company's
structure with client needs for specialized risk management expertise.
The Company will continue to evaluate domestic and international
geographical market expansion possibilities and further industry
specialization. Furthermore, the Company is considering additional 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 will continue to
evaluate such opportunities and prospects. However, the Company cannot predict
if any transaction will be consummated, nor the terms or form of consideration
required. Nor can the Company predict, if any such transaction is consummated,
what the financial benefit, if any, will be to the Company.
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 SEPTEMBER 30, 1996 VS. 1995
Consolidated Results
The Company reported net income of $13.1 million, or $0.14 per share on
consolidated operating revenues of $317.9 million for the three months ended
September 30, 1996. Fully diluted earnings per share for the quarter were also
$0.14.
For the same period of 1995, the Company reported net income of $17.5
million, or $0.25 per share on consolidated operating revenues of $299.7
million. Fully diluted earnings per share for the quarter were also $0.25.
37
<PAGE>
Operating Revenues
Consolidated operating revenues for the third quarter of 1996 were $317.9
million compared to $299.7 million for the same period in 1995, an increase of
$18.2 million or 6.1 percent. The increase was primarily due to acquisitions.
Foreign exchange fluctuations had a nominal impact on quarter to quarter
comparisons. Offsetting the favorable impact of acquisitions were the negative
effects of a weak pricing environment in worldwide insurance markets.
Commissions and Fees
Total commissions and fees for the third quarter of 1996 were $301.6 million
compared to $283.7 million for the same period in 1995, an increase of $17.9
million or 6.3 percent. The increase was primarily attributed to acquisition
revenues of approximately $17 million.
Fiduciary Investment Income
Investment income earned on fiduciary funds for the third quarter of 1996
increased by $0.3 million, or 1.9 percent, versus 1995 levels primarily due to
the impact of interest rate hedging performance in the U.K. and U.S.,
partially offset by lower average interest rates.
Interest rate swap and forward rate agreements and interest rate options
increased the Company's fiduciary investment income by $1.3 million in the
third quarter of 1996 and had no significant impact in the same period in
1995. For additional information relating to the Company's interest rate
financial instruments, see Note 10 of Unaudited Notes to Financial Statements
and Note 12 of Audited Notes to Financial Statements in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
Operating Expenses
Consolidated operating expenses for the third quarter of 1996 were $296.2
million compared to $272.1 million for the same period in 1995, an increase of
$24.1 million or 8.9 percent. Excluding the impact of favorable foreign
exchange fluctuations of $1.7 million, total operating expenses increased
$25.8 million or 9.5 percent, primarily due to acquisitions.
Salaries and Benefits
Consolidated salaries and benefits for the third quarter of 1996 were $191.6
million compared to $175.4 million for the same period in 1995, an increase of
$16.2 million or 9.2 percent. After adjusting for changes in foreign exchange
rates, consolidated salaries and benefits increased by $16.5 million, or 9.4
percent, versus the comparable quarter in 1995. Acquisitions increased
salaries and benefits by approximately $10 million.
Partially offsetting this increase was the decline in headcount from
approximately 11,600 at September 30, 1995 to approximately 11,300 at
September 30, 1996, excluding an increase of approximately 700 people due to
acquisitions in the fourth quarter of 1995 and first nine months of 1996. The
headcount reductions were primarily effected in the U.S. operations.
Other Operating Expenses
Consolidated other operating expenses increased by $7.9 million, or 8.2
percent in the third quarter of 1996 compared to 1995. Excluding the favorable
impact of changes in foreign currency rates and including hedging contract
gains and losses, total other operating expenses increased $9.3 million, or
9.6 percent, for the comparable period, including approximately $5 million
from acquisitions.
Contributing to this increase were higher goodwill amortization and other
expenses relating to the acquisitions, a $1.6 million charge associated with
the Lloyd's reconstruction and renewal program and increased
38
<PAGE>
costs associated with the Company's ongoing investment in information
technology. Partially offsetting this increase was a decrease in insurance
costs primarily relating to the Company's professional indemnity programs.
Other Income (Expenses)
Investment Income
Investment income earned on operating funds decreased in the third quarter
of 1996 by $1.1 million, or 23.9 percent over the comparable period in 1995.
The decrease was primarily due to a reduction in average investment balances
and lower interest rates, particularly in the U.S.
Interest Expense
Interest expense decreased by $0.7 million, or 15.2 percent, in the third
quarter of 1996 versus 1995. The decrease was primarily due to the Company's
redemption and subsequent funding of the 11% convertible subordinated
debentures with borrowings at more favorable rates under the long term credit
facility. Partially offsetting the decrease was additional interest expense on
the promissory note relating to the October 1995 purchase of JIB.
Income Taxes
The Company's effective tax rate for the third quarter was 40.1 percent in
1996 and 38.2 percent in 1995. The effective tax rates are higher than the
U.S. statutory rate of 35 percent primarily due to U.S. state and local income
taxes and to the nondeductibility of certain expenses, including entertainment
and amortization of goodwill, in various jurisdictions in which the Company
does business. Partially offsetting these factors was the favorable impact of
foreign tax rates which were lower than the U.S. statutory rate.
SEGMENT INFORMATION
Insurance Services
Operating results for the Insurance Services segment of the Company's
operations are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
-------------
1996 1995
------ ------
<S> <C> <C>
Operating revenues:
Risk management and insurance services broking........... $182.1 $166.1
Specialist insurance and reinsurance broking............. 67.6 66.2
Fiduciary investment income.............................. 16.3 15.9
------ ------
Total operating revenues............................... 266.0 248.2
Operating expenses......................................... 240.5 215.7
------ ------
Operating income........................................... $ 25.5 $ 32.5
====== ======
</TABLE>
Risk Management and Insurance Services Broking Revenues
Worldwide risk management and insurance services broking commissions and
fees were $182.1 million, an increase of $16 million, or 9.6 percent, for the
third quarter of 1996 versus 1995.
The increase was primarily due to the effect of acquisition revenues, which
approximated $17 million, and revenue gains in the Company's U.K., France,
Netherlands and Latin American operations. Excluding acquisitions, revenues
were significantly lower in the North American operations.
39
<PAGE>
Specialist Insurance and Reinsurance Broking Revenues
Total third quarter 1996 broking commissions and fees for the specialist
insurance and reinsurance broking operations increased $1.4 million, or 2.1
percent, versus 1995 levels. Changes in foreign exchange rates had a nominal
effect on third quarter broking revenues. This increase was primarily due to
revenue gains in the Latin American operations and in captive management
services.
Operating Expenses
Operating expenses were $240.5 million for the third quarter of 1996, an
increase of $24.8 million, or 11.5 percent, versus the comparable period in
1995. Excluding the impact of foreign exchange rate changes, including hedging
contract gains of $1.6 million, operating expenses increased $26.4 million, or
12.2 percent on a comparable basis due mainly to an approximate $14 million
impact from acquisitions. Additional increases resulted from higher salaries
and benefits expenses, particularly in the U.K., and costs associated with the
Company's ongoing investment in information technology, as well as the Lloyd's
contribution.
Human Resource Management Consulting
Operating results for the Human Resource Management Consulting segment of
the Company's operations are summarized below:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
SEPTEMBER
30,
-----------
1996 1995
----- -----
<S> <C> <C>
Operating revenues:
Commissions and fees....................................... $51.9 $51.4
Fiduciary investment income................................ -- 0.1
----- -----
Total operating revenues................................. 51.9 51.5
Operating expenses........................................... 49.4 49.4
----- -----
Operating income............................................. $ 2.5 $ 2.1
===== =====
</TABLE>
Human resource management consulting commissions and fees of $51.9 million
increased by $0.5 million, or 1 percent, in the third quarter of 1996 compared
to the same period in 1995. After adjusting for the impact of the transfer of
a business unit to the U.S. risk management and insurance services operations,
these revenues increased by $2.1 million, or 4.2 percent. This increase was
primarily attributable to revenue gains in the U.S. and U.K. operations.
Operating expenses were flat for the third quarter of 1996 compared to the
same period in 1995. After adjusting for the effect of changes in foreign
exchange rates and the transfer of a business unit, operating expenses
increased by $2 million or 4.2 percent. This increase was primarily attributed
to the U.S. operations and the 1996 acquisitions of two small operations in
Australia and Sweden.
CONSOLIDATED RESULTS
The Company reported net income of $47.7 million, or $0.62 per share on
consolidated operating revenues of $967.4 million for the nine months ended
September 30, 1996. Fully diluted earnings per share for the nine months ended
September 30, 1996 were also $0.62.
For the nine months ended September 30, 1995, the Company reported net
income of $81.9 million, or $1.42 per share, on consolidated operating
revenues of $952 million. Fully diluted earnings per share for the nine months
ended September 30, 1995 were $1.33. Included in the 1995 results is an after-
tax gain of $19.8 million, or $0.44 per share, from the sale of Alexsis, the
Company's U.S.-based third party claims administration operation.
40
<PAGE>
Operating Revenues
Consolidated operating revenues were $967.4 million for the first nine
months of 1996, an increase of $15.4 million, or 1.6 percent, from the
corresponding period in 1995. Revenue comparisons were impacted by both
foreign currency fluctuations and the effect of dispositions. After adjusting
for the effect of these items, total revenues increased $33.3 million, or 3.5
percent, primarily due to acquisitions partially offset by the effect of lower
premium rates.
Commissions and Fees
Total commissions and fees were $920.6 million for the first nine months of
1996, an increase of $17.2 million, or 1.9 percent, compared to the same
period in 1995. After adjusting for the negative impact of foreign exchange
rates and the impact of operations sold in 1995, total commissions and fees
increased by $34.5 million, or 3.9 percent. This increase was due primarily to
the addition of approximately $44 million from acquisitions offset by the
impact of soft market conditions, primarily in the U.S.
Fiduciary Investment Income
Investment income earned on fiduciary funds for the first nine months of
1996 decreased by $1.8 million, or 3.7 percent, versus 1995 levels primarily
due to lower average investment levels, particularly in the U.K. and lower
worldwide short term interest rates, particularly in the U.K. and Canada.
Partially offsetting this decrease was improved interest rate hedging
performance in the U.K. and U.S.
Interest rate swap and forward rate agreements and interest rate options
increased the Company's fiduciary investment income by $3 million in the first
nine months of 1996 and $0.9 million in the same period in 1995. For
additional information relating to the Company's interest rate financial
instruments, see Note 10 of Unaudited Notes to Financial Statements and Note
12 of Audited Notes to Financial Statements in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
Operating Expenses
Consolidated operating expenses were $879.1 million for the first nine
months of 1996, an increase of $35.6 million or 4.2 percent, versus the
comparable first nine months of 1995. After adjusting for the $8.2 million
favorable effect of changes in foreign currency rates, including hedging
contract gains and losses, and the impact of operations sold in 1995,
operating expenses increased by $51.6 million, or 6.2 percent. The increase
was primarily attributed to acquisitions which increased operating expenses by
approximately $41 million.
Salaries and Benefits
Consolidated salaries and benefits increased by $22.7 million, or 4.2
percent in the first nine months of 1996 versus the same period in 1995.
Excluding the $4.2 million favorable effect of changes in foreign exchange
rates and the 1995 dispositions, total salaries and benefits increased $31.5
million, or 5.8 percent, versus 1995 levels. This increase was primarily due
to the impact of acquisitions of approximately $27 million.
Other Operating Expenses
Consolidated other operating expenses increased by $12.9 million, or 4.3
percent, in the first nine months of 1996 compared to the same period in 1995.
Excluding the favorable impact of changes in foreign exchange rates, including
hedging contracts gains and losses, and operations sold in 1995, other
operating expenses increased $20.1 million, or 6.8 percent, in the first nine
months of 1996 versus the same period in 1995.
This increase was attributed to the effect of acquisitions, which increased
expenses approximately $14 million, increased travel expenses primarily
relating to acquisition activity and globalization of businesses and
41
<PAGE>
additional costs associated with the Company's ongoing investment in
information and technology. Partially offsetting this increase was a decrease
in insurance costs primarily relating to the Company's professional indemnity
programs.
Other Income (Expenses)
Investment Income
Investment income earned on operating funds decreased for the first nine
months of 1996 by $3.3 million, or 23.7 percent compared to the same period in
1995. The decrease was primarily attributable to lower interest rates and a
reduction in the average investment balances.
Interest Expense
Interest expense decreased by $2.3 million, or 16.3 percent, in the first
nine months of 1996 versus the same period in 1995. The decrease was primarily
due to the Company's redemption and subsequent funding of the 11% convertible
subordinated debentures with borrowings at more favorable rates under the long
term credit facility. Partially offsetting the decrease was additional
interest expense on the promissory note relating to the purchase of JIB.
Other
Other non-operating income (expenses) consists of the following:
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
SEPTEMBER
30,
----------
1996 1995
---- -----
<S> <C> <C>
Gains on sales of businesses................................... $ -- $30.4
Other.......................................................... 0.6 3.6
---- -----
$0.6 $34.0
==== =====
</TABLE>
Other non-operating income (expense) decreased $33.4 million for the first
nine months of 1996 compared to 1995. The 1995 results included the pre-tax
gain on the sale of Alexsis, Inc., the Company's U.S.-based third party claims
administrator, totaling $28.7 million ($19.8 million after-tax or $0.44 per
share). In addition, the 1995 results included gains resulting from the sale
of two small operations and a U.K. merchant bank, totaling $1.4 million and
$0.3 million, respectively.
Income Taxes
The Company's effective tax rate for the first nine months of the year was
39.9 percent in 1996 and 38.4 percent for the same period in 1995. The
effective tax rates were higher than the U.S. statutory rate of 35 percent
primarily due to U.S. state and local income taxes and to the nondeductibility
of certain expenses, including entertainment and amortization of goodwill, in
the various jurisdictions in which the Company does business. Partially
offsetting these factors in the first nine months of both 1996 and 1995 was
the favorable impact of foreign tax rates which were lower than the U.S.
statutory rate. In the first nine months of 1995 the rate was also favorably
affected by the amount of gain recognized for tax purposes on the sale of
Alexsis.
As discussed in Note 3 of Unaudited Notes to Financial Statements, the
Internal Revenue Service withdrew a previously proposed adjustment to the
Company's 1991 taxable income with respect to certain intercompany
transactions involving the stock of a United Kingdom subsidiary.
42
<PAGE>
Discontinued Operations
In 1985, the Company discontinued its insurance underwriting operations. In
1987, the Company sold 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, an
underwriting management company previously managed by Alexander Howden.
In 1994, Orion, which has financial responsibility for sharing certain of
the insurance pool 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 net liabilities of discontinued operations shown in the accompanying
Consolidated Balance Sheets include insurance liabilities associated with the
above indemnities, liabilities of insurance underwriting subsidiaries
currently in run-off and other related liabilities.
The insurance liabilities represent estimates of future claims expected to
be made under occurrence-based insurance policies and reinsurance business
written through Lloyd's and the London market covering primarily asbestosis,
environmental pollution, and latent disease risks in the United States, which
are coupled with substantial litigation expenses. These claims are expected to
develop and be settled over the next twenty to thirty years.
Liabilities stemming from these claims cannot be estimated using
conventional actuarial reserving techniques because the available historical
experience is not adequate to support the use of such techniques and because
case law, as well as scientific standards for measuring the adequacy of site
cleanup (both of which have had, and will continue to have, a significant
bearing on the ultimate extent of the liabilities) is still evolving.
Accordingly, the Company's independent actuaries have combined available
exposure information with other relevant industry 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 with a
reinsurance company, 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, 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 September 30, 1996, the
recoveries were limited to $120.8 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.
While the insurance liabilities represent the Company's best estimate of the
probable liabilities within a range of independent actuarial estimates of
reasonably probable loss amounts, there is no assurance that further adverse
developments may not occur due to variables inherent in the estimation
processes and other matters described above. Based on independent actuarial
estimates of a range of reasonably possible loss amounts, liabilities could
exceed recorded amounts by approximately $165 million. However, in the event
of such adverse developments, based on the independent actuarial estimate of
pay out patterns, up to approximately $125 million of this excess would be
recoverable under the finite risk contracts.
43
<PAGE>
The Company believes that, based on current estimates, the established total
net liabilities of discontinued operations are sufficient to cover its
exposures.
SEGMENT INFORMATION
Insurance Services
Operating results for the Insurance Services segment of the Company's
operations are summarized below:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
-------------
1996 1995
------ ------
<S> <C> <C>
Operating revenues:
Risk management and insurance services broking........................ $562.4 $542.1
Specialist insurance and reinsurance broking.......................... 203.5 205.7
Fiduciary investment income........................................... 46.7 48.3
------ ------
Total Operating revenues............................................ 812.6 796.1
Operating expenses...................................................... 715.1 672.4
------ ------
Operating income........................................................ $ 97.5 $123.7
====== ======
</TABLE>
Risk Management and Insurance Services Broking Revenues
Worldwide risk management and insurance services broking commissions and
fees increased $20.3 million, or 3.7 percent, for the first nine months of
1996 compared to the same period in 1995. After adjusting for the unfavorable
foreign exchange rate variance of $3.2 million and the impact of operations
sold in 1995, commissions and fees increased $35 million, or 6.6 percent.
This increase was due to an approximate increase of $43 million for
acquisitions and revenue gains in the U.K. operations. Offsetting these
increases were lower revenues due to severe pricing and competitive pressures,
particularly in the North American operations.
Specialist Insurance and Reinsurance Broking Revenues
For the first nine months of 1996 total broking commissions and fees for the
specialist insurance and reinsurance broking operations decreased $2.2
million, or 1.1 percent, versus 1995 levels for the same period. Changes in
foreign exchange rates decreased 1996 broking revenues by $1.7 million. After
adjusting for the effect of foreign exchange rates, commissions and fees
decreased $0.5 million, or 0.2 percent, in the first nine months of 1996.
Decreased revenues of $2.5 million in the Company's U.K. operations were
partially offset by a $1.1 million and $0.9 million increase in the
international and U.S. operations, respectively. The U.K. operations decrease
resulted from unfavorable market conditions resulting in premium rate
reductions on most classes of business.
Operating Expenses
Worldwide risk management and insurance services operating expenses for the
first nine months of 1996 increased $37.7 million, or 7.5 percent, versus the
same period in 1995. After adjusting for foreign exchange rate changes,
including hedging contracts gains and losses, and the 1995 dispositions, total
operating expenses increased $49 million, or 9.9 percent, in the first nine
months of 1996, primarily due to acquisitions which increased expenses
approximately $40 million. Additionally, increases were reported in the Latin
American and Asia/Pacific operations of $2.6 million and $3.1 million,
respectively. The increase in Latin America was primarily due to increased
staff costs in Mexico and Brazil. The Asia/Pacific variance included the
impact of inflation and higher costs related to the expansion of operations.
44
<PAGE>
For the first nine months of 1996 operating expenses for the specialist and
reinsurance broking operations increased $5 million, or 2.9 percent, versus
the same period in 1995. Foreign exchange rate variances, including hedging
gains and losses, favorably impacted expenses by $3.9 million in 1996. After
adjusting for foreign exchange rate variances, total operating expenses
increased $8.9 million, or 5.2 percent. Contributing to the 1996 increase were
the international operations, primarily due to increased staff costs, and the
U.K. operations, primarily due to the charge associated with the Lloyd's
reconstruction and renewal program.
Human Resource Management Consulting
Operating results for the Human Resource Management Consulting segment of
the Company's operations are summarized below:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
-------------
1996 1995
------ ------
<S> <C> <C>
Operating revenues:
Commissions and fees..................................... $154.7 $155.6
Fiduciary investment income.............................. 0.1 0.3
------ ------
Total Operating revenues............................... 154.8 155.9
Operating expenses......................................... 145.7 149.7
------ ------
Operating income........................................... $ 9.1 $ 6.2
====== ======
</TABLE>
Human resource management consulting commissions and fees decreased by $0.9
million, or 0.6 percent, in the first nine months of 1996 compared to the same
period in 1995. Excluding the impact of changes in foreign exchange rates and
the impact of the transfer of a business unit to the U.S. risk management and
insurance services operations, commissions and fees increased $5 million, or
3.3 percent, in the first nine months of 1996. The increased revenues were
spread throughout geographic regions with $2.2 million, $1.9 million and $0.9
million in the U.K., U.S. and other international operations, respectively.
Operating expenses decreased by $4 million, or 2.7 percent, for the first
nine months of 1996 compared to 1995. After adjusting for the effect of
changes in foreign exchange rates and the transfer of a business unit,
operating expenses increased $2.6 million or 1.8 percent, in the first nine
months of 1996. This increase was primarily attributed to the 1996
acquisitions of two small operations in Australia and Sweden.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company's operating cash and cash equivalents
totaled $232 million, a $9.2 million decrease compared to the 1995 year-end
balance. In addition, the Company had $42.5 million of operating funds
invested in short-term and long-term investments at September 30, 1996, a $0.3
million increase compared to December 31, 1995.
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, and gains on sales of business. The net cash flows
relating to discontinued operations and changes in working capital balances
are also included. In the first nine months of 1996, the Company's operating
activities provided $28.5 million of operating funds.
The Company paid approximately $72 million for the 1995 performance year and
$50 million for the 1994 performance year in bonus incentives during the first
nine months of 1996 and 1995, respectively. Generally, these payments are made
in the first quarter of the year for prior year performance.
45
<PAGE>
Investing Activities
The Company's net capital expenditures for property and equipment were $18.6
million and $15.1 million during the nine months ended September 30, 1996 and
1995, respectively. These expenditures increased primarily as a result of the
Company's worldwide investment in technology, particularly in the U.S. and
Asia/Pacific region, coupled with leasehold improvements in the U.S. due to
the consolidation of real estate space.
In the first nine months of 1996, the Company acquired or invested in
several brokerage and consulting operations, primarily in the Asia/Pacific
region, for combined purchase prices approximating $27.5 million. The Company
paid a total of $21.9 million at closing for these acquisitions.
Financing Activities
In August 1996, the Company obtained two short-term bank loans totaling $7
million. The proceeds from these loans were used to reduce the amount
outstanding under the long-term revolving credit agreement by $10 million.
On June 11, 1996 in accordance with the terms of the 1995 Jardine purchase
agreement, the Company reduced the remaining $8.1 million note payable due in
October 1996 to $6 million.
In May 1996, the Company issued a $2.7 million, 9 percent two year note,
relating to an acquisition in the Asia/Pacific region. (See Note 2 of the
Unaudited Notes to Financial Statements).
In April 1996, the Company announced a stock repurchase program which allows
for the repurchase of up to two million shares of the Company's common stock
that will be used to fund the Company's equity based compensation and employee
benefit plans. At September 30, 1996, no shares had been repurchased under
this program.
During the first quarter of 1996, the Company borrowed $30 million under its
long-term revolving credit agreement.
Other
The Company's accumulated translation adjustment balance for its Mexican
operations reflected an unrealized loss of $8 million at September 30, 1996.
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 impaired.
During the first nine months of 1996, 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 $4.8 million. The increase reflects the strengthening
of the U.K. pound against the U.S. dollar.
At September 30, 1996, the Company had an accumulated deficit of $203.1
million. The Company's current financial position satisfies Maryland law
requirements for the payment of dividends. At September 30, 1996, the current
maximum amount of unrestricted funds the Company has available to pay Common
Stock dividends under Maryland law equaled approximately $347.5 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 9 of 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
Stock.
46
<PAGE>
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.
Information Concerning Forward-Looking Statements
The Company has made and may from time to time make forward-looking
statements concerning future financial results or events or conditions that
may affect its future financial results. Forward-looking statements are made
based upon management's expectations, assumptions, judgments and beliefs
concerning future developments and global economic, industry and financial
market conditions, and their potential effect upon the Company. There can be
no assurance that these future conditions and developments will be in
accordance with management's expectations or that the effect of future
conditions and developments on the Company will be those anticipated by
management.
The Company cautions that the assumptions that form the basis for forward-
looking statements concerning future financial results, or events or
conditions that may affect such results, are based on many factors that are
beyond the Company's ability to control or estimate precisely, including
future market conditions and the behavior of competitors and other market
participants. Among the factors, in addition to other possible factors not
listed, that could affect actual results and cause such results to differ
materially from those anticipated in such forward-looking statements are the
following:
Economic Conditions
The insurance brokerage industry is affected by changes in national,
international and local economic conditions as well as in client preferences
and spending patterns. Factors such as inflation and changes in worldwide
interest rates and monetary fluctuations may affect the Company's clients and
the markets in which the Company operates and its ability to finance needed
capital expenditures.
Government Regulation and Licensing
The global insurance brokerage industry is affected by the adoption of new,
and by changes in, trade, monetary, accounting and fiscal policies, laws and
regulations such as trade restrictions and prohibitions, as well as other
activities of federal and local governments, agencies and similar
organizations. The Company's ability to conduct business may be precluded,
temporarily suspended or otherwise adversely affected as a result of any such
changes or activities.
In addition, the activities of the Company related to insurance broking and
human resource management consulting services are subject to licensing
requirements and extensive regulation under the laws of the United States and
its states, territories and possessions, as well as the laws of other
countries in which the Company's subsidiaries conduct business. These laws and
regulations vary from jurisdiction to jurisdiction. The appropriate regulatory
authorities generally have wide discretionary authority in adopting, amending
and implementing such regulations. In addition, certain of the Company's
activities are governed by the rules of the Lloyds of London insurance market
and other similar organizations. Compliance with such licensing and regulatory
requirements and the restructuring and reorganization of Lloyds of London may
increase the Company's cost of doing business or change the manner in which
the Company is permitted to operate.
Competition
The insurance brokerage industry is intensely competitive with respect to
broking commissions, fee growth, personnel and the quality of service
provided. There is keen competition within the industry on a local, national
and international level, not only to gain new clients but also to retain
existing clients. In addition, the Company is subject to loss of business due
to the growing alternative markets and to loss of personnel to its
competitors.
47
<PAGE>
Market Conditions
The insurance brokerage industry is affected by periods of soft pricing and
excess market capacity which, in recent years, has resulted in a downward
pressure on premium rates and intense competition among insurance carriers and
brokers for market share. The occurrence of catastrophic events can change
loss ratios and, subsequently, pricing, thereby affecting a broker's
contingent commissions and overriders. The Company's revenues, expenses and
associated hedging programs are also affected by the general level of interest
rates and the income earned on fiduciary funds as well as changes in foreign
currency exchange rates. The timing of renewal cycles in different parts of
the world and lines of business produces seasonality in its results.
Contingencies
The Company's financial results are affected by the costs and other effects
of claims and lawsuits from both private and governmental parties, which may
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, as well as claims relating
to the Company's discontinued operations and tax matters, which may affect its
operations and administrative expenses. The Company is also subject to the
risk of losses from the potential uncollectibility of insurance and
reinsurance claims and advances on behalf of clients and indemnifications
connected with the sales of certain businesses.
Growth Plans
The Company plans to explore geographical market expansion as well as
strategic and niche acquisitions relating to its core business. There can be
no assurance that the Company will be able to achieve its growth objectives or
consummate any acquisition or joint venture opportunities it may pursue or if
a transaction is consummated, what the financial benefit, if any, will be to
the Company. Growth in certain markets or products can impact the historical
quarterly comparisons of earnings based on insurance renewal cycles.
Restructuring/Cost Saving Efforts
The Company's future earnings will be affected by its ability to effectuate
additional internal consolidation and other cost savings initiatives and its
investment in new technology, products and personnel.
While the Company periodically reassesses material trends and uncertainties
affecting its results of operations and financial condition in connection with
its preparation of management's discussion and analysis of results of
operations and financial condition contained in its quarterly and annual
reports, the Company undertakes no obligation to publicly update or revise any
particular forward-looking statement in light of future events.
PRICE RANGE OF SHARES
The Shares are listed on the NYSE. The following table sets forth for the
periods indicated the high and low sales prices per Share on NYSE as reported
by the Company in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 with respect to the years ended December 31, 1994 and
December 31, 1995, and as reported by published financial sources with respect
to periods after December 31, 1995.
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
---- ---- ---------
<S> <C> <C> <C>
Year Ended December 31, 1994:
First Quarter....................................... $22 3/4 $17 1/4 $ .250
Second Quarter...................................... 18 1/8 14 .025
Third Quarter....................................... 20 7/8 16 .025
Fourth Quarter...................................... 21 1/2 18 1/2 .025
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
---- ---- ---------
<S> <C> <C> <C>
Year Ended December 31,
1995:
First Quarter........... $23 3/4 $18 1/2 $ .025
Second Quarter.......... 26 7/16 22 1/8 .025
Third Quarter........... 25 1/2 22 3/8 .025
Fourth Quarter.......... 24 3/8 18 5/8 .025
Year Ended December 31,
1996:
First Quarter........... $20 5/8 $18 1/4 $ .025
Second Quarter.......... 21 1/2 18 1/2 .025
Third Quarter........... 20 1/8 15 1/2 .025
Fourth Quarter.......... 17 1/4 13 5/8 .025
Year Ended December 31,
1997:
First Quarter (through
January 31, 1997)...... $17 1/2 $17 1/4 $ --
</TABLE>
On December 10, 1996, the last full day of trading prior to the public
announcement of the execution of the Merger Agreement, the closing price per
Share as reported on NYSE was $14 1/8.
BUSINESS OF THE COMPANY
GENERAL
The Company is a holding company which, through its subsidiaries, provides
risk management, insurance brokerage and human resource management consulting
services on a global basis. It is one of the few organizations capable of
providing such services to clients with multinational operations. The Company
operates from offices located in more than 80 countries and territories
through wholly-owned subsidiaries, affiliates and other servicing
capabilities. Its international operations represent 53 percent, 48 percent
and 46 percent of the Company's consolidated operating revenues for the years
ended December 31, 1995, 1994 and 1993, respectively. The Company was
incorporated under the laws of the State of Maryland in 1973 and through
predecessor entities has been in business since 1899.
INDUSTRY SEGMENTS
Insurance Services. The Company's principal industry segment is insurance
services, which includes risk management and insurance services, specialist
broking and reinsurance broking. For each of the years ended December 31,
1995, 1994 and 1993, total revenues contributed by the Company's insurance
services segment accounted for 84 percent of its consolidated operating
revenues. The Company's extensive services permit it to handle diverse lines
of coverage. In October 1995, the Company acquired most of the U.S. retail
insurance broking and consulting business of Jardine Insurance Brokers, Inc.
for a purchase price not to exceed approximately $48.3 million. The
acquisition increased the Company's presence in the west, primarily in
California, and added management strength to certain U.S. practice groups,
including health care and agribusiness.
Risk Management and Insurance Services. The Company's Risk Management and
Insurance Services operations (also referred to as "retail broking") develop
risk management programs and place coverage on behalf of its clients directly
with insurance companies or indirectly through specialist insurance brokers.
During 1995, this operation served approximately 125,000 clients, through 260
offices in 74 countries. For the years ended December 31, 1995, 1994 and 1993,
the Company's risk management and insurance services operations accounted for
approximately 60 percent, 64 percent and 64 percent, respectively, of the
Company's consolidated operating revenues. The Company's risk analysis and
management capabilities include a broad range of services
49
<PAGE>
such as risk surveys and analyses, loss control and cost studies, formulation
of safety procedures and insurance programs. Complementing these services, the
Company offers financial and actuarial services, risk information and
strategic risk management consulting. In 1993, the common trading name of
"Alexander & Alexander" was introduced throughout its global insurance
services network in the United States, the United Kingdom, Canada and Japan
and in most of its markets in Continental Europe, Asia-Pacific and the Middle
East.
Specialist and Reinsurance Broking. Effective January 1, 1995, the Company's
specialist broking (also referred to as "wholesale broking") and reinsurance
broking operations were combined under the operating name Alexander Howden
Group Limited, headquartered in London. This operation has 62 offices located
in 37 countries. For the years ended December 31, 1995, 1994 and 1993, the
Company's combined specialist and reinsurance broking operations accounted for
approximately 24 percent, 20 percent and 20 percent, respectively, of the
Company's consolidated operating revenues. As a specialist broker, the Company
acts as an intermediary between the retail broker and insurance companies
throughout the world, including Lloyds of London syndicates. The Company's
worldwide specialist operations place large and complex risks that require
access to the London and world insurance markets, and offer excess, surplus
and specialty lines placements, specialist insurance broking and facultative
reinsurance. As a reinsurance broker, the Company places coverage on behalf of
its insurance or reinsurance company clients worldwide, including Lloyds of
London syndicates, to reinsure all or a portion of the risk underwritten by
that insurance or reinsurance company.
The Company is compensated for its broking services by commissions, usually
as a percentage of insurance premiums paid by the client, or by negotiated
fees. The Company may also receive overrider and/or contingent commissions
which are based on the volume and/or profitability of business placed with an
insurance company over a given period of time. The Company is generally
compensated on a fee basis when providing consulting and advisory services
with respect to clients' risk and underwriting management programs. In
addition to commissions and fees, the Company derives revenues from investment
income earned on fiduciary funds. Premiums received from insureds, but not yet
remitted to the carriers and claims payments received from carriers but not
yet remitted to the insureds, are held as cash or investments in a fiduciary
capacity.
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. Commission and fee growth has been
constrained since the mid-to-late 1980's due to soft pricing and excess
capacity and the resultant intense competition among insurance carriers. The
Company's broking revenues are also affected by the timing of renewal cycles
in different parts of the world and lines of business which produce a degree
of seasonality in the Company's results. Risk management and insurance
services broking revenues in Continental Europe are the strongest during the
first quarter of the year, in contrast to the U.S. and Asia-Pacific, where
such revenues are the strongest in the fourth quarter of the year. Specialist
and reinsurance broking revenues are strongest during the first and second
quarters.
