For further information concerning the Company's obligations under capital leases and noncancelable operating leases see Notes 8 and 13 of Notes to Financial Statements.
(1) Includes restructuring charges of $69 million in 1994, $45.5 million in 1991 and $6.5 million in 1990 (see Note 3 of Notes to Financial Statements).
(2) Includes special charges primarily related to contingency settlements and other indemnity costs of $69.7 million in 1994, $16.5 million in 1992, $13 million in 1991 and $5.5 million in 1990. Also includes gains on sales of non-core businesses of $20.2 million in 1994, $3.9 million in 1993 and $43.8 million in 1992 (see Note 3 of Notes to Financial Statements).
(3) Includes the adoption, effective January 1, 1994, of SFAS No. 112 "Employers' Accounting for Postemployment Benefits"; effective January 1, 1993, of SFAS No. 109 "Accounting for Income Taxes" and effective January 1, 1991, of certain provisions of SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" relating to deferred compensation plans (see Notes 5 and 9 of Notes to Financial Statements).
. Since mid-June 1994 a new senior management team was appointed and ten new directors were elected.
. In June 1994, the quarterly common stock dividend was reduced by 90 percent resulting in an annualized cash savings of over $39 million.
. In July 1994, American International Group, Inc. (AIG) invested $200 million in the Company and received 4 million shares of non-voting 8% Series B Cumulative Convertible Preferred Stock. The net proceeds of $196 million will be used for general corporate purposes.
. The 1995 savings from these reviews are estimated at approximately $100 million before normal inflationary increases. A portion of the savings will be reinvested into new technology, product development and other areas associated with service enhancements as well as revenue generation.
. The Company has also undertaken a long-term reengineering process of its U.S. risk management and insurance services operations to standardize and automate work processes and increase productivity.
. In the fourth quarter of 1994, management committed to a formal plan of restructuring and in February 1995, announced a $69 million fourth quarter 1994 restructuring charge, including $25.2 million to consolidate real estate space requirements at 48 offices worldwide and $43.8 million for early retirement programs and worldwide workforce reductions of approximately 1,100 positions. In addition, a $24.9 million provision was made to settle certain litigation matters and strengthen reserves related to the Company's professional indemnity programs.
. In July 1994, the Company entered into an insurance-based financing contract (finite risk contract) with a reinsurance company that affords protection for certain long-tailed exposures included in the Company's discontinued operations. The contract provided for a payment of $80 million by the Company ($50 million of which was subsequently borrowed from the reinsurance company) and for payment by the Company of the first $73 million of claims. The Company recorded a $6 million charge in 1994 representing the amount of the payment that exceeded the recoverable portion of existing reserves.
. In December 1994, the Company resolved certain indemnity obligations related to the 1987 sale of Sphere Drake Insurance Group (Sphere Drake). The Company provided a $20.9 million loss from discontinued operations in the third quarter of 1994 related to this agreement.
. 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. The gain will be reflected in the first quarter of 1995.
. In February 1995, the Company completed the sale of Alexsis, Inc., its U.S.-based third-party administrator operation, for total cash proceeds of $47.1 million. The pre-tax gain on this transaction will approximate $30 million and will be reflected in the first quarter of 1995.
These actions were implemented to lay a foundation for improved, sustainable earnings and to substantially reduce the Company's financial exposure to litigation and other contingencies.
The Company reported a net loss of $138.7 million, or $3.51 per share for 1994. 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 1992, the Company incurred a net loss of $87.9 million, or $2.03 per share, including a loss from discontinued operations of $145 million, or $3.35 per share; after-tax gains from the sale of three non-core businesses of $28.5 million, or $0.66 per share, and after-tax special charges of $13.9 million, or $0.32 per share, relating to the costs of indemnities provided to the purchaser of a former Company operation.
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 decreased in 1994 by $17.7 million, or 1.3 percent, compared to a decrease of $27.9 million, or 2 percent, in 1993. Revenue comparisons were impacted by both foreign currency fluctuations and the effects of acquisitions and dispositions. After adjusting for the effect of these items, total revenues decreased $17.4 million in 1994 compared to 1993 levels.
Total 1993 revenues were negatively impacted by $57.7 million due to appreciation of the U.S. dollar against most of the major currencies of the Company's international operations and decreased another $8.2 million as a result of operations sold in 1992. Excluding the effect of these items, total 1993 revenues increased by $38 million over 1992 levels.
Investment income earned on fiduciary funds decreased by $2.3 million, or 4.3 percent, in 1994 primarily due to lower average investment levels, particularly in the U.S. In 1993, fiduciary investment income declined by $18.6 million, or 25.7 percent, primarily due to lower average interest rates worldwide, especially in the U.S. and U.K.
Staff costs for the comparable periods also reflect normal salary progressions and higher benefit costs, partially offset by declines in headcount of 8.3 percent and 2.7 percent in 1994 and 1993, respectively. Performance-based incentive costs declined by $4.8 million and $6.7 million in 1994 and 1993, respectively.
