SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____ to _____
Commission File Number: 0-20724
WATSON WYATT & COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 53-0181291
(State or other jurisdiction (I.R.S. Employer
of organization) Identification No.)
601 13TH STREET, N.W.
SUITE 1000
WASHINGTON, D.C. 20005
(Address of Principal executive offices including zip code)
(202) 508-4600
(Registrant's telephone number, including area code)
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B)OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
NONE NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE OUTSTANDING AT SEPTEMBER 16, 1996
(TITLE OF CLASS) 17,271,166 SHARES
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant is $74,219,137. The aggregate market value was computed by using the
formula book value of the stock (calculated in accordance with the bylaws) as of
September 16, 1996.
Documents Incorporated by Reference
The registrant's definitive proxy statement for its 1996 annual meeting of
shareholders (which is to be filed pursuant to General Instruction G of Form
10-K not later than October 28, 1996), is incorporated by reference into Part
III of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Watson Wyatt & Company, together with its affiliates and consolidated
subsidiaries, (collectively, "Watson Wyatt" or "the Company"), provides human
resource and employee benefits consulting and administrative/recordkeeping
services. The Company also provides a broad range of services in risk management
and general insurance and investment consulting, and derives fees from sales of
surveys and licensing of software. The Company works with organizations of all
sizes, from the largest multinationals to public employers and nonprofit
institutions.
On April 1, 1995, the Company (then The Wyatt Company or "Wyatt") transferred
its United Kingdom operations to R Watson & Sons ("Watsons"), an actuarial
consulting partnership based in the United Kingdom, and received a beneficial
interest and a 10% interest in a defined profit pool of the partnership. Wyatt
also transferred its Continental European operations to a newly formed holding
company owned by Wyatt and Watsons in exchange for 50.1% of its shares. On July
1, 1996, Wyatt and Watsons changed their names to Watson Wyatt & Company and
Watson Wyatt Partners, respectively. While both remain separate legal entities,
the companies are operating together as Watson Wyatt Worldwide.
On March 31, 1996, the Company transferred the employee outsourced benefits
administration operations of Wyatt PREFERRED CHOICE (R) ("WPC"), to a newly
formed limited liability company, Wellspring Resources, LLC ("Wellspring").
Wellspring, which is owned 50% by Watson Wyatt and 50% by State Street Bank and
Trust Company ("State Street"), provides outsourced benefits and human resources
administration.
Founded in 1946, Watson Wyatt is owned almost entirely by its active employees.
The Company is incorporated in Delaware, and its principal executive offices are
located at 601 13th Street, N.W., Washington, D.C., 20005.
GLOBAL OPERATIONS
Watson Wyatt provides services in the United States, Canada, Asia and the South
Pacific, Europe, Africa, Latin America and the Caribbean.
Watson Wyatt Worldwide continues to expand geographically with new offices
recently opened in Colombo, Sri Lanka and Johannesburg, South Africa. The
Company has plans to open 3 new offices in fiscal year 1997.
Together Watson Wyatt Worldwide employs approximately 4,980 associates. Of this
total, the Company employs approximately 3,710 full-time associates in the
following geographic areas:
North America 3,150
Asia and the South Pacific 490
Latin America 70
-----
3,710
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<PAGE>
None of the Company's associates are subject to collective bargaining
agreements. The Company believes relations with associates are good.
PRINCIPAL SERVICES
Watson Wyatt provides a vast array of employee benefit and related services to
clients. While the Company groups services into functional categories,
management believes its primary strength is the ability to deliver its services
without boundaries to meet the requirements of its clients. Services provided by
the Company include:
RETIREMENT CONSULTING: Analysis, design and implementation of client
organizations' retirement benefits programs, including actuarial services and
required reporting of plan contributions and funding levels comprised 41% of
fiscal year 1996 fees.
BENEFITS ADMINISTRATION, RECORDKEEPING AND CONSULTING: Analysis, design and
implementation of client organizations' defined contribution plans,
administrative systems, outsourced benefits administration, and software
licensing comprised 19% of fiscal year 1996 fees.
GROUP, HEALTH CARE AND FLEXIBLE BENEFITS CONSULTING: Analysis, plan design and
implementation of client organizations' group, health care, flexible benefits
programs, and consulting with providers of health care services to help them
deliver services on a more efficient and cost-effective basis comprised 9% of
fiscal year 1996 fees.