Human Resource Management Consulting. The Company offers global workforce-
related consulting and benefits broking services through The Alexander
Consulting Group Inc. ("ACG"). For each of the years ended December 31, 1995,
1994 and 1993, total revenues contributed by ACG accounted for 16 percent of
the Company's consolidated operating revenues. ACG provides integrated
advisory and support services in workforce management, including retirement
planning, health/welfare and total compensation, human resource information
technologies and communications. ACG also offers brokerage services for group
health and welfare, special risk, and executive planning insurance coverages.
During 1995, ACG served over 20,000 clients, through 87 offices in 17
countries.
The Company is compensated for human resource management consulting services
on a fee basis, except in instances where it receives commissions from
insurance companies for the placement of individual and group insurance
contracts. Revenues for the human resource management consulting segment are
typically strongest in the fourth quarter and weakest in the first quarter,
and therefore, produce a degree of seasonality in the Company's results.
Revenue generated in the Company's human resource consulting business can be
significantly affected by legislative enactments.
50
<PAGE>
Financial Information about Industry Segments. For financial information
related to the Company's industry segments and geographical concentrations for
each of the three years in the period ended December 31, 1995, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") and Note 15 of the Notes to Financial Statements in the
Company's 1995 Annual Report to Stockholders (the "1995 Annual Report").
DISCONTINUED OPERATIONS
In 1985, the Company discontinued its insurance underwriting operations. In
1987, the Company sold Sphere Drake Insurance Group. 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, a U.K.-based insurance company, and future losses
pursuant to a stop-loss reinsurance contract between Sphere Drake and Lloyds
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, an underwriting management company previously managed by a subsidiary
of the Company. In addition, the Company is currently running off its
insurance underwriting subsidiaries located in Atlanta and Bermuda. For
further information concerning discontinued operations, see MD&A and Note 6 of
Notes to Financial Statements appearing elsewhere herein.
CERTAIN SECURITY HOLDINGS
The following table sets forth as of January 17, 1997 certain information
regarding the beneficial ownership of shares of Common stock for (i) each
person known to the Company to be the beneficial owner of more than a 5%
interest in the Company, (ii) each director and named executive officer of the
Company and (iii) the directors and executive officers of the Company as a
group. Unless otherwise indicated, the person listed as the beneficial owner
of Shares has sole voting and investment power for all such Shares. An
asterisk under "Percent of Class" indicates "less than one percent."
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
BENEFICIALLY SUBJECT TO PERCENT OF
NAME OWNED OPTIONS(3) COMMON STOCK
- - ---- ------------ ------------ ------------
<S> <C> <C> <C>
Aon Corporation(1)
123 N. Wacker Drive
Chicago, Illinois 60606................ 58,541,474 -- 98.0
Frank G. Zarb (2)....................... 171,692 100,000 *
H. Furlong Baldwin...................... -- -- --
Kenneth J. Davis........................ -- 1,100 *
Joseph L. Dionne........................ -- -- --
Maurice H. Hartigan..................... -- -- --
Ronald A. Iles.......................... -- 15,100 *
Edward F. Kosnik........................ -- -- --
Dennis L. Mahoney....................... -- -- --
All directors and executive officers as
a group (17 persons)(2)................ 187,461 116,200 *
</TABLE>
- - --------
(1) The shares listed as beneficially owned by Aon include (i) 44,293,552
Shares acquired by Merger Sub pursuant to the Offer and (ii) 14,247,922
Shares that are issuable upon the exchange of 4,846,232 shares of Series B
Preferred Stock. Each share of Series B Preferred Stock is currently
convertible into approximately 2.94 shares of Class D Common Stock of the
Company. Subject to certain limitations, the Class D Common Stock is
exchangeable for Common Stock on a share-for-share basis.
(2) All directors and executive officers tendered shares held directly or
indirectly by them with the exception of Mr. Zarb whose tender was not
accepted by the depositary due to error.
(3) Represents shares which are subject to options exercisable within 60 days.
51
<PAGE>
CERTAIN INFORMATION CONCERNING AON AND MERGER SUB
Merger Sub is a newly incorporated Maryland corporation. To date, Merger Sub
has not conducted any business other than that incident to its formation, the
execution and delivery of the Merger Agreement and the consummation of the
Offer. Accordingly, no meaningful financial information with respect to Merger
Sub is available. Merger Sub is a wholly-owned subsidiary of Aon. The
principal executive office of Merger Sub is located at Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202.
Aon, a Delaware corporation, has its principal executive office at 123 N.
Wacker Drive, Chicago, Illinois 60606. Aon is an insurance services holding
company that comprises a family of insurance brokerage, consulting and
consumer insurance companies.
Aon is subject to the informational requirements of the Exchange Act and in
accordance therewith files periodic reports and other information with the
Commission relating to its business, financial condition and other matters.
Such reports and other information are available for inspection and copying at
the offices of the Commission in the same manner as set forth with respect to
the Company.
INDEPENDENT ACCOUNTANTS
The consolidated balance sheets of the Company and subsidiaries as of
December 31, 1995 and 1994 and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the three years in
the period ended December 31, 1995 have been audited by Deloitte & Touche LLP,
independent auditors, whose report thereon is included on page F-2.
A representative of Deloitte and Touche LLP will not be present at the
Special Meeting.
STOCKHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
The 1997 Annual Meeting of Stockholders of the Company has been postponed
pending the results of the Special Meeting. In the event the Merger is not
consummated and the 1997 Annual Meeting is held, any stockholder proposal
intended to be presented at the 1997 Annual Meeting must have been received by
the Company prior to date of this proxy statement in order to be considered
for inclusion in the proxy statement and form of proxy for such meeting.
OTHER MATTERS
Under the Company's Bylaws, no business may be transacted at the Special
Meeting other than the consideration of and voting upon the Merger Proposal.
If any other matters properly come before the Special Meeting, it is intended
that the holders of the proxies hereby solicited will act in respect to such
matters in accordance with their best judgment.
52
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. All such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the Commission 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549, and
at the Commission's regional offices at 7 World Trade Center, Suite 1300, New
York, NY 10048 and 500 West Madison Street, Suite 1300, Chicago, IL 60661.
Copies of such material can also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Room 3190, Washington, D.C. 20549
at prescribed rates. Such material should also be available on-line through
the Commission's EDGAR electronic filing and retrieval system and on the
Commission's World Wide Web site at http://www.sec.gov.
By Order of the Board of Directors,
Alice L. Russell
Corporate Secretary
February 6, 1997
PLEASE MARK, SIGN AND DATE THE ACCOMPANYING PROXY AND
MAIL IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
FINANCIAL STATEMENTS:
Consolidated Statements of Operations--For the years ended December 31,
1995, 1994 and 1993.................................................... F-3
Consolidated Balance Sheets--As of December 31, 1995 and 1994........... F-4
Consolidated Statements of Cash Flows--For the years ended December 31,
1995, 1994 and 1993.................................................... F-5
Consolidated Statements of Stockholders' Equity--For the years ended De-
cember 31, 1995, 1994 and 1993......................................... F-6
Notes to Financial Statments............................................ F-7
UNAUDITED FINANCIAL STATEMENTS:
Unaudited Consolidated Statements of Operations--For the three and nine
months ended September 30, 1996 and 1995............................... F-40
Condensed Consolidated Balance Sheets--As of September 30, 1996 (Unau-
dited) and December 31, 1995........................................... F-41
Unaudited Consolidated Statements of Cash Flows--For the nine months
ended September 30, 1996 and 1995...................................... F-42
Unaudited Notes to Financial Statements................................. F-43
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Stockholders of Alexander & Alexander Services Inc.:
We have audited the accompanying consolidated balance sheets of Alexander &
Alexander Services Inc. and Subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the companies at December 31,
1995 and 1994, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
As discussed in Notes 5, 7 and 11 to the consolidated financial statements,
the Company changed its method of accounting for international postretirement
benefits in 1995, certain investments in debt and equity securities and
postemployment benefits in 1994, and income taxes and United States
postretirement benefits in 1993.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Baltimore, Maryland
February 14, 1996
F-2
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
OPERATING REVENUES:
Commissions and fees............................. $1,219.5 $1,272.3 $1,287.7
Fiduciary investment income...................... 62.9 51.6 53.9
-------- -------- --------
Total.......................................... 1,282.4 1,323.9 1,341.6
-------- -------- --------
OPERATING EXPENSES:
Salaries and benefits............................ 735.1 814.3 785.3
Other operating expenses......................... 407.0 523.5 504.0
Restructuring and special charges................ 17.6 69.0 --
-------- -------- --------
Total.......................................... 1,159.7 1,406.8 1,289.3
-------- -------- --------
Operating income (loss).......................... 122.7 (82.9) 52.3
-------- -------- --------
OTHER INCOME (EXPENSES):
Investment income................................ 19.2 10.9 9.6
Interest expense................................. (18.6) (16.0) (14.4)
Other............................................ 32.7 10.9 (15.6)
Special charges.................................. -- (69.7) --
-------- -------- --------
Total.......................................... 33.3 (63.9) (20.4)
-------- -------- --------
Income (loss) before income taxes and minority
interest........................................ 156.0 (146.8) 31.9
Income taxes (benefit)........................... 60.9 (42.6) 6.4
-------- -------- --------
Income (loss) before minority interest........... 95.1 (104.2) 25.5
Minority interest................................ (5.7) (3.0) (1.9)
-------- -------- --------
Income (loss) from continuing operations......... 89.4 (107.2) 23.6
Loss from discontinued operations................ -- (28.9) --
-------- -------- --------
Income (loss) before cumulative effect of change
in accounting................................... 89.4 (136.1) 23.6
Cumulative effect of change in accounting........ -- (2.6) 3.3
-------- -------- --------
Net income (loss).............................. 89.4 (138.7) 26.9
======== ======== ========
Preferred stock dividends........................ (25.4) (15.1) (6.2)
-------- -------- --------
Earnings (loss) attributable to common sharehold-
ers............................................. $ 64.0 $ (153.8) $ 20.7
======== ======== ========
PER SHARE INFORMATION:
Primary earnings per share:
Income (loss) from continuing operations......... $ 1.44 $ (2.79) $ 0.40
Loss from discontinued operations................ -- (0.66) --
Cumulative effect of change in accounting........ -- (0.06) 0.08
-------- -------- --------
Net earnings (loss)............................ $ 1.44 $ (3.51) $ 0.48
======== ======== ========
Average common and common equivalent shares out-
standing........................................ 44.6 43.8 43.4
======== ======== ========
Fully diluted earnings per share:
Income (loss) from continuing operations......... $ 1.42 $ (2.79) $ 0.40
Loss from discontinued operations................ -- (0.66) --
Cumulative effect of change in accounting........ -- (0.06) 0.08
-------- -------- --------
Net earnings (loss)............................ $ 1.42 $ (3.51) $ 0.48
======== ======== ========
Average common and common equivalent shares out-
standing, assuming full dilution................ 57.1 43.8 43.4
-------- -------- --------
Cash dividends per common share.................. $ .10 $ .325 $ 1.00
======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, (IN MILLIONS)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents:
Operating................................................ $ 241.2 $ 248.7
Fiduciary................................................ 496.4 428.5
Short-term investments:
Operating................................................ 11.3 19.2
Fiduciary................................................ 224.9 292.2
Premiums and fees receivable (less allowance for doubtful
accounts of $20.5 in 1995 and $23.7 in 1994)............. 1,292.8 1,206.1
Deferred income taxes..................................... 20.0 71.5
Other current assets...................................... 85.4 120.7
-------- --------
Total current assets................................... 2,372.0 2,386.9
-------- --------
PROPERTY AND EQUIPMENT:
Land and buildings........................................ 39.2 39.7
Furniture and equipment................................... 274.6 296.5
Leasehold improvements.................................... 83.0 95.1
-------- --------
396.8 431.3
Less accumulated depreciation and amortization............ (270.4) (293.3)
-------- --------
Property and equipment--net............................... 126.4 138.0
-------- --------
OTHER ASSETS:
Intangible assets (net of accumulated amortization of
$124.5 in 1995 and $117.5 in 1994)....................... 210.7 175.1
Deferred income taxes..................................... 102.1 87.1
Long-term operating investments........................... 30.9 64.1
Other..................................................... 100.3 94.5
-------- --------
Total assets........................................... $2,942.4 $2,945.7
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Premiums payable to insurance companies................... $1,810.4 $1,738.3
Short-term debt........................................... 19.1 1.0
Current portion of long-term debt......................... 9.3 17.1
Deferred income taxes..................................... 9.4 8.5
Accrued compensation and related benefits................. 81.8 60.0
Income taxes payable...................................... 24.7 66.3
Other accrued expenses.................................... 165.8 258.1
-------- --------
Total current liabilities.............................. 2,120.5 2,149.3
-------- --------
LONG-TERM LIABILITIES:
Long-term debt............................................ 126.2 132.7
Deferred income taxes..................................... 15.6 13.4
Net liabilities of discontinued operations................ 33.4 56.8
Other..................................................... 234.1 266.0
-------- --------
Total long-term liabilities............................ 409.3 468.9
-------- --------
Commitments and Contingent Liabilities (Notes 5, 6, 13 and
14)
8% Series B cumulative convertible preferred stock contin-
gency (Note 14).......................................... 10.0 10.0
-------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, authorized 15,000,000 shares, $1 par val-
ue:
Series A junior participating preferred stock, issued
and outstanding, none................................... -- --
$3.625 Series A convertible preferred stock, issued and
outstanding, 2,300,000 shares, liquidation preference
of $115 million......................................... 2.3 2.3
8% Series B cumulative convertible preferred stock, is-
sued and outstanding 4,477,170 and 4,136,213 shares,
respectively, liquidation preference of $224 million
and $205 million, respectively.......................... 4.5 4.1
Common stock, authorized 200,000,000 shares, $1 par value;
issued and outstanding 42,259,282 and 41,569,902 shares,
respectively............................................. 42.3 41.5
Class A common stock, authorized 26,000,000 shares,
$.00001 par value; issued and outstanding 1,920,821 and
2,282,088 shares, respectively........................... -- --
Class C common stock, authorized 11,000,000 shares, $1 par
value; issued and outstanding 361,092 and 372,557 shares,
respectively............................................. 0.4 0.4
Class D common stock, authorized 40,000,000 shares, $1 par
value; issued and outstanding, none...................... -- --
Paid-in capital........................................... 638.1 615.0
Accumulated deficit....................................... (227.5) (287.1)
Unrealized investment gains, net of income taxes.......... 5.6 1.5
Accumulated translation adjustments....................... (63.1) (60.2)
-------- --------
Total stockholders' equity............................. 402.6 317.5
-------- --------
Total liabilities and stockholders' equity............. $2,942.4 $2,945.7
======== ========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, (IN MILLIONS)
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- ------
<S> <C> <C> <C>
CASH PROVIDED (USED) BY:
OPERATING ACTIVITIES:
Income (loss) from continuing operations............. $ 89.4 $(107.2) $ 23.6
Adjustments to reconcile to net cash provided (used)
by operating activities:
Depreciation and amortization....................... 46.1 51.2 54.5
Deferred income taxes............................... 36.0 (77.5) (27.5)
Gains on disposition of subsidiaries and other as-
sets............................................... (30.4) (20.2) (3.9)
Restructuring and special charges, net of cash pay-
ments.............................................. 17.6 131.8 --
Other............................................... 12.5 14.2 13.4
Changes in assets and liabilities (net of effects
from acquisitions and dispositions):
Net fiduciary cash and cash equivalents and short-
term investments................................... 25.3 105.8 (46.0)
Premiums and fees receivable........................ (58.8) 9.0 (69.3)
Other current assets................................ (13.5) 16.0 (15.8)
Other assets........................................ (13.6) 9.2 (11.9)
Premiums payable to insurance companies............. 16.7 (70.8) 74.6
Other accrued expenses.............................. (90.2) 3.7 8.0
Other long-term liabilities......................... (31.3) (0.6) 12.8
Discontinued operations (net)........................ (16.1) 1.4 (11.9)
Cumulative effect of change in accounting............ -- (2.6) 3.3
------ ------- ------
Net cash provided (used) by operating activities.. (10.3) 63.4 3.9
------ ------- ------
INVESTING ACTIVITIES:
Net purchases of property and equipment.............. (27.7) (21.5) (26.0)
Purchases of businesses.............................. (24.4) (4.7) (21.0)
Proceeds from sales of subsidiaries and other assets. 88.1 4.1 9.6
Purchases of operating investments................... (188.0) (79.2) (61.7)
Sales and maturities of operating investments........ 231.3 9.0 68.3
------ ------- ------
Net cash provided (used) by investing activities.. 79.3 (92.3) (30.8)
------ ------- ------
FINANCING ACTIVITIES:
Cash dividends....................................... (12.7) (22.6) (47.9)
Proceeds from issuance of short-term debt............ 0.2 9.0 18.7
Payments of short-term debt.......................... (0.8) (24.8) (1.5)
Proceeds from issuance of long-term debt............. 62.5 51.8 19.4
Payment for a finite risk contract................... -- (80.0) --
Repayments of long-term debt......................... (126.1) (8.3) (26.0)
Issuance of preferred and common stock............... 1.4 196.1 112.1
Distribution of earnings of pooled entity............ -- -- (5.5)
------ ------- ------
Net cash provided (used) by financing activities..... (75.5) 121.2 69.3
Effect of exchange rate changes on operating cash and
cash equivalents.................................... (1.0) 4.9 (7.9)
Operating cash and cash equivalents at beginning of
year................................................ 248.7 151.5 117.0
------ ------- ------
Operating cash and cash equivalents at end of year... $241.2 $ 248.7 $151.5
====== ======= ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................ $ 19.3 $ 14.2 $ 14.6
Income taxes........................................ 72.1 37.0 56.0
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Notes payable issued for contingency settlements..... 45.7 -- --
Series B cumulative convertible preferred stock divi-
dends-in-kind....................................... 17.1 6.8 --
Common stock issued for business acquisitions and em-
ployee benefit and stock plans...................... 5.1 6.8 2.3
Notes received on dispositions of subsidiaries....... -- 29.2 2.0
Notes payable on acquisition of subsidiary........... 18.7 -- --
Sale of direct financing lease and related mortgage
notes............................................... -- 19.0 --
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, (IN MILLIONS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
$3.625 SERIES A CONVERTIBLE PREFERRED STOCK:
Balance, beginning of year.......................... $ 2.3 $ 2.3 $ --
Shares issued by private placement.................. -- -- 2.3
------- ------- -------
Balance, end of year............................. $ 2.3 $ 2.3 $ 2.3
======= ======= =======
8% SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK:
Balance, beginning of year.......................... $ 4.1 $ -- $ --
Shares issued by private placement.................. -- 4.0 --
Dividends-in-kind................................... 0.4 0.1 --
------- ------- -------
Balance, end of year............................. $ 4.5 $ 4.1 $ --
======= ======= =======
COMMON STOCK:
Balance, beginning of year.......................... $ 41.5 $ 40.7 $ 40.1
Conversions of Class A and Class C shares into com-
mon stock, 372,732 shares, 104,125 shares and
502,450 shares, respectively....................... 0.4 0.1 0.5
Other, principally stock compensation transactions.. 0.4 0.7 0.1
------- ------- -------
Balance, end of year............................. $ 42.3 $ 41.5 $ 40.7
======= ======= =======
CLASS A COMMON STOCK:
Balance, beginning of year.......................... $ 0.0 $ 0.0 $ 0.0
Conversions into common stock, 361,267 shares,
87,300 shares and 478,892 shares, respectively..... -- -- --
------- ------- -------
Balance, end of year............................. $ 0.0 $ 0.0 $ 0.0
======= ======= =======
CLASS C COMMON STOCK:
Balance, beginning of year.......................... $ 0.4 $ 0.4 $ 0.4
Conversions into common stock, 11,465 shares, 16,825
shares and 23,558 shares, respectively............. -- -- --
------- ------- -------
Balance, end of year............................. $ 0.4 $ 0.4 $ 0.4
======= ======= =======
PAID-IN CAPITAL:
Balance, beginning of year.......................... $ 615.0 $ 423.4 $ 296.5
Conversions into common stock....................... (0.4) (0.1) (0.4)
Preferred stock issuances........................... 16.7 188.9 108.6
Other, principally stock compensation transactions.. 6.8 2.8 1.1
Tax benefit from acquisitions accounted for as pool-
ing of interests................................... -- -- 17.6
------- ------- -------
Balance, end of year............................. $ 638.1 $ 615.0 $ 423.4
======= ======= =======
ACCUMULATED DEFICIT:
Balance, beginning of year.......................... $(287.1) $(119.0) $ (92.5)
Net income (loss)................................... 89.4 (138.7) 26.9
Dividends:
Common stock....................................... (4.4) (14.3) (41.7)
Preferred stock.................................... (25.4) (15.1) (6.2)
Distribution of earnings of pooled entity........... -- -- (5.5)
------- ------- -------
Balance, end of year............................. $(227.5) $(287.1) $(119.0)
======= ======= =======
UNREALIZED INVESTMENT GAINS, NET OF INCOME TAXES:
Balance, beginning of year.......................... $ 1.5 $ -- $ --
Change in unrealized gains, net of tax.............. 4.1 1.5 --
------- ------- -------
Balance, end of year............................. $ 5.6 $ 1.5 $ --
======= ======= =======
ACCUMULATED TRANSLATION ADJUSTMENTS:
Balance, beginning of year.......................... $ (60.2) $ (71.6) $ (59.0)
Foreign currency translation adjustments............ (2.9) 11.4 (12.6)
------- ------- -------
Balance, end of year............................. $ (63.1) $ (60.2) $ (71.6)
======= ======= =======
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1. SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements of Alexander & Alexander
Services Inc. (the Company) include the accounts of all majority-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
Nature of Operations
The Company is a holding company which, through its subsidiaries, provides
risk management, insurance brokerage and human resource management consulting
services on a global basis. The principal industry segment is insurance
services. This segment accounted for approximately 84 percent of the Company's
total revenues in 1995 which are derived primarily from risk management and
insurance services, specialist and reinsurance broking operations. Human
resource management consulting operations, which represent approximately 16
percent of total revenues in 1995, provide integrated advisory and support
services in human resource management, including retirement planning, health
care management, organizational effectiveness, compensation, human resource-
related communications, information technologies and also offers brokerage
services for group health and welfare coverages.
The Company operates from offices located in more than 80 countries and
territories through wholly-owned subsidiaries, affiliates and other servicing
capabilities. The Company's extensive international operations represented 53
percent of consolidated operating revenues in 1995, primarily in the United
Kingdom and Canada.
The Company's clients are primarily commercial enterprises, including a
broad range of industrial, transportation, service, financial and other
businesses. Clients also include government and governmental agencies, not-
for-profit organizations and individuals.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents and Investments
Cash equivalents are highly liquid investments, including certificates of
deposit, government securities and time deposits, with maturities of three
months or less at the time of purchase and are stated at estimated fair value
or cost. Short-term investments are similar investments with maturities of
more than three months but less than one year from the date of purchase. Long-
term investments consists of debt securities with maturities greater than one
year and equity securities.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." In accordance with the statement, the Company has
classified as available for sale, all of its debt and equity securities. These
securities are carried at fair value with unrealized gains and losses reported
as a separate component of Stockholders' Equity. Prior to the adoption of this
statement, cash equivalents and short-term investments were stated at cost.
The cost of securities sold is determined by the specific identification
method.
F-7
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Foreign Currency Translation
The financial statements of the Company's foreign operations, where the
local currency is the functional currency, are translated into U.S. dollars at
the exchange rates in effect at each year end for assets and liabilities and
average exchange rates during the year for the results of operations. The
related unrealized gains or losses resulting from translation are reported as
a separate component of Stockholders' Equity.
Net foreign currency transaction gains, included in operating income,
amounted to $5.7 million, $4.8 million and $9 million for the years ended
December 31, 1995, 1994 and 1993, respectively.
Property and Depreciation
The cost of property and equipment is generally depreciated using the
straight-line method over the estimated useful lives of the related assets
which range from 3 to 40 years for buildings and 3 to 10 years for equipment.
Leasehold improvements are capitalized and amortized over the shorter of the
life of the asset or the lease term.
Intangible Assets
Intangible assets resulting from acquisitions, principally expiration lists
and goodwill, are amortized using the straight-line method over periods not
exceeding 17 and 40 years, respectively. The costs of non-compete agreements
are amortized using the straight-line method over the terms of the agreements.
Amortization of intangible assets included in operating expenses amounted to
$12.3 million, $11.9 million and $13 million for the years ended December 31,
1995, 1994 and 1993, respectively.
The Company periodically evaluates the carrying value of its intangible
assets by projecting operating results over the remaining lives of such assets
on an undiscounted basis. Such projections take into account past financial
performance as well as management's estimate of future operating results.
Income Taxes
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." The adoption of SFAS No. 109 changes the Company's method of
accounting for income taxes from the deferred method to an asset and liability
method whereby deferred income taxes reflect the net tax effects of temporary
differences between the tax bases and financial reporting bases of assets and
liabilities.
Income taxes are generally not provided on undistributed earnings of foreign
subsidiaries because they are considered to be permanently invested or will
not be repatriated unless any additional federal income taxes would be
substantially offset by foreign tax credits.
Fiduciary Funds
Premiums which are due from insureds are reported as assets of the Company
and as corresponding liabilities, net of commissions, to the insurance
carriers. Premiums received from insureds but not yet remitted to the carriers
are held as cash or investments in a fiduciary capacity.
Revenue Recognition
Commissions and fees for insurance services are generally recognized on the
effective date of the policies or the billing date, whichever is later. Any
subsequent commission adjustments, including policy cancellations, are
generally recognized upon notification from the insurance carriers. Contingent
commissions and commissions on policies billed and collected directly by
insurance carriers are recognized when received.
F-8
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Fees and commissions for human resource management consulting services are
generally recognized when the services are provided.
Per Share Data
Primary earnings per share are computed by dividing earnings (loss)
attributable to common stockholders by the weighted average number of shares
of Common Stock and their equivalents (Class A and Class C Common Stock)
outstanding during the period and, if dilutive, shares issuable upon the
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 for primary share computations.
Fully diluted earnings per share in the first and second quarters and for
the full year of 1995 assumes the conversion of the 8% Series B Cumulative
Convertible Preferred Stock. In 1995, the $3.625 Series A Convertible
Preferred Stock and the 11% Convertible Subordinated Debentures were anti-
dilutive for fully diluted earnings per share calculations.
Fully diluted earnings per share for the 1994 and 1993 periods were anti-
dilutive; therefore, the amounts for primary and fully diluted earnings are
the same.
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.
2. ACQUISITIONS AND DISPOSITIONS
Acquisitions
On October 12, 1995, the Company acquired most of the U.S. retail insurance
broking and consulting business of Jardine Insurance Brokers, Inc. (the JIB
acquisition) for a purchase price not to exceed $48.3 million. The Company
paid $21.1 million at closing and issued two 6.375% promissory notes totaling
$21.2 million with payments of $10.6 million due on April 9 and October 12,
1996, respectively. During the fourth quarter of 1995, the October promissory
note was revalued to $8.1 million as a result of certain revenue retention
criteria with respect to former JIB offices. The remaining purchase price of
approximately $6 million is contingent on the retention of specific accounts
over a four-year period ending October 12, 1999. The acquired offices
generated revenues of approximately $53 million in 1994.
The acquisition was accounted for as a purchase. Of the purchase price,
$44.3 million has been allocated to identifiable intangible assets (expiration
lists) and goodwill. The expiration lists will be amortized over an average of
nine years and goodwill will be amortized over twenty years.
On November 30, 1993, the Company issued 2.3 million shares of its Common
Stock for all of the partnership interests of Clay & Partners (Clay), a U.K.-
based actuarial consulting operation. This acquisition was accounted for as a
pooling of interests. In connection with the merger, the Company recorded
$14.4 million as additional paid-in capital representing deferred tax benefits
associated with the taxable business combination of Clay.
Prior to the merger, Clay operated as a partnership. Accordingly, the
Company's results for 1993 do not include approximately $2.2 million for
partners' salaries or $0.7 million for corporate income taxes. Pro-forma net
income (loss) for the Company, assuming partner salaries and corporate income
taxes were charged to operations, would have been $28.5 million, or $0.51 per
share, in 1993.
F-9
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Effective July 1, 1993, the Company acquired an 80 percent interest in a
Mexican insurance brokerage company which was accounted for as a purchase. The
purchase price was $16.9 million, including a $7.4 million cash payment and
notes payable of $9.5 million due in three installments from 1994 to 1996. The
excess of the purchase price over the fair value of net tangible assets
acquired was approximately $16 million.
As a result of the devaluation of the Mexican peso, the Company's
accumulated translation adjustment balance for its Mexican operations
reflected an unrealized loss of $9.5 million and $6.2 million at December 31,
1995 and December 31, 1994, respectively. 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 currently consider its investment in Mexico to be
impaired.
Dispositions
On February 28, 1995, the Company completed the sale of Alexsis Inc., its
U.S.-based third party claims administrator for total cash proceeds of $47.1
million resulting in a pre-tax gain of $28.7 million ($18.7 million after-tax
or $0.42 per share).
During 1995, the Company sold three small operations for gross proceeds of
$9.1 million resulting in pre-tax gains totaling $1.7 million ($1.1 after-tax
or $0.02 per share).
On November 10, 1994, the Company completed the sale of its U.S.-based
personal lines insurance broking business. The total proceeds from the sale
were $30.2 million, including $1 million in cash and a note receivable of
$29.2 million due in January 1995, with a resulting pre-tax gain of $20.2
million ($12.5 million after-tax or $0.28 per share).
During 1993, the Company sold three small operations for gross proceeds of
$9.6 million. Pre-tax gains of $3.9 million have been recognized on the sales
with resulting after-tax gains totaling $2.3 million or $0.05 per share.
These gains are included in Other Income (Expenses) in the Consolidated
Statements of Operations.
Total revenues and operating income from all of these operations were $12
million, $120.9 million and $128.3 million; and $4.1 million, $10.4 million
and $2.5 million, respectively, for the years ended December 31, 1995, 1994
and 1993.
3. RESTRUCTURING AND SPECIAL CHARGES
In the fourth quarter of 1995, the Company recorded a $17.6 million pre-tax
charge ($11.2 million after-tax or $0.25 per share) related primarily to the
JIB acquisition. The JIB portion of this charge amounted to $13 million, of
which $12.5 million reflects the anticipated costs associated with the
abandonment of certain of the Company's office space and the remaining balance
reflects the anticipated costs associated with involuntary workforce
reductions. The lease liability will be paid through the year 2007. The
remaining $4.6 million of the charge primarily represents costs associated
with other involuntary workforce reductions in the U.S.
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.
F-10
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The involuntary severance portion and voluntary early retirement program
amounted to $22.9 million and $20.9 million, respectively. Of these amounts,
$8.8 million will be paid from various pension plans of the Company. The
Company paid $17.1 million and $5.7 million of the liabilities in 1995 and
1994, respectively, and expects to pay $5.2 million of the liabilities in
1996. The remainder of the liabilities will generally be paid in the form of
annuities through the year 2020.
The charge associated with real estate activities relates to the closure,
abandonment and downsizing of office space globally. The costs primarily
include remaining lease obligations and write-offs of leasehold improvements
and fixed assets. The Company paid $9.3 million and $1.2 million of these
liabilities during the years 1995 and 1994, respectively, and has written off
assets of $2.7 million during 1995.
The Company expects to pay $3.8 million of the liability in 1996. The
remainder of the liability will be paid out over the remaining lease periods,
which extend through the year 2009.
In the fourth quarter of 1994, the Company recorded pre-tax special charges
of $69.7 million ($45.3 million after-tax or $1.03 per share). These charges,
which are reflected in non-operating results, include a $32.5 million
settlement in January 1995 which resolved certain indemnification obligations
relating to the 1987 sale of Shand Morahan & Company (Shand) and a $37.2
million increase to the Company's pre-existing reserves, based on settlement
discussions which led to a March 1995 settlement agreement with the
rehabilitator of Mutual Fire, Marine & Inland Insurance Company, (Mutual
Fire). See Note 14 of Notes to Financial Statements.
4. OTHER INCOME (EXPENSES)
Other income (expenses) consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
--------------------
1995 1994 1993
----- ----- ------
<S> <C> <C> <C>
Gains on sales of businesses (See Note 2).......... $30.4 $20.2 $ 3.9
Litigation costs................................... (0.1) (9.1) (20.2)
Other.............................................. 2.4 (0.2) 0.7
----- ----- ------
$32.7 $10.9 $(15.6)
===== ===== ======
</TABLE>
Litigation costs are associated primarily with the Mutual Fire lawsuit
described in Note 14 of Notes to Financial Statements as well as a 1993
settlement of certain other litigation matters.
5. INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes." The cumulative effect of adopting this standard increased 1993
net income by $3.3 million or $0.08 per share. Tax benefits of $3.2 million
were also allocated to paid-in capital representing the difference in the tax
bases over the book bases of the net assets of taxable business combinations
accounted for as pooling of interests. These benefits would have been
recognized at the respective dates of combination if SFAS No. 109 had been
applied at that time.