Consolidated other operating expenses increased by $19.5 million, or 3.9 percent, in 1994 compared to an increase of $24.5 million, or 5.1 percent in 1993. Excluding the negative impact of changes in foreign exchange rates and acquisitions and dispositions, other operating expenses increased by $15.8 million in 1994 versus 1993. The 1994 increase includes higher insurance costs of $17.1 million.
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 1993, a provision of $15.9 million was made for similar items. In addition, higher system development costs were reflected in 1994 due to the standardization and automation efforts underway in the U.S. The 1993 increase reflected higher insurance costs, travel and entertainment expenses and systems development costs, offset by lower foreign exchange rates.
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 includes $25.2 million to consolidate real estate space requirements at
48 offices worldwide, and $43.8 million for voluntary early retirement programs and involuntary workforce reductions involving approximately 1,100 positions, of which 650 are in the U.S.
The severance portion of the charge amounted to $22.9 million and reflects the elimination of 898 positions worldwide. The voluntary early retirement program was accepted by 208 employees prior to December 31, 1994 and amounted to $20.9 million of the charge. Approximately $5.7 million of these liabilities were paid in 1994 with a substantial majority of the remainder expected to be paid in 1995.
The charge associated with real estate activities relates to the closure, abandonment and downsizing of office space throughout the global operations, including 34 locations in the U.S. The Company anticipates that these actions will be essentially completed by the end of 1995. The costs include primarily remaining lease obligations and write-offs of leasehold improvements and fixed assets. Approximately $1.2 million of these liabilities were paid in 1994. The cash portion of the remaining liabilities, excluding the fixed asset and leasehold improvement write-offs of approximately $5.2 million, will be paid out over the remaining lease periods, which range from one to ten years.
Interest expense increased by $1.6 million, or 11.1 percent, in 1994 compared to a decrease of $3.6 million, or 20 percent, in 1993. The 1994 increase is due primarily to a higher debt level associated with the $50 million borrowing in mid-1994 relating to a contract with a reinsurance company. The 1993 decrease reflected significantly lower worldwide interest rates and a decrease in average debt compared to 1992 levels.
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).
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.
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, contingency settlements, deferred compensation expenses, professional indemnity costs, and pension and other employee benefit expenses. The net deferred tax asset also includes $26.7 million relating to a $76.2 million U.S. federal net operating loss carryforward generated in 1994 which will expire in the year 2009, U.S. federal foreign tax credit carryforwards totaling $8.8 million, portions of which expire in 1998 and 1999, and U.S. federal alternative minimum tax credits of $5.2 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 Company will report on its 1995 U.S. federal income tax return gains totaling an estimated $50 million with respect to the sales of its personal lines business and its Alexsis subsidiary. Based on 1994 results, excluding nonrecurring items and sold subsidiaries and businesses, with an estimated 8.5% reduction in U.S. operating costs as a result of the Company's restructuring in 1994, the net U.S. deferred tax asset would be realized with average annual growth in U.S. operating revenues and pre-tax income of less than two percent.
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 carryforward) for the Company's U.S. operations is as follows:
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 Internal Revenue Service (IRS) on settlement of tax issues with respect to years 1980 through 1986. Also during 1994, the Company reached an agreement with the IRS on settlement of the examination of years 1987 through 1989. On February 28, 1995, the Company paid the amounts due for years 1980 through 1989 and charged the tax and net interest totaling $35.6 million against previously established reserves.
In 1994, the Company received a Notice of Proposed Adjustment from the IRS in connection with the examination of its 1990 and 1991 U.S. federal income tax returns, proposing an increase in taxable income for the 1991 year which, if sustained, would result in additional tax liability estimated by the Company at $50 million. This proposed adjustment relates to intercompany transactions involving the stock of a U.K. subsidiary.
In 1985, the Company discontinued its insurance underwriting operations. In 1987 the Company sold Sphere Drake Insurance Group (Sphere Drake). The Sphere Drake sales agreement provides indemnities by the Company to the purchaser for various potential liabilities including provisions covering future losses on certain insurance pooling arrangements from 1953 to 1967 between Sphere Drake and Orion Insurance Company (Orion), a U.K.-based insurance company, and future losses pursuant to a stop-loss reinsurance contract between Sphere Drake and Lloyd's Syndicate 701 (Syndicate 701). In addition, the sales agreement requires the Company to assume any losses in respect of actions or omissions by Swann & Everett Underwriting Agency (Swann & Everett), an underwriting management company previously managed by Alexander Howden Group plc (Alexander Howden).
Insurance liabilities in excess of recorded liabilities could develop in the future. Based on independent actuarial estimates of the amount and timing of claim payments, it is reasonably possible that such additional liabilities, net of estimated amounts recoverable for paid losses under the finite risk contracts, could amount to $74 million. However, management currently believes that such additional insurance liabilities are not likely to develop.
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.
Worldwide risk management and insurance services broking commissions and fees decreased $16.3 million, or 2 percent, in 1994 compared to a $5.5 million, or 0.7 percent, increase in 1993. Foreign exchange rate variances negatively impacted such revenues by $1 million and $27.5 million in 1994 and 1993, respectively.