The components of income (loss) from continuing operations before income
taxes are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1995 1994 1993
------ ------- ------
<S> <C> <C> <C>
United States..................................... $ 37.4 $(200.9) $(74.2)
International..................................... 118.6 54.1 106.1
------ ------- ------
$156.0 $(146.8) $ 31.9
====== ======= ======
</TABLE>
F-11
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of the provision (benefit) for income taxes on continuing
operations are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1995 1994 1993
------ ------ -----
<S> <C> <C> <C>
Current:
Federal.......................................... $(17.7) $ 1.7 $(0.2)
State and local.................................. 1.9 (0.7) (0.8)
International.................................... 40.7 33.9 34.9
------ ------ -----
24.9 34.9 33.9
------ ------ -----
Deferred:
Federal.......................................... 28.7 (67.3) (28.7)
State and local.................................. -- (3.6) (2.0)
International.................................... 7.3 (6.6) 3.2
------ ------ -----
36.0 (77.5) (27.5)
------ ------ -----
$ 60.9 $(42.6) $ 6.4
====== ====== =====
</TABLE>
A reconciliation of the tax provision and the amount computed by applying
the U.S. federal income tax rate of 35% to income (loss) from continuing
operations before income taxes is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
--------------------
1995 1994 1993
----- ------ -----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit).......... $54.6 $(51.4) $11.2
State and local income taxes--net of federal income
tax............................................... 1.2 (1.6) (1.9)
Foreign statutory rates under U.S. federal statu-
tory rate......................................... (0.4) (2.8) (2.9)
Foreign partnership income not taxed............... -- -- (1.9)
Tax benefit of capital losses...................... -- -- (3.5)
Tax rate changes................................... -- -- (1.2)
Adjustment to prior year tax provisions............ -- -- (2.9)
Amortization of intangible assets.................. 2.6 2.6 2.5
U.S. federal income tax on foreign earnings, net of
credits........................................... 0.9 0.5 3.3
Other non-deductible expenses...................... 4.2 7.5 4.1
Other, net......................................... (2.2) 2.6 (0.4)
----- ------ -----
Actual tax expense (benefit)..................... $60.9 $(42.6) $ 6.4
===== ====== =====
</TABLE>
Federal income taxes have not been provided on undistributed earnings of
foreign subsidiaries which aggregated approximately $364.6 million at December
31, 1995, because such earnings are permanently invested or will not be
repatriated unless any additional income taxes would be substantially offset
by foreign tax credits. It is not practicable to determine the amount of
unrecognized deferred income tax liabilities on these undistributed earnings.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes as well as loss and tax
credit carryforwards.
F-12
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of the significant components of the Company's
gross deferred tax assets and liabilities:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
-------------
1995 1994
----- ------
<S> <C> <C>
Deferred tax assets:
Deferred compensation................................... $ 9.2 $ 10.2
Restructuring charges................................... 11.0 19.6
Shand/Mutual Fire reserves.............................. -- 30.9
Capital loss carryforwards.............................. 13.2 16.7
Net operating loss and tax credit carryforwards......... 63.1 63.6
Business combinations................................... 16.5 17.1
Other accruals not currently deductible................. 78.6 81.5
----- ------
191.6 239.6
Less: Valuation allowance............................... (35.2) (36.7)
----- ------
Total deferred tax assets............................. 156.4 202.9
----- ------
Deferred tax liabilities:
Deferred commissions.................................... 8.6 9.6
Depreciation............................................ 2.2 3.0
Gains on settlement of pension liabilities, net of
accruals............................................... 22.7 19.7
Gain on sale of personal lines business................. -- 11.3
Tax leases.............................................. 10.5 13.9
Other accruals.......................................... 15.3 8.7
----- ------
Total deferred tax liabilities........................ 59.3 66.2
----- ------
Net deferred tax asset................................ $97.1 $136.7
===== ======
</TABLE>
The deferred tax balances shown in the Consolidated Balance Sheets are after
reclassification of the above amounts within the various jurisdictions in
which the Company operates.
As of December 31, 1995, the Company has a U.S. federal net operating loss
carryforward of $45 million which expires in the year 2009 and U.S. state net
operating loss carryforwards totaling $224.9 million which expire in various
years through 2010. The Company also has U.S. federal foreign tax credit
carryforwards of $11.8 million which expire in years 1998 through 2000, and
U.S. federal alternative minimum tax credits of $7.5 million which can be
carried forward indefinitely. In addition, the Company has foreign net
operating loss and capital loss carryforwards for tax purposes of $12.2
million and $31.3 million, respectively, which can be carried forward
indefinitely and approximately $7 million of foreign net operating losses
which expire in various years through 2009.
The Company expects that sufficient taxable income will be generated in
future years to realize the U.S. federal net operating loss and tax credit
carryforwards and, therefore, the Company believes that a valuation allowance
is not necessary for these amounts. The $35.2 million valuation allowance at
December 31, 1995 relates primarily to foreign and U.S. state net operating
loss and capital loss carryforwards. The valuation allowance decreased by a
net amount of $1.5 million in 1995, of which $3.5 million relates to a
decrease in foreign capital loss carryforwards and $2 million to increases in
foreign and U.S. state net operating losses.
Although future earnings cannot be predicted with certainty, management
currently believes that realization of the net deferred tax asset is more
likely than not. The net U.S. deferred tax asset would be realized with
average future annual earnings equivalent to 1995 results, excluding
nonrecurring items and sold subsidiaries and businesses.
F-13
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
The Company is currently under examination by the IRS for years 1990 and
1991. In 1994, the Company received a Notice of Proposed Adjustment from the
IRS proposing an increase in taxable income for the 1991 year which, if
sustained, would result in an 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 U.K.
subsidiary.
The Company disagrees with the proposed adjustment and has requested advice
from the IRS National Office on this issue. The Company currently believes
that the National Office review should be completed in the first half of 1996.
Although the ultimate outcome of the matter cannot be predicted with
certainty, the Company and its independent tax counsel believe there are
substantial arguments in support of the Company's position and that the
Company should prevail in the event that the issue were to be litigated.
A similar set of transactions occurred in 1993. Depending on the outcome of
the IRS National Office review of the 1991 issue, the IRS could propose an
increase in 1993 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 all
of its tax liabilities.
6. 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
Limited (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.
F-14
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of the net liabilities of discontinued operations is as follows:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
-------------
1995 1994
------ ------
<S> <C> <C>
Liabilities:
Insurance liabilities.................................... $257.1 $277.6
Other.................................................... 14.9 31.4
------ ------
Total liabilities.................................... 272.0 309.0
------ ------
Assets:
Recoverable under finite risk contracts:
Insurance liabilities.................................. 126.4 135.7
Premium adjustment..................................... 9.8 10.8
Reinsurance recoverables................................. 51.6 64.2
Cash and investments..................................... 27.2 23.6
Other.................................................... 9.3 10.9
------ ------
Total assets......................................... 224.3 245.2
------ ------
Total net liabilities of discontinued operations........... 47.7 63.8
Less current portion classified as other accrued expenses.. 14.3 7.0
------ ------
Remainder classified as net liabilities of discontinued op-
erations.................................................. $ 33.4 $ 56.8
====== ======
</TABLE>
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
clean-up (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 relevant industry 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
insurance pool 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 December 31,
1995, based on an estimate by an independent actuarial firm, the Company had
recorded $13.5 million of the deductible.
On July 1, 1994, the Company entered into an insurance-based financing
contract (finite risk contract) with the reinsurance company providing
protection primarily for exposures relating to Orion, Syndicate 701 and Swann
& Everett. The contract provided for the payment by the Company of $80
million, $50 million of which
F-15
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
was borrowed from 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
December 31, 1995, recoveries were limited to $115.2 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, all of
which are under the Company's control, to terminate that contract.
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.
Changes in the total net liabilities of discontinued operations are as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
1995 1994 1993
----- ------ ------
<S> <C> <C> <C>
Beginning balance.................................. $63.8 $113.5 $102.4
Provisions for loss................................ -- 28.9 --
Litigation settlement.............................. -- -- 22.3
Net cash proceeds on the zero coupon notes......... -- 5.0 --
Claims and expense payments........................ (7.3) (7.0) (11.9)
Payment for a finite risk contract................. -- (80.0) --
Net capital infusion............................... (3.0) -- --
Tax settlement..................................... (5.8) -- --
Other.............................................. -- 3.4 --
Translation adjustment............................. -- -- 0.7
----- ------ ------
Ending balance................................... $47.7 $ 63.8 $113.5
===== ====== ======
</TABLE>
The 1994 provision for loss of $28.9 million includes a $6 million charge
associated with the 1994 finite risk contract, a $20.9 million charge relating
to an agreement that resolved certain indemnity obligations to Sphere Drake
and a $2 million charge recorded in the fourth quarter of 1994 related to
other liabilities. Under terms of the Sphere Drake agreement, the Company
received a cash payment of $5 million in settlement of the zero coupon notes
receivable and related indemnities as well as certain income tax liabilities.
While the insurance liabilities set forth above represent the Company's best
estimate of the probable liabilities within a range of independent actuarial
estimates of reasonably probable loss amounts, there is no assurance that
further adverse development may not occur due to variables inherent in the
estimation processes and other matters described above. Based on independent
actuarial estimates of a range of reasonably possible
F-16
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
loss amounts, liabilities could exceed recorded amounts by approximately $170
million. However, in the event of such adverse development, based on
independent actuarial estimates of pay-out patterns, up to approximately $130
million of this excess would be recoverable under the finite risk contracts.
The Company believes that, based on current estimates, the established total
net liabilities of discontinued operations are sufficient to cover its
exposures.
7. EMPLOYEES' RETIREMENT PLANS AND BENEFITS
Pension Plans
The Company has contributory and non-contributory defined benefit pension
plans covering substantially all employees. The plans generally provide
pension benefits that are based on the employee's years of service and
compensation prior to retirement. In general, it is the Company's policy to
fund these plans consistent with the laws and regulations of the respective
jurisdictions in which the Company operates.
Total pension costs are summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Service cost..................................... $ 23.8 $ 38.8 $ 29.5
Interest cost.................................... 46.2 43.4 38.4
Actual return on plan assets..................... (127.9) 22.7 (73.4)
Net amortization and deferral.................... 55.8 (99.7) 7.4
------- ------ ------
Net pension costs (credit)..................... $ (2.1) $ 5.2 $ 1.9
======= ====== ======
</TABLE>
During the first quarter of 1995, the Company realized a pension curtailment
gain of $4.4 million due to the sale of Alexsis Inc. (see Note 2 of Notes to
Financial Statements).
The following table sets forth the funded status and amounts recognized in
the Company's Consolidated Balance Sheets:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------
1995 1994
------------------ ------------------
U.S. INT'L U.S. INT'L
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Vested benefit obligation........ $ 289.5 $ 277.1 $ 199.1 $ 247.1
======= ========= ======= =========
Accumulated benefit obligation... $ 299.6 $ 278.5 $ 223.3 $ 248.7
======= ========= ======= =========
Projected benefit obligation..... $(351.8) $ (298.9) $(271.6) $ (270.3)
Plan assets at fair market value. 344.5 427.1 289.3 383.7
------- --------- ------- ---------
Excess (shortfall) of plan assets
over projected benefit obliga-
tion............................ (7.3) 128.2 17.7 113.4
Unrecognized net loss (gain)..... 18.2 (33.5) (5.5) (26.8)
Unrecognized prior service cost.. 0.1 (6.2) (1.3) (6.6)
Unrecognized net assets being am-
ortized over the plans' average
remaining service lives......... (11.6) (26.9) (14.0) (29.4)
------- --------- ------- ---------
Prepaid (accrued) pension cost... $ (0.6) $ 61.6 $ (3.1) $ 50.6
======= ========= ======= =========
Assumptions used were as follows:
Assumed discount rate............ 7.0% 6.0-9.0% 8.5% 6.5-9.5%
Assumed rate of compensation in-
crease.......................... 4.5% 3.5-5.0% 5.0% 3.5-5.0%
Expected rate of return on plan
assets.......................... 9.75% 7.0-10.75% 9.75% 7.0-10.25%
</TABLE>
F-17
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1994, approximately 75 percent and 76 percent,
respectively, of all plan assets are invested in equity securities and 25
percent and 24 percent, respectively, in cash equivalents and/or fixed-income
securities.
Thrift Plans
The Company maintains thrift plans for most U.S. and Canadian employees.
Under the thrift plans, eligible employees may contribute amounts through
payroll deduction, supplemented by Company contributions, for investments in
various funds established by the plans. The cost of these plans was $9.1
million in 1995, $11.9 million in 1994 and $11.3 million in 1993.
Postretirement Benefits
The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective January 1, 1993 for its U.S. plans
and effective January 1, 1995 for its international plans. This statement
requires the Company to accrue the estimated cost of future retiree benefit
payments during the years the employee provides services. The Company
previously expensed the cost of these benefits, which are principally health
care and life insurance, as premiums or claims were paid. The statement
allowed recognition of the cumulative effect of the liability in the year of
the adoption or the amortization of the obligation over a period of up to
twenty years. The Company elected to recognize the initial postretirement
benefit obligation of $14 million and $5.9 million for its U.S. plans and
international plans, respectively, over a period of twenty years.
Total postretirement benefit costs are summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER
31,
-----------------
1995 1994
------------ ----
U.S. INT'L U.S.
----- ----- ----
<S> <C> <C> <C>
Service cost........................................... $ 0.5 $0.3 $0.8
Interest cost.......................................... 1.5 0.6 1.5
Actual return on plan assets........................... (0.6) -- 0.2
Net amortization and deferral.......................... 1.0 0.3 0.6
----- ---- ----
Net postretirement costs............................. $ 2.4 $1.2 $3.1
===== ==== ====
</TABLE>
F-18
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the funded status and amounts recognized in
the Company's consolidated financial statements:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------
1995 1994
--------------------- ---------
U.S. INT'L U.S.
-------- ----------- ---------
<S> <C> <C> <C>
Accumulated postretirement benefit ob-
ligation:
Retirees............................. $ (14.0) $ (2.9) $ (11.0)
Fully eligible active participants... (1.9) (1.0) (3.1)
Other active participants............ (5.3) (2.8) (5.4)
-------- ----------- ---------
(21.2) (6.7) (19.5)
Plan assets at fair market value....... 5.8 -- 5.4
-------- ----------- ---------
Accumulated benefit obligation in
excess of plan assets................. (15.4) (6.7) (14.1)
Unrecognized net obligation............ 8.7 5.7 11.7
Unrecognized net loss.................. 2.8 0.2 1.9
-------- ----------- ---------
Accrued postretirement benefit liabili-
ty.................................... $ (3.9) $ (0.8) $ (0.5)
======== =========== =========
Assumptions used were as follows:
Assumed discount rate.................. 7.0% 8.5-9.0% 8.5%
Assumed rate of compensation increase.. 4.5% 4.0-5.0% 4.5%
Expected rate of return on plan assets. 5.75% -- 5.75%
Assumed medical trend rate-1996 and af-
ter 9 to 5.5% 11.5 to 7.5% 10 to 5.5%
The amount of a 1% increase in assumed
trend rate on:
Aggregate of service and interest
cost............................... $ 0.2 $ 0.2 $ 0.2
Accumulated postretirement benefit
obligation......................... 1.2 0.9 1.2
======== =========== =========
</TABLE>
During the first quarter of 1995, the Company incurred a postretirement
curtailment loss of $2.8 million due to the sale of Alexsis Inc.
Postemployment 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.
Deferred Compensation Plan
The Company has a deferred compensation plan which permitted certain of its
key officers and employees to defer a portion of their incentive compensation
during 1986 to 1989. The Company has purchased whole life insurance policies
on each participant's life to assist in the funding of the deferred
compensation liability. At December 31, 1995, the cash surrender value of
these policies was $0.6 million, which is net of $44.9 million of policy
loans. The Company's obligation under the plan, including accumulated
interest, was $16 million and $16.2 million at December 31, 1995 and 1994,
respectively, and is included in Other Long-Term Liabilities in the
Consolidated Balance Sheets.
F-19
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. DEBT
Consolidated short-term debt outstanding is as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1995 1994
--------- ---------
<S> <C> <C>
Lines of credit........................................ $ 0.1 $0.7
Notes payable (A)...................................... 19.0 0.3
--------- --------
$19.1 $1.0
========= ========
</TABLE>
The weighted average interest rate on short-term borrowings was 6.5 percent
and 7.0 percent at December 31, 1995 and 1994, respectively.
Consolidated long-term debt outstanding is as follows:
<TABLE>
<CAPTION>
AS
OF DECEMBER 31,
-----------------
1995 1994
-------- -------
<S> <C> <C>
11% Convertible subordinated debentures (B)............ $ -- $ 60.2
Notes payable (C)...................................... 77.5 50.0
Obligations under capital leases (D)................... 24.2 22.1
Term loans (E)......................................... -- 10.0
Credit agreement (F)................................... 30.0 --
Other.................................................. 3.8 7.5
-------- -------
135.5 149.8
Less current portion................................... (9.3) (17.1)
-------- -------
$ 126.2 $ 132.7
======== =======
</TABLE>
The principal payments required during the next five years are $9.3 million
in 1996, $18 million in 1997, $47.8 million in 1998, $17.4 million in 1999,
and $15.9 million in 2000.
A. Current Notes Payable
In connection with the JIB acquisition on October 12, 1995, the Company
issued two 6.375% promissory notes totaling $21.2 million with payments of
$10.6 million due on April 9 and October 12, 1996, respectively. During the
fourth quarter of 1995, the October promissory note was revalued to $8.1
million in accordance with the revenue retention criteria for the former JIB
offices stipulated in the purchase agreement. (See Note 2 of Notes to
Financial Statements.)
B. 11% Convertible Subordinated Debentures
On October 13, 1995, the Company redeemed all $60.2 million of its
outstanding 11% Convertible Subordinated Debentures due 2007 together with
accrued interest and a $0.9 million redemption premium. This redemption was
primarily funded by the Company through the borrowing of $60 million under its
revolving long-term credit facility. (See Item F.)
C. Notes Payable
As a result of the Mutual Fire settlement as described in Note 14 of Notes
to Financial Statements, the Company issued a $35 million zero coupon note in
March 1995. Using a discount rate of 9.3%, the present value of the note was
recorded as a $25.9 million long-term debt obligation. The note is payable in
six annual installments, commencing April 1, 1996. The carrying value of the
outstanding principal balance, including imputed interest, of the note payable
at December 31, 1995 was $27.5 million.
F-20
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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, which was pre-paid in
June 1995, and paid a net contingent obligation of $4.5 million.
In July 1994, the Company borrowed $50 million from the reinsurance company
that executed a finite risk contract relating to the Company's discontinued
operations. The note is payable in five equal annual installments, commencing
July 1, 1997, and bears interest at a rate of 9.45 percent. If the Company
defaults on the borrowing, the reinsurance company may utilize the note to
settle reinsurance claims under the finite risk contract.
D. Obligations Under Capital Leases
The Company's obligations under capital leases consists primarily of lease
agreements for office facilities. Future minimum lease payment obligations are
approximately $2.7 million for each of the next five years and an aggregate of
$24.2 million thereafter.
E. Term Loans
In March 1995, a U.S. subsidiary prepaid an unsecured $10 million term loan
with a bank which was due August 1995.
F. Credit Agreement
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 and for the
issuance of up to $100 million of letters of credit, and contains various
covenants, including 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. The
covenant requires that the Company's ratio of profits before taxes, interest
expense and depreciation and amortization to interest expense and cash
dividends exceed 4.25 at all times. The Company's ratio was 6.85 at December
31, 1995. In addition, the occurrence of a "Special Event" under the terms of
the Series B convertible preferred stock purchase agreement, which, if not
waived, would constitute an event of default under the new agreement. (See
Note 10 of Notes to Financial Statements.) Interest rates charged on amounts
drawn on this credit agreement are dependent upon the Company's credit
ratings, the duration of the borrowings and the Company's choice of one of a
number of published rates, including the prime lending rate, certificate of
deposit rates, the federal funds rate and LIBOR.
During the second quarter of 1995, the Company arranged a $10 million letter
of credit under the agreement. On October 13, 1995, the Company borrowed $60
million under the agreement to fund the redemption of its outstanding 11%
Convertible Subordinated Debentures due 2007. In December 1995, the Company
repaid $30 million of its long-term revolving credit agreement borrowings. The
interest rate on the remaining $30 million is 6.3125 percent as of December
31, 1995. The Company borrowed $10 million under this agreement in January
1996 and an additional $20 million in February 1996.
Supplementing the credit agreement, the Company has unsecured lines of
credit available for general corporate purposes totaling $87.9 million of
which $87.8 million were unused as of December 31, 1995. These lines consist
of uncommitted facilities principally in the U.K. and Canada. If drawn, the
lines bear interest at market rates and carry annual fees of not greater than
1/2 percent of the line.
F-21
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK OPTION AND INCENTIVE PLANS
Long-Term Incentive Awards
The Company's 1995 Long-Term Incentive Plan (1995 LTIP) was approved by
stockholders at the 1995 annual meeting of stockholders and became effective
on May 18, 1995. The 1995 LTIP includes grants in the form of non-qualified
stock options and incentive stock options, stock appreciation rights,
restricted stock awards, bonus equity awards, performance share/unit awards
and other stock based awards.
As of the effective date of the 1995 LTIP, the Company had awards
outstanding under the 1988 Long-Term Incentive Compensation Plan (1988 Plan)
and under the 1982 Employee Stock Option Plan (1982 Plan). Awards outstanding
under the 1988 Plan include stock options, stock appreciation rights and
restricted stock. Only stock option awards are outstanding under the 1982
Plan. At December 31, 1995, 4,226,067 shares of common stock were available
for issuance. This amount includes 538,761 shares available under the 1988
Plan.
Stock options may be granted at a price not less than the fair market value
of the Common Stock on the date the option is granted and, with respect to
incentive stock options, must be exercised not later than 10 years from date
of grant and, with respect to non-qualified options, must be exercised not
later than 10 years and one day from date of grant. The 1995 LTIP also
provides for replacement options for a limited number of key executives. In
December 1995, the Company exchanged 1,358,300 stock options ranging in a per-
share exercise price of $24.50 to $23.13 for stock options having an exercise
price of $19.63.
The Company will adopt SFAS No. 123, "Accounting for Stock Based
Compensation," in December 1996. The Company has elected to continue to
measure compensation costs using APB Opinion No. 25 and accordingly will
provide the disclosures required by SFAS No 123.
Stock option transactions were as follows:
<TABLE>
<CAPTION>
NUMBER OPTION PRICE
OF PER SHARE
SHARES RANGE
---------- -------------
<S> <C> <C>
Outstanding,
January 1, 1993................................ 2,925,055 $17.75-$38.63
Granted....................................... 488,500 26.00- 27.63
Exercised..................................... (93,948) 17.75- 25.38
Canceled...................................... (188,307)
---------- -------------
Outstanding,
December 31, 1993.............................. 3,131,300 $17.75-$38.63
Granted....................................... 2,361,500 14.19- 20.63
Exercised..................................... (5,375) 17.75
Canceled...................................... (503,320)
---------- -------------
Outstanding,
December 31, 1994.............................. 4,984,105 $14.19-$38.63
Granted....................................... 3,006,100 19.63- 25.63
Exercised..................................... (7,685) 17.75- 23.13
Canceled...................................... (1,841,136)
---------- -------------
Outstanding,
December 31, 1995.............................. 6,141,384 $14.19-$38.63
========== =============
</TABLE>
F-22
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The number of options exercisable at December 31 were as follows:
<TABLE>
<S> <C>
1995........................... 2,592,525
1994........................... 2,197,405
1993........................... 2,231,301
</TABLE>
Stock appreciation rights may be granted alone or in conjunction with a
stock option at a price not less than the fair market value of the Common
Stock at date of grant. Upon exercise of a stock appreciation right, the
participant will receive cash, Common Stock or a combination thereof equal to
the excess of the market value over the exercise price of the stock
appreciation right. Exercise of either the right or the stock option will
result in the surrender of the other.
Restricted stock awards may be granted which limit the sale or transfer of
the shares until the expiration of a specified time period. With certain
specified exceptions, such awards are subject to forfeiture if the participant
does not remain in the employ of the Company until the end of the restricted
time period. A maximum of 940,000 shares may be issued under the 1995 LTIP.
There were 202,798 shares, 308,500 shares, and 60,000 shares of restricted
stock, excluding BEP Awards (described below), issued in 1995, 1994 and 1993,
respectively. In addition to awards made under the 1988 Plan in 1994, 271,307
shares of restricted stock were awarded to an executive officer to offset the
loss of certain benefits from the executive's prior employer when the
executive joined the Company.
Bonus equity program awards (BEP Awards) may be granted based on a
percentage of the cash incentive compensation otherwise payable to a
participant under any compensation program of the Company. The size of the BEP
Award is determined by formula. The number of shares of Common Stock is
determined by dividing the dollar amount designated for the award by the fair
market value (based on a five-day average of the Common Stock closing price)
discounted by up to 25 percent. Shares subject to the BEP Award are restricted
as to transfer (generally for a period of up to three years) and are subject
to forfeiture should the participant terminate employment for reasons other
than death, disability or retirement during the restricted period. No BEP
Awards were granted in 1995, 1994 and 1993.
Performance share/unit awards may be granted based upon specified
performance criteria. Upon achievement of the performance share/unit criteria,
the participant will receive cash, Common Stock or a combination thereof equal
to the award. There were no performance share/unit awards made in 1995 or 1993
and 23,000 awards were made in 1994.
Performance Bonus Plan for Executive Officers.
The Company's Performance Bonus Plan for Executive Officers (Performance
Bonus Plan) was approved by stockholders at the 1995 annual meeting of
stockholders and became effective as of January 1, 1995.
The Performance Bonus Plan establishes certain performance criteria for
determining the maximum amount of bonus compensation, including BEP Awards,
for those executive officers who, on the last day of the Company's taxable
year, consist of the chief executive officer and the four most highly
compensated executive officers and whose compensation is deductible in the
U.S. (Covered Employees). The Performance Bonus Plan is designed to comply
with Section 162(m) of the Internal Revenue Code of 1986, which is effective
for the tax year commencing 1995, and which limits the tax deductibility by
the Company of annual compensation paid to Covered Employees in excess of $1
million, except to the extent such compensation is paid pursuant to the
performance criteria established by the Performance Bonus Plan. For 1995, the
compensation paid to the one Covered Employee eligible under the Performance
Bonus Plan, should be fully deductible to the Company.
F-23
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Employee Discount Stock Purchase Plan
The Company's 1995 Employee Discount Stock Purchase Plan (Employee Purchase
Plan) was approved by stockholders at the 1995 annual meeting of stockholders
and became effective as of July 1, 1995. Eligible U.S. employees may purchase
up to an aggregate of 750,000 shares of the Company's Common Stock, at a price
equal to the lower of the closing price of the Common Stock reported on the
New York Stock Exchange at the beginning or end of the offering period,
discounted by up to 15 percent.
Shares purchased are limited to the number of shares that can be purchased
by the aggregate amount deducted from the participant's salary during a 6-
month purchase period. Shares of Common Stock purchased under the Employee
Purchase Plan must remain in an employee's account for one year after the
purchase date.
As of December 31, 1995, 81,994 shares of Common Stock were issued under the
1995 Employee Purchase Plan, at a weighted average price of $16.15 per share.
At December 31, 1995, there were 668,006 shares available for issuance under
the Employee Purchase Plan.
In January 1996, the Company commenced offering to eligible employees
outside the U.S., the opportunity to participate in an international employee
discount stock purchase plan (Plan). At the end of the 5-year offering period,
participants can elect to purchase from the contributions saved, shares of the
Company's Common Stock at a 15 percent discount of the closing price of the
Common Stock reported on the New York Stock Exchange on the first date of the
5-year offering period. Non-U.S. employees who are "executive officers" of the
Company, as that term is defined pursuant to Section 16 of the Securities
Exchange Act of 1934, participate in a subplan of the Employee Purchase Plan
on terms similar to the Plan.
Non-Employee Director Deferred Stock Ownership Plan
The Company's Non-Employee Director Deferred Stock Ownership Plan ("NEDD
Plan") was approved by stockholders at the 1995 annual meeting of stockholders
and became effective as of January 1, 1995.
Under the NEDD Plan each non-employee director of the Company is entitled to
a single annual fee or retainer (Annual Fee) for all services as a director
during the period from one annual meeting of stockholders to the next. The
Annual Fee is currently set at $40,000 per year. Under the NEDD Plan, in lieu
of payment of the Annual Fee, the Company will generally contribute shares of
Common Stock to a grantor trust established by the Company (Company Trust)
equal to that portion of the Annual Fee then payable. Under the NEDD Plan,
shares of Common Stock delivered to the grantor trust may not be sold for a
period of one year from the date of grant or earlier in the event of a change
of control.
Approximately 160,000 shares of Common Stock are authorized for issuance
under the NEDD Plan which will expire on December 31, 2005. As of December 31,
1995, 50,103 shares were delivered to the Company's trust under the NEDD Plan.
Of that number 24,285 shares were delivered in connection with the termination
of the Non-Employee Director Retirement Plan. During 1994, 140,000 shares of
Common Stock were also delivered to the Company Trust to fund a special
compensation award to a non-employee director.
10. COMMON AND PREFERRED STOCK
Authorized Capital Stock
The Company has authorized capital stock of 292 million shares of five
classes of stock consisting of 200 million shares of Common Stock, par value
$1.00 (Common Stock); 26 million shares of Class A Common Stock, par value
$.00001 (Class A Stock); 11 million shares of Class C Common Stock, $1.00 par
value (Class C Stock); 40 million shares of Class D Common Stock, $1.00 par
value (Class D Stock) and 15 million shares of Preferred Stock, $1.00 par
value (Preferred Stock).
F-24
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Of the 15 million shares of Preferred Stock authorized, the Board of
Directors in March 1993 designated 2.3 million shares as $3.625 Series A
Convertible Preferred Stock, $1.00 par value (Series A Convertible Preferred
Stock), and in July 1994 designated (i) 6.2 million shares as 8% Series B
Cumulative Convertible Preferred Stock, $1.00 par value (Series B Convertible
Preferred Stock) and (ii) 1 million shares as Series A Junior Participating
Preferred Stock, $1.00 par value (Junior Participating Preferred Stock).
At December 31, 1995, the Company had 10.4 million shares of Common Stock
reserved for issuance under its employee stock incentive plans; 2.3 million
shares reserved for issuance upon the conversion or redemption of Class A
Stock, the Class C Stock, the Class D Stock and the Series A Convertible
Preferred Stock; and 13.2 million shares of Class D Stock reserved for
issuance in connection with the conversion of the Series B Convertible
Preferred Stock.
Common Stock Classes
Each holder of the Common Stock, Class A Stock and Class C Stock is entitled
to one vote for each share held on all matters voted upon by the stockholders
of the Company, including the election of directors. In certain instances,
however, holders of the Class A and Class C Stock vote as a group. Holders of
the Class D Stock are not entitled to vote, except that the Company's Charter
cannot be amended so as to adversely affect the holders of the Class D Stock
without the approval of the holders of two-thirds of such shares then
outstanding. The Common Stock, Class A Stock, Class C Stock and Class D Stock
do not have pre-emptive or conversion rights or cumulative voting rights for
the election of directors and there are no redemption or sinking fund
provisions applicable thereto.
Subject to the provisions of Maryland law, dividends on the Common Stock and
the Class D Stock (when and if issued) may be declared and paid by the Board
of Directors. Neither the Class A Stock nor the Class C Stock have dividend
rights; however, associated with each share of Class A Stock is a dividend
paying share (RSC Class 1 Share) issued by Reed Stenhouse Companies Limited, a
Canadian subsidiary of the Company, and associated with each share of Class C
Stock is a dividend paying share (UK Dividend Share) issued by Alexander &
Alexander Services UK plc, a U.K. subsidiary of the Company. No dividends may
be declared or paid on the Common Stock, unless an equivalent amount per share
is declared and paid on the RSC Class 1 Shares and the UK Dividend Shares.
Accordingly, the Company's ability to pay dividends is limited by the amounts
available to the Canadian and U.K. subsidiaries for such purposes. At December
31, 1995, these amounts approximate Canadian $96.5 million or $70.9 million,
assuming certain solvency tests are met under Canadian law, and 127 million
U.K. pounds sterling or $196.6 million. In the event sufficient earnings are
not available in the Canadian or U.K. subsidiary to pay dividends the
Company's legal structure allows it to make earnings or capital available in
those subsidiaries to pay dividends.
Holders of the Common Stock, Class C Stock and Class D Stock are entitled to
receive, upon liquidation of the Company, all remaining assets available for
distribution to stockholders after satisfaction of the Company's liabilities
and the preferential rights of any Preferred Stock which may then be
outstanding. Holders of the Class A Stock are not entitled to receive any
dividends or liquidating or other distributions with respect to such shares
from the Company, but are entitled to receive in respect of their associated
RSC Class 1 Shares an amount in Canadian dollars equivalent to the U.S. dollar
amount to be paid on the Common Stock.
The Class C Stock shares are convertible at any time into, and shares of RSC
Class 1 Shares are exchangeable at any time (and the Class A Stock is
concurrently redeemable), for fully paid, non-assessable shares of Common
Stock on the basis of one share of Common Stock for each share of Class C
Stock or RSC Class 1 Share (subject to adjustment). In addition, upon the
happening of certain events, the Company can require such conversion. Shares
of the Series B Convertible Preferred Stock are convertible into Class D
Stock, at a
F-25
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
conversion price of $17 per share (subject to adjustment). The Class D Stock
may be exchanged for Common Stock at anytime on a share-for-share basis,
provided, however, that no person is entitled to acquire Common Stock upon
such exchange if after giving effect thereto such person has more than 9.9
percent of the combined voting power of the common stock voting shares then
outstanding, absent certain events. The Common Stock, Class A Stock, Class C
Stock and Class D Stock have customary anti-dilution provisions.
Preferred Stock Series and Related Rights
The Company has one class of Preferred Stock which can be issued in one or
more series with full or limited voting rights, with the rights of each series
to be determined by the Board of Directors before each issuance.
Series A Convertible Preferred Stock
Holders of the Series A Convertible Preferred Stock are entitled to receive
cumulative cash dividends at an annual rate of $3.625 per share, payable
quarterly in arrears. The shares are convertible into Common Stock at a
conversion price of $31.875 per share (subject to adjustments). The Series A
Convertible Preferred Stock may be redeemed by the Company on or after March
22, 1997, at $52.18 per share until March 14, 1998, and declining ratably
annually to $50 per share on or after March 15, 2003, plus accrued and unpaid
dividends. The Series A Convertible Preferred Stock is non-voting, except as
provided by law, and except that, among other things, holders will be entitled
to vote as a separate class with other series of outstanding Preferred Stock
to elect a maximum of two directors if the equivalent of six or more quarterly
dividends of the Series A Convertible Stock is in arrears. With respect to
dividend rights and rights of liquidation, dissolution and winding up, the
Series A Convertible Preferred Stock ranks senior to all classes of common
capital stock and to the Junior Participating Preferred Stock (when and if
issued) and pari passu to the Series B Convertible Preferred Stock. The
liquidation preference for the Series A Convertible Preferred Stock is $50 per
share.
Series B Convertible Preferred Stock
Holders of the Series B Convertible Preferred Stock are entitled to receive
dividends at a rate of 8% per annum payable quarterly in arrears. Until
December 15, 1996, dividends on the Series B Convertible Preferred Stock are
payable in kind and thereafter, at the discretion of the Company's Board of
Directors, in cash or in kind until December 15, 1999, provided that if the
Company at any time pays dividends in cash on or after December 15, 1996, the
Company may not thereafter declare or pay dividends in kind. The Series B
Convertible Preferred Stock has the same dividend rights, voting rights and
rights of liquidation, dissolution and winding up as the Series A Convertible
Preferred Stock. In addition, however, following the occurrence of a Specified
Corporate Action (as defined in the Company's Charter) holders of the Series B
Convertible Preferred Stock also have the right to vote as a class with the
holders of the Common Stock and the Class D Stock on all matters as to which
the holders of Common Stock are entitled to vote. A Specified Corporate Action
is defined generally as an action by the Company that would permit a change in
control and certain related events. For the purposes of such vote, the holders
of the Series B Convertible Preferred Stock will be deemed holders of that
number of shares of Class D Stock into which such shares would then be
convertible.
The Series B Convertible Preferred Stock may be redeemed in whole or in part
by the Company after December 15, 1999, so long as after that date the Common
Stock has traded 30 consecutive trading days on the New York Stock Exchange at
a price in excess of 150 percent of the then effective conversion price. The
redemption price is $54 per share until December 14, 2000, declining ratably
annually to $50 per share on or after December 14, 2006, plus accrued and
unpaid dividends. All redemptions are to be made pro-rata.
F-26
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Holders of Series B Convertible Preferred Stock have the right to require
the Company to purchase all or any part of the Series B Convertible Preferred
Stock then held by such holders upon the occurrence of a Special Event. A
Special Event consists of actions solely within the control of the Company and
includes the declaration or payments of dividends aggregating in excess of
cumulatively 25 percent of earnings in 1996, and cumulatively 50 percent of
earnings thereafter; the disposition by the Company of assets representing 35
percent or more of the Company's book value or gross revenues; certain mergers
or consolidations of the Company or any of its principal subsidiaries with or
into any other firm or entity involving 20 percent or more of the total market
value of the Company's equity securities; and repurchases and redemptions of
the Company's securities (other than the Company's Series B Convertible
Preferred Stock) in excess of net proceeds to the Company from the sale of
stock (less amounts expended for repurchases and redemptions of the Company's
preferred shares). Other Special Events include the acquisition by a third
party, with the consent or approval of the Company, of beneficial ownership of
securities representing 35 percent or more of the Company's total outstanding
voting power. The repurchase price in the event of a Special Event is $72.06
per share, plus in each case accrued and unpaid dividends.
Junior Participating Preferred Stock and Related Rights.
The Company has a Shareholder Rights Plan (the "Rights Plan") designed to
deter coercive takeover tactics and to prevent an acquirer from gaining
control of the Company without offering a fair price to all stockholders.
Under the terms of the Rights Plan, adopted in July 1987 and as amended, one
preferred share purchase right (a "Right") accompanies each share of
outstanding Common Stock, Class A Stock, Class C Stock and Class D Stock. Each
Right entitles the holder thereof to purchase one one-hundredth of a share of
Junior Participating Preferred Stock.
The Rights become exercisable only following the public announcement by the
Company that a person or group (i) has acquired beneficial ownership of 20
percent or more of the Company's voting shares or (ii) has commenced a tender
or exchange offer that if consummated would result in the ownership of 20
percent or more of such voting shares. Under such circumstances, if the Rights
become exercisable, each holder will be entitled to purchase at the then-
current exercise price, that number of Junior Participating Preferred Stock
equal to twice the exercise price of the Right. If the Company is subsequently
acquired, each right will entitle the holder to purchase at the then-current
exercise price, stock of the surviving company having a market value of twice
the exercise price of one Right. In addition, if a person or group acquires
more than 20 percent, but less than 50 percent, of the Company's common voting
shares, the Board of Directors may exchange each Right for one one-hundredth
of a share of Junior Participating Preferred Stock. Rights beneficially owned
by a holder of 20 percent or more of the voting shares become void once such
holder passes the 20 percent threshold. The Rights, which expire on July 6,
1997, are redeemable by the Board of Directors prior to becoming exercisable
at a redemption price of $.01 per Right.
In June 1994, the Board of Directors amended the Rights Plan so that the
initial acquisition of the Series B Convertible Preferred Shares, the
acquisition of the Class D Stock upon conversion of the Series B Convertible
Preferred Stock, the acquisition of Common Stock upon exchange of the Class D
Stock, or permitted acquisitions by the purchaser, its affiliates or any
transferee thereof of the Company's securities will not cause the Rights to
become exercisable. In addition, on November 16, 1995, the Rights Plan was
amended to provide for modifications of the definitions of Acquiring Person
and Distribution Date to raise from 15 percent to 20 percent the percentage of
stock ownership needed to cause a person to become an Acquiring Person or to
cause a Distribution Date to occur (as such capitalized terms are defined in
the Rights Agreement).
Each share of Junior Participating Preferred Stock will be entitled to a
minimum preferential quarterly dividend payment of $10 per share but will be
entitled to an aggregate dividend of 100 times the dividend declared per share
of Common Stock. In the event of liquidation, the holders of the Junior
Participating Preferred
F-27
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock will be entitled to a minimum preferential liquidation payment of $100
per share but will be entitled to an aggregate payment of 100 times the
payment made per share of Common Stock. Each share of Junior Participating
Preferred Stock will have 100 votes, voting together with the Company's common
voting shares. In the event of any merger, consolidation or other transaction
in which voting shares are exchanged, each share of Junior Participating
Preferred Stock will be entitled to receive 100 times the amount received per
share of Common Stock. The Junior Participating Preferred Stock shares have
customary anti-dilution provisions. Because of the nature of the dividend,
liquidation and voting rights of the Junior Participating Preferred Stock, the
value of the one one-hundredth interest in a share of Junior Participating
Preferred Stock purchasable upon exercise of each Right should approximate the
value of one share of Common Stock. Shares of Junior Participating Preferred
Stock purchasable upon exercise of the Rights will not be redeemable.
Dividends and Distributions
Under Maryland General Corporation Law, the Board of Directors of the
Company may not declare or pay dividends to holders of any class of the
Company's capital stock if, after giving effect to such distribution, (1) the
Company would be unable to pay its debts as they become due in the usual
course; or (2) the Company's total assets would be less than the sum of its
liabilities plus the dissolution preference of the holders of any class or
series of preferred stock issued and outstanding. In determining whether a
distribution by the Company (other than upon voluntary or involuntary
liquidation), by dividend, redemption or other acquisition of shares or
otherwise, is permitted pursuant to the balance sheet solvency test under the
Maryland General Corporation Law, the aggregate liquidation preference of the
Series B Convertible Preferred Shares will not be counted as a liability. The
Series B Convertible Preferred Shares have a liquidation preference of $50 per
share.
11. 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. The net unrealized holding gains totaled $5.6 million and
$1.5 million, net of deferred income taxes of $2 million and $0.2 million, and
are reported as a separate component of Stockholders' Equity for December 31,
1995 and 1994, respectively. Net unrealized holding gains increased $4.1
million and decreased $2 million during 1995 and 1994, respectively.
At December 31, 1995 and 1994, the amortized cost and estimated fair value
of the Company's debt and equity securities and related financial instruments
used to hedge such investments are summarized below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government agencies/state
issuances..................... $ 2.7 $-- $ -- $ 2.7
Other interest-bearing securi-
ties.......................... 138.1 -- -- 138.1
Mortgage-backed securities..... -- -- -- --
Equity securities.............. 3.1 6.5 -- 9.6
Financial instruments used as
hedges........................ -- 1.3 (0.2) 1.1
------ ---- ----- ------
Total........................ $143.9 $7.8 $(0.2) $151.5
====== ==== ===== ======
</TABLE>
F-28
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1994
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government agencies/state
issuances..................... $ 63.5 $-- $(0.1) $ 63.4
Other interest-bearing securi-
ties.......................... 146.7 -- -- 146.7
Mortgage-backed securities..... 83.8 -- -- 83.8
Equity securities.............. 1.9 4.6 -- 6.5
Financial instruments used as
hedges........................ -- 0.3 (3.1) (2.8)
------ ---- ----- ------
Total........................ $295.9 $4.9 $(3.2) $297.6
====== ==== ===== ======
</TABLE>
The above debt and equity securities and financial instruments used as
hedges are classified in the Consolidated Balance Sheet at December 31, as
follows:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
-------------
1995 1994
------ ------
<S> <C> <C>
Cash and cash equivalents:
Operating................................................ $ 34.1 $ 63.9
Fiduciary................................................ 73.1 51.8
Short-term investments:
Operating................................................ 0.3 1.8
Fiduciary................................................ 18.8 117.9
Long-term operating investments............................ 25.2 62.2
------ ------
Total.................................................. $151.5 $297.6
====== ======
</TABLE>
At December 31, 1995 and 1994, the amortized cost and estimated fair value
of debt securities by contractual maturity are summarized below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------
1995 1994
------------------- -------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less.......... $120.8 $120.8 $152.7 $152.6
Due after one year through five
years........................... 4.8 4.8 46.7 46.7
Due after five years through ten
years........................... 10.2 10.2 0.7 0.7
Due after ten years.............. 5.0 5.0 10.1 10.1
------ ------ ------ ------
140.8 140.8 210.2 210.1
Mortgage-backed securities....... 0.0 0.0 83.8 83.8
------ ------ ------ ------
Total debt securities.......... $140.8 $140.8 $294.0 $293.9
====== ====== ====== ======
</TABLE>
Certain of the above investments with maturities greater than one year are
classified as short-term and included in current assets as they represent
fiduciary investments that will be utilized during the normal operating cycle
of the business to pay premiums payable to insurance companies that are
included in current liabilities.
12. 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
F-29
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 foreign exchange contracts 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 December
31, 1995, was a liability of $0.7 million.
Foreign exchange options written by the Company are marked to market at each
balance sheet date and the resulting gain or loss is recorded as a component
of other operating expenses. Future cash requirements may exist if the option
is exercised by the holder. At December 31, 1995, the Company had $20 million
notional principal of written foreign exchange options outstanding. Based on
foreign exchange rates at December 31, 1995, the Company recognized a current
liability of $0.6 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 December 31, 1995, the Company had $69.9 million notional principal of
forward exchange contracts outstanding, primarily to exchange U.S. dollars
into U.K. pounds sterling, and $16.3 million notional principal outstanding,
primarily to exchange U.K. pounds sterling into U.S. dollars.
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. 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 December 31, 1995, an
unrealized gain of $1.1 million on interest rate swaps and forward rate
agreements which hedge existing fiduciary investments was reflected in
fiduciary cash and equivalents in the Consolidated Balance Sheet.
F-30
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1994, the Company has the following interest rate
swaps and forward rate agreements in effect, by year of final maturity:
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
NET WEIGHTED NET WEIGHTED
GROSS AVERAGE GROSS AVERAGE
RECEIVING INTEREST PAYING INTEREST
YEAR FIXED RATE FIXED RATE
---- --------- ------------ ------ ------------
<S> <C> <C> <C> <C>
1996........................... $390.3 7.38% $471.7 6.27%
1997........................... 203.2 6.68 40.0 5.90
1998........................... 182.9 7.08 -- --
------ ------
Total........................ $776.4 7.13% $511.7 6.24%
====== ==== ====== ====
AS OF DECEMBER 31, 1994
<CAPTION>
NET WEIGHTED NET WEIGHTED
GROSS AVERAGE GROSS AVERAGE
RECEIVING INTEREST PAYING INTEREST
YEAR FIXED RATE FIXED RATE
---- --------- ------------ ------ ------------
<S> <C> <C> <C> <C>
1995........................... $457.0 6.84% $257.0 6.83%
1996........................... 291.9 7.30 31.2 8.85
1997........................... 97.8 6.65 -- --
------ ------
Total........................ $846.7 6.98% $288.2 7.05%
====== ==== ====== ====
</TABLE>
The Company generally enters into interest rate swap agreements with a final
maturity of three years or less. The floating rate on these agreements is
generally based upon the six-month LIBOR rate on the relevant reset dates.
Forward rate agreements generally have a final maturity date that is less than
two years, and use six-month LIBOR as the floating rate index.
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. The Company recognized a current liability of $0.3 million
and $1.3 million, representing the estimated cost to settle these options at
December 31, 1995 and 1994, respectively. 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.
F-31
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1994, the Company had the following written
interest rate option agreements outstanding, by year of final maturity:
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
NET WEIGHTED NET WEIGHTED
GROSS AVERAGE GROSS AVERAGE
RECEIVING INTEREST PAYING INTEREST
YEAR FIXED RATE FIXED RATE
---- --------- ------------ ------ ------------
<S> <C> <C> <C> <C>
1996........................... $43.2 5.41% $10.0 4.60%
1997........................... 15.5 8.50 -- --
1998........................... 10.0 8.50 -- --
----- -----
Total........................ $68.7 6.54% $10.0 4.60%
===== ==== ===== ====
AS OF DECEMBER 31, 1994
<CAPTION>
NET WEIGHTED NET WEIGHTED
GROSS AVERAGE GROSS AVERAGE
RECEIVING INTEREST PAYING INTEREST
YEAR FIXED RATE FIXED RATE
---- --------- ------------ ------ ------------
<S> <C> <C> <C> <C>
1995........................... $15.6 5.27% $ -- --
1996........................... 43.4 5.42 10.0 4.60%
----- -----
Total........................ $59.0 5.38% $10.0 4.60%
===== ==== ===== ====
</TABLE>
The above financial instruments are purchased from large international banks
and financial institutions with strong credit ratings. Credit limits are
established based on such credit ratings and are monitored on a regular basis.
Management does not anticipate incurring any losses due to non-performance by
these institutions. In addition, the Company monitors the market risk
associated with these agreements by using probability analyses, external
pricing systems and information from banks and brokers.
The following methods and assumptions were used in estimating the fair value
of each class of financial instrument. The fair values of short-term and long-
term investments were estimated based upon quoted market prices for the same
or similar instruments. The fair value of long-term debt, including the
current portion, was estimated on the basis of market prices for similar
issues at current interest rates for the applicable period. The fair value of
interest rate swaps and forward rate agreements was estimated by discounting
the future cash flows using rates currently available for agreements of
similar terms and maturities. The fair value of foreign exchange forward
contracts and foreign exchange option agreements was estimated based upon
year-end exchange rates. The fair value of interest rate options was estimated
based upon market quotes of the cost to settle these agreements. The carrying
amounts of the Company's other financial instruments approximate fair value
due to their short-term maturities.
The following table presents the carrying amounts and the estimated fair
value of the Company's financial instruments that are not marked to market.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------
1995 1994
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Long-term debt, including current
portion......................... $135.6 $135.8 $149.8 $146.4
Interest rate swaps and forward
rate agreements................. -- 5.1 -- (5.4)
</TABLE>
F-32
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. COMMITMENTS
Lease Commitments
The Company leases property and equipment under noncancelable operating
lease agreements which expire at various dates.
Future minimum annual rentals under noncancelable operating leases,
excluding $18.6 million of future sublease rental income, which have been
translated at December 31, 1995 closing foreign exchange rates, are as
follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1996............................................................ $ 83.3
1997............................................................ 67.7
1998............................................................ 55.3
1999............................................................ 46.3
2000............................................................ 41.4
Thereafter...................................................... 192.2
------
Total minimum lease payments.................................. $486.2
======
</TABLE>
Rent expense for office space, which includes property taxes and certain
other costs, amounted to $83.9 million, $93.6 million and $92 million for the
years ended December 31, 1995, 1994, and 1993, respectively.
Other Commitments
At December 31, 1995, the Company had $76.4 million of letters of credit
outstanding which are required under certain agreements in the ordinary course
of business.
14. 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.
A claim asserting these allegations is pending in a suit filed in New York.
In an 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 certain of the plaintiffs for
contribution. Discovery in this case remains to be concluded and no trial date
has been set. 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 action.
F-33
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Certain other claims were resolved during 1995: (1) 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 totaling
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; and (2) In an Ohio action brought in 1985 (The Highway
Equipment Company, et al. v. Alexander Howden Limited, et al. (Case No. 1-
8501667, U.S. Bankruptcy Court, So. Dist. Ohio, Western Div.)), plaintiffs
sought compensatory and punitive damages, as well as treble damages under RICO
totaling $24 million. A directed verdict in the Company's favor was reaffirmed
on August 15, 1995 by the U.S. Court of Appeals for the Sixth Circuit.
These above 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.
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 commenced an action captioned Foster v. Alexander &
Alexander Services Inc., 91 Civ. 1179 (E.D.Pa.). 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 sought damages estimated at approximately $234 million.
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 paid $12 million in cash and issued a $35 million six-
year zero coupon note. In addition, in 1995 Shand 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 (Alexander & Alexander
Services Inc. and Alexander & Alexander Inc. v. Those Certain Underwriters at
Lloyd's of London, subscribing to insurance evidenced by policy numbers 879/P.
31356 and 879/P. 35349 and Assicurazioni Generali, S.P.A., No. 92 Civ. 6319
(F.D.N.Y.). All required documents in this case have been submitted to the
Court, and the Company is awaiting a decision on the matter.
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.
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. During 1995 most
of those claims have been resolved by a series of settlement agreements,
involving the settlement or
F-34
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 potential 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
expected to pay a contingent obligation of $4.5 million. In June 1995, the $14
million note payable was prepaid in whole. The remaining contingent note
payable of $4.5 million was paid in full in September 1995.
Notwithstanding these settlements, the limitation of certain contract
obligations and the restructuring of the parties' relationship, some of the
Company's indemnification provisions under the 1987 agreement are still in
effect. As a result, there remains the possibility of substantial exposure
under the indemnification provisions of the 1987 agreement, although the
Company, based on current facts and circumstances, believes the possibility of
a material loss resulting from these exposures is remote.
In November 1993, a class action suit was filed against the Company and two
of its then 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. In response to the second
amended complaint, the Company filed a motion to dismiss. A hearing on the
Company's motion to dismiss was held on January 26, 1996. On February 27, 1996
the Company's motion to dismiss was granted and plaintiff was denied leave to
replead. Plaintiff has until April 1, 1996 to appeal the verdict. Should
plaintiff appeal, management will vigorously defend the matter as management
believes there are valid defenses to the allegations set forth in the amended
complaint. The Company currently believes that this action is covered by the
Company's insurance program and that the reasonably possible loss that might
result, if any, would not be material to the Company's financial position or
results of operations.
These contingent liabilities involve significant amounts. While it is not
possible to predict with certainty the outcome of such contingent liabilities,
the applicability or availability of coverage for such matters under the
Company's professional indemnity insurance program, or their financial impact
on the Company, management currently believes that such impact will not be
material to the Company's financial position. However, it is possible that
future developments with respect to these matters could have a material effect
on future interim or annual results of operations.
Under the Series B Convertible Preferred Stock Purchase Agreement, as
amended, the Company has agreed to make certain payments to the purchaser
pursuant to indemnifications given with respect to tax payments and reserves
in excess of recorded tax reserves as of March 31, 1994. The Company's
potential exposures under the indemnification, individually or in the
aggregate, are limited to $10 million. 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.
F-35
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
15. BUSINESS SEGMENTS
Segment information is provided for the Company's two reportable industry
segments, Insurance Services and Human Resource Management Consulting.
Insurance Services operations include risk management and insurance
services, specialist insurance and reinsurance broking.
Human Resource Management Consulting includes a variety of human resource
management consulting services, including actuarial and benefit plan
consulting services, flexible compensation consulting, communications and
management consulting services, executive planning services and human resource
organizational analysis, as well as brokerage services for group health and
welfare coverages.
The following tables present information about the Company's operations by
business segment and geographical areas for each of the three years in the
period ended December 31, 1995:
BUSINESS SEGMENTS
<TABLE>
<CAPTION>
OPERATING OPERATING IDENTIFIABLE DEPRECIATION & CAPITAL
REVENUES INCOME(A) ASSETS AMORTIZATION EXPENDITURES
--------- --------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
1995
Insurance services...... $1,071.8 $143.4 $2,667.6 $39.4 $25.2
Human resource manage-
ment consulting........ 210.6 10.0 125.5 6.1 3.0
General corporate....... -- (30.7) 149.3 0.6 (0.5)
-------- ------ -------- ----- -----
$1,282.4 $122.7 $2,942.4 $46.1 $27.7
======== ====== ======== ===== =====
1994
Insurance services...... $1,113.2 $(12.2) $2,525.4 $44.7 $19.0
Human resource manage-
ment consulting........ 210.7 (19.1) 130.3 6.0 2.9
General corporate....... -- (51.6) 290.0 0.5 (0.4)
-------- ------ -------- ----- -----
$1,323.9 $(82.9) $2,945.7 $51.2 $21.5
======== ====== ======== ===== =====
1993
Insurance services...... $1,128.6 $ 92.9 $2,544.1 $48.3 $21.0
Human resource manage-
ment consulting........ 213.0 (7.5) 121.4 5.6 4.0
General corporate....... -- (33.1) 128.3 0.6 1.0
-------- ------ -------- ----- -----
$1,341.6 $ 52.3 $2,793.8 $54.5 $26.0
======== ====== ======== ===== =====
</TABLE>
- - --------
(a) Includes restructuring/special charges of $15.7 million and $56.3 million
for 1995 and 1994, respectively, in insurance services, $1.4 million and
$8.3 million for 1995 and 1994, respectively, in human resource management
consulting and $0.5 million and $4.4 million for 1995 and 1994,
respectively, in general corporate as described in Note 3 of Notes to
Financial Statements.
F-36
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
GEOGRAPHICAL AREAS
<TABLE>
<CAPTION>
OPERATING OPERATING IDENTIFIABLE
REVENUES INCOME(A)(B) ASSETS
--------- ------------ ------------
<S> <C> <C> <C>
1995
United States.............................. $ 608.2 $ 36.1 $ 895.5
United Kingdom............................. 317.5 55.1 1,092.3
Canada, principally Reed Stenhouse Cos.
Ltd....................................... 121.2 21.7 201.2
Other countries............................ 235.5 40.5 604.1
General corporate.......................... -- (30.7) 149.3
-------- ------ --------
$1,282.4 $122.7 $2,942.4
======== ====== ========
1994
United States.............................. $ 685.4 $(78.8) $ 904.2
United Kingdom............................. 312.5 19.4 1,065.8
Canada, principally Reed Stenhouse Cos.
Ltd....................................... 118.9 10.0 191.0
Other countries............................ 207.1 18.1 494.7
General corporate.......................... -- (51.6) 290.0
-------- ------ --------
$1,323.9 $(82.9) $2,945.7
======== ====== ========
1993
United States.............................. $ 727.1 $(11.8) $1,029.2
United Kingdom............................. 315.5 64.1 987.8
Canada, principally Reed Stenhouse Cos.
Ltd....................................... 120.9 13.0 208.1
Other countries............................ 178.1 20.1 440.4
General corporate.......................... -- (33.1) 128.3
-------- ------ --------
$1,341.6 $ 52.3 $2,793.8
======== ====== ========
</TABLE>
- - --------
(a) The 1995 special charges referred to in Note 3 of Notes to Financial
Statements have been allocated to their respective geographical areas in
1995, including $16 million in the U.S., $1 million in the U.K., $0.1
million in other countries and $0.5 million in general corporate.
(b) The 1994 restructuring charges referred to in Note 3 of Notes to Financial
Statements have been allocated to their respective geographical areas in
1994, including $31.8 million in the U.S., $21.9 million in the U.K., $4
million in Canada, $6.9 million in Other Countries and $4.4 million in
general corporate.
F-37
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for 1995 and 1994 are summarized below (in
millions, except per share data).
<TABLE>
<CAPTION>
INCOME (LOSS)
FROM
OPERATING OPERATING CONTINUING NET
REVENUES INCOME (LOSS) OPERATIONS INCOME (LOSS)
--------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
1995
1st........................ $ 324.2 $ 41.7 $ 41.7 $ 41.7
2nd........................ 328.1 39.2 22.7 22.7
3rd........................ 299.7 27.6 17.5 17.5
4th........................ 330.4 14.2 7.5 7.5 (a)
-------- ------ ------- -------
Year....................... $1,282.4 $122.7 $ 89.4 $ 89.4
-------- ------ ------- -------
1994
1st........................ $ 323.0 $ 5.2 $ (1.8) $ (4.4)
2nd........................ 335.1 14.6 3.8 (2.2)(b)
3rd........................ 332.6 4.2 0.1 (20.8)(c)
4th........................ 333.2 (106.9) (109.3) (111.3)(d)
-------- ------ ------- -------
Year....................... $1,323.9 $(82.9) $(107.2) $(138.7)
======== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
INCOME (LOSS)
FROM FULLY DILUTED
PER SHARE OF CONTINUING PRIMARY NET NET
COMMON STOCK OPERATIONS EARNINGS (LOSS) EARNINGS (LOSS) DIVIDENDS HIGH LOW
- - ------------ ------------- --------------- --------------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
1995
1st..................... $ .80 $ .80 $ .69 $.025 $23 3/4 $18 1/2
2nd..................... .37 .37 .36 .025 26 7/16 22 1/8
3rd..................... .25 .25 .25 .025 25 1/2 22 3/8
4th..................... .02 .02 (a) .02 .025 24 3/8 18 5/8
------ ------ ------ -----
Year $ 1.44 $ 1.44 $ 1.42 (e) $.100
------ ------ ------ -----
1994
1st..................... $ (.09) $ (.15) $ (.15) $.250 $22 3/4 $17 1/4
2nd..................... .04 (.10)(b) (.10) .025 18 1/8 14
3rd..................... (.11) (.58)(c) (.58) .025 20 7/8 16
4th..................... (2.61) (2.66)(d) (2.66) .025 21 1/2 18 1/2
------ ------ ------ -----
Year.................... $(2.79)(e) $(3.51)(e) $(3.51)(e) $.325
====== ====== ====== =====
</TABLE>
- - --------
(a) Includes a charge of $17.6 million ($11.2 million after-tax or $0.25 per
share) for restructuring and other special charges related primarily to
the acquisition of certain U.S. operations from Jardine Insurance Brokers,
Inc. (see Note 3 of Notes to Financial Statements).
(b) Includes a charge of $6 million, or $.14 per share, relating to the
Company's discontinued operations (see Note 6 of Notes to Financial
Statements).
(c) Includes a loss from discontinued operations of $20.9 million, or $.47 per
share, relating to an agreement in principle to resolve certain indemnity
obligations to Sphere Drake (see Note 6 of Notes to Financial Statements).
(d) Includes charges of $163.6 million ($106.6 million after-tax or $2.43 per
share) for restructuring, contingency settlements and other reserves.
(e) Full year earnings per share amounts do not equal the sum of the quarterly
amounts due to changes in weighted average shares during the periods.
F-38
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
17. SUBSEQUENT EVENTS (UNAUDITED)
On December 11, 1996, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Aon Corporation ("Aon"). The Merger
Agreement provides for the acquisition, subject to the terms and conditions
thereof, of the Company by Aon. As contemplated by the Merger Agreement, on
December 16, 1996, Aon launched a cash tender offer for all of the Company's
common stock and the associated preferred stock purchase rights of the
Company. In addition, Aon has entered into a stock purchase agreement with
American International Group, Inc. ("AIG"), pursuant to which Aon has agreed
to purchase the Company's 8% Series B Cumulative Convertible Preferred Stock
owned by AIG or its subsidiaries.
Pursuant to the terms of the Merger Agreement, on December 16, 1996, Aon
commenced its tender offer to purchase all the outstanding shares of Company
stock at $17.50 per share. The tender offer expired on January 14, 1997, at
which time 44,293,552 shares, or approximately 97%, of the Common Stock had
been validly tendered and accepted for payment.
In connection with the acquisition of the Company by Aon, the Company will
incur in 1996 significant expenses relating to the change of control,
primarily due to the accelerated vesting of certain employee stock-based
compensation and option plans, as well as the transaction costs.
In addition, in 1997, the Company and/or its successors is expected to incur
significant severance and other related costs associated with the transaction.
F-39
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1996 1995 1996 1995
------ ------ ------ ------
(IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Commissions and fees........................... $301.6 $283.7 $920.6 $903.4
Fiduciary investment income.................... 16.3 16.0 46.8 48.6
------ ------ ------ ------
Total........................................ 317.9 299.7 967.4 952.0
------ ------ ------ ------
OPERATING EXPENSES:
Salaries and benefits.......................... 191.6 175.4 566.6 543.9
Other.......................................... 104.6 96.7 312.5 299.6
------ ------ ------ ------
Total........................................ 296.2 272.1 879.1 843.5
------ ------ ------ ------
Operating income............................... 21.7 27.6 88.3 108.5
------ ------ ------ ------
OTHER INCOME (EXPENSES):
Investment income.............................. 3.5 4.6 10.6 13.9
Interest expense............................... (3.9) (4.6) (11.8) (14.1)
Other.......................................... 1.1 1.2 0.6 34.0
------ ------ ------ ------
Total........................................ 0.7 1.2 (0.6) 33.8
------ ------ ------ ------
Income before income taxes and minority inter-
est........................................... 22.4 28.8 87.7 142.3
Income taxes................................... (9.0) (11.0) (35.0) (54.7)
------ ------ ------ ------
Income before minority interest................ 13.4 17.8 52.7 87.6
Minority interest.............................. (0.3) (0.3) (5.0) (5.7)
------ ------ ------ ------
Net income..................................... 13.1 17.5 47.7 81.9
Preferred stock dividends...................... (6.7) (6.4) (19.9) (18.9)
------ ------ ------ ------
Earnings attributable to common shareholders... $ 6.4 $ 11.1 $ 27.8 $ 63.0
====== ====== ====== ======
PER SHARE INFORMATION:
Primary earnings per share..................... $ 0.14 $ 0.25 $ 0.62 $ 1.42
====== ====== ====== ======
Average common and common equivalent shares
outstanding................................... 45.3 44.6 45.1 44.5
====== ====== ====== ======
Fully diluted earnings per share............... $ 0.14 $ 0.25 $ 0.62 $ 1.33
====== ====== ====== ======
Average common shares outstanding, assuming
full dilution................................. 45.3 44.6 45.1 57.1
====== ====== ====== ======
Cash dividends per common share................ $0.025 $0.025 $0.075 $0.075
====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(IN MILLIONS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents:
Operating......................................... $ 232.0 $ 241.2
Fiduciary......................................... 526.2 496.4
Short-term investments:
Operating......................................... 21.1 11.3
Fiduciary......................................... 265.0 224.9
Premiums and fees receivable (less allowance for
doubtful accounts of $20.6 in 1996 and $20.5 in
1995)............................................. 1,200.7 1,292.8
Deferred income taxes.............................. 16.8 20.0
Other current assets............................... 74.1 85.4
-------- --------
Total current assets............................ 2,335.9 2,372.0
Property and equipment--net........................ 120.4 126.4
Intangible assets--net............................. 221.2 210.7
Deferred income taxes.............................. 103.6 102.1
Long-term operating investments.................... 21.4 30.9
Other.............................................. 119.5 100.3
-------- --------
$2,922.0 $2,942.4
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Premiums payable to insurance companies............ $1,775.9 $1,810.4
Short-term debt.................................... 13.8 19.1
Current portion of long-term debt.................. 7.7 9.3
Deferred income taxes.............................. 8.8 9.4
Accrued compensation and related benefits.......... 56.1 81.8
Income taxes payable............................... 34.6 24.7
Other accrued expenses............................. 130.6 165.8
-------- --------
Total current liabilities....................... 2,027.5 2,120.5
-------- --------
LONG-TERM LIABILITIES:
Long-term debt..................................... 142.4 126.2
Deferred income taxes.............................. 18.9 15.6
Net liabilities of discontinued operations......... 27.0 33.4
Other.............................................. 243.7 234.1
-------- --------
Total long-term liabilities..................... 432.0 409.3
-------- --------
Commitments and contingent liabilities (Notes 3, 6
and 9)
8% Series B cumulative convertible preferred stock
contingency (Note 9).............................. 0.0 10.0
STOCKHOLDERS' EQUITY:
Preferred stock, authorized 15,000,000 shares, $1
par value:
Series A junior participating preferred stock,
issued and outstanding, none..................... -- --
$3.625 Series A convertible preferred stock, issued
and outstanding, 2,300,000 shares, liquidation
preference of $115 million........................ 2.3 2.3
8% Series B cumulative convertible preferred stock,
issued and outstanding, 4,751,208 and 4,477,170
shares, respectively, liquidation preference of
$238 million and $224 million, respectively....... 4.8 4.5
Common stock, authorized 200,000,000 shares, $1 par
value; issued and outstanding 43,005,799 and
42,259,282 shares, respectively................... 43.0 42.3
Class A common stock, authorized 26,000,000 shares,
$.00001 par value; issued and outstanding
1,811,121 and 1,920,821 shares, respectively...... -- --
Class C common stock, authorized 11,000,000 shares,
$1 par value; issued and outstanding 350,003 and
361,092 shares, respectively...................... 0.4 0.4
Class D common stock, authorized 40,000,000 shares,
$1 par value; issued and outstanding, none........ -- --
Paid-in capital.................................... 666.7 638.1
Accumulated deficit................................ (203.1) (227.5)
Net unrealized investment gains--net of income tax-
es................................................ 6.7 5.6
Accumulated translation adjustments................ (58.3) (63.1)
-------- --------
Total stockholders' equity...................... 462.5 402.6
-------- --------
$2,922.0 $2,942.4
======== ========
</TABLE>
See accompanying notes to financial statements.