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 America operations, primarily from the 1993 Mexico acquisition, and also increases of $5.3 million and $3.7 million occurred in the Europe and Canada operations, respectively. These increases were due primarily to new business production. Furthermore, operations sold in 1993, primarily in the U.S., served to reduce 1994 broking revenues by $7.9 million.
The decrease in 1993 broking revenues compared to 1992 was primarily attributable to reduced property and casualty premium rates in North America, coupled with the impact of unfavorable economic conditions which limited revenue growth. These effects were partially offset by new business production and moderate firming of premium rates in certain international markets.
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. Prior to the merger, they operated as independent business units.
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.
Gains and losses on contracts which are designated as hedges of firm commitments are deferred until the settlement dates. Contracts which are not designated as hedges are marked to market at each balance sheet date and are included in other current assets or liabilities, with the resulting gain or loss recorded as a component of other operating expenses. The fair market value of all foreign exchange contracts at December 31, 1994 was $2.6 million. 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 generally 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.
Operating expenses, excluding $16.1 million of restructuring charges, for the specialist insurance and reinsurance broking operations increased by $15 million, or 7.1 percent, in 1994 compared to a decrease of $4.6 million, or 2.1 percent, in 1993. Foreign exchange rate variances, including hedging gains and losses, favorably impacted expenses by $1.9 million and $19 million in 1994 and 1993, respectively. 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. The 1993 decrease was primarily the result of the aforementioned favorable effect of foreign exchange rates partially offset by increased expenses in the U.K. operations.
Human resource management consulting commissions and fees decreased by $2.2 million, or 1 percent, in 1994 compared to a decrease of $27.6 million, or 11.5 percent in 1993. The impact of changes in foreign exchange rates on such revenues was an increase of $0.6 million and a decrease of $11.1 million for 1994 and 1993, respectively. Contributing to the 1994 decrease was a shortfall in the
In 1994, the Company changed its presentation of cash flows to distinguish fiduciary balances from operating balances. The Company believes that this presentation provides more useful information regarding cash flows that are available for general corporate purposes.
Of the $30.2 million proceeds from the November 1994 sale of the U.S.-based personal lines business, $1 million was received in 1994 and the remaining $29.2 million in January 1995. In addition, the Company received $7.2 million in January 1995 from the sale of its minority interest in a U.K. merchant bank and $47.1 million from the sale of Alexsis Inc. in February 1995.
At December 31, 1994 the Company had a $150 million credit agreement with various banks which would have expired in July 1995. The Company had full access to such funds and had no borrowings outstanding at December 31, 1994. At December 31, 1994, the Company was in technical default on two financial covenants under this agreement and was granted a waiver with respect to compliance with such covenants.
On July 15, 1994, pursuant to the terms of the AIG Agreement, AIG purchased from the Company 4,000,000 shares of Series B Convertible Preferred Shares at a purchase price of $50 per share for a total purchase price of $200,000,000. Such proceeds, net of approximately $3.8 million of related expenses, are available for general corporate purposes, of which $30 million has been used to fund the finite risk contract relating to discontinued operations. For additional information relating to the AIG Agreement, see Note 10 of Notes to Financial Statements.
Under the terms of the AIG Agreement, the declaration or payment of dividends on common stock in excess of prescribed amounts may require the Company to purchase all or part of the then outstanding Series B Convertible Preferred Shares. Dividends on the Series B Convertible Preferred Shares will reduce the amount or earnings otherwise available for common stockholders by approximately $16 million in the first year after issuance, and by approximately $23 million in the fifth year after issuance, assuming dividends on the Series B Convertible Preferred Shares were to be paid in kind throughout the first five years after issuance.
On July 1, 1994, Alexander & Alexander Services Inc. borrowed $50 million from the reinsurance company that executed the finite risk contract relating to 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 Alexander & Alexander Services Inc. defaults on the borrowing, the reinsurance company may utilize the Alexander & Alexander Services Inc. note to settle claims under the finite risk contract.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ALEXANDER & ALEXANDER SERVICES INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND RELATED INFORMATION
The Company maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and that accounting records provide a reliable basis for the preparation of financial statements. The internal accounting control system is augmented by an internal auditing program, written policies and guidelines and the careful selection and training of qualified personnel.
Deloitte & Touche LLP has been engaged, with the approval of the Company's stockholders, as the independent auditors to audit the financial statements of the Company and to express an opinion thereon. Their opinion is based on procedures believed by them to be sufficient to provide reasonable assurance that the financial statements present fairly, in all material respects, the Company's financial position, cash flows and results of operations. Their report is set forth on Page 26. The Audit Committee of the board of directors is composed of four directors, none of whom is an employee of the Company. It assists the board in exercising its fiduciary responsibilities for oversight of audit and related matters, including corporate accounting, reporting and control practices. It is responsible for recommending to the board of directors the independent auditors to be employed for the coming year. The Audit Committee meets periodically with management, internal auditors and the independent auditors to review internal accounting controls, auditing and financial reporting matters. The independent auditors and the internal auditors have unrestricted access to the Audit Committee.
DELOITTE & TOUCHE LLP Baltimore, Maryland February 15, 1995 (February 28, March 16 and 27, 1995 with respect to certain information in Notes 2, 5, 8 and 14)
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS--(CONTINUED) AS OF DECEMBER 31, (IN MILLIONS)
ALEXANDER & ALEXANDER SERVICES INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, (IN MILLIONS)
ALEXANDER & ALEXANDER SERVICES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, (IN MILLIONS)
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.
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 all its debt and equity securities as available for sale, which 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, which approximated market value at December 31, 1993. The cost of securities sold is determined by the specific identification method.
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.
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 $11.9 million, $13 million and $14 million for the years ended December 31, 1994, 1993 and 1992, respectively.
INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (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.
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.
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 and upon conversion of the convertible subordinate debentures. The $3.625 Series A Convertible Preferred Stock and the 8% Series B Convertible Preferred Stock are not common stock equivalents. Fully diluted earnings per share for the periods presented was antidilutive; therefore, the amounts for primary and fully diluted earnings are the same.
Prior to the merger, Clay operated as a partnership. Accordingly, the Company's results for 1993 and 1992 do not include approximately $2.2 million and $3.2 million, respectively, for partners' salaries or $0.7 million and $1 million, respectively, for corporate income taxes. Pro-forma net income (loss) for the Company, assuming partner salaries and corporate income taxes were charged to operations, would be $28.5 million, or $0.51 per share, in 1993 and $(85.9) million, or $(1.99) per share, in 1992.
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).
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. The gain will be reflected in the first quarter of 1995.
The involuntary severance portion of the charge amounted to $22.9 million and reflects the elimination of 898 positions worldwide. The voluntary early retirement program was accepted by 208 employees prior to December 31, 1994 and amounted to $20.9 million of the charge. Approximately $5.7 million of these liabilities were paid in 1994 with a substantial majority of the remainder expected to be paid in 1995.
The charge associated with real estate activities relates to the closure, abandonment and downsizing of office space globally, including 34 locations in the U.S. The Company anticipates that these
actions will be completed by the end of 1995. The costs include primarily remaining lease obligations and write-offs of leasehold improvements and fixed assets. Approximately $1.2 million of these liabilities were paid in 1994. The cash portion of the remaining liabilities, excluding the fixed asset and leasehold improvement write-offs of approximately $5.2 million, will be paid out over the remaining lease periods, which range from one to ten years.
In 1992, the Company recorded a $16.5 million pre-tax charge ($13.9 million after-tax, or $0.32 per share) associated with the sale of Shand. The provision reflected the estimated cost of indemnities provided to the purchasers of Shand, including $10 million associated with the Mutual Fire lawsuits and other disputes.
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.
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.
The following is a summary of the significant components of the Company's gross deferred tax assets and liabilities:
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, 1994, the Company has a U.S. federal net operating loss carryforward of $76.2 million which expires in the year 2009 and U.S. state net operating loss carryforwards totaling $165.2 million which expire in various years through 2009. The Company also has U.S. federal foreign tax credit carryforwards of $8.8 million, $3.2 million of which expires in 1998 and $5.6 million which expires in 1999, and U.S. federal alternative minimum tax credits of $5.2 million which can be carried forward indefinitely. In addition, the Company has foreign net operating loss and capital loss carryforwards for tax purposes of $10.5 million and $42.1 million, respectively, which can be carried forward indefinitely and approximately $7.1 million of foreign net operating losses which expire in various years through 2002.
net U.S. deferred tax asset would be realized with average annual growth in U.S. operating revenues and pre-tax income of less than two percent.
The $36.7 million valuation allowance at December 31, 1994 relates primarily to foreign and U.S. state net operating loss and capital loss carryforwards. The valuation allowance increased by a net amount of $13.6 million in 1994, of which $7.6 million relates to increases in foreign capital loss carryforwards and $6 million to increases in U.S. state and foreign net operating losses.
Prior to the change in accounting for income taxes, the components of the provision for deferred income taxes for the year ended December 31, 1992 were as follows:
Depreciation....................................................... $ (2.5) Tax leases......................................................... (3.2) Financial accounting accruals, net................................. (17.5) Net deferred losses on subsidiary dispositions..................... 3.6 Special charges.................................................... 14.3 Other.............................................................. (0.2) ------ $ (5.5) ------ ------
A reconciliation of the tax provision and the amount computed by applying the U.S. federal income tax rate of 35% in 1994 and 1993 and 34% in 1992 to income (loss) from continuing operations before income taxes is as follows:
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
The Company believes that its current tax reserves are adequate to cover all of its tax liabilities.
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 Company has certain protection against adverse developments of the insurance liabilities through two finite risk contracts issued by a 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, 1994, based on an estimate by an independent actuarial firm, the Company had recorded $6.6 million of the deductible.