F-41
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
CASH PROVIDED (USED) BY:
OPERATING ACTIVITIES:
Income from continuing operations............................. $ 47.7 $ 81.9
Adjustments to reconcile to net cash provided by operating ac-
tivities:
Depreciation and amortization................................ 36.9 33.3
Deferred income taxes........................................ 5.7 28.9
Gains on dispositions of subsidiaries and other assets....... -- (30.4)
Other........................................................ 10.3 7.8
Changes in assets and liabilities (net of effects from acqui-
sitions and dispositions):
Net fiduciary cash and cash equivalents and short-term in-
vestments................................................... (65.4) (44.7)
Premiums and fees receivable................................. 106.5 38.2
Prepaid expenses and other current assets.................... 17.3 (8.4)
Other non-current assets..................................... (15.2) (13.2)
Premiums payable to insurance companies...................... (53.1) (10.1)
Other accrued expenses....................................... (67.5) (104.2)
Other long-term liabilities.................................. 15.7 (8.5)
Discontinued operations (net)................................. (10.4) (12.8)
------ ------
Net cash provided (used) by operating activities........... 28.5 (42.2)
------ ------
INVESTING ACTIVITIES:
Net purchases of property and equipment....................... (18.6) (15.1)
Purchases of businesses....................................... (22.8) (2.8)
Proceeds from sales of subsidiaries and other assets.......... 0.7 88.1
Purchases of operating investments............................ (26.0) (180.2)
Sales and maturities of operating investments................. 27.8 196.1
------ ------
Net cash provided (used) by investing activities........... (38.9) 86.1
------ ------
FINANCING ACTIVITIES:
Cash dividends................................................ (9.6) (9.6)
Proceeds from issuance of short-term debt..................... 12.0 0.2
Repayments of short-term debt................................. (15.2) (0.4)
Proceeds from issuance of long-term debt...................... 30.1 4.6
Repayments of long-term debt.................................. (18.9) (35.1)
Issuance of common stock...................................... 1.2 0.1
------ ------
Net cash used by financing activities......................... (0.4) (40.2)
------ ------
Effect of exchange rate changes on operating cash and cash
equivalents.................................................. 1.6 2.4
Operating cash and cash equivalents at beginning of year...... 241.2 248.7
------ ------
Operating cash and cash equivalents at end of period.......... $232.0 $254.8
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest..................................................... $ 14.7 $ 13.9
Income taxes................................................. 14.0 67.5
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Notes payable issued for contingency settlements.............. $ -- $ 45.7
Series B cumulative convertible preferred stock dividends-in-
kind......................................................... 13.7 12.6
Common stock issued for employee benefit and stock plans...... 4.5 3.6
Common stock issued for non-employee stock plans.............. 0.2 0.4
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
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. In the opinion of the management of the Company, all adjustments,
consisting only of normal recurring accruals, necessary for a fair
presentation have been included in the consolidated financial statements. The
results of operations for the first nine months of the year are not
necessarily indicative of results for the year.
These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes
thereto included in the Company's 1995 Annual Report to Shareholders.
2. ACQUISITIONS AND DISPOSITIONS
Acquisitions
In the first nine months of 1996, the Company acquired in transactions
accounted for as purchases, or invested in ten brokerage and consulting
operations, primarily in the Asia/Pacific region, for combined purchase prices
approximating $27.5 million. The Company paid a total of $21.9 million at
closing for these acquisitions. These acquisitions produced approximately $30
million in annualized revenues.
In October 1996, the Company acquired a European retail broking operation
for a purchase price not to exceed $5.3 million of which $3.3 million was paid
at closing.
Dispositions
On February 28, 1995, the Company completed the sale of Alexsis Inc., its
U.S.-based third party claims administrator for total cash proceeds of $47.1
million resulting in a pre-tax gain of $30.3 million, ($20.8 million after-tax
or $0.47 per share). Adjustments, including post closing adjustments pursuant
to the agreement, resulted in a final reported pre-tax gain of $28.7 million,
($18.7 million after-tax or $0.42 per share) for the year ended December 31,
1995.
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.
3. INCOME TAXES
On August 6, 1996, the Company received a technical advice memorandum
("TAM"), issued by the IRS National Office, favorable to the Company with
respect to the federal income tax consequences of certain 1991 intercompany
transactions involving the stock of a U.K. subsidiary. The IRS District
Director's Office subsequently adopted the TAM and withdrew its proposal to
increase taxable income for the year 1991 with respect to this issue. The
examination of the 1990 and 1991 federal income tax returns will come to a
conclusion with the disposition of this issue.
Based upon the favorable TAM relating to the 1991 transactions, the Company
does not expect IRS examiners to take issue with the Company's reporting of a
similar series of transactions that occurred in 1993. The IRS commenced its
examination of the tax years 1992 through 1994 in July 1996. The potential tax
liability, excluding interest and penalties, associated with the 1993
transactions had been estimated by the Company at $25 million.
F-43
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
UNAUDITED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
No provision for any potential liability with respect to the 1991 and 1993
transactions had been made in the consolidated financial statements.
The Company believes that its current tax reserves are adequate to cover its
tax liabilities.
4. EMPLOYEES' RETIREMENT PLANS AND BENEFITS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation". The Company has elected to continue to measure compensation
costs using APB Opinion No. 25 and accordingly will provide the pro-forma
disclosures required by SFAS No. 123 in its Annual Report on Form 10-K for the
year ended December 31, 1996.
5. STOCK OPTION AND INCENTIVE PLANS
Worldwide Employee Savings-Related Stock Purchase Plan
The Company's Worldwide Employee Savings-Related Stock Purchase Plan
(Worldwide Employee Purchase Plan) was approved by the Board of Directors and
became effective as of May 16, 1996. Under the Worldwide Employee Purchase
Plan eligible employees outside the U.S. may purchase up to an aggregate
750,000 shares of the Company's Common Stock. At the end of the 5-year
offering period, participants can elect to purchase from the contributions
saved, shares of the Company's Common Stock at a 15 percent discount of the
closing price of the Common Stock reported on the New York Stock Exchange on
the first date of the 5-year offering period. 471,000 shares have been
subscribed to as of September 30, 1996. Non-U.S. employees who are "executive
officers" of the Company, as that term is defined pursuant to Section 16 of
the Securities Exchange Act of 1934, participate in a subplan of the Employee
Discount Stock Purchase Plan with similar terms.
1995 Long-Term Incentive Plan Amendment
On May 16, 1996 an amendment to the 1995 Long-Term Incentive Plan (1995
LTIP) was approved by stockholders. The 1995 LTIP provided that no more than
940,000 restricted shares may be used for Restricted Stock Awards and Bonus
Equity Plan Awards (BEP). The amendment excludes BEP Awards from the 940,000
restricted share limitation, but does not increase the number of shares
authorized under the 1995 LTIP.
6. 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
Limited (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.
F-44
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
UNAUDITED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of the net liabilities of discontinued operations is as follows:
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Liabilities:
Insurance liabilities....................... $252.4 $257.1
Other....................................... 15.1 14.9
------ ------
Total liabilities....................... 267.5 272.0
------ ------
Assets:
Recoverable under finite risk contracts:
Insurance liabilities..................... 129.4 126.4
Premium adjustment........................ 9.7 9.8
Reinsurance recoverables.................... 52.6 51.6
Cash and investments........................ 29.7 27.2
Other....................................... 8.8 9.3
------ ------
Total assets............................ 230.2 224.3
------ ------
Total net liabilities of discontinued opera-
tions........................................ 37.3 47.7
Less current portion classified as other ac-
crued expenses............................... 10.3 14.3
------ ------
Remainder classified as net liabilities of
discontinued operations...................... $ 27.0 $ 33.4
====== ======
</TABLE>
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
clean-up (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 relevant industry 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 insurance pool 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 September 30,
1996, based on an estimate by an independent actuarial firm, the Company had
accrued $12.9 million of the deductible.
F-45
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
UNAUDITED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On July 1, 1994, the Company entered into an insurance-based financing
contract (finite risk contract) with the reinsurance company providing
protection primarily for exposures relating to Orion, Syndicate 701 and Swann
& Everett. The contract provided for the payment by the Company of $80
million, $50 million of which was borrowed from 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 September 30, 1996, recoveries were
limited to $120.8 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, all of
which are under the Company's control, to terminate that contract.
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.
Changes in the total net liabilities of discontinued operations for the nine
months ended September 30, 1996 are as follows:
<TABLE>
<S> <C>
Beginning balance.................................................. $47.7
Claims and expense payments...................................... (10.4)
-----
Ending Balance..................................................... $37.3
=====
</TABLE>
While the insurance liabilities set forth above represent the Company's best
estimate of the probable liabilities within a range of independent actuarial
estimates of reasonably probable loss amounts, there is no assurance that
further adverse developments may not occur due to variables inherent in the
estimation processes and other matters described above. Based on independent
actuarial estimates of a range of reasonably possible loss amounts,
liabilities could exceed recorded amounts by approximately $165 million.
However, in the event of such adverse developments, based on independent
actuarial estimates of pay-out patterns, up to approximately $125 million of
this excess would be recoverable under the finite risk contracts.
The Company believes that, based on current estimates, the established total
net liabilities of discontinued operations are sufficient to cover its
exposures.
7. INVESTMENTS
At September 30, 1996, net unrealized holding gains totaled $6.7 million,
net of deferred income taxes of $2.4 million, and are reported as a separate
component of Stockholders' Equity.
F-46
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
UNAUDITED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At September 30, 1996 and December 31, 1995, the amortized cost and
estimated fair value of the Company's debt and equity securities and related
financial instruments used to hedge such investments are summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government agencies/state
issuances.................... $ -- $-- $ -- $ --
Other interest-bearing securi-
ties......................... 138.1 -- -- 138.1
Mortgage-backed securities.... 5.7 -- -- 5.7
Equity securities............. 4.7 8.7 -- 13.4
Financial instruments--used as
hedges....................... -- 0.9 (0.5) 0.4
------ ---- ----- ------
Total..................... $148.5 $9.6 $(0.5) $157.6
====== ==== ===== ======
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government agencies/state
issuances.................... $ 2.7 $-- $ -- $ 2.7
Other interest-bearing
securities................... 138.1 -- -- 138.1
Equity securities............. 3.1 6.5 -- 9.6
Financial instruments--used as
hedges....................... -- 1.3 (0.2) 1.1
------ ---- ----- ------
Total..................... $143.9 $7.8 $(0.2) $151.5
====== ==== ===== ======
</TABLE>
The above debt and equity securities and financial instruments used as
hedges are classified in the Consolidated Balance Sheets as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Cash and cash equivalents:
Operating.................................... $ 41.7 $ 34.1
Fiduciary.................................... 93.2 73.1
Short-term investments:
Operating.................................... 0.7 0.3
Fiduciary.................................... 2.3 18.8
Long-term operating investments................ 19.7 25.2
------ ------
Total...................................... $157.6 $151.5
====== ======
</TABLE>
F-47
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
UNAUDITED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At September 30, 1996 and December 31, 1995, the amortized cost and
estimated fair value of debt securities by contractual maturity are summarized
below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less............................... $137.8 $137.8
Due after one year through five years................. 0.2 0.2
Due after five years through ten years................ 0.1 0.1
Due after ten years................................... -- --
------ ------
138.1 138.1
Mortgage-backed securities............................ 5.7 5.7
------ ------
Total debt securities............................. $143.8 $143.8
====== ======
<CAPTION>
DECEMBER 31, 1995
-------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less............................... $120.8 $120.8
Due after one year through five years................. 4.8 4.8
Due after five years through ten years................ 10.2 10.2
Due after ten years................................... 5.0 5.0
------ ------
140.8 140.8
Mortgage-backed securities............................ -- --
------ ------
Total debt securities............................. $140.8 $140.8
====== ======
</TABLE>
Certain of the above investments with maturities greater than one year are
classified as short-term and included in current assets as they represent
fiduciary investments that will be utilized during the normal operating cycle
of the business to pay premiums payable to insurance companies that are
included in current liabilities.
8. DEBT
The Company has a $200 million three year credit facility with various
banks, which expires in March 1998. The agreement provides for unsecured
borrowings and for the issuance of up to $100 million of letters of credit,
and contains various covenants, including minimum consolidated net worth,
maximum leverage and minimum cash flow requirements. Interest rates charged on
amounts drawn on this credit agreement are dependent upon the Company's credit
ratings, the duration of the borrowings and the Company's choice of one of a
number of indices, including the prime lending rate, certificate of deposit
rates, the federal funds rate and LIBOR.
In August 1996, the Company obtained two short-term bank loans totaling $7
million. The proceeds from these loans were used to reduce the amount
outstanding under the agreement. As of September 30, 1996, $50 million of
unsecured borrowings were outstanding. During the first quarter of 1996, a $10
million letter of credit was issued, and, in July 1996, the $10 million letter
of credit was cancelled.
In March 1996, the Company obtained a $10 million, short term bank loan
which was subsequently repaid in April 1996.
F-48
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
UNAUDITED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As part of the October 1995 agreement for the purchase of JIB, the Company
paid a promissory note totaling $10.6 million in April, 1996. During the
second quarter of 1996, the October 1996 promissory note was revalued to $6
million in accordance with the revenue retention criteria for the former JIB
offices stipulated in the purchase agreement.
In April 1996, the Company paid the first installment of $5.8 million on the
Mutual Fire zero-coupon note. (See Note 9 of the Unaudited Notes to Financial
Statements).
In May 1996, the Company issued a $2.7 million, 9 percent two year note,
relating to an acquisition in the Asia-Pacific region. This note is contingent
upon future results of the acquired business. (See Note 2 of the Unaudited
Notes to Financial Statements.)
9. 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 were 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. The remaining claim asserting these allegations is
pending in a suit filed in New York. In an 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 certain of
the plaintiffs for contribution. Discovery in this case remains to be
concluded and no trial date has been set. 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 action.
This action is 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 this action, if any, would not
be material to the Company's financial position or results of operations.
In 1987, the Company sold Shand Morahan & Company (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 Marine & Inland
Insurance Company (Mutual Fire). Mutual Fire was placed in rehabilitation by
the Courts of the Commonwealth of Pennsylvania in December 1986. In February
1991, the rehabilitator commenced an action captioned Foster v. Alexander &
Alexander Services Inc., 91 Civ. 1179 (E.D.Pa.). 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 sought damages estimated at approximately $234 million.
On March 27, 1995, the Company, Shand and the rehabilitator entered into a
settlement agreement which was 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 and issued a $35 million six-year zero-coupon note.
In addition, in 1995 Shand returned $4.6 million of trusteed assets to the
rehabilitator and the rehabilitator has eliminated any right of set-offs
previously
F-49
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
UNAUDITED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
In April 1996 the Company paid the first installment on the zero-coupon note
in the amount of $5.8 million.
Although the Company's professional liability underwriters have denied
coverage for the Mutual Fire lawsuit, the Company has instituted a declaratory
judgment action attempting to validate coverage (Alexander & Alexander
Services Inc. and Alexander & Alexander Inc. v. Those Certain Underwriters at
Lloyd's of London, subscribing to insurance evidence by policy numbers 879/P.
31356 and 879/P. 35349 and Assicurazioni Generali, S.P.A., No. 92 Civ. 6319
(F.D.N.Y.)). On October 16, 1996, the Court issued a decision holding that the
Company is not entitled to coverage for the rehabilitator's claims. The
Company plans to appeal the ruling.
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.
Starting in late 1992, the purchaser of Shand has asserted a number of
claims under both the Mutual Fire indemnification provision and the errors and
omissions indemnification provision of the sales agreement. During 1995, most
of those claims have been resolved by a series of settlement agreements,
involving the settlement or release of (a) claims relating to reinsurance
recoverables due to Shand's subsidiaries from Mutual Fire, (b) claims relating
to deterioration of reserves for business written by Mutual Fire and ceded to
Shand's subsidiaries, and (c) a number of potential errors and omissions
claims by third-party reinsurers against Shand. Under the settlement agreement
entered into in January 1995, covering the errors and omissions claims by
third-party reinsurers, the Company obtained a release and limitation of
indemnification obligations relating to certain third-party errors and
omissions claims, and restructured the contractual relationship with the
purchaser so that the parties' future interests as to third-party claims are
more closely aligned. The Company paid $14 million in cash, issued a five-year
interest bearing note in the principal amount of $14 million and expected to
pay a contingent obligation of $4.5 million. In June 1995, the $14 million
note payable was prepaid in whole. The remaining contingent note payable of
$4.5 million was paid in full in September 1995.
Notwithstanding these settlements, the limitation of certain contract
obligations and the restructuring of the parties' relationship, some of the
Company's indemnification provisions under the 1987 agreement are still in
effect. As a result there remains the possibility of substantial exposure
under the indemnification provisions of the 1987 agreement, although the
Company, based on current facts and circumstances, believes the possibility of
a material loss resulting from these exposures is remote.
In November 1993, a class action suit was filed against the Company and two
of its then 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 purported 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 sought 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.
F-50
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
UNAUDITED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In response to the second amended complaint, the Company filed a motion to
dismiss. On March 4, 1996, the Court entered an order granting the Company's
motion to dismiss the action and plaintiff was denied leave to replead.
Following plaintiff's filing a notice of appeal, the parties entered into a
stipulation withdrawing the appeal, which was entered by the court on June 17,
1996, thereby terminating the litigation.
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 Series B Convertible Preferred Stock Purchase Agreement, as
amended, the Company had agreed to make certain payments to the purchaser
pursuant to indemnifications given with respect to tax payments and reserves
in excess of recorded tax reserves as of March 31, 1994. The Company's
potential exposures under the indemnification, individually or in the
aggregate, were limited to $10 million. As a result of the IRS decision
discussed in Note 3, the Company's Series B Convertible Preferred Stock
purchase agreement has been amended to terminate contingent payment
obligations for all remaining indemnifications given by the Company with
respect to tax payments and reserves for contingent liabilities. Accordingly,
the Company increased shareholder equity by $10 million by reclassifying
proceeds from the issuance of the Series B stock.
10. 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 with settlements 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 foreign exchange forward contracts 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 forward
contracts at September 30, 1996 was an asset of $1.4 million and a liability
of $0.1 million as of December 31, 1995.
At September 30, 1996 and December 31, 1995, the Company had $87.1 million
and $69.9 million, respectively, notional principal of forward exchange
contracts outstanding, primarily to exchange U.S. dollars into U.K. pounds
sterling, and $34.5 million and $16.3 million, respectively, notional
principal outstanding, primarily to exchange U.K. pounds sterling into U.S.
dollars.
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 September 30, 1996, the Company had $20 million
notional
F-51
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
UNAUDITED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
principal of written foreign exchange options outstanding. Based on foreign
exchange rates at September 30, 1996 and December 31, 1995, the Company
recognized a current liability of $0.5 million and $0.6 million, respectively,
consisting of unamortized premiums and the estimated cost to settle these
options on those dates.
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. 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 held as
investments by the Company are marked to market in accordance with SFAS No.
115 and are recorded as a separate component of stockholders' equity, net of
taxes. At September 30, 1996, an unrealized gain of $0.3 million on interest
rate swaps and forward rate agreements which hedge existing fiduciary
investments was reflected in fiduciary cash and equivalents in the
Consolidated Balance Sheet.
At September 30, 1996 and December 31, 1995 the Company had the following
interest rate swaps and forward rate agreements in effect, by year of final
maturity:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------------------
NET WEIGHTED NET WEIGHTED
GROSS AVERAGE GROSS AVERAGE
RECEIVING INTEREST PAYING INTEREST
YEAR FIXED RATE FIXED RATE
---- --------- ------------ ------ ------------
<S> <C> <C> <C> <C>
1996........................... $ 112.8 6.05% $100.6 5.71%
1997........................... 612.0 6.57 156.3 6.12
1998........................... 249.4 6.97 10.0 6.80
1999........................... 101.3 6.73 -- --
-------- ---- ------ ----
Total........................ $1,075.5 6.63% $266.9 5.99%
======== ==== ====== ====
<CAPTION>
DECEMBER 31, 1995
------------------------------------------
NET WEIGHTED NET WEIGHTED
GROSS AVERAGE GROSS AVERAGE
RECEIVING INTEREST PAYING INTEREST
YEAR FIXED RATE FIXED RATE
---- --------- ------------ ------ ------------
<S> <C> <C> <C> <C>
1996........................... $ 390.3 7.38% $471.7 6.27%
1997........................... 203.2 6.68 40.0 5.90
1998........................... 182.9 7.08 -- --
-------- ---- ------ ----
Total........................ $ 776.4 7.13% $511.7 6.24%
======== ==== ====== ====
</TABLE>
The Company generally enters into interest rate swap agreements with a final
maturity of three years or less. The floating rate on these agreements is
generally based upon the six-month LIBOR rate on the relevant reset dates.
Forward rate agreements generally have a final maturity date that is less than
two years, and use six-month LIBOR as the floating rate index.
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
F-52
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
UNAUDITED NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
recognized as a reduction to fiduciary investment income in the period when
such changes in market value occur. The Company recognized a current liability
of $0.5 million and $0.3 million, representing the estimated cost to settle
these options at September 30, 1996 and December 31, 1995, respectively. The
estimated cost to settle these agreements was determined by obtaining quotes
from banks and other financial institutions which make a market in these
instruments.
At September 30, 1996 and December 31, 1995, the Company had the following
written interest rate option agreements outstanding, by year of final
maturity:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------------------------
NET WEIGHTED NET WEIGHTED
GROSS AVERAGE GROSS AVERAGE
RECEIVING INTEREST PAYING INTEREST
YEAR FIXED RATE FIXED RATE
---- --------- ------------ ------ ------------
<S> <C> <C> <C> <C>
1996........................... $ 7.8 6.00% $ -- -- %
1997........................... 55.6 6.17 -- --
1998........................... 61.3 7.05 -- --
------ ---- ----- ----
Total........................ $124.7 6.59% $ -- -- %
====== ==== ===== ====
<CAPTION>
DECEMBER 31, 1995
------------------------------------------
NET WEIGHTED NET WEIGHTED
GROSS AVERAGE GROSS AVERAGE
RECEIVING INTEREST PAYING INTEREST
YEAR FIXED RATE FIXED RATE
---- --------- ------------ ------ ------------
<S> <C> <C> <C> <C>
1996........................... $ 43.2 5.41% $10.0 4.60%
1997........................... 15.5 8.50 -- --
1998........................... 10.0 8.50 -- --
------ ---- ----- ----
Total........................ $ 68.7 6.54% $10.0 4.60%
====== ==== ===== ====
</TABLE>
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
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.
F-53
<PAGE>
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES
UNAUDITED NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
The following table presents the carrying amounts and the estimated fair
value of the Company's financial instruments that are not carried at fair
value.
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Long-term debt, including current
portion......................... $150.1 $148.1 $135.6 $135.8
Interest rate swaps and forward
rate agreements................. -- 2.2 -- 5.1
</TABLE>
F-54
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF MERGER
AMONG
AON CORPORATION,
SUBSIDIARY CORPORATION, INC.
AND
ALEXANDER & ALEXANDER SERVICES INC.
DATED AS OF DECEMBER 11, 1996
AND AMENDED AS OF
JANUARY 7, 1997
COMPOSITE CONFORMED
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
THE OFFER
<TABLE>
<C> <S> <C>
SECTION 1.1 The Offer..................................................... 1
SECTION 1.2 Company Actions............................................... 2
SECTION 1.3 Reed Stenhouse Companies Limited.............................. 3
SECTION 1.4 Alexander & Alexander Services UK plc......................... 4
SECTION 1.5 MJDS.......................................................... 4
ARTICLE II
THE MERGER
SECTION 2.1 The Merger.................................................... 5
SECTION 2.2 Closing....................................................... 5
SECTION 2.3 Effective Time................................................ 5
SECTION 2.4 Effects of the Merger......................................... 5
SECTION 2.5 Charter and By-laws; Officers and Directors................... 5
ARTICLE III
EFFECT OF THE MERGER ON THE STOCK OF THE
CONSTITUENT CORPORATIONS; SURRENDER OF CERTIFICATES
SECTION 3.1 Effect on Stock............................................... 5
SECTION 3.2 Surrender of Certificates..................................... 6
</TABLE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
<TABLE>
<C> <S> <C>
SECTION 4.1 Organization................................................. 8
SECTION 4.2 Subsidiaries................................................. 8
SECTION 4.3 Capital Structure............................................ 8
SECTION 4.4 Authority.................................................... 9
SECTION 4.5 Consent and Approvals; No Violations......................... 10
SECTION 4.6 SEC Documents and Other Reports.............................. 10
SECTION 4.7 Absence of Material Adverse Change........................... 11
SECTION 4.8 Information Supplied......................................... 11
SECTION 4.9 Compliance with Laws......................................... 11
SECTION 4.10 Licenses and Permits......................................... 11
SECTION 4.11 Tax Matters.................................................. 12
SECTION 4.12 Liabilities.................................................. 12
SECTION 4.13 Opinion of Financial Advisor................................. 12
SECTION 4.14 State Takeover Statutes; Rights Agreement.................... 12
SECTION 4.15 Brokers...................................................... 12
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
SECTION 5.1 Organization................................................. 13
SECTION 5.2 Authority.................................................... 13
SECTION 5.3 Consents and Approvals; No Violations........................ 13
SECTION 5.4 Information Supplied......................................... 14
SECTION 5.5 Interim Operations of Sub.................................... 14
SECTION 5.6 Brokers...................................................... 14
SECTION 5.7 Financing.................................................... 14
</TABLE>
I-i
<PAGE>
PAGE
ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
<TABLE>
<C> <S> <C>
Conduct of
Business by the
Company Pending
SECTION 6.1 the Merger...... 14
SECTION 6.2 No Solicitation. 16
Third Party
Standstill
SECTION 6.3 Agreements...... 17
SECTION 6.4 Other Actions... 17
ARTICLE VII
ADDITIONAL AGREEMENTS
Stockholder
Approval;
Preparation of
SECTION 7.1 Proxy Statement. 17
Access to
SECTION 7.2 Information..... 18
Fees and
SECTION 7.3 Expenses........ 18
SECTION 7.4 Options......... 19
Public
SECTION 7.5 Announcements... 19
Real Estate
SECTION 7.6 Transfer Tax.... 20
State Takeover
SECTION 7.7 Laws............ 20
Indemnification;
Directors and
Officers
SECTION 7.8 Insurance....... 20
Notification of
SECTION 7.9 Certain Matters. 20
Board of
SECTION 7.10 Directors....... 21
Reasonable Best
SECTION 7.11 Efforts......... 21
Certain
SECTION 7.12 Litigation...... 22
Employee
SECTION 7.13 Benefits........ 22
Stapled
SECTION 7.14 Securities...... 23
ARTICLE VIII
CONDITIONS PRECEDENT
Conditions to
Each Party's
Obligation to
Effect the
SECTION 8.1 Merger.......... 24
ARTICLE IX
TERMINATION AND AMENDMENT
SECTION 9.1 Termination..... 24
Effect of
SECTION 9.2 Termination..... 25
SECTION 9.3 Amendment....... 25
Extension;
SECTION 9.4 Waiver.......... 25
ARTICLE X
GENERAL PROVISIONS
Non-Survival of
Representations
SECTION 10.1 and Warranties.. 26
SECTION 10.2 Notices......... 26
SECTION 10.3 Interpretation.. 27
SECTION 10.4 Counterparts.... 27
Entire
Agreement; No
Third-Party
SECTION 10.5 Beneficiaries... 27
SECTION 10.6 Governing Law... 27
SECTION 10.7 Assignment...... 27
SECTION 10.8 Severability.... 27
Enforcement of
SECTION 10.9 this Agreement.. 27
Obligations of
SECTION 10.10 Subsidiaries.... 28
</TABLE>
I-ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of December 11, 1996 (this
"Agreement"), among AON CORPORATION, a Delaware corporation ("Aon"),
SUBSIDIARY CORPORATION, INC., a Maryland corporation and a wholly-owned
subsidiary of Aon ("Sub"), and ALEXANDER & ALEXANDER SERVICES INC., a Maryland
corporation (the "Company") (Sub and the Company being hereinafter
collectively referred to as the "Constituent Corporations").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of Aon, Sub and the Company have
unanimously approved the acquisition of the Company by Aon pursuant to a
tender offer (as it may be amended from time to time as permitted under this
Agreement, the "Offer") by Sub for all of the outstanding shares of Common
Stock, par value $1.00 per share (the "Common Stock"), together with the
related Rights (as defined in Section 4.3), of the Company, at a price of
$17.50 per share (the "Offer Price"), net to the seller in cash, without
interest thereon, followed by a merger (the "Merger") of Sub with and into the
Company upon the terms and subject to the conditions set forth herein (the
shares of Common Stock subject to the Offer are hereinafter referred to as the
"Shares");
WHEREAS, the Board of Directors of the Company has (i) determined that the
consideration to be paid for each Share in the Offer is fair to and in the
best interests of the stockholders of the Company, (ii) approved and adopted
this Agreement and the transactions contemplated hereby and (iii) adopted
resolutions unanimously determining that the Offer and the Merger are
advisable, approving such transactions and recommending that the Company's
stockholders accept the Offer and approve the Merger;
WHEREAS, the Company has been advised that Aon and Sub are entering into on
the date hereof a Stock Purchase and Sale Agreement (the "Preferred Stock
Purchase Agreement") with American International Group, Inc., which, together
with certain of its subsidiaries, holds all of the outstanding shares of the
Company's 8% Series B Cumulative Convertible Preferred Stock, par value $1.00
per share (the "Series B Preferred Stock"); and
WHEREAS, pursuant to the Merger, each issued and outstanding share of
Company Common Capital Stock (as hereinafter defined) not owned directly or
indirectly by Aon or the Company will be converted into the right to receive
the consideration paid per share of the Common Stock pursuant to the Offer.
NOW, THEREFORE, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties agree as follows:
ARTICLE I
THE OFFER
SECTION 1.1 The Offer. (a) Subject to the provisions of this Agreement, as
promptly as practicable but in no event later than five business days after
the date of the public announcement by Aon and the Company of this Agreement,
Sub shall, and Aon shall cause Sub to, commence the Offer. The obligation of
Sub to, and of Aon to cause Sub to, commence the Offer and accept for payment,
and pay for, any Shares tendered pursuant to the Offer shall be subject only
to the conditions set forth in Exhibit A (the "Offer Conditions") (any of
which may be waived in whole or in part by Sub in its sole discretion,
provided that, without the consent of the Company, Sub shall not waive the
Minimum Condition (as defined in Exhibit A)). Sub expressly reserves the right
to modify the terms of the Offer, except that, without the consent of the
Company, Sub shall not (i) reduce the number of Shares subject to the Offer,
(ii) reduce the Offer Price, (iii) impose any other conditions to the Offer
other than the Offer Conditions or modify the Offer Conditions (other than to
waive any Offer Conditions
I-1
<PAGE>
to the extent permitted by this Agreement), (iv) except as provided in the
next sentence, extend the Offer, (v) change the form of consideration payable
in the Offer or (vi) amend, waive or add any other term of the Offer in any
manner adverse to the Company or the holders of Shares. Notwithstanding the
foregoing, Sub may, without the consent of the Company, (i) extend the Offer,
if at the scheduled or extended expiration date of the Offer any of the Offer
Conditions shall not be satisfied or waived, until such time as such
conditions are satisfied or waived, (ii) extend the Offer for any period
required by any rule, regulation, interpretation or position of the Securities
and Exchange Commission (the "SEC") or the staff thereof applicable to the
Offer and (iii) extend the Offer for any reason for one or more occasions for
an aggregate period of not more than 10 business days beyond the latest
expiration date that would otherwise be permitted under clause (i) or (ii) of
this sentence. So long as this Agreement is in effect and the Offer Conditions
have not been satisfied or waived, Sub shall, and Aon shall cause Sub to,
cause the Offer not to expire. Subject to the terms and conditions of the
Offer and this Agreement, Sub shall, and Aon shall cause Sub to, accept for
and pay for, all Shares validly tendered and not withdrawn pursuant to the
Offer that Sub is permitted to accept for payment under applicable law, and
pay for, pursuant to the Offer as soon as practicable after the expiration of
the Offer.
(b) On the date of commencement of the Offer, Aon and Sub shall file with
the SEC a Tender Offer Statement on Schedule 14D-1 (the "Schedule 14D-1") with
respect to the Offer, which shall contain an offer to purchase and a related
letter of transmittal and summary advertisement (such Schedule 14D-1 and the
documents included therein pursuant to which the Offer will be made, together
with any supplements or amendments thereto, the "Offer Documents"). Aon, Sub
and the Company each agrees promptly to correct any information provided by it
for use in the Offer Documents if and to the extent that such information
shall have become false or misleading in any material respect, and Aon and Sub
further agree to take all steps necessary to cause the Schedule 14D-1 as so
corrected to be filed with the SEC and the other Offer Documents as so
corrected to be disseminated to holders of Shares, in each case as and to the
extent required by applicable federal securities laws. The Company and its
counsel shall be given reasonable opportunity to review and comment upon the
Offer Documents prior to their filing with the SEC or dissemination to the
stockholders of the Company. Aon and Sub agree to provide the Company and its
counsel any comments Aon, Sub or their counsel may receive from the SEC or its
staff with respect to the Offer Documents promptly after the receipt of such
comments.