On July 1, 1994, the Company entered into an insurance-based financing contract (finite risk contract) providing protection primarily for exposures relating to Orion, Syndicate 701 and Swann & Everett. The contract provided for a payment by the Company of $80 million ($50 million of which was borrowed from the reinsurance company) to the reinsurance company and for payment by the Company of the first $73 million of paid claims. The contract entitles the Company to recover paid claims in excess of the Company's $73 million retention. At December 31, 1994, recoveries were limited to $108.3 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, presently considered to be remote by the Company, to terminate that contract.
Changes in the total net liabilities of discontinued operations are as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 1994 1993 1992 ------ ------ ------ Beginning balance................................. $113.5 $102.4 $(36.4) Provisions for loss............................. 28.9 -- 145.0 Litigation settlement........................... -- 22.3 -- Net cash proceeds on the zero coupon notes...... 5.0 -- -- Claims and expense payments..................... (7.0) (11.9) (13.1) Payment for a finite risk contract.............. (80.0) -- -- Other........................................... 3.4 -- -- Translation adjustment.......................... -- 0.7 6.9 ------ ------ ------ Ending balance.................................... $ 63.8 $113.5 $102.4 ------ ------ ------ ------ ------ ------
The Company believes that, based on current estimates, the established total net liabilities of discontinued operations are sufficient to cover its exposures. However, there is no assurance that further adverse development may not occur due to variables inherent in the estimation processes and other matters described above. The Company currently believes that the effect of such adverse development, if any, will not be material to the Company's financial position and results of operations.
At December 31, 1994 and 1993, approximately 84 percent and 85 percent, respectively, of all plan assets are invested in equity securities and 16 percent and 15 percent, respectively, in cash equivalents and/or fixed-income securities.
POSTRETIREMENT BENEFITS Effective January 1, 1993, the Company adopted SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" for its U.S. plans. This statement requires the Company to accrue the estimated cost of future retiree benefit payments during the years the employee provides services. The Company previously expensed the cost of these benefits, which are principally health care and life insurance, as premiums or claims were paid. The statement 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 over a period of twenty years. The Company's cash flows are not affected by implementation of this statement and the impact to the results of operations for 1993 was not significant.
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. The increase to the annual cost of providing such benefits will not be significant.
these policies was $0.6 million, which is net of $38.7 million of policy loans. The Company's obligation under the plan, including accumulated interest, was $16.2 million and $15.6 million at December 31, 1994 and 1993, respectively, and is included in Other Long-Term Liabilities in the Consolidated Balance Sheets.
DECEMBER 31, -------------- 1994 1993 ----- ----- Lines of credit............................................... $ 0.7 $ 5.3 Notes payable to financial institutions....................... 0.3 12.2 ----- ----- $ 1.0 $17.5 ----- ----- ----- -----
The principal payments required during the next five years are $17.1 million in 1995, $5.6 million in 1996, $14.5 million in 1997, $14.5 million in 1998, and $14.5 million in 1999.
A. 11% CONVERTIBLE SUBORDINATED DEBENTURES The debentures are unsecured subordinated obligations maturing April 15, 2007. The debentures were issued in connection with the acquisition of Alexander Howden under an Indenture agreement dated February 1, 1982, and are convertible into common stock at $39 per share, subject to adjustment under certain conditions and to prior redemption. The remaining debentures are redeemable any time, at 102.2 percent of par value prior to April 15, 1995, and at declining prices thereafter until April 15, 1997 and at par thereafter. Commencing April 15, 1992, and annually thereafter, 5 percent of the aggregate principal amount outstanding as of October 15, 1991, must be redeemed at par value through the operation of a mandatory sinking fund. The Company may make an optional sinking fund payment in each year not exceeding the amount of the mandatory sinking fund payment. In 1994 and 1993, the Company satisfied the mandatory sinking fund payment through the use of previously repurchased debentures.
C. OBLIGATION UNDER CAPITAL LEASE A French subsidiary has a lease agreement for office facilities which is classified as a capital lease. Future minimum lease payment obligations are approximately $2.5 million for each of the next five years and an aggregate of $24.7 million thereafter.
E. TERM LOANS In August 1992, a U.S. subsidiary entered into an unsecured $10 million three-year term loan agreement with a bank. The interest rate (6.8125 percent at December 31, 1994) floats with the LIBOR rate. The agreement, guaranteed by the Company, contains financial covenants on minimum consolidated net worth and maximum consolidated indebtedness.
Stock options may be granted under the 1988 Plan 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.
At the 1995 Annual Meeting of Stockholders, the Company intends to submit for stockholder approval four new compensation plans. The plans to be submitted for stockholder approval are: (1) the 1995 Long-Term Incentive Plan (1995 Plan) to provide for compensation of executive officers and other
key employees of the Company and its subsidiaries through stock options, restricted stock, performance units and other equity-based incentives; (2) the Employee Discount Stock Purchase Plan (Purchase Plan) to provide for the purchase by employees, through salary deferrals, of the Company's Common Stock at a discount from fair market value; (3) the Performance Bonus Plan for Executive Officers, to provide for the compensation of executive officers by means of awards (including equity-based awards) for achievement by the Company of certain performance goals; and (4) the Non-Employee Director Deferred Stock Ownership Plan, to provide an equity based non-employee director deferred compensation plan. If approved by stockholders at the annual meeting, 4,700,000 shares of Common Stock will be reserved for issuance under the 1995 Plan and 750,000 shares of Common Stock will be reserved for issuance under the Purchase Plan.
At a special meeting of the Company's stockholders held on July 15, 1994 (Special Meeting) an amendment to the Company's Charter (Charter Amendment) was approved. The Charter Amendment authorized (i) an increase in the number of authorized shares of stock of the Company (ii) the terms of a new class of common stock, Class D Common Stock, par value $1.00 (Class D Stock) and (iii) other minor amendments. At the special meeting, stockholders also approved the transactions contemplated by the Stock Purchase and Sale Agreement entered into by the Company and AIG on June 7, 1994, as it may be amended from time to time (AIG Agreement), which included approval of the issuance and sale of 4,000,000 shares of the Company's 8% Series B Cumulative Convertible Preferred Stock, par value $1.00 (Series B Convertible Preferred Shares) to three wholly owned subsidiaries of AIG at a purchase price of $50 per share for a total purchase price of $200 million (AIG Investment).
In related matters, on July 15, 1994, the Board of Directors authorized an increase in the number of authorized shares of the Series A Junior Participating Preferred Stock, par value $1.00 (Participating Preferred Shares), from 600,000 shares to 1,000,000 shares and certain amendments were made to the Company's Rights Agreement associated with the Participating Preferred Shares.
the Company's ability to pay dividends is limited by the amounts available to the Canadian and U.K. subsidiaries for such purposes. These amounts approximate Canadian $82 million or $58.2 million, assuming certain solvency tests are met under Canadian law, and 104.4 million pounds sterling or $162.8 million, respectively, at December 31, 1994. In the event sufficient earnings are not available in the Canadian or the U.K. subsidiary to declare dividends, the Company's legal structure allows it to make earnings or capital available in those subsidiaries to pay dividends. In addition, the Series A Convertible Preferred Stock and the Series B Convertible Preferred Stock described below have priority as to dividends over the Common Stock.
The Board of Directors has authorized, subject to certain business and market conditions, the purchase of up to 5 million shares of the Company's Common Stock. As of December 31, 1994, the total number of shares purchased was 3.7 million at an average price of $21.77 per share. No shares were repurchased in 1994 or 1993. Shares of its own stock acquired by the Company constitute authorized but unissued shares.
Holders of Series B Convertible Preferred Shares are entitled to receive cumulative dividends at a rate of 8 percent per annum payable quarterly in arrears. Until December 15, 1996, dividends on the Series B Convertible Preferred Shares are payable in kind and thereafter, at the election of the 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. With respect to dividend rights and rights of liquidation, dissolution and winding up, Series B Convertible Preferred Shares rank senior to Common Stock, Class A Common Stock, Class C Common Stock, Class D Stock and Participating Preferred Shares (when and if issued) and pari passu with the Series A Convertible Preferred Shares.
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.
Series B Convertible Preferred Shares are non-voting, except as provided by law and except that, among other things, holders will be entitled to vote as a separate class with any other series of outstanding Preferred Stock to elect a maximum of two directors if the equivalent of six or more quarterly dividends on the Series B Convertible Preferred Shares are in arrears. Following the occurrence of a Specified Corporate Action (as defined in the Company's Charter) holders shall 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 Shares will be deemed holders of that number of shares of Class D Stock into which such shares would then be convertible.
Holders of Series B Convertible Preferred Shares have the right to require the Company to purchase all or any part of the Series B Convertible Preferred Shares 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 payment of dividends aggregating in excess of $0.075 per share of Common Stock during the last seven months of 1994, cumulatively 25 percent of earnings in 1995 and 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 stock after June 1994 (other than the Company's Series B Convertible Preferred Shares) in excess of net proceeds to the Company from the sale of stock after June 1994 (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 at a specified premium, ranging from $66.18 per share, if the Special Event occurs within six and twelve months after the original issue date, to $72.06 per share, if the Special Event occurs more than twelve months after the original issue date, plus in each case accrued and unpaid dividends. The approximately 11,765,000 shares of Common Stock issuable upon the ultimate conversion of the Series B Convertible Preferred Shares represent approximately 21 percent of the aggregate number of voting shares outstanding after giving effect to such issuance. If dividends on the Series B Convertible Preferred Shares are paid in kind for the full five year period permitted, approximately 18,069,000 shares of Common Stock will be issuable upon such exchange, representing approximately 29 percent of the total number of voting shares outstanding after giving effect to such issuance.