(c) Prior to the expiration of the Offer, Aon shall provide or cause to be
provided to Sub all funds necessary to accept for payment, and pay for, any
Shares that Sub is permitted to accept for payment under applicable law and
pay for, pursuant to the Offer.
SECTION 1.2 Company Actions. (a) The Company hereby approves of and consents
to the Offer and represents that the Board of Directors of the Company, at a
meeting duly called and held, at which all directors were present, duly and
unanimously adopted resolutions approving this Agreement, the Offer and the
Merger, determining that the Offer and the Merger are advisable and that the
terms of the Offer and the Merger are fair to, and in the best interests of,
the Company's stockholders and recommending that holders of Shares accept the
Offer and that the Company's stockholders approve the Merger; provided,
however, that such approval, determination, recommendation or other action may
be withdrawn, modified or amended at any time or from time to time if a
majority of the Board of Directors of the Company determines, in its good
faith judgment, based on the opinion of independent outside legal counsel to
the Company, that failing to take such action would constitute a breach of
such Board's duties under applicable law. The Company represents that its
Board of Directors has received the opinion of CS First Boston Corporation
("First Boston") that the proposed consideration to be received by
stockholders pursuant to the Offer and the Merger is fair to the Company's
stockholders from a financial point of view. The Company has been authorized
by First Boston to permit, subject to prior review and consent by First Boston
(such consent not to be unreasonably withheld), the inclusion of such fairness
opinion (or a reference thereto) in the Offer Documents and in the Schedule
14D-9 referred to below. The Company hereby consents to the inclusion in the
Offer Documents of the recommendation of the Company's Board of Directors
described in this Section 1.2(a); provided, however, that such recommendation
may be withdrawn, modified or amended at any time or from time to time if a
majority of the Board of Directors of the Company determines, in its good
faith judgment, based on the opinion of independent outside legal counsel
I-2
<PAGE>
to the Company, that failing to take such action would constitute a breach of
such Board's duties under applicable law. The Company has been advised by each
of its directors and executive officers that each such person intends to
tender all Shares owned by such person pursuant to the Offer.
(b) On the date the Offer Documents are filed with the SEC, the Company
shall file with the SEC a Solicitation/Recommendation Statement on Schedule
14D-9 with respect to the Offer (such Schedule 14D-9, as amended from time to
time, the "Schedule 14D-9") containing the recommendation described in
paragraph (a) (subject to the withdrawal, modification or amendment of such
recommendation at any time or from time to time if the Board of Directors of
the Company determines, in its good faith judgment, based on the opinion of
independent outside legal counsel to the Company, that failing to take such
action would constitute a breach of such Board's duties under applicable law)
and shall mail a copy of the Schedule 14D-9 to the stockholders of the
Company. Each of the Company, Aon and Sub agrees promptly to correct any
information provided by it for use in the Schedule 14D-9 if and to the extent
that such information shall have become false or misleading in any material
respect, and the Company further agrees to take all steps necessary to amend
or supplement the Schedule 14D-9 and to cause the Schedule 14D-9 as so amended
or supplemented to be filed with the SEC and disseminated to the Company's
stockholders, in each case as and to the extent required by applicable federal
securities laws. Aon and its counsel shall be given reasonable opportunity to
review and comment upon the Schedule 14D-9 prior to its filing with the SEC or
dissemination to stockholders of the Company. The Company agrees to provide
Aon and its counsel any comments the Company or counsel may receive from the
SEC or its staff with respect to the Schedule 14D-9 promptly after the receipt
of such comments.
(c) In connection with the Offer and the Merger, the Company shall cause its
transfer agent to furnish Sub promptly with mailing labels containing the
names and addresses of the record holders of Shares as of a recent date and of
those persons becoming record holders subsequent to such date, together with
copies of all lists of stockholders, security position listings and computer
files and all other information in the Company's possession or control
regarding the beneficial owners of Shares, and shall furnish to Sub such
information and assistance (including updated lists of stockholders, security
position listings and computer files) as Aon or Sub may reasonably request in
communicating the Offer to the Company's stockholders. Subject to the
requirements of applicable law, and except for such steps as are necessary to
disseminate the Offer Documents and any other documents necessary to
consummate the Merger, Aon and Sub and their agents shall hold in confidence
the information contained in any such labels, listings and files, will use
such information only in connection with the Offer and the Merger and, if this
Agreement shall be terminated, will, upon request, deliver, and will use their
reasonable best efforts to cause their agents to deliver, to the Company all
copies of such information then in their possession or control.
SECTION 1.3 Reed Stenhouse Companies Limited. The Company shall cause Reed
Stenhouse Companies Limited, a corporation organized under the laws of Canada
and a Subsidiary of the Company ("RSC"), to transmit to each holder of the
Class 1 special shares of RSC (the "RSC Class 1 Shares"), contemporaneously
with the transmission of the Offer Documents to the holders of Common Stock:
(i) the Offer Documents; (ii) a letter stating that holders of RSC Class 1
Shares who wish to participate in the Offer must request retraction of such
RSC Class 1 Shares for shares of Common Stock pursuant to Section 5 of the
Restated Certificate of Incorporation of RSC; and (iii) a form of retraction
request, which retraction request shall provide that a holder of RSC Class 1
Shares requests retraction thereof on the date Sub first accepts for payment
Shares pursuant to the Offer and contemporaneously therewith, and that the
shares of Common Stock received upon such retraction shall be deemed validly
tendered pursuant to the Offer. RSC shall retract such RSC Class 1 Shares in
accordance with such retraction request (and the Company represents and
warrants that such retraction can be effected in compliance with Section 36 of
the Canada Business Corporations Act) and the Company shall cause to be issued
(for tender as so requested) such number of shares of Common Stock as is
necessary to satisfy the redemption price in accordance with the Restated
Articles of Incorporation of RSC and the related Keepwell Agreement (the
"Keepwell Agreement"), between the Company and RSC. In addition, the Company
shall cause (x) RSC to transmit to the holders of RSC Class 1 Shares a
recommendation of the Company and RSC that such holders retract such shares
and tender the shares of Common Stock received on such retraction pursuant to
the
I-3
<PAGE>
Offer and (y) the transfer agent for the RSC Class 1 Shares to furnish Sub
promptly with mailing labels containing the names and addresses of the record
holders of RSC Class 1 Shares as of a recent date and of those persons
becoming record holders subsequent to such date, together with all copies of
all lists of stockholders, security position listings and computer files and
all other information in the Company's or RSC's possession or control
regarding the beneficial owners of RSC Class 1 Shares, and shall furnish to
Sub such information and assistance (including updated lists of stockholders,
security position listings and computer files) as Aon or Sub may reasonably
request in communicating the documentation referred to in the first sentence
of this Section 1.3 to the holders of RSC Class 1 Shares. Aon and Sub and
their agents shall hold in confidence the information contained in any such
labels, listings and files, will use such information only in connection with
the Offer and the Merger and, if this Agreement shall be terminated, will,
upon request, deliver, and will use their reasonable best efforts to cause
their agents to deliver, to the Company all copies of such information then in
their possession or control.
SECTION 1.4 Alexander & Alexander Services UK plc. The Company shall, and
shall cause Alexander & Alexander Services UK plc, a corporation organized
under the laws of Scotland and a Subsidiary of the Company ("AAUK"), to,
transmit to each holder of any share of Class C Common Stock (as defined in
Section 3.1) and any related Dividend Share of AAUK (the "Dividend Shares"),
contemporaneously with the transmission of the Offer Documents to the holders
of Common Stock: (i) the Offer Documents; (ii) a letter stating that holders
of shares of Class C Common Stock and the related Dividend Shares who wish to
participate in the Offer must request the conversion of the shares of Class C
Common Stock into shares of Common Stock pursuant to Subsection E of Article
SIXTH of the Charter of the Company; and (iii) a form of conversion request,
which conversion request shall provide that a holder of shares of Class C
Common Stock requests conversion thereof on the date Sub first accepts for
payment Shares pursuant to the Offer and contemporaneously therewith, and that
the shares of Common Stock received upon such conversion shall be deemed
validly tendered pursuant to the Offer. The Company shall cause the
cancellation of such shares of Class C Common Stock in accordance with such
conversion request and the Company shall issue (for tender as so requested)
such number of shares of Common Stock as is necessary to satisfy such
conversion request in accordance with the Charter of the Company. In addition,
the Company shall (x) transmit to the holders of the shares of Class C Common
Stock a recommendation of the Company and AAUK that such holders convert such
shares and tender the shares of Common Stock received on such conversion
pursuant to the Offer and (y) the transfer agent for the Class C Common Stock
to furnish Sub promptly with mailing labels containing the names and addresses
of the record holders of shares of Class C Common Stock as of a recent date
and of those persons becoming record holders subsequent to such date, together
with all copies of all lists of stockholders, security position listings and
computer files and all other information in the Company's or AAUK's possession
or control regarding the beneficial owners of shares of Class C Common Stock,
and shall furnish to Sub such information and assistance (including updated
lists of stockholders, security position listings and computer files) as Aon
or Sub may reasonably request in communicating the documentation referred to
in the first sentence of this Section 1.4 to the holders of shares of Class C
Common Stock. Aon and Sub and their agents shall hold in confidence the
information contained in any such labels, listings and files, will use such
information only in connection with the Offer and the Merger and, if this
Agreement shall be terminated, will, upon request, deliver, and will use their
reasonable best efforts to cause their agents to deliver, to the Company all
copies of such information then in their possession or control.
SECTION 1.5 MJDS. Each of the parties shall comply with the provisions of
National Policy No. 45 adopted by the Canadian Securities Administrators in
connection with the making of the Offer to residents of Canada, unless the
Offer is an exempt takeover bid for the purposes of section 93(1)(e) of the
Securities Act (Ontario) and the comparable provisions of the securities
legislation of the other provinces of Canada.
I-4
<PAGE>
ARTICLE II
THE MERGER
SECTION 2.1 The Merger. Upon the terms and subject to the conditions hereof,
and in accordance with the General Corporation Law of the State of Maryland
(the "MGCL"), Sub shall be merged with and into the Company at the Effective
Time (as defined in Section 2.3). Following the Merger, the separate corporate
existence of Sub shall cease and the Company shall continue as the surviving
corporation (the "Surviving Corporation") and shall succeed to and assume all
the rights and obligations of Sub in accordance with the MGCL.
SECTION 2.2 Closing. The closing of the Merger will take place at 10:00 a.m.
on a date to be specified by Aon or Sub, which shall be no later than the
second business day after satisfaction or waiver of the conditions set forth
in Article VIII (the "Closing Date"), at the offices of Sidley & Austin, One
First National Plaza, Chicago, Illinois 60603, unless another date, time or
place is agreed to in writing by the parties hereto.
SECTION 2.3 Effective Time. The Merger shall become effective when Articles
of Merger (the "Articles of Merger"), executed in accordance with the relevant
provisions of the MGCL, are accepted for record by the State Department of
Assessments and Taxation of Maryland (the "SDAT"); provided, however, that,
upon mutual consent of the Constituent Corporations, the Articles of Merger
may provide for a later date of effectiveness of the Merger not more than 30
days after the date the Articles of Merger are accepted for record. When used
in this Agreement, the term "Effective Time" shall mean the later of the date
and time at which the Articles of Merger are accepted for record by the SDAT
or such later time established by the Articles of Merger. The filing of the
Articles of Merger shall be made as soon as practicable after the satisfaction
or waiver of the conditions to the Merger set forth herein.
SECTION 2.4 Effects of the Merger. The Merger shall have the effects set
forth in Section 3-114 of the MGCL.
SECTION 2.5 Charter and By-laws; Officers and Directors. (a) The Charter (as
defined in the MGCL) of the Company, as in effect immediately prior to the
Effective Time, shall be the Charter of the Surviving Corporation until
thereafter changed or amended as provided therein or by applicable law.
(b) The By-Laws of the Company, as in effect immediately prior to the
Effective Time, shall be the By-laws of the Surviving Corporation until
thereafter changed or amended as provided therein or by the Charter of the
Surviving Corporation or by applicable law.
(c) The directors of Sub immediately prior to the Effective Time shall be
the directors of the Surviving Corporation, until the next annual meeting of
stockholders (or the earlier of their resignation or removal) and until their
respective successors are duly elected and qualified, as the case may be.
(d) The officers of the Company immediately prior to the Effective Time
shall be the officers of the Surviving Corporation, for a term of one year (or
until the earlier of their resignation or removal) and until their respective
successors are duly elected and qualified, as the case may be.
ARTICLE III
EFFECT OF THE MERGER ON THE STOCK OF THE
CONSTITUENT CORPORATIONS; SURRENDER OF CERTIFICATES
SECTION 3.1 Effect on Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of stock
of Sub or rights to acquire any such stock:
I-5
<PAGE>
(a) Capital Stock of Sub. Each issued and outstanding share of stock of Sub
shall be converted into and become 600,000 fully paid and nonassessable shares
of Common Stock, par value $1.00 per share, of the Surviving Corporation.
(b) Aon Owned Stock. Each share of stock of the Company (including, without
limitation, the Shares purchased pursuant to the Offer and the shares of the
Series B Preferred Stock purchased pursuant to the Preferred Stock Purchase
Agreement) owned by any Subsidiary of the Company, Aon, Sub or any other
Subsidiary of Aon (other than the shares into which the outstanding shares of
stock of Sub were converted pursuant to Section 3.1(a)) shall automatically be
canceled and retired and shall cease to exist, and no consideration shall be
delivered in exchange therefor.
(c) Conversion of Shares. Subject to Section 3.1(d), each holder of a share
of (i) the Common Stock, together with the related Right, (ii) the Class A
Common Stock, par value $.00001 per share, of the Company (the "Class A Common
Stock"), together with the related RSC Class 1 Share and related Right, or
(iii) the Class C Common Stock, par value $1.00 per share, of the Company (the
"Class C Common Stock"), together with the related Dividend Share and related
Right (the Common Stock, Class A Common Stock and Class C Common Stock are
hereinafter collectively referred to as the "Company Common Capital Stock"),
in each case, that is issued and outstanding (other than shares to be
cancelled in accordance with Section 3.1(b)), shall be paid by the Surviving
Corporation as consideration for the conversion of each share in cash, without
interest and without any further action by such holder, the price paid per
share of Common Stock in the Offer (the "Merger Consideration"). The Merger
Consideration shall be allocated, in the case of clause (i), U.S. $.01 to the
Right and the balance of the Merger Consideration to the share of Common
Stock, in the case of clause (ii), the U.S. dollar equivalent of Cdn. $.00001
to the share of Class A Common Stock, U.S. $.01 to the Right and the balance
of the Merger Consideration to the RSC Class 1 Share, and, in the case of
clause (iii), the U.S. dollar equivalent of 2 pence to the Dividend Share,
U.S. $.01 to the Right and the balance of the Merger Consideration to the
share of Class C Common Stock. As of the Effective Time, all such shares shall
be converted in accordance with this paragraph, and when so converted, shall
no longer be outstanding and shall automatically be canceled and retired and
shall cease to exist, and each holder of a certificate representing any such
shares shall cease to have any rights with respect thereto, except the right
to receive the aforesaid amount, without interest.
(d) Shares of Objecting Stockholders. Notwithstanding anything in this
Agreement to the contrary, any issued and outstanding shares of Class A Common
Stock, Class C Common Stock or (if the holders of shares of Common Stock are
entitled to dissenters' rights under the MGCL) Common Stock held by a person
(an "Objecting Stockholder") who objects to the Merger and complies with all
the provisions of the MGCL concerning the right of holders of shares to
dissent from the Merger and require appraisal of their shares ("Objecting
Shares") shall not be converted as described in Section 3.1(c), but shall
become the right to receive such consideration as may be determined to be due
to such Objecting Stockholder pursuant to the MGCL. If, after the Effective
Time, such Objecting Stockholder withdraws his demand for appraisal or fails
to perfect or otherwise loses his right of appraisal, in any case pursuant to
the MGCL, his shares of Class A Common Stock, Class C Common Stock or Common
Stock shall be deemed to be converted as of the Effective Time into the right
to receive the Merger Consideration allocated as provided in Section 3.1(c).
The Company shall give Aon (i) prompt notice of any demands for appraisal of
shares received by the Company and (ii) the opportunity to participate in and
direct all negotiations and proceedings with respect to any such demands. The
Company shall not, without the prior written consent of Aon, make any payment
with respect to, or settle, offer to settle or otherwise negotiate, any such
demands.
(e) Shares of Series A Convertible Preferred Stock. The holder of each share
of Series A Convertible Preferred Stock (as defined in Section 4.3) shall have
the right to convert such share only into cash in the amount equal to the sum
of (i) $52.54 and (ii) the amount per share of dividends accrued and unpaid
with respect to the Series A Convertible Preferred Stock as of the day
immediately preceding the date of purchase of Shares pursuant to the Offer.
SECTION 3.2 Surrender of Certificates. (a) Paying Agent. Prior to the
Effective Time, Aon shall designate a bank or trust company to act as paying
agent in the Merger (the "Paying Agent"), and prior to the
I-6
<PAGE>
Effective Time, Aon shall make available, or cause the Surviving Corporation
to make available, to the Paying Agent cash in amounts necessary for the
payment of the Merger Consideration as provided in Section 3.1 upon surrender
of certificates representing shares of Company Common Capital Stock as part of
the Merger (it being understood that any and all interest earned on funds made
available to the Paying Agent pursuant to this Agreement shall be turned over
to Aon). If the amount of cash deposited with the Paying Agent pursuant to
this Section 3.2 is insufficient to pay all of the amounts required to be paid
pursuant to Section 3.1, Aon from time to time after the Effective Time shall
take all steps necessary to enable or cause the Surviving Corporation to
deposit with the Paying Agent additional cash in an amount sufficient to make
all such payments.
(b) Payment Procedure. (i) Concurrently with or immediately prior to the
Effective Time, Aon or Sub shall deposit in trust with the Paying Agent cash
in United States dollars in an aggregate amount equal to the product of (A)
the number of shares of Company Common Capital Stock outstanding immediately
prior to the Effective Time (other than shares which are owned by any
Subsidiary of the Company, Aon or any Subsidiary of Aon (including Sub) or a
person known at the time of such deposit to be a Objecting Stockholder) and
(B) the Merger Consideration (such amount being hereinafter referred to as the
"Payment Fund"). The Payment Fund shall be invested by the Paying Agent as
directed by Aon in direct obligations of the United States, obligations for
which the full faith and credit of the United States is pledged to provide for
the payment of principal and interest, commercial paper rated of the highest
quality by Moody's Investors Services, Inc. or Standard & Poor's Ratings Group
or certificates of deposit, bank repurchase agreements or bankers' acceptance
a commercial bank having at least $100,000,000 in assets (collectively,
"Permitted Investments") or in money market funds which are invested in
Permitted Investments, and any net earnings with respect thereto shall be paid
to Aon as and when requested by Aon. The Paying Agent shall, pursuant to
irrevocable instructions of Aon or Sub, make the payments referred to in this
Section 3.2 out of the Payment Fund. The Payment Fund shall not be used for
any other purpose except as otherwise agreed to by Aon.
(ii) As soon as reasonably practicable after the Effective Time, the
Paying Agent shall mail to each holder of record of a certificate or
certificates that immediately prior to the Effective Time represented
shares of Company Common Capital Stock (the "Certificates"), (i) a letter
of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon delivery
of the Certificates to the Paying Agent and shall be in a form and have
such other provisions as Aon may reasonably specify) and (ii) instructions
for use in effecting the surrender of the Certificates in exchange for the
Merger Consideration as provided in Section 3.1. Upon surrender of a
Certificate for cancellation to the Paying Agent or to such other agent or
agents as may be appointed by Aon, together with such letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Paying Agent, the holder of such Certificate shall be
entitled to receive in exchange therefor the amount of cash into which the
shares of Company Common Capital Stock theretofore represented by such
Certificate shall have been converted pursuant to Section 3.1, and the
Certificate so surrendered shall forthwith be cancelled. In the event of a
transfer of ownership of shares of Company Common Capital Stock that is not
registered in the transfer records of the Company, payment may be made to a
person other than the person in whose name the Certificate so surrendered
is registered, if such Certificate shall be properly endorsed or otherwise
be in proper form for transfer and the person requesting such payment shall
pay any transfer or other taxes required by reason of the payment to a
person other than the registered holder of such Certificate or establish to
the satisfaction of the Surviving Corporation that such tax has been paid
or is not applicable. Until surrendered as contemplated by this Section
3.2, each Certificate (other than Certificates representing Objecting
Shares) shall be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the amount of cash, without
interest, into which the shares of stock theretofore represented by such
Certificate shall have been converted pursuant to Section 3.1. No interest
will be paid or will accrue on the cash payable upon the surrender of any
Certificate.
(c) No Further Ownership Rights in Shares. All cash paid upon the surrender
of Certificates in accordance with the terms of this Article III shall be
deemed to have been paid in full satisfaction of all rights pertaining to the
shares of stock theretofore represented by such Certificates. At the Effective
Time, the stock transfer books of the Company shall be closed, and there shall
be no further registration of transfers on the stock
I-7
<PAGE>
transfer books of the Surviving Corporation of the shares of stock that were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation or the Paying
Agent for any reason, they shall be cancelled and exchanged as provided in
this Article III.
(d) No Liability. None of Aon, Sub, the Company or the Paying Agent shall be
liable to any person in respect of any cash delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law. If any
Certificates shall not have been surrendered prior to two years after the
Effective Time (or immediately prior to such earlier date on which any payment
pursuant to this Article III would otherwise escheat to or become the property
of any Governmental Entity (as defined in Section 4.5)), the cash payment in
respect of such Certificate shall, to the extent permitted by applicable law,
become the property of the Surviving Corporation, free and clear of all claims
or interests of any person previously entitled thereto.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Aon and Sub as follows:
SECTION 4.1 Organization. The Company and each of its Significant
Subsidiaries (as defined in Section 10.3) is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation and has all requisite corporate power and authority to carry
on its business as now being conducted, except where the failure to be so
organized, validly existing or in good standing would not have a Material
Adverse Effect (as defined in Section 10.3) on the Company. The Company has
delivered to Aon complete and correct copies of its Charter and By-laws and
the Charter and By-laws (or similar organizational documents) of its
Significant Subsidiaries.
SECTION 4.2 Subsidiaries. Except as set forth in item 4.2 of the letter from
the Company to Aon dated the date hereof, which letter relates to this
Agreement and is designated therein as the Company Letter (the "Company
Letter"), Exhibit 21 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 lists each Subsidiary of the Company existing as of
the date hereof (other than Subsidiaries that are immaterial) and accurately
reflects thereon the ownership interests in such Subsidiaries of the Company
and its Subsidiaries. The authorized capital stock of RSC consists of four
classes of capital stock, each unlimited in amount. As of the date of this
Agreement, 1,805,616.112 RSC Class 1 Shares were issued, outstanding and
(excluding 42,910 shares owned by a Subsidiary of the Company) owned by
persons other than the Company or any of its Subsidiaries, all of which shares
were validly issued, fully paid and nonassessable and free of preemptive
rights, and (ii) all other shares of capital stock of RSC were owned by the
Company. The authorized capital stock of AAUK consists of 46,000,000 Deferred
Shares of 25 pence (Type 1), 12,927,195 Dividend Shares of 2 pence (Type 2),
37,960,000 Ordinary Non-Voting Shares 1 pence (Type 3) and 100,000,000
Ordinary Shares of (Pounds) 1.00 (Type 4). As of the date of this Agreement,
(i) 372,748 Dividend Shares were issued, outstanding and owned by persons
other than the Company or any of its Subsidiaries, all of which shares were
validly issued, fully paid and nonassessable and free of preemptive rights,
and (ii) and all other shares of capital stock of AAUK were owned by the
Company and its wholly-owned Subsidiaries.
SECTION 4.3 Capital Structure. The authorized capital stock of the Company
consists of 200,000,000 shares of Common Stock, 26,000,000 shares of Class A
Common Stock, 11,000,000 shares of Class C Common Stock, 40,000,000 shares of
Class D Common Stock, and 15,000,000 shares of Preferred Stock, par value
$1.00 per share (the "Company Preferred Stock"), of which 2,300,000 shares
have been designated as "Series A Convertible Preferred Stock" (the "Series A
Convertible Preferred Stock"), 500,000 shares have been designated as "Series
A Junior Participating Preferred Stock" (the "Series A Junior Preferred
Stock") and 6,200,000 shares have been designated as "8% Series B Cumulative
Convertible Preferred Stock". At the close of business on December 6, 1996,
(i) 42,812,129 shares of Common Stock were issued and outstanding, all of
which were validly issued, fully paid and nonassessable and free of preemptive
rights, (ii) 1,848,526.112 shares of Class A Common Stock were issued and
outstanding, all of which were validly issued, fully paid and
I-8
<PAGE>
nonassessable and free of preemptive rights, (iii) 348,690 shares of Class C
Common Stock were issued and outstanding, all of which were validly issued,
fully paid and nonassessable and free of preemptive rights, (iv) no shares of
Class D Common Stock were outstanding, (v) 2,300,000 shares of Series A
Convertible Preferred Stock were outstanding, all of which were validly
issued, fully paid and nonassessable and free of preemptive rights, (vi) no
shares of Series A Junior Participating Preferred Stock of the Company were
outstanding and (vii) 4,751,208.9707 shares of Series B Preferred Stock were
outstanding, all of which were validly issued, fully paid and nonassessable
and free of preemptive rights. As of the date of this Agreement, except as
provided in the Company's Charter with respect to Class A Common Stock, Class
C Common Stock, Class D Common Stock, Series A Convertible Preferred Stock and
Series B Preferred Stock, except for the rights to purchase shares of the
Series A Junior Preferred Stock (the "Rights") issued pursuant to the Rights
Agreement dated as of June 11, 1987, as amended and restated as of March 22,
1990, and as amended as of April 21, 1992, June 6, 1994, July 15, 1994 and
November 16, 1995 (as so amended, the "Rights Agreement"), between the Company
and First Chicago Trust Company of New York, as Rights Agent, and except for
stock options covering not in excess of 6,100,000 shares of Common Stock and
rights to acquire not in excess of 600,000 shares under the Company's Employee
Discount Stock Purchase Plan, Bonus Equity Plan and Worldwide Savings Related
Stock Purchase Plan (collectively, the "Company Stock Options"), there are no
options, warrants, calls, rights or agreements to which the Company or any of
its Subsidiaries is a party or by which any of them is bound obligating the
Company or any of its Subsidiaries to issue or sell, or cause to be issued,
delivered or sold, additional shares of capital stock of the Company or any
Subsidiary or obligating the Company or any of its Subsidiaries to grant,
extend or enter into any such option, warrant, call, right or agreement. At
such time as the amount of outstanding RSC Class 1 Shares and shares of Class
C Common Stock shall in the aggregate be less than 1,500,000, RSC shall be
entitled to cause the mandatory redemption of all outstanding RSC Class 1
Shares for shares of Common Stock (on a share-for-share basis) in compliance
with the provisions of Section 36 of the Canada Business Corporations Act and
simultaneously therewith the Company shall be entitled to repurchase at Cdn.
$0.00001 per share all outstanding shares of Class A Common Stock. At such
time as the shares of Class A Common Stock and Class C Common Stock shall in
the aggregate be less than 1,500,000, the Company shall be entitled to cause
the mandatory conversion of all outstanding shares of Class C Common Stock
into shares of Common Stock on a share-for-share basis and simultaneously
therewith AAUK shall be entitled to mandatorily redeem at 2 pence per share
all outstanding Dividend Shares. Following the consummation of the Merger,
each share of Series A Convertible Preferred Stock shall cease to be
convertible at the option of a holder into shares of Common Stock but will, at
the option of a holder, be convertible solely into cash in the amount equal to
the sum of (i) $52.54 (assuming the purchase of Shares pursuant to the Offer
is effected prior to March 22, 1997) and (ii) the amount per share of
dividends accrued and unpaid with respect to the Series A Convertible
Preferred Stock as of the day immediately preceding the date of purchase of
Shares pursuant to the Offer.
Except as set forth in the Company Filed SEC Documents (as defined in
Section 4.7), as of the date of this Agreement, there are no outstanding
contractual obligations of the Company or any of its Subsidiaries (i) to
repurchase, redeem or otherwise acquire any shares of capital stock of the
Company or (ii) to vote or to dispose of any shares of the capital stock of
any of the Company's Subsidiaries.
SECTION 4.4 Authority. The Board of Directors of the Company has declared
the Merger advisable, and the Company has all requisite power and authority to
enter into this Agreement and, subject to approval by the stockholders of the
Company of the Merger (if required), to consummate the transactions
contemplated hereby. The execution, delivery and performance of this Agreement
by the Company and the consummation by the Company of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of the Company, subject to approval by the stockholders of
the Company of the Merger (if required). This Agreement has been duly executed
and delivered by the Company and (assuming the valid authorization, execution
and delivery of this Agreement by Aon and Sub) constitutes the valid and
binding obligation of the Company enforceable against the Company in
accordance with its terms, except that such enforceability (i) may be limited
by bankruptcy, insolvency, moratorium or other similar laws affecting or
relating to the enforcement of creditors' rights generally and (ii) is subject
to general principles of equity. The only stockholder action required in order
to effect the Merger under the MGCL is approval of the Merger by the
I-9
<PAGE>
holders of a majority of the shares of the Company Common Capital Stock
outstanding as of the record date for the Stockholders Meeting (as defined in
Section 7.1(a)(i)), all holders of the Company Common Capital Stock voting
together as a single class; provided, however, that if Aon purchases an amount
of Shares pursuant to the Offer sufficient to permit the Merger to be effected
in accordance with Section 3-106 of the MGCL, no stockholder approval will be
required.
SECTION 4.5 Consent and Approvals; No Violations. Except as set forth in
item 4.5 of the Company Letter, the execution and delivery by the Company of
this Agreement do not, and the consummation by the Company of the transactions
contemplated hereby and thereby and compliance by the Company with the
provisions hereof will not, result in any (a) material violation of, or
material default (with or without notice or lapse of time, or both) under, or
give rise to a right of termination, cancellation or acceleration of any
obligation or to the loss of a material benefit under, or result in the
creation of any pledge, claim, lien, charge, encumbrance or security interest
of any kind or nature whatsoever (collectively, "Liens") upon any of the
material properties or material assets of the Company or any of its
Subsidiaries under, any provision of the Charter or Bylaws of the Company or
(b) violation of, or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or the loss of a material benefit under, or
result in the creation of any Lien upon any of the material properties or
material assets of the Company or any of its Subsidiaries under, (i) any
provision of the Charter, Bylaws or comparable organization documents of any
of the Significant Subsidiaries of the Company, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to the Company
or any of its Significant Subsidiaries or (iii) any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to the Company or any
of its Significant Subsidiaries or any of their respective properties or
assets, other than, in the case of clause (i), (ii) or (iii), any such
violations, defaults, rights, losses or Liens, that, individually or in the
aggregate, would not have a Material Adverse Effect on the Company. No filing
or registration with, or authorization, consent or approval of, any domestic
(federal and state), foreign or supranational court, commission, governmental
body, regulatory agency, authority or tribunal (a "Governmental Entity") is
required by or with respect to the Company or any of its Subsidiaries in
connection with the execution and delivery of this Agreement by the Company or
is necessary for the consummation of the Offer, the Merger and the other
transactions contemplated by this Agreement, except for (i) in connection, or
in compliance, with the provisions of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), and the Securities
Exchange Act of 1934, as amended (together with the rules and regulations
promulgated thereunder, the "Exchange Act"), (ii) the filing of Articles of
Merger with the SDAT and appropriate documents with the relevant authorities
of other states in which the Company or any of its Subsidiaries is qualified
to do business, (iii) such filings and consents as may be required under any
environmental, health or safety law or regulation pertaining to any
notification, disclosure or required approval triggered by the Offer, the
Merger or the other transactions contemplated by this Agreement, (iv) such
filings, authorizations, orders and approvals as may be required by state
takeover laws (the "State Takeover Approvals"), (v) such filings as may be
required in connection with the taxes described in Section 7.6, (vi) such
filings and consents as may be required by insurance or insurance brokerage
laws or regulations, (vii) in connection, or in compliance, with the
provisions of the Competition Act (Canada) (the "Competition Act"), (viii)
such other consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under the laws of any foreign
country in which the Company or any of its Subsidiaries conducts any business
or owns any property or assets and (ix) such other consents, orders,
authorizations, registrations, declarations and filings the failure of which
to be obtained or made would not, individually or in the aggregate, have a
Material Adverse Effect on the Company. Item 4.5 of the Company Letter sets
forth the estimated amount which would be payable to each of the top twenty
highest paid officers of the Company in the United States under (i) any
employment, severance, continuity or similar agreement or (ii) any
cancellation and cash-out of Company Stock Options, in each case assuming the
purchase of Shares pursuant to the Offer, the consummation of the Merger and
the termination without cause of such person's employment.
SECTION 4.6 SEC Documents and Other Reports. The Company has filed all
required documents with the SEC since January 1, 1993 (the "Company SEC
Documents"). As of their respective dates, the Company
I-10
<PAGE>
SEC Documents complied in all material respects with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), or the Exchange
Act, as the case may be, and as of their respective dates none of the Company
SEC Documents contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the
Company SEC Documents comply as of their respective dates as to form in all
material respects with the then applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles (except,
in the case of the unaudited statements, as permitted by Form 10-Q of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated therein or in the notes thereto) and fairly present the consolidated
financial position of the Company and its consolidated Subsidiaries as at the
dates thereof and the consolidated results of their operations and their
consolidated cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments and to any other
adjustments described therein). The Company has not, since December 31, 1995,
made any change in the accounting policies applied in the preparation of
financial statements other than as described in the Company Filed SEC
Documents (as hereinafter defined).