SERIES A JUNIOR PARTICIPATING PREFERRED SHARES In 1987, Participating Preferred Shares were authorized and a dividend of one preferred share purchase right (a Right) for each outstanding share of Common Stock, each share of Class A and Class C Common Stock and each subsequently issued share was declared. With respect to the Rights, the Class D Stock will be treated as if such shares are Class C Common Stock. Each Right, as amended, entitles the holder thereof to buy one one-hundredth of a Participating Preferred Share at a price of $85 (subject to adjustment). The Rights become exercisable only following the announcement by the Company that a person or a group has acquired beneficial ownership of 15 percent or more of the Company's voting shares or has commenced a tender or exchange offer that if consummated would result in the ownership of 15 percent or more of such voting shares. If the Rights become exercisable, each holder will be entitled to purchase at the then-current exercise price that number of Participating Preferred Shares having a value equal to twice the then-current exercise price.
announcement that any person or group has beneficially acquired 15 percent or more of the Company's voting shares. All rights beneficially owned by a holder of 15 percent or more of the voting shares become void once such holder passes the 15 percent threshold. The Rights are redeemable by action of the Board of Directors prior to becoming exercisable at a redemption price of $.01 per Right. The Rights will expire on July 6, 1997.
Cash and cash equivalents: Operating....................................................... $ 63.9 Fiduciary....................................................... 51.8 Short-term investments: Operating....................................................... 1.8 Fiduciary....................................................... 117.9 Long-term operating investments................................... 62.2 ------ Total....................................................... $297.6 ------ ------
The amortized cost and estimated fair value of debt securities at December 31, 1994 by contractual maturity are summarized below:
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
The Company generally sells forward U.S. dollars and purchases U.K. pounds sterling for periods of up to two years in the future. Such contracts provide risk management against future anticipated transactions which are not firm commitments. In addition, the Company enters into foreign exchange contracts to manage market risk associated with foreign exchange volatility on intercompany loans and expected intercompany dividends. Finally, the Company enters into foreign exchange contracts to effectively offset existing contracts when anticipated exchange rate movements would benefit the Company.
Gains and losses on contracts which are designated as hedges of firm commitments are deferred until the settlement dates. Contracts which are not designated as hedges are marked to market at each balance sheet date and are included in other current assets or liabilities, with the resulting gain or loss recorded as a component of other operating expenses. The fair market value of all foreign exchange contracts at December 31, 1994 was $2.6 million.
Foreign exchange options written by the Company are marked to market at each balance sheet date and the resulting gain or loss is recorded as a component of other operating expenses. Future cash requirements may exist if the option is exercised by the holder. Based on foreign exchange rates at December 31, 1994, these options could be exercised at a nominal cost to the Company.
At December 31, 1994, the Company had approximately $108.5 million notional principal of forward exchange contracts outstanding, primarily to exchange U.S. dollars into U.K. pounds sterling, and approximately $47.7 million notional principal outstanding, primarily to exchange U.K. pounds sterling into U.S. dollars. In addition, at December 31, 1994, the Company has approximately $4.6 million notional principal of foreign exchange contracts outstanding related to intercompany loans.
The Company has entered into interest rate swaps and forward rate agreements, which are accounted for as hedges, as a means to limit the earnings volatility associated with changes in short-term interest rates on its existing and anticipated fiduciary investments with maturities of three months or less. These instruments are contractual agreements between the Company and financial institutions which exchange fixed and floating interest rate payments periodically over the life of the agreements without exchanges of the underlying principal amounts. The notional principal amounts of such agreements are used to measure the interest to be paid or received and do not represent the amount of exposure to credit loss. The Company records the difference between the fixed and floating rates of such agreements as a component of its fiduciary investment income. Interest rate swaps and forward rate agreements which relate to debt securities are marked to market in accordance with SFAS No. 115. At December 31, 1994, an unrealized loss of $2.8 million on interest rate swaps and forward rate agreements which hedge existing and anticipated fiduciary investments with maturities of three months or less was reflected in fiduciary cash and equivalents in the Consolidated Balance Sheet.
The options are marked to market at each balance sheet date, based on the Company's estimated cost to settle the options. The estimated cost to settle the options, less any premium deferred by the Company, is recognized as a reduction to fiduciary investment income in the period when such changes in market value occur. At December 31, 1994, the Company recognized a current liability of $1.3 million, representing the estimated cost to settle these options at that date. The estimated cost to settle these options was nominal at December 31, 1993. 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.
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.
LEASE COMMITMENTS The Company leases property and equipment under noncancelable operating lease agreements which expire at various dates.
Rent expense for office space, which includes property taxes and certain other costs, amounted to $93.6 million, $92 million and $99.3 million for the years ended December 31, 1994, 1993, and 1992, respectively.
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.
Claims asserting these allegations are pending in suits filed in New York and Ohio. In a New York action brought in 1985, claims were asserted against the Company and certain subsidiaries (Pine Top Insurance Company, Ltd. v. Alexander & Alexander Services Inc., et al., 85 Civ. 9860 (RPP) (S.D.N.Y.)). The plaintiff sought compensatory and punitive, as well as treble damages under RICO totalling approximately $87 million, arising from alleged RICO violations, common law fraud, breach of contract and negligence. Two subsidiaries counterclaimed for breach of certain reinsurance contracts with the plaintiff. This action was settled as of January 12, 1995 and the action was voluntarily dismissed in February 1995. The settlement amount was $4.5 million. The Company's portion was $2.1 million which was previously reserved under its professional indemnity program. In a similar New York action brought in 1988 against the Company and certain subsidiaries (Certain Underwriters at Lloyd's of London Subscribing to Insurance Agreements ML8055801, et al. v. Alexander & Alexander Services Inc., et al., formerly captioned Dennis Edward Jennings v. Alexander & Alexander Europe plc, et al., 88 CIV. 7060 (RO) (S.D.N.Y.)), plaintiffs seek compensatory and punitive damages, as well as treble damages under RICO totaling $36 million. The defendants have counterclaimed against some of the plaintiffs for contribution. Discovery in this case remains to be concluded and no trial date has been set. In the Ohio action brought in 1985 (The Highway Equipment Company, et al. v. Alexander Howden Limited, et al. (Case No. 1-85-01667, U.S. Bankruptcy Court, So. Dist. Ohio, Western Div.)), plaintiffs seek compensatory and punitive damages, as well as treble damages under RICO totaling $24 million. A directed verdict in the Company's favor was affirmed on March 14, 1994 in a decision by the U.S. District Court for the Southern District of Ohio. The plaintiffs have appealed this decision to the U.S. Court of Appeals for the Sixth Circuit. Management of the Company believes there are valid defenses to all the claims that have been made with respect to these activities and the Company is vigorously defending the pending actions. These actions are covered under the Company's professional indemnity program, except for possible damages under RICO. The Company currently believes the reasonably possible loss that might result from these actions, if any, would not be material to the Company's financial position or results of operations.
On March 27, 1995, the Company, Shand and the rehabilitator entered into a settlement agreement which, if approved by the courts, would terminate the rehabilitator's litigation and release the Company and Shand from any further claims by the rehabilitator. Under the terms of the settlement, the Company would pay $12 million in cash and an additional $35 million in the form of a six-year zero-coupon note with a discounted value of $25.9 million. In addition, Shand is required to return $4.6 million of trusteed assets to the rehabilitator and the rehabilitator has eliminated any right of set-offs previously estimated to be $4.7 million. The Mutual Fire settlement agreement includes certain features protecting the Company from possible third-party claims and expenses arising out of such claims. Although the Company's professional liability underwriters have denied coverage for the Mutual Fire lawsuit, the Company has instituted a declaratory judgment action attempting to validate
coverage (Alexander & Alexander Services Inc. and Alexander & Alexander Inc. plaintiffs against those certain underwriters at Lloyd's, London, England subscribing to insurance evidence by policy numbers 879/P. 31356 and 879/P. 35349 and Assicurazioni Generali, S.P.A., defendants No. 92 Civ. 6319 (F.D.N.Y.)). In the fourth quarter of 1994, the Company increased its previously established reserves of $10 million based on an estimated settlement amount, and recorded a pre-tax charge of $37.2 million ($24.2 million after-tax or $0.55 per share).
In November 1993, a class action suit was filed against the Company and two of its directors and officers, Tinsley H. Irvin and Michael K. White, in the United States District Court for the Southern District of New York under the caption Harry Glickman v. Alexander & Alexander Services Inc., et al. (Civil Action No. 93 Civ. 7594). On January 6, 1995, the plaintiff filed a second amended complaint which, among other things, dropped Mr. White as a defendant. The second amended complaint purports to assert claims on behalf of a class of persons who purchased the Company's Common Stock during the period May 1, 1991 to November 4, 1993, alleging that during said period the Company's financial statements contained material misrepresentations as a result of inadequate reserves established by the Company's subsidiary, Alexander Consulting Group Inc., for unbillable work-in-progress. The second amended complaint seeks damages in an unspecified amount, as well as attorneys' fees and other costs, for alleged violations of the federal securities laws. The defendants have filed a motion to dismiss the second amended complaint. Management of the Company believes there are valid defenses to the allegations set forth in the complaint and the Company intends to vigorously dispute this claim. The Company currently believes that this action is covered by the Company's insurance program and
Under the AIG Agreement, the Company has agreed to make certain payments to AIG pursuant to indemnifications given with respect to the Company's balance sheet as of March 31, 1994. Pursuant to an amendment to the AIG Agreement, dated November 10, 1994, the Company's potential exposures under the indemnification, individually or in the aggregate, was limited to $10 million. Pursuant to a second amendment, dated March 16, 1995, the indemnification was further limited to cover only tax payments and reserves in excess of recorded tax reserves as of March 31, 1994. As a result of this indemnification, the Company has classified $10 million of the proceeds from the issuance of the Series B Convertible Preferred Shares outside stockholders' equity until such time as the indemnification, if any, is satisfied or terminated.
Segment information is provided for the Company's two reportable industry segments, Insurance Services and Human Resource Management Consulting.
Quarterly operating results for 1994 and 1993 are summarized below (in millions, except per share data).
(b) 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) 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.
ALEXANDER & ALEXANDER SERVICES INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1994 (THOUSANDS OF DOLLARS)