SECTION 4.7 Absence of Material Adverse Change. Except as disclosed in the
Company SEC Documents filed and publicly available prior to the date of this
Agreement (the "Company Filed SEC Documents"), since September 30, 1996, there
has been no event other than ordinary business operating results and general
insurance brokerage industry conditions and contingencies disclosed to Aon
prior to the date hereof causing a Material Adverse Change (as defined in
Section 10.3) with respect to the Company.
SECTION 4.8 Information Supplied. None of the information supplied or to be
supplied by the Company specifically for inclusion or incorporation by
reference in (i) the Offer Documents, (ii) the Schedule 14D-9, (iii) the
information to be filed by the Company in connection with the Offer pursuant
to Rule 14f-1 promulgated under the Exchange Act (the "Information Statement")
or (iv) the proxy statement (together with any amendments or supplements
thereto, the "Proxy Statement") relating to the Stockholders Meeting, will, in
the case of the Offer Documents, the Schedule 14D-9 and the Information
Statement, at the respective times the Offer Documents, the Schedule 14D-9 and
the Information Statement are filed with the SEC or first published, sent or
given to the Company's stockholders, or, in the case of the Proxy Statement,
at the time the Proxy Statement is first mailed to the Company's stockholders
or at the time of the Stockholders Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Schedule 14D-9,
the Information Statement and the Proxy Statement will comply as to form in
all material respects with the requirements of the Exchange Act and the rules
and regulations thereunder, except that no representation or warranty is made
by the Company with respect to statements made or incorporated by reference
therein based on information supplied by Aon or Sub specifically for inclusion
or incorporation by reference therein.
SECTION 4.9 Compliance with Laws. Except as disclosed in the Company Filed
SEC Documents, the Company and its Subsidiaries are in compliance with all
applicable laws, regulations, orders, judgments and decrees except where the
failure to so comply would not have a Material Adverse Effect on the Company.
SECTION 4.10 Licenses and Permits. The Company and its Significant
Subsidiaries have such certificates, permits, licenses, franchises, consents,
approvals, orders, authorizations and clearances from appropriate Governmental
Entities (the "Company Licenses") as are necessary to conduct their businesses
in the manner described in the Company SEC Documents and as currently
conducted, and all such Company Licenses are valid and in full force and
effect, except such licenses which the failure to have or to be in full force
and effect, individually or in the aggregate, would not have a Material
Adverse Effect on the Company. The Company and its Significant Subsidiaries
are in compliance in all material respects with their respective obligations
under the Company Licenses, with such exceptions as, individually or in the
aggregate, would not have a Material Adverse Effect on the Company.
I-11
<PAGE>
SECTION 4.11 Tax Matters. The Company has filed all material tax returns and
has paid all taxes shown to be due on such tax returns except for those taxes
being contested by the Company in good faith.
SECTION 4.12 Liabilities. Except as reflected or reserved against in the
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, or disclosed in the footnotes thereto, as of
December 31, 1995, the Company and its Subsidiaries had no liabilities
(including, without limitation, tax liabilities), absolute or contingent, that
were material, either individually or in the aggregate, to the Company and its
Subsidiaries taken as a whole or not incurred in the ordinary course of
business. Except as so reflected, reserved or disclosed, as of such date, the
Company and its Subsidiaries had no commitments which were materially adverse,
either individually or in the aggregate, to the Company and its Subsidiaries
taken as a whole.
SECTION 4.13 Opinion of Financial Advisor. The Company has received the
opinion of First Boston, dated the date hereof, to the effect that, as of the
date hereof, the consideration to be received in the Offer and the Merger by
the Company's stockholders is fair to the Company's stockholders from a
financial point of view.
SECTION 4.14 State Takeover Statutes; Rights Agreement. The Board of
Directors of the Company has duly adopted a resolution that is a valid action
of such Board, is binding on the Company and constitutes a valid and
irrevocable exemption from Section 3-602 of the MGCL as to the transactions
contemplated by this Agreement and the Preferred Stock Purchase Agreement. By
reason of Section 4 of Article IX of the Company's By-Laws, the transactions
contemplated by this Agreement and the Preferred Stock Purchase Agreement are
approved for purposes of, and exempt from the provisions of, Subtitle 7 of
Title 3 of the MGCL. The Company has heretofore provided Aon with a complete
and correct copy of the Rights Agreement, including all amendments (including
the amendment referred to in the immediately following sentence) and exhibits
thereto. The Board of Directors of the Company has amended the Rights
Agreement to provide that a Distribution Date, a Section 11(a)(ii) Event or a
Section 13 Transaction (as such terms are defined in the Rights Agreement)
shall not occur or be deemed to occur, the Rights shall not separate (to the
extent the Rights Agreement otherwise provides for such separation) or become
exercisable, and neither Aon nor Sub shall become an Acquiring Person (as
defined in the Rights Agreement) as a result of the execution, delivery or
performance of this Agreement or the Preferred Stock Purchase Agreement, the
announcement, making or consummation of the Offer, the acquisition of shares
of capital stock pursuant to the Offer, the Merger or the Preferred Stock
Purchase Agreement, the consummation of the Merger or any other transactions
contemplated by this Agreement or the Preferred Stock Purchase Agreement. No
other action is required to prevent the holders of Rights from having any
right under the Rights Agreement as a result of the Offer, the Merger or any
other transaction contemplated by this Agreement or the Preferred Stock
Purchase Agreement.
SECTION 4.15 Brokers. No broker, investment banker, financial advisor or
other person, other than First Boston, the fees and expenses of which will be
paid by the Company (and are reflected in an agreement between First Boston
and the Company, a copy of which has been furnished to Aon), is entitled to
any broker's, finder's, financial advisor's or other similar fee or commission
in connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company.
I-12
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF AON AND SUB
Aon and Sub represent and warrant to the Company as follows:
SECTION 5.1 Organization. Each of Aon and Sub is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority to carry on its business as now being conducted, except where the
failure to be so organized, validly existing or in good standing would not
have a Material Adverse Effect on Aon or Sub or prevent or materially delay
the consummation of the Offer or the Merger.
SECTION 5.2 Authority. Aon and Sub have requisite corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by Aon and Sub and the consummation by Aon and Sub of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Aon and Sub. This Agreement has been duly
executed and delivered by Aon and Sub, as the case may be, and (assuming the
valid authorization, execution and delivery of this Agreement by the Company)
constitutes a valid and binding obligation of each of Aon and Sub enforceable
against them in accordance with its terms, except that such enforceability (i)
may be limited by bankruptcy, insolvency, moratorium or other similar laws
affecting or relating to the enforcement of creditors' rights generally and
(ii) is subject to general principles of equity.
SECTION 5.3 Consents and Approvals; No Violations. The execution and
delivery by Aon and Sub of this Agreement do not, and the consummation by Aon
and Sub of the transactions contemplated hereby and compliance with the
provisions hereof will not, result in any (a) material violation of, or
material default (with or without notice or lapse of time, or both) under, or
give rise to a right of termination, cancellation or acceleration of any
obligation or to the loss of a material benefit under, or result in the
creation of any Lien upon any of the material properties or material assets of
Aon or any of its Subsidiaries under, any provision of the Certificate of
Incorporation or Bylaws of Aon or Sub or (b) violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or the loss of a
material benefit under, or result in the creation of any Lien upon any of the
material properties or material assets of Aon or any of its Subsidiaries
under, (i) any provision of the Certificate of Incorporation, Bylaws or
comparable organization documents of any of Significant Subsidiaries of Aon,
(ii) any loan or credit agreement, note, bond, mortgage, indenture, lease or
other agreement, instrument, permit, concession, franchise or license
applicable to Aon or any of its Significant Subsidiaries or (iii) any
judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Aon or any of its Significant Subsidiaries or any of their
respective properties or assets, other than, in the case of clause (i), (ii)
or (iii), any such violations, defaults, rights, losses or Liens, that,
individually or in the aggregate, would not have a Material Adverse Effect on
Aon. No filing or registration with, or authorization, consent or approval of,
any Governmental Entity is required by or with respect to Aon or any of its
Subsidiaries in connection with the execution and delivery of this Agreement
by Aon or Sub or is necessary for the consummation of the Offer, the Merger
and the other transactions contemplated by this Agreement, except for (i) in
connection, or in compliance, with the provisions of the HSR Act and the
Exchange Act, (ii) the filing of Articles of Merger and appropriate documents
with the relevant authorities of other states in which Aon or any of its
Subsidiaries is qualified to do business, (iii) such filings and consents as
may be required under any environmental, health or safety law or regulation
pertaining to any notification, disclosure or required approval triggered by
the Offer, the Merger or the other transactions contemplated by this
Agreement, (iv) such filings, authorizations, orders and approvals as may be
required to obtain the State Takeover Approvals, (v) such filings as may be
required in connection with the taxes described in Section 7.6, (vi) such
filings and consents as may be required by insurance or insurance brokerage
laws or regulations, (vii) in connection, or in compliance, with the
provisions of the Competition Act, (viii) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required
under the laws of any foreign country in which Aon or any of its Subsidiaries
conducts any business or owns any
I-13
<PAGE>
property or assets and (ix) such other consents, orders, authorizations,
registrations, declarations and filings the failure of which to be obtained or
made would not, individually or in the aggregate, have a Material Adverse
Effect on Aon.
SECTION 5.4 Information Supplied. None of the information supplied or to be
supplied by Aon or Sub specifically for inclusion or incorporation by
reference in (i) the Offer Documents, (ii) the Schedule 14D-9, (iii) the
Information Statement or (iv) the Proxy Statement will, in the case of the
Offer Documents, the Schedule 14D-9 and the Information Statement, at the
respective times the Offer Documents, the Schedule 14D-9 and the Information
Statement are filed with the SEC or first published, sent or given to the
Company's stockholders, or, in the case of the Proxy Statement, at the time
the Proxy Statement is first mailed to the Company's stockholders or at the
time of the Stockholders Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Offer Documents
will comply as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations thereunder, except that no
representation or warranty is made by Aon or Sub with respect to statements
made or incorporated by reference therein based on information supplied by the
Company specifically for inclusion or incorporation by reference therein.
SECTION 5.5 Interim Operations of Sub. Sub was formed solely for the purpose
of engaging in the transactions contemplated hereby, has engaged in no other
business activities and has conducted its operations only as contemplated
hereby.
SECTION 5.6 Brokers. No broker, investment banker, financial advisor or
other person, other than Lazard Freres & Co., LLC, the fees and expenses of
which will be paid by Aon, is entitled to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Aon or Sub.
SECTION 5.7 Financing. Aon will have, and shall provide Sub with, the funds
necessary to consummate the Offer and the Merger and the transactions
contemplated hereby in accordance with the terms hereof.
ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 6.1 Conduct of Business by the Company Pending the Merger. During
the period from the date of this Agreement until such time as Aon's designees
shall constitute a majority of the Board of Directors of the Company, the
Company shall, and shall cause each of its Subsidiaries to, in all material
respects carry on its business in the ordinary course of its business as
currently conducted and, to the extent consistent therewith, use reasonable
best efforts to preserve intact its current business organizations, keep
available the services of its current officers and key employees and preserve
its relationships with customers, suppliers and others having business
dealings with it to the end that its goodwill and ongoing business shall not
be materially impaired. Without limiting the generality of the foregoing, and
except as otherwise expressly contemplated by this Agreement, during such
period, the Company shall not, and shall not permit any of its Subsidiaries
to, without the prior written consent of Aon (which consent shall not be
unreasonably withheld):
(a) (w) declare, set aside or pay any dividends on, or make any other
actual, constructive or deemed distributions in respect of, any of its capital
stock, or otherwise make any payments to its stockholders in their capacity as
such (other than regular quarterly dividends of not more than $.90625 per
share on the Series A Convertible Preferred Stock and of not more than $.025
per share on the Common Stock, a regular quarterly payment-in-kind dividend in
respect of the Series B Preferred Stock on December 15, 1996 and thereafter
cash dividends of not more than $1.00 per share on the Series B Preferred
Stock, in each case declared and paid in on
I-14
<PAGE>
dates consistent with past practice), (x) split, combine or reclassify any of
its capital stock or issue or authorize the issuance of any other securities
in respect of, in lieu of or in substitution for shares of its capital stock
or (y) except as required under existing employee benefit plans, agreements,
policies, awards or arrangements in effect on the date of this Agreement, or
pursuant to the Company's Employee Stock Option Exchange Program communicated
to the Company Options Recipients on November 26, 1996, purchase, redeem or
otherwise acquire any shares of its capital stock or those of any Subsidiary
or any other securities thereof or any rights, warrants or options to acquire
any such shares or other securities;
(b) except as required under existing employee benefit plans, agreements,
policies, awards or arrangements in effect on the date of this Agreement, or
pursuant to the Company's Employee Stock Option Exchange Program communicated
to the Company Options Recipients on November 26, 1996, issue, deliver, sell,
pledge, dispose of or otherwise encumber any shares of its capital stock, any
other voting securities or equity equivalent or any securities convertible
into, or any rights, warrants or options to acquire any such shares, voting
securities, equity equivalent or convertible securities (other than the
issuance of shares of Common Stock upon the exercise of Company Stock Options
outstanding on the date of this Agreement in accordance with their current
terms, the issuance of shares of Common Stock upon the retraction, redemption
or conversion of RSC Class 1 Shares, or shares of Class C Common Stock, Series
A Convertible Preferred Stock or Series B Preferred Stock, in each case in
accordance with the terms thereof, and the issuance on December 15, 1996 of
shares of Series B Preferred Stock as a regular quarterly payment-in-kind
dividend in accordance with the terms thereof);
(c) amend its Charter or Bylaws or other similar organizational documents;
(d) acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial portion of the assets of or equity in, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof or otherwise acquire or agree
to acquire any assets, other than (A) transactions that are in the ordinary
course of business consistent with past practice and not material to the
Company and its Subsidiaries taken as a whole and (B) acquisitions of one or
more insurance brokerage businesses with respect to which the aggregate amount
of consideration paid or payable by the Company and its Subsidiaries (valuing
any non-cash consideration at its fair market value and any contingent
payments at the maximum amount payable and treating any liabilities assumed as
consideration paid) does not exceed $15,000,000;
(e) sell, lease or otherwise dispose of, or agree to sell, lease or
otherwise dispose of, any of its assets, other than transactions that are in
the ordinary course of business consistent with past practice and which
involve assets having an aggregate fair market value or book value not in
excess of $10,000,000;
(f) incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee any debt
securities of others, except for borrowings or guarantees incurred in the
ordinary course of business consistent with past practice, or make any loans,
advances or capital contributions to, or other investments in, any other
person, other than to or in the Company or any wholly-owned Subsidiary of the
Company;
(g) alter (through merger, liquidation, reorganization, restructuring or in
any other fashion) the corporate structure or ownership of the Company or any
Subsidiary, except as contemplated by this Agreement or as set forth in item
6.1(g) of the Company Letter;
(h) enter into or adopt, or amend any existing, severance plan, agreement or
arrangement or enter into or amend any Company Plan (as defined in Section
7.13) or employment or consulting agreement, other than as required by law or
as contemplated by Sections 7.4 and 7.13;
(i) except as otherwise provided in Section 7.4 or as required under
existing plans, agreements, policies, awards or arrangements in effect on the
date of this Agreement, or pursuant to the Company's Employee Stock Option
Exchange Program communicated to the Company Options Recipients on November
26, 1996, increase
I-15
<PAGE>
the compensation payable or to become payable to its officers or employees,
except, in the case of employees who are not officers, for increases in the
ordinary course of business consistent with past practice, or grant any
severance or termination pay to, or enter into any employment or severance
agreement, or establish, adopt, enter into, or amend in any material respect
or take action to enhance in any material respect or accelerate any rights or
benefits under, any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, agreement,
trust, fund, policy or arrangement for the benefit of any director, officer or
employee, except, in each case, as may be required to comply with applicable
law or regulation;
(j) violate or fail to perform any material obligation or duty imposed upon
it by any applicable federal, state or local law, rule, regulation, guideline
or ordinance which would be reasonably expected to have a Material Adverse
Effect on the Company;
(k) redeem the Rights or, other than as contemplated by Section 4.14, amend
the Rights Agreement;
(l) amend the Stock Purchase and Sale Agreement, dated as of June 6, 1994,
between the Company and American International Group, Inc.;
(m) make any material change in its method of accounting;
(n) take any of the actions prohibited in item 6.1(n) of the Company Letter;
or
(o) authorize, recommend, propose or announce an intention to do any of the
foregoing, or enter into any contract, agreement, commitment or arrangement to
do any of the foregoing.
The Company shall promptly advise Aon orally and in writing of any change or
event having, or which could reasonably be expected to have, a Material
Adverse Effect on the Company or which could prevent or materially delay the
consummation of the Offer or the Merger.
SECTION 6.2 No Solicitation. From and after the date hereof, the Company
will not, and will not permit any of its or its Subsidiaries' officers,
directors or employees to, and the Company will use its reasonable best
efforts to cause all of its and its Subsidiaries' attorneys, financial
advisors, agents and other representatives not to, directly or indirectly,
solicit, initiate or knowingly encourage (including by way of furnishing
information) any Takeover Proposal, or engage in or continue discussions or
negotiations relating thereto; provided, however, that the Company may engage
in discussions or negotiations with, or furnish information concerning the
Company and its business, properties or assets to, any third party which makes
a Takeover Proposal (as hereinafter defined) if the Board of Directors of the
Company determines, in its good faith judgement, based on the opinion of
independent outside legal counsel to the Company, that failing to take such
action would constitute a breach of such Board's duties under applicable law;
provided, further, that nothing in this Section 6.2 shall prevent the Company
or the Board from taking, and disclosing to the Company's stockholders, a
position contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange
Act with regard to any tender offer or from making such disclosure to the
Company's stockholders which, as advised in an opinion of the Company's
independent outside legal counsel, is required under applicable law; provided,
further, that the Board shall not recommend that the stockholders of the
Company tender their shares in connection with any such tender offer unless
the Board determines, in its good faith judgment, based on the opinion of
independent outside legal counsel to the Company, that failing to take such
action would constitute a breach of the Board's duties under applicable law.
The Company will promptly notify Aon of any Takeover Proposal, including the
material terms and conditions thereof and the identity of the person or group
making such Takeover Proposal, and will promptly notify Aon of any
determination by the Company's Board of Directors that a Superior Proposal has
been made. As used in this Agreement, (i) "Takeover Proposal" shall mean any
proposal or offer, other than a proposal or offer by Aon or any of its
Subsidiaries for a tender or exchange offer, a merger, consolidation or other
business combination involving the Company or any of its Subsidiaries or any
proposal to acquire in any manner a substantial equity interest in, or a
substantial portion of the assets of, the Company or any of its Subsidiaries
and
I-16
<PAGE>
(ii) "Superior Proposal" shall mean a bona fide proposal or offer made by a
third party to acquire the Company pursuant to a tender or exchange offer, a
merger, consolidation or other business combination or a sale of all or
substantially all of the assets of the Company and its Subsidiaries on terms
which a majority of the members of the Board of Directors of the Company,
having received the advice of an independent financial advisor, determines in
their good faith reasonable judgment to be more favorable to the Company's
stockholders than the transactions contemplated hereby and for which any
required financing is committed or which a majority of such members, having
received the advice of an independent financial advisor, determines in their
good faith reasonable judgment is reasonably capable of being obtained by such
third party.
SECTION 6.3 Third Party Standstill Agreements. During the period from the
date of this Agreement through the Effective Time, the Company shall not
terminate, amend, modify or waive any provision of any confidentiality or
standstill agreement to which the Company or any of its Subsidiaries is a
party (other than any involving Aon).
SECTION 6.4 Other Actions. Except as expressly contemplated or permitted by
this Agreement or except as set forth in the Company Letter, the Company shall
not, and shall not permit any of its Subsidiaries to, take any action that
would, or that could reasonably be expected to, result in (i) any of the
representations and warranties of the Company set forth in this Agreement that
are qualified as to materiality becoming untrue, (ii) any of such
representations and warranties that are not so qualified becoming untrue in
any material respect, or (iii) any of the Offer Conditions not being satisfied
(subject to the Company's right to take actions specifically permitted by
Section 6.2).
ARTICLE VII
ADDITIONAL AGREEMENTS
SECTION 7.1 Stockholder Approval; Preparation of Proxy Statement. (a) If
approval of the Merger by stockholders of the Company (the "Company
Stockholder Approval") is required by law, the Company shall, at Aon's
request, as soon as practicable following the expiration of the Offer, duly
call, give notice of, convene and hold a meeting of its stockholders (the
"Stockholders Meeting") for the purpose of obtaining the Company Stockholder
Approval. The Stockholders Meeting shall be held as soon as practicable
following the purchase of Shares pursuant to the Offer. The Company shall,
through its Board of Directors, but subject to the duties of its Board of
Directors under applicable law as determined by the Board of Directors in good
faith on the basis of the opinion of the Company's outside independent legal
counsel, recommend to its stockholders that the Company Stockholder Approval
be given. Notwithstanding the foregoing, if Sub or any other Subsidiary of Aon
shall acquire shares entitled to cast 90% or more of all the votes entitled to
be cast on the Merger, the parties shall, at the request of Aon, take all
necessary and appropriate action to cause the Merger to become effective as
soon as reasonably practicable after the expiration of the Offer without a
Stockholders Meeting in accordance with Section 3-106 of the MGCL.
(b) If the Company Stockholder Approval is required by law, the Company
shall, at Aon's request, as soon as practicable following the expiration of
the Offer, prepare and file a preliminary Proxy Statement with the SEC and
shall use its reasonable best efforts to respond to any comments of the SEC or
its staff and to cause the Proxy Statement to be mailed to the Company's
stockholders as promptly as practicable after responding to all such comments
to the satisfaction of the staff. The Company shall notify Aon promptly of the
receipt of any comments from the SEC or its staff and of any request by the
SEC or its staff for amendments or supplements to the Proxy Statement or for
additional information and will supply Aon with copies of all correspondence
between the Company or any of its representatives, on the one hand, and the
SEC or its staff, on the other hand, with respect to the Proxy Statement or
the Merger. If at any time prior to the Stockholders Meeting there shall occur
any event that should be set forth in an amendment or supplement to the Proxy
Statement, the Company shall promptly prepare and mail to its stockholders
such an amendment or supplement. The Company shall not mail any Proxy
Statement, or any amendment or supplement thereto, to which Aon reasonably
objects. Aon shall cooperate with the Company in the preparation of the Proxy
Statement or any amendment or supplement thereto.
I-17
<PAGE>
(c) Aon agrees to cause all shares of the Common Stock purchased pursuant to
the Offer and all other shares of capital stock of the Company entitled to
vote on the Merger owned by Aon or any Subsidiary of Aon to be voted in favor
of the Company Stockholder Approval.
SECTION 7.2 Access to Information. Subject to currently existing contractual
and legal restrictions applicable to the Company, the Company shall, and shall
cause each of its Subsidiaries to, upon reasonable notice, afford to Aon and
to the officers, employees, accountants, counsel, actuaries, financial
advisors and other representatives of Aon reasonable access to, and permit
them to make such inspections as they may reasonably require of, during normal
business hours (to the extent feasible without undue interference with or
disruption to the operation of the Company, or any of its business units)
during the period from the date of this Agreement through the Effective Time,
all their respective properties, books, contracts, commitments and records
(including, without limitation, the work papers of independent accountants and
actuaries) and, during such period, the Company shall, and shall cause each of
its Subsidiaries to, furnish promptly to Aon (i) a copy of each report,
schedule, registration statement and other document filed by it during such
period pursuant to the requirements of federal or state securities laws and
(ii) all other information concerning its business, properties and personnel
as Aon may reasonably request. All information obtained by Aon pursuant to
this Section 7.2 shall be kept confidential in accordance with the
Confidentiality Agreement dated November 29, 1996, between Aon and the
Company.
SECTION 7.3 Fees and Expenses. (a) Except as provided in this Section 7.3
and Section 7.6, whether or not the Merger is consummated, all costs and
expenses incurred by a party hereto in connection with this Agreement and the
transactions contemplated hereby, including, without limitation, the fees and
disbursements of counsel, financial advisors and accountants, shall be paid by
the party incurring such costs and expenses, provided that all printing
expenses and filing fees shall be divided equally between Aon and the Company.
(b) The Company shall pay, or cause to be paid, in same day funds to Aon $35
million (the "Termination Fee") upon demand if: (i) Aon or Sub terminates this
Agreement under Section 9.1(d) following the occurrence of any event set forth
in clause (i) or (ii) of paragraph (c) of Exhibit A and within six months
following such termination a Third Party Acquisition Event occurs; (ii) the
Company terminates this Agreement pursuant to Section 9.1(e); or (iii) this
Agreement is terminated and prior thereto a Third Party Acquisition Event (as
defined below) occurred.
(c) Aon shall pay, or cause to be paid, in same day funds to the Company $35
million (the "Aon Minimum Damages") upon demand if the Company shall have
terminated this Agreement pursuant to Section 9.1(f), including, without
limitation, based upon a breach by Aon or Sub or its obligations under Section
7.11; provided, however, that Aon Minimum Damages shall be repaid to Aon if,
within six months following such termination, a Third Party Acquisition Event
shall occur having a value per share of Common Stock of not less than the
Offer Price.
A "Third Party Acquisition Event" means any of the following events: (A) any
person, corporation, partnership or other entity or group (such person,
corporation, partnership or other entity or group being referred to
hereinafter, singularly or collectively, as a "Person"), other than Aon or its
Subsidiaries, acquires or becomes the beneficial owner of 30% or more of the
outstanding shares of the Company Common Capital Stock; (B) any new group is
formed which, at the time of formation, beneficially owns 30% or more of the
outstanding shares of the Company Common Capital Stock (other than a group
which includes or may reasonably be deemed to include Aon or any of its
Subsidiaries); (C) the Company enters into an agreement providing for a merger
or other business combination involving the Company or the acquisition of a
substantial interest in, or a substantial portion of the assets, business or
operations of, the Company and its subsidiaries (other than the transactions
contemplated by this Agreement); or (D) any Person (other than Aon or its
Subsidiaries) is granted any option or right, conditional or otherwise, to
acquire or otherwise become the beneficial owner of shares of the Company
Common Capital Stock that results or would result in such Person being the
beneficial owner of 30% or more of the outstanding shares of the Company
Common Capital Stock. For purposes of this Section 7.3(b), the terms "group"
and "beneficial owner" shall be defined by reference to Section 13(d) of the
Exchange Act.
I-18
<PAGE>
SECTION 7.4 Options. (a) Prior to the commencement of the Offer, the Board
of Directors of the Company or the Compensation Committee of the Board of
Directors of the Company (the "Committee") shall adopt procedures pursuant to
which each outstanding Company Stock Option, stock appreciation right, limited
stock appreciation right and other stock based award (an "Option") which is
exercisable immediately prior to the consummation of the Offer in accordance
with the terms of the applicable plan (collectively, the "Stock Option
Plans"), may be exercised by the holder thereof by the delivery to the Company
of a notice of exercise prior to the consummation of the Offer. Upon the
consummation of the Offer, each Option so exercised shall be canceled and
promptly thereafter the Company shall deliver to the holder thereof cash in an
amount equal to (i) the product of (x) the number of shares of Common Stock
subject or related to such Option and (y) the excess, if any, of the Merger
Consideration over the exercise or purchase price per share of Common Stock
subject or related to such Option, minus (ii) all applicable federal, state
and local taxes required to be withheld by the Company.
(b) Prior to the commencement of the Offer, the Board of Directors of the
Company or the Committee shall take action in accordance with the terms of the
Stock Option Plans to cause each Option outstanding immediately following the
consummation of the Offer, whether or not then exercisable, to become fully
exercisable. The Board of Directors of the Company or the Committee shall also
adopt procedures pursuant to which each such Option may be exercised by the
holder thereof by the delivery to the Company of a notice of exercise prior to
the Effective Time. At the Effective Time, each such Option so exercised shall
be canceled and promptly thereafter the Company shall deliver to the holder
thereof cash in an amount equal to (i) the product of (x) the number of shares
of Common Stock subject or related to such Option and (y) the excess, if any,
of the Merger Consideration over the exercise or purchase price per share of
Common Stock subject or related to such Option minus (ii) all applicable
federal, state and local taxes required to be withheld by the Company.
(c) The Company will use its reasonable best efforts to ensure that
immediately following the Effective Time, each outstanding Option which has
not theretofore been exercised by the holder thereof shall be canceled
(whether or not such holder has delivered the acknowledgment referred to in
the proviso to this sentence), and promptly thereafter Aon shall deliver to
the holder thereof cash in an amount equal to (i) the product of (x) the
number of shares of Common Stock subject or related to such Option and (y) the
excess, if any, of the Merger Consideration over the exercise or purchase
price per share of Common Stock subject or related to such Option, minus (ii)
all applicable federal, state and local taxes required to be withheld by the
Company; provided, however, that any such payment to a holder of an Option so
canceled shall be conditioned upon the delivery to Aon by such holder of a
receipt in writing acknowledging the receipt by such holder of such payment in
exchange for the cancellation of all Options held by such holder. For purposes
of this subsection (c), options offered under the Company's Employee Discount
Stock Purchase Plan shall be deemed outstanding only to the extent of
employees' elections to participate therein as in effect on the date of
purchase of Shares pursuant to the Offer. No further options shall be granted
under any Stock Option Plan after the date of this Agreement except pursuant
to the normal operation of the Company's Employee Discount Stock Purchase
Plan, and no further Options shall be granted thereunder after the purchase of
Shares pursuant to the Offer.
(d) Prior to the commencement of the Offer, the Board of Directors of the
Company or the Committee shall take action in accordance with the terms of the
Stock Option Plans and pursuant to all other plans and agreements providing
for the award of restricted Common Stock to cause the restrictions on the
shares of restricted Common Stock granted under such plans and agreements to
lapse effective upon the consummation of the Offer and to adopt procedures to
enable all holders thereof to tender such shares of Common Stock pursuant to
the terms of the Offer.
SECTION 7.5 Public Announcements. Aon and the Company will consult with each
other before issuing any press release or otherwise making any public
statements with respect to the transactions contemplated by this Agreement and
shall not issue any such press release or make any such public statement prior
to such consultation, except as may be required by applicable law or by
obligations pursuant to any listing agreement with any national securities
exchange.
I-19
<PAGE>
SECTION 7.6 Real Estate Transfer Tax. Aon and the Company agree that either
the Surviving Corporation or Aon will pay any state or local tax which is
attributable to the transfer of the beneficial ownership of the Company's or
its Subsidiaries' real property, if any (collectively, the "Transfer Taxes"),
and any penalties or interest with respect to the Transfer Taxes, payable in
connection with the consummation of the Offer and the Merger. The Company
agrees to cooperate with Aon in the filing of any returns with respect to the
Transfer Taxes, including supplying in a timely manner a complete list of all
real property interests held by the Company and its Subsidiaries and any
information with respect to such property that is reasonably necessary to
complete such returns. The portion of the consideration allocable to the real
property of the Company and its Subsidiaries shall be determined by Aon in its
reasonable discretion. The stockholders of the Company shall be deemed to have
agreed to be bound by the allocation established pursuant to this Section 7.6
in the preparation of any return with respect to the Transfer Taxes.
SECTION 7.7 State Takeover Laws. If any "fair price" or "control share
acquisition" statute or other similar statute or regulation shall become
applicable to the transactions contemplated hereby, Aon and the Company and
their respective Boards of Directors shall use their reasonable best efforts
to grant such approvals and take such actions as are necessary so that the
transactions contemplated hereby may be consummated as promptly as practicable
on the terms contemplated hereby and otherwise act to minimize the effects of
any such statute or regulation on the transactions contemplated hereby.
SECTION 7.8 Indemnification; Directors and Officers Insurance. (a) From and
after the Effective Time, Aon agrees to cause the Surviving Corporation to
exculpate, indemnify and hold harmless all past and present officers and
directors of the Company and its Subsidiaries (the "Indemnified Parties") to
the same extent such persons are currently exculpated and indemnified by the
Company pursuant to the Company's Charter and By-Laws for acts or omissions
occurring at or prior to the Effective Time. Aon shall cause the Surviving
Corporation to provide, for an aggregate period of not less than six years
from the Effective Time, the Company's current directors and officers an
insurance and indemnification policy that provides coverage for events
occurring prior to the Effective Time (the "D&O Insurance") that is no less
favorable than the Company's existing policy or, if substantially equivalent
insurance coverage is unavailable, the best available coverage; provided,
however, that the Surviving Corporation shall not be required to pay an annual
premium for the D&O Insurance in excess of 175 percent of the last annual
premium paid prior to the date hereof, but in such case shall purchase as much
coverage as possible for such amount.
(b) Any Indemnified Party wishing to claim indemnification under Section
7.8(a), upon learning of any claim, action, suit, proceeding or investigation
subject to indemnification thereunder, shall promptly notify the Surviving
Corporation thereof. An Indemnified Party may select counsel to represent him
or her in connection with any of the foregoing, which counsel shall be
reasonably acceptable to the Surviving Corporation, and the Surviving
Corporation will cooperate in the defense of any such matter; provided,
however, that the Surviving Corporation shall not be liable for any settlement
effected without its written consent; and provided, further, that the
Surviving Corporation shall not be obligated to pay the fees and disbursements
of more than one counsel for all Indemnified Parties in any single matter
except to the extent that, in the opinion of counsel for the Indemnified
Parties, two or more of such Indemnified Parties have conflicting interests in
the outcome of such matter. The Surviving Corporation shall not have any
obligation hereunder to an Indemnified Party if and when a court of competent
jurisdiction shall ultimately determine, and such determination shall have
become final, that the indemnification of such Indemnified Party in the manner
contemplated hereby is prohibited by applicable law.
SECTION 7.9 Notification of Certain Matters. Aon shall give prompt notice to
the Company, and the Company shall give prompt notice to Aon, of: (i) the
occurrence, or non-occurrence, of any event the occurrence, or non-occurrence,
of which would be likely to cause (x) any representation or warranty contained
in this Agreement that is not qualified as to materiality to be untrue or
inaccurate in any material respect, (y) any representation or warranty
contained in this Agreement that is qualified as to materiality to be untrue
or inaccurate in any respect, or (z) any covenant, condition or agreement
contained in this Agreement not to be complied with or satisfied; and (ii) any
failure of Aon or the Company, as the case may be, to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however,
I-20
<PAGE>
that the delivery of any notice pursuant to this Section 7.9 shall not limit
or otherwise affect the remedies available hereunder to the party receiving
such notice.
SECTION 7.10 Board of Directors. Promptly after such time as Sub acquires
Shares pursuant to the Offer, Sub shall be entitled to designate at its option
up to that number of directors, rounded to the nearest whole number, of the
Company's Board of Directors, subject to compliance with Section 14(f) of the
Exchange Act, as will make the percentage of the Company's directors
designated by Sub equal to the aggregate voting power of the Shares of Common
Stock held by Aon or any of its Subsidiaries (assuming the exercise of all
outstanding options to purchase, and the conversion or exchange of all
securities convertible or exchangeable into shares of the Company Common
Capital Stock, other than the conversion of the shares of Class B Preferred
Stock); provided, however, that in the event that Sub's designees are elected
to the Board of Directors of the Company, until the Effective Time, such Board
of Directors shall have at least three directors who are directors on the date
of this Agreement and who are not officers of the Company (the "Independent
Directors"); and provided, further that, in such event, if the number of
Independent Directors shall be reduced below three for any reason whatsoever,
the remaining Independent Directors shall designate a person to fill such
vacancy who shall be deemed to be an Independent Director for purposes of this
Agreement or, if no Independent Directors then remain, the other directors
shall designate three persons to fill such vacancies who shall not be officers
or affiliates of the Company or any of its Subsidiaries, or officers or
affiliates of Aon or any of its Subsidiaries, and such persons shall be deemed
to be Independent Directors for purposes of this Agreement. Subject to
applicable law, the Company shall take all action requested by Aon which is
reasonably necessary to effect any such election, including mailing to its
stockholders the Information Statement containing the information required by
Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder, and
the Company agrees to make such mailing with the mailing of the Schedule 14D-9
(provided that Sub shall have provided to the Company on a timely basis all
information required to be included in the Information Statement with respect
to Sub's designees). In connection with the foregoing, the Company will
promptly, at the option of Aon, either increase the size of the Company's
Board of Directors and/or obtain the resignation of such number of its current
directors as is necessary to enable Sub's designees to be elected or appointed
to the Company's Board of Directors as provided above.
SECTION 7.11 Reasonable Best Efforts. Each of the Company, Aon and Sub
agrees to use its reasonable best efforts to cause the purchase of Shares
pursuant to the Offer and the consummation of the Merger to occur as soon as
practicable. Without limiting the foregoing, (a) each of the Company, Aon and
Sub agree to use its reasonable best efforts to take, or cause to be taken,
all actions necessary to comply promptly with all legal requirements that may
be imposed on itself with respect to the Offer and the Merger (which actions
shall include furnishing all information required under the HSR Act,
including, without limitation, with respect to the transactions contemplated
by the Preferred Stock Purchase Agreement, and in connection with approvals of
or filings with any other Governmental Entity) and shall promptly cooperate
with and furnish information to each other in connection with any such
requirements imposed upon any of them or any of their Subsidiaries in
connection with the Offer and the Merger and (b) each of the Company, Aon and
Sub shall, and shall cause its Subsidiaries to, use its reasonable best
efforts to obtain (and shall cooperate with each other in obtaining) any
consent, authorization, order or approval of, or any exemption by, any
Governmental Entity or other public or private third party required to be
obtained or made by Aon, Sub, the Company or any of their Subsidiaries in
connection with the Offer and the Merger or the taking of any action
contemplated thereby or by this Agreement. Notwithstanding anything to the
contrary contained in this Agreement, (i) the Company shall not be obligated
to use its reasonable best efforts or to take any action pursuant to this
Section 7.11 if the Board of Directors of the Company shall determine, in its
good faith judgment, based on the opinion of independent outside legal counsel
to the Company, that such action would constitute a breach of such Board's
duties under applicable law, and (ii) in connection with any filing or
submission required or action to be taken by Aon, the Company or any of its
respective Subsidiaries to consummate the Offer, the Merger or the other
transactions contemplated in this Agreement, the Company shall not, without
Aon's prior written consent, commit to any divestiture of assets or businesses
of the Company and its Subsidiaries if such divested assets and/or businesses
are material to the assets or profitability of the Company and its
Subsidiaries taken as a whole; and neither Aon nor any of its Subsidiaries
I-21
<PAGE>
shall be required to divest any assets or business of Aon or its Subsidiaries
or the Company or its Subsidiaries if such divested assets and/or businesses
are material to the assets or profitability of Aon or its Subsidiaries taken
as a whole or the Company and its Subsidiaries taken as a whole, respectively,
or hold separate or otherwise take or commit to take any action that
materially limits its freedom of action with respect to the Company or any
such assets or businesses.
SECTION 7.12 Certain Litigation. The Company agrees that it shall not settle
any litigation commenced after the date hereof against the Company or any of
its directors by any stockholder of the Company relating to the Offer, the
Merger, this Agreement or the Preferred Stock Purchase Agreement without the
prior written consent of Aon (which shall not be unreasonably withheld).
SECTION 7.13 Employee Benefits. The Company shall take, or shall cause to be
taken, any and all action as shall be necessary or appropriate so that
effective upon the purchase of Shares pursuant to the Offer, neither the
Company nor any of its Subsidiaries shall be obligated to issue or sell to any
Company Plan (as defined in clause (i) of the definition of "Company Plan" set
forth below) any shares of or rights to acquire capital stock of the Company
or any of its Subsidiaries. Aon agrees that it will cause the Company, and
each Subsidiary of the Company, to honor from and after the Effective Time,
all Company Plans (as hereinafter defined); provided, however, that Aon may
cause the Company to amend or terminate any Company Plan in accordance with
its terms and applicable law. Except as otherwise provided by Section 7.4 or
this Section 7.13, to the extent that after the purchase of Shares pursuant to
the Offer, Aon shall cause the amendment, modification or termination of any
Company Plan, Aon shall cause the affected employees, former employees and
retirees to receive benefits of the type affected by such amendment,
modification or termination no less favorable than the comparable type of
benefits provided to similarly situated employees, former employees and
retirees of Aon or its affiliates ("Aon-Provided Plans").
For purposes of eligibility to participate, vesting and eligibility for and
accrual of benefits under all Company Plans and Aon-Provided Plans, all
service of any individual who is an employee of the Company or any Subsidiary
of the Company immediately prior to the Effective Time (a "Company Employee")
with the Company and/or any Subsidiary of the Company prior to the Effective
Time shall, on and after the Effective Time, be treated as service with the
Company, all Subsidiaries of the Company, Aon and/or Subsidiaries of Aon (as
applicable); provided, however, that, with respect to a Company Employee's
service prior to the Effective Time, Aon shall not be required to provide any
benefit under any defined benefit pension plan to such Company Employee in an
amount greater than the benefit such Company Employee has accrued as of the
Effective Time, except that in determining the amount of such accrued benefit,
compensation paid to such Company Employee on or after the Effective Time
shall be counted to the extent that the compensation of such Company Employee
after the Effective Time remains a factor used in determining such accrued
benefit under such plan. The Company, the Subsidiaries of the Company, Aon and
the Subsidiaries of Aon shall cause all Company Plans and Aon-Provided Plans
to (x) waive any pre-existing condition limitations otherwise applicable on
and after the Effective Time to Company Employees who are not subject to pre-
existing condition limitations immediately prior to the Effective Time, and
(y) provide that any expenses incurred by Company Employees (and their
dependents) during any plan year within which the Effective Time occurs shall
be taken into account for purposes of satisfying applicable deductible,
coinsurance and maximum out-of-pocket provisions (and like adjustments or
limitations on coverage) under the Company Plans and Aon-Provided Plans. As
used in this Agreement, except as otherwise provided above, "Company Plan"
shall include any United States or non-United States (i) "employee benefit
plan," within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), (ii) bonus, stock option, stock
purchase, restricted stock, incentive, equity participation, profit-sharing,
savings, pension, retirement, deferred compensation, medical, health, life
insurance, disability, accident, accrued leave, vacation, sick pay, sick
leave, supplemental retirement and unemployment benefit plan, program,
arrangement, commitment and/or practice, and (iii) employment, consulting,
termination, change in control, severance and salary continuation agreement,
contract, plan, policy, program and/or arrangement, that, in the case of (i),
(ii) and (iii), the Company and/or any Subsidiary of the Company currently
maintains or contributes to (or with respect to which the Company or any
Subsidiary of the Company has any
I-22
<PAGE>
obligation) for active, retired or former employees or directors of the
Company or any Subsidiary of the Company, whether or not any such plan,
program, arrangement, commitment, contract, agreement and/or practice
(referred to in (i), (ii) or (iii)) is in writing, is insured or is exempt
from the provisions of ERISA. Any Company Employee whose employment is
terminated by the Company, any Subsidiary of the Company, Aon or any
Subsidiary of Aon, or any successor of any thereof, on or before one (1) year
following the Effective Time (except for any Company Employee whose employment
is terminated for engaging in criminal conduct or malfeasance in connection
with his or her employment) shall be provided, in addition to all other
applicable non-severance benefits, severance benefits no less favorable than
those such Company Employee would have received upon such termination of his
or her employment with the Company or a Subsidiary of the Company (as
applicable) occurring immediately prior to the Effective Time.
At the Effective Time, the employment of Frank G. Zarb with the Surviving
Corporation shall be terminated without cause.
SECTION 7.14 Stapled Securities. (a) Simultaneously with any retraction at
the option of a holder of RSC Class 1 Shares for shares of Common Stock,
whether as contemplated by Section 1.3 or otherwise, the Company shall
repurchase from the Trustee (as hereinafter defined), pursuant to the relevant
Exchange and Trust Agreement, among the Company, RSC and The Montreal Trust
Company, as trustee (the "Trustee"), an amount of shares of Class A Common
Stock equal to the amount of RSC Class 1 Shares so retracted and at a
repurchase price of Cdn. $0.00001 per share of Class A Common Stock.
(b) Simultaneously with any conversion at the option of a holder of Class C
Common Stock into Common Stock, whether as contemplated by Section 1.4 or
otherwise, the Company shall cause AAUK to mandatorily redeem at par (2 pence
per share) each Dividend Share associated with a share of Class C Common Stock
so converted.
(c) Immediately following the purchase of Shares pursuant to the Offer and
in any event prior to the Effective Time, the Company shall (i) take such
actions as Aon may reasonably request to cause all of the RSC Class 1 Shares
then outstanding to be redeemed or retracted for shares of Common Stock (on a
share-for-share basis), pursuant to Section 4 or 5 of the Restated Certificate
of Incorporation of RSC (which shares of Common Stock the Company shall then
issue) (ii) repurchase from the Trustee, pursuant to the Trust Agreement, an
amount of shares of Class A Common Stock equal to the amount of RSC Class 1
Shares redeemed or retracted in accordance with the preceding clause (i) and
at a repurchase price of Cdn. $0.00001 per share of Class A Common Stock,
(iii) take such actions as Aon may reasonably request to cause all of the
shares of Class C Common Stock then outstanding to be converted into an
identical amount of shares of Common Stock, pursuant to subsection E, F or G
of Article SIXTH of the Charter of the Company (which shares of Common Stock
the Company shall then issue) and (iv) cause AAUK to mandatorily redeem at par
(2 pence per share) each Dividend Share related to a share of Class C Common
Stock so converted.
I-23
<PAGE>
ARTICLE VIII
CONDITIONS PRECEDENT
SECTION 8.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
(a) Company Stockholder Approval. If required by applicable law, the Company
Stockholder Approval shall have been obtained; provided, however, that Aon and
Sub shall vote all of their shares of capital stock of the Company entitled to
vote thereon in favor of the Merger.
(b) No Injunction or Restraint. No statute, rule, regulation, executive
order, decree, temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or
other Governmental Entity preventing the consummation of the Merger shall be
in effect; provided, however, that each of the parties shall have used its
reasonable best efforts to prevent the entry of any such temporary restraining
order, injunction or other order and to appeal as promptly as possible any
injunction or other order that may be entered.
(c) Purchase of Shares. Sub shall have previously accepted for payment and
paid for Shares pursuant to the Offer; provided, however, that this condition
will be deemed satisfied with respect to the obligations of Aon or Sub if Sub
fails to accept for payment and pay for any Shares pursuant to the Offer in
violation of the terms of this Agreement.
(d) HSR Act. Any waiting period (and any extension thereof) under the HSR
Act applicable to the Merger shall have expired or been terminated.
ARTICLE IX
TERMINATION AND AMENDMENT
SECTION 9.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after the Company Stockholder
Approval (if required by applicable law):
(a) by mutual written consent of Aon and the Company;
(b) by either Aon or the Company:
(i) if (x) as a result of the failure of any of the Offer Conditions set
forth in Exhibit A the Offer shall have terminated or expired in accordance
with its terms without Sub having accepted for payment any Shares pursuant
to the Offer or (y) all of the Offer Conditions have not been satisfied
prior to April 1, 1997; provided, however, that the right to terminate this
Agreement pursuant to this Section 9.1(b)(i) shall not be available to any
party whose failure to perform any of its obligations under this Agreement
results in the failure of any such Offer Condition or if the failure of
such Offer Condition results from facts or circumstances that constitute a
breach of representation or warranty under this Agreement by such party; or
(ii) if any Governmental Entity shall have issued an order, decree or
ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting the transactions contemplated by this Agreement and
such order, decree or ruling or other action shall have become final and
nonappealable; provided, however, that Aon shall, if necessary to prevent
any such issuance or the taking of such action, offer to accept an order to
divest such of the Company's or Aon's assets and businesses as may be
necessary to forestall such injunction or order and to hold separate such
assets and business pending such divestiture, but only if the amount of
such assets and businesses is not material to the assets or profitability
of the Company and its Subsidiaries taken as a whole or Aon and its
Subsidiaries taken as a whole, respectively;
I-24
<PAGE>
(c) by Aon or Sub prior to the purchase of Shares pursuant to the Offer in
the event of a breach by the Company of any representation, warranty, covenant
or other agreement contained in this Agreement which (i) would give rise to
the failure of a condition set forth in paragraph (d) or (e) of Exhibit A and
(ii) cannot be or has not been cured within 20 days after the giving of
written notice to the Company;
(d) by Aon or Sub if either Aon or Sub is entitled to terminate the Offer as
a result of the occurrence of any event set forth in paragraph (c) of Exhibit
A to this Agreement;
(e) by either Aon or the Company if the Board of Directors of the Company
reasonably determines that a Takeover Proposal constitutes a Superior Proposal
and the Board of Directors of the Company determines, in its good faith
judgment, based on the opinion of independent outside legal counsel to the
Company, that failing to terminate this Agreement would constitute a breach of
such Board's duties under applicable law; provided, however, that the Company
may not terminate this Agreement pursuant to this Section 9.1(e) unless and
until 48 hours have elapsed following delivery to Aon of a written notice of
such determination by the Board of Directors of the Company; provided,
further, that the Company may not terminate this Agreement pursuant to this
Section 9.1(e) unless simultaneously with such termination the Company pays to
Aon the amount specified under Section 7.3(b); and provided, further, that any
termination by Aon pursuant to this Section 9.1(e) shall in no way constitute
an admission that the Company complied with the provisions of Section 6.2 or
any other provision hereof, or prejudice any claim by Aon that the Company did
not comply with the provisions of Section 6.2 or any other provisions hereof.
(f) by the Company, if (i) any of the representations or warranties of Aon
or Sub set forth in this Agreement that are qualified as to materiality shall
not be true and correct in any respect or any such representations or
warranties that are not so qualified shall not be true and correct in any
material respect, or (ii) Aon or Sub shall have failed to perform in any
material respect any obligation or to comply in any material respect with any
agreement or covenant of Aon or Sub to be performed or complied with by it
under this Agreement and, in the case of (i) or (ii), such untruth or
incorrectness or failure cannot be or has not been cured within 20 days after
the giving of written notice to Aon or Sub, as applicable; or
(g) by the Company, (i) if the Offer has not been timely commenced in
accordance with Section 1.1 or (ii) Sub shall not have accepted for payment
any Shares pursuant to the Offer prior to April 1, 1997;
SECTION 9.2 Effect of Termination. In the event of a termination of this
Agreement by either the Company or Aon as provided in Section 9.1, this
Agreement shall forthwith become void and there shall be no liability or
obligation on the part of Aon, Sub or the Company or their respective officers
or directors, except with respect to the last sentences of each of Section
1.2(c), 1.3 and 1.4, Section 4.15, Section 5.6, the last sentence of Section
7.2, Section 7.3, this Section 9.2 and Section 10.7; provided, however, that
nothing herein shall relieve any party for liability for any breach hereof.
SECTION 9.3 Amendment. This Agreement may be amended by the parties hereto,
by action taken or authorized by their respective Boards of Directors at any
time before or after obtaining the Company Stockholder Approval (if required
by law), but, after the purchase of Shares pursuant to the Offer no amendment
shall be made which decreases the Merger Consideration and after the Company
Stockholder Approval no amendment shall be made which by law requires further
approval by the stockholders of the Company without obtaining such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto. Following the election or
appointment of the Sub's designees pursuant to Section 7.10 and prior to the
Effective Time, the affirmative vote of a majority of the Independent
Directors then in office shall be required by the Company to (i) amend or
terminate this Agreement by the Company, (ii) exercise or waive any of the
Company's rights or remedies under this Agreement or (iii) extend the time for
performance of Aon and Sub's respective obligations under this Agreement.
SECTION 9.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (i) subject to the
I-25
<PAGE>
provisions of Section 9.3, extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) subject to the
provisions of Section 9.3, waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto or
(iii) subject to the provisions of Section 9.3, waive compliance with any of
the agreements or conditions contained herein. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid only if set forth
in a written instrument signed on behalf of such party. The failure of any
party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of those rights.
ARTICLE X
GENERAL PROVISIONS
SECTION 10.1 Non-Survival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Effective Time.
SECTION 10.2 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given when delivered personally, one day
after being delivered to an overnight courier or when telecopied (with a
confirmatory copy sent by overnight courier) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to Aon or Sub, to
Aon Corporation 123 North Wacker Drive Chicago, IL 60606 Attention:
Raymond I. Skilling, Esq.
Executive Vice President & Chief Counsel
with a copy to:
Sidley & Austin One First National Plaza Chicago, Illinois 60603
Attn: Thomas A. Cole, Esq.
(b) if to the Company, to
Alexander & Alexander Services Inc. 1185 Avenue of the Americas 21st
Floor New York, New York 10036 Attention: Albert A. Skwiertz, Jr.
Senior Vice President & General Counsel
with a copy to:
White & Case 1155 Avenue of the Americas New York, New York 10036
Attention: Kevin Keogh
I-26
<PAGE>
SECTION 10.3 Interpretation. When a reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to
be followed by the words "without limitation." As used in this Agreement, the
term "subsidiary" or "Subsidiary" of any person means another person, an
amount of the voting securities, other voting ownership or voting partnership
interests of which is sufficient to elect at least a majority of its Board of
Directors or other governing body (or, if there are no such voting interests,
50% or more of the equity interests of which) is owned directly or indirectly
by such first person. As used in this Agreement, the term "Significant
Subsidiary" of any person means a Subsidiary of such person that would
constitute a "significant subsidiary" of such person within the meaning of
Rule 1.02(v) of Regulation S-X as promulgated by the SEC. As used in this
Agreement, "Material Adverse Change" or "Material Adverse Effect" means, when
used in connection with the Company or Aon, as the case may be, any change or
effect (or any development that, insofar as can reasonably be foreseen, is
likely to result in any change or effect) that is materially adverse to the
business, financial condition or results of operations of the Company and its
Subsidiaries taken as a whole or Aon and its Subsidiaries taken as a whole, as
the case may be. As used in this Agreement, "consummation of the Offer" means
the purchase of Shares pursuant to the Offer.
SECTION 10.4 Counterparts. This Agreement may be executed in counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been signed by each of the
parties and delivered to the other parties.
SECTION 10.5 Entire Agreement; No Third-Party Beneficiaries. This Agreement,
except as provided in the last sentence of Section 7.2, constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof. This
Agreement, except for the provisions of Section 7.8, is not intended to confer
upon any person other than the parties hereto any rights or remedies
hereunder.
SECTION 10.6 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Maryland, regardless of
the laws that might otherwise govern under applicable principles of conflicts
of laws thereof.
SECTION 10.7 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto without the prior written consent of the other parties, except that Sub
may assign, in its sole discretion, any of or all its rights, interests and
obligations under this Agreement to Aon or to any direct or indirect wholly
owned Subsidiary of Aon, but no such assignment shall relieve Sub of any of
its obligations hereunder. Subject to the preceding sentence, this Agreement
shall be binding upon, inure to the benefit of, and be enforceable by, the
parties and their respective successors and assigns.
SECTION 10.8 Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law, or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic and legal
substance of the transactions contemplated hereby are not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated by this
Agreement may be consummated as originally contemplated to the fullest extent
possible.
SECTION 10.9 Enforcement of this Agreement. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and
I-27
<PAGE>
provisions hereof in any court of the United States or any state having
jurisdiction, such remedy being in addition to any other remedy to which any
party is entitled at law or in equity.
SECTION 10.10 Obligations of Subsidiaries. Whenever this Agreement requires
any Subsidiary of Aon (including Sub) or of the Company to take any action,
such requirement shall be deemed to include an undertaking on the part of Aon
or the Company, as the case may be, to cause such Subsidiary to take such
action.
In Witness Whereof, Aon, Sub and the Company have caused this Agreement to
be signed by their respective officers thereunto duly authorized all as of the
date first written above.
AON CORPORATION
By:/s/ Patrick G. Ryan
----------------------------------
Name: Patrick G. Ryan
Title: Chairman, President &
Chief Executive Officer
Attest:
/s/ William J. Fasel
- - -------------------------------------
Name: William J. Fasel
Title: Corporate Secretary
SUBSIDIARY CORPORATION, INC.
By:/s/ Patrick G. Ryan
----------------------------------
Name: Patrick G. Ryan
Title: President
Attest:
/s/ Raymond I. Skilling
- - -------------------------------------
Name: Raymond I. Skilling
Title: Secretary
ALEXANDER & ALEXANDER SERVICES INC.
By:/s/ Frank G. Zarb
----------------------------------
Name: Frank G. Zarb
Title: Chairman of the Board,
President & Chief Executive
Officer
Attest:
/s/ Alice Russell
- - -------------------------------------
Name: Alice Russell
Title: Secretary
I-28
<PAGE>
EXHIBIT A
CONDITIONS OF THE OFFER
Notwithstanding any other term of the Offer or this Agreement, Sub shall not
be required to accept for payment or, subject to any applicable rules and
regulations of the SEC, including Rule 14e-l(c) under the Exchange Act
(relating to Sub's obligation to pay for or return tendered Shares after the
termination or withdrawal of the Offer), to pay for any Shares tendered
pursuant to the Offer unless (i) there shall have been validly tendered and
not withdrawn prior to the expiration of the Offer such number of Shares that
would constitute a majority of the combined voting power of the shares of the
Company Common Capital Stock (assuming the exercise of all options to
purchase, and the conversion or exchange of all securities convertible or
exchangeable into, shares of the Company Common Stock outstanding at the
expiration date of the Offer, other than the conversion of the shares of the
Series B Preferred Stock) (the "Minimum Condition"), (ii) any waiting period
under the HSR Act or the Competition Act (Canada) applicable to the purchase
of Shares pursuant to the Offer shall have expired or been terminated and
(iii) the approvals of the Department of Insurance of the States of Delaware,
New York and Vermont, shall have been received with respect to the acquisition
of control (or the disclaimer thereof) resulting from the transactions
contemplated by this Agreement of the insurance-underwriting Subsidiaries of
the Company organized under the laws of Delaware and New York, respectively.
Furthermore, notwithstanding any other term of the Offer or this Agreement,
Sub shall not be required to accept for payment or, subject as aforesaid, to
pay for any Shares not theretofore accepted for payment or paid for, and may
terminate the Offer if, at any time on or after the date of this Agreement and
before the acceptance of such Shares for payment or the payment therefor, any
of the following conditions exists (other than as a result of any action or
inaction of Aon or any of its Subsidiaries that constitutes a breach of this
Agreement):
(a) there shall be instituted by any Governmental Entity any suit, action or
proceeding (i) making illegal or prohibiting the acquisition by Aon or Sub of
any Shares under the Offer, making illegal or prohibiting the making or
consummation of the Offer or the Merger or the performance of any of the other
transactions contemplated by this Agreement, or seeking to obtain from the
Company, Aon or Sub any damages that are material in relation to the Company
and its Subsidiaries taken as a whole, (ii) prohibiting or materially limiting
the ownership or operation by the Company, Aon or any of their respective
Subsidiaries of any material business or assets of the Company and its
Subsidiaries, or Aon and its Subsidiaries, or compelling the Company or Aon to
dispose of or hold separate any material business or assets of the Company and
its Subsidiaries or Aon and its Subsidiaries, as a result of the Offer, the
Merger or any of the other transactions contemplated by this Agreement, (iii)
imposing material limitations on the ability of Aon or Sub to acquire or hold,
or exercise full rights of ownership of, any Shares to be accepted for payment
pursuant to the Offer, including, without limitation, the right to vote such
Shares or shares on all matters properly presented to the stockholders of the
Company, or (iv) prohibiting Aon or any of its Subsidiaries from effectively
controlling any business or operations of the Company or its Subsidiaries,
provided, however, that Aon shall, if necessary to prevent any such
consequence, offer to accept an order to divest such of the Company's or Aon's
assets and businesses as may be necessary to prevent such consequence and to
hold separate such assets and businesses pending such divestiture, but only if
the amount of such assets and businesses is not material to the assets or
profitability of the Company and its Subsidiaries taken as a whole or Aon and
its Subsidiaries taken as a whole, as the case may be;
(b) there shall be enacted, entered, enforced, promulgated or deemed
applicable to the Offer or the Merger by any Governmental Entity, any statute,
rule, regulation, judgment, order or injunction, other than the application to
the Offer or the Merger of applicable waiting periods under the HSR Act or the
Competition Act (Canada), that would reasonably be expected to result,
directly or indirectly, in any of the consequences referred to in clauses (i)
through (iv) of paragraph (a) above;
(c) (i) the Board of Directors of the Company or any committee thereof shall
have withdrawn or modified in a manner adverse to Aon or Sub its approval or
recommendation of the Offer, the Merger or this Agreement,
I-29
<PAGE>
or approved or recommended any Takeover Proposal or (ii) the Board of
Directors of the Company or any committee thereof shall have resolved to take
any of the foregoing actions (it being understood that the taking and
disclosing to the Company's stockholders of a position contemplated by Rule
14d-9(e) promulgated under the Exchange Act shall not constitute an event
referred to in clause (i) or (ii));
(d) any of the representations and warranties of the Company set forth in
this Agreement that are qualified as to materiality shall not be true and
correct in any respect or any such representations and warranties that are not
so qualified shall not be true and correct in any material respect, in each
case as if such representations and warranties were made as of such time;
(e) the Company shall have failed to perform in any material respect any
obligation or to comply in any material respect with any agreement or covenant
of the Company to be performed or complied with by it under this Agreement;
(f) there shall have occurred and continued to exist for not less than three
business days (i) any general suspension of trading in, or limitation on
prices for, securities on a national securities exchange in the United States
(excluding any coordinated trading halt triggered solely as a result of a
specified decrease in a market index) or (ii) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States; or
(g) this Agreement shall have been terminated in accordance with its terms.
The foregoing conditions are for the sole benefit of Aon and Sub and may,
subject to the terms of this Agreement, be waived by Aon and Sub in whole or
in part at any time and from time to time in their sole discretion. The
failure by Aon or Sub at any time to exercise any of the foregoing rights
shall not be deemed a waiver of any such right, the waiver of any such right
with respect to particular facts and circumstances shall not be deemed a
waiver with respect to any other facts and circumstances and each such right
shall be deemed an ongoing right that may be asserted at any time and from
time to time.
I-30
<PAGE>
ANNEX II
LOGO
CS First Boston Corporation 11 Madison Avenue
New York, NY 10010
Telephone 212 325-2000
December 11, 1996
Board of Directors
Alexander & Alexander Services Inc.
1185 Avenue of the Americas
New York, New York 10036
Dear Sirs and Madam:
You have asked us to advise you with respect to the fairness to the holders
of the common stock, par value $1.00 per share (the "Common Stock"), of
Alexander & Alexander Services Inc. (the "Company") from a financial point of
view of the consideration to be received by such stockholders pursuant to the
terms of the Agreement and Plan of Merger, dated as of December 11, 1996 (the
"Acquisition Agreement"), among the Company, Aon Corporation (the "Acquiror")
and Subsidiary Corporation, Inc. (the "Sub"). The Acquisition Agreement
provides for a tender offer (the "Offer") by Sub for all of the outstanding
shares of the Common Stock and the subsequent merger (the "Merger") of the
Company with the Sub pursuant to which the Company will become a wholly owned
subsidiary of the Acquiror and each outstanding share of the Common Stock will
be converted into the right to receive $17.50 in cash.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company, as well as the
Acquisition Agreement. We have also reviewed certain other information,
including financial forecasts, provided to us by the Company, and have met
with the Company's management to discuss the business and prospects of the
Company.
We have also considered certain financial and stock market data of the
Company, and we have compared that data with similar data for other publicly
held companies in businesses similar to those of the Company and we have
considered the financial terms of certain other business combinations and
other transactions which have recently been effected. We have also considered
such other information, financial studies, analyses and investigations and
financial, economic and market criteria which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied
on its being complete and accurate in all material respects. With respect to
the financial forecasts, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the Company's management as to the future financial performance
of the Company. In addition, we have not made an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of the
Company, nor have we been furnished with any such evaluations or appraisals.
Our opinion is necessarily based upon financial, economic, market and other
conditions as they exist and can be evaluated on the date hereof.
We have acted as financial advisor to the Company in connection with the
Merger and will receive a fee for our services, a portion of which is
contingent upon the consummation of the Merger. We will also receive a fee for
rendering this opinion.
II-1
<PAGE>
In the past, we have performed certain investment banking services for the
Company and the Acquiror and have received customary fees for such services.
Mr. Frank G. Zarb, Chairman of the Board, President and Chief Executive
Officer of the Company, is a director of CS First Boston, Inc.
In the ordinary course of our business, CS First Boston and its affiliates
may actively trade the debt and equity securities of both the Company and the
Acquiror for their own accounts and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of the Company in connection with its consideration of the Offer and
the Merger and does not constitute a recommendation to any stockholder as to
whether or not such stockholder should tender shares pursuant to the Offer and
is not to be quoted or referred to, in whole or in part, in any registration
statement, prospectus or proxy statement, or in any other document used in
connection with the offering or sale of securities, nor shall this letter be
used for any other purposes, without CS First Boston's prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration to be received by the common stockholders of
the Company in the Offer and the Merger is fair to such stockholders from a
financial point of view.
Very truly yours,
CS FIRST BOSTON CORPORATION
By:________________________________________________
Jonathan Plutzik
Managing Director
LOGO
II-2
<PAGE>
P R O X Y
ALEXANDER & ALEXANDER SERVICES INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR SPECIAL MEETING--FEBRUARY 20, 1997
The undersigned stockholder of Alexander & Alexander Services Inc., a Maryland
corporation (the "Company"), hereby appoint(s) Raymond I. Skilling, Harvey N.
Medvin and Michael D. O'Halleran, and each of them, as proxies for the under-
signed, with full power of substitution, for and in the name, place and stead
of the undersigned, to attend the Special Meeting of Stockholders of the Com-
pany to be held at the offices of the Company, 1185 Avenue of the Americas, New
York, New York 10036 on February 20, 1997 at 10:00 A.M. Eastern Time, and any
adjournment(s) or postponement thereof, and to cast on behalf of the under-
signed the number of votes the undersigned would be entitled to vote if person-
ally present as set forth herein and otherwise to represent the undersigned at
the meeting with all powers possessed by the undersigned if personally present
at the meeting. The undersigned acknowledges receipt of the Notice of the Spe-
cial Meeting of Stockholders and the accompanying Proxy Statement and revokes
any proxy heretofore given with respect to such meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR ADOPTION AND APPROVAL OF THE MERGER AGREEMENT AND THE MERGER PROVIDED
FOR THEREIN AS SET FORTH IN PARAGRAPH 1 ON THE REVERSE SIDE.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
- - -------------------------------------------------------------------------------
1295
----
THIS PROXY IS REVOCABLE AT ANY TIME BEFORE IT IS EXERCISED AND THE UNDERSIGNED
RESERVE(S) THE RIGHT TO ATTEND THE MEETING AND VOTE IN PERSON.
1. PROPOSAL FOR APPROVAL OF THE MERGER contemplated by the AGREEMENT AND PLAN OF
MERGER (the "Merger Agreement") dated as of December 11, 1996, as amended
January 7, 1997, by and among the Company, Aon Corporation and Subsidiary
Corporation.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
SIGNATURE ______________________ DATED _________________________________ , 1997
Your signature should be as your name appears hereon. When signed in a fiduciary
or representative capacity, please show your full title as such. For joint
accounts each joint owner should sign.
The undersigned hereby ratifies and confirms all that said attorneys and
proxies, or any one or more of them or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof and any prior proxies are
hereby revoked.
PLEASE DATE, SIGN AND RETURN IN THE ENCLOSED ENVELOPE PROMPTLY.