OTHER STRATEGIC CONSULTING SERVICES: Watson Wyatt provides consulting services,
which separately represent less than 10% of total fees, and which accounted in
the aggregate for 31% of fiscal year 1996 fees. These services included
consulting in the areas of communications, compensation, risk management, asset
services, organization effectiveness and international benefit consulting as
well as research and surveys.
COMPETITION
The human resource consulting business is highly competitive and has relatively
low barriers to entry. The Company's competitors include other human resource
consulting firms, insurance brokers, general management consultants, public
accounting firms and, to some extent, mutual funds and other financial
institutions, particularly in the defined contribution recordkeeping area. The
human resource consulting field includes as many as ten principal competitors
who offer services in the United States and, in several cases, internationally.
BUSINESS INSURANCE (December 11, 1995) ranks Watson Wyatt as the third largest
employee benefits consulting firm in the world.
Although competition is based primarily upon quality of service and availability
of key consulting resources, in recent years in some aspects of the business,
price has become a more significant competitive factor. Other competitive
factors of increasing importance are the quality and effectiveness of available
technology and software and the ability to serve multinational clients.
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<PAGE>
ITEM 2. PROPERTIES.
Watson Wyatt Worldwide operates in approximately 89 offices in cities throughout
the world. With minor exceptions, operations are carried out in leased offices
under operating leases which normally do not exceed 10 years in length. The
Company does not anticipate difficulty in meeting its space needs at lease
expiration or if additional space is required earlier. The Company also
evaluates office relocation on an ongoing basis to meet changing needs in its
markets while minimizing its occupancy expense.
The fixed assets owned by Watson Wyatt represented approximately 11% of total
assets at June 30, 1996 and consisted primarily of computer equipment, office
furniture and leasehold improvements.
ITEM 3. LEGAL PROCEEDINGS.
Watson Wyatt is from time to time a defendant in various lawsuits which arise in
the ordinary course of business. These disputes typically involve claims
relating to employment matters or the rendering of professional services. The
management of the Company does not believe that any such currently pending or
threatened litigation is likely to have a material adverse effect on the
business or financial condition of Watson Wyatt.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the fourth
fiscal quarter.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION; HOLDERS
There is no established public trading market for the Common Stock, nor is any
likely to develop, since the transferability of all shares of the Company's
Common Stock is restricted. Ownership of the Company's Common Stock is generally
limited to directors, full-time and certain part-time associates of the Company,
its subsidiaries and affiliates, and corporations, partnerships, associations or
other entities designated by the Board of Directors with which the Company has a
business affiliation and the employees thereof. In addition, all shareholders of
the Company, prior to selling any shares of the Company's Common Stock to a
third party, must first offer such shares to the Company. As of September 16,
1996, there were 2,102 registered holders of the Company's Common Stock.
Transfers of the Company's Common Stock are made at a formula book value, as
defined, and the current formula book value per share is calculated pursuant to
the Company's bylaws to be $4.94 per share at June 30, 1996, as further
described in the Consolidated Financial Statements. This reflects an increase of
approximately 9.5% from the formula book value of $4.51 per share at June 30,
1995.
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<PAGE>
DIVIDENDS
The Company's credit facility requires it to observe certain covenants
(including requirements as to minimum net worth) that affect the amounts
available for the payment of dividends. Under the most restrictive of these
covenants, approximately $15.8 million was available for the payment of
dividends as of June 30, 1996. No dividends have been declared by the Company
since fiscal year 1991. The declaration and payment of dividends by the Company
is at the discretion of the Company's Board of Directors and depends on numerous
factors, including, without limitation, the Company's net earnings, financial
condition, availability of capital, debt covenant limitations, and other
business needs of the Company and its subsidiaries and affiliates.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table sets forth selected consolidated financial data of the
Company as of and for each of the years in the five year period ended June 30,
1996. The selected consolidated financial data as of June 30, 1996 and 1995 and
for each of the years in the three year period ended June 30, 1996 are derived
from the audited consolidated financial statements of Watson Wyatt included in
this Form 10-K. The selected consolidated financial data as of June 30, 1994,
1993, 1992, and for each of the years ended June 30, 1993 and 1992 have been
derived from audited consolidated financial statements of Watson Wyatt not
included in this Form 10-K. The selected consolidated financial data should be
read in conjunction with Watson Wyatt's consolidated financial statements and
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in Item 7 in this Form 10-K. Amounts are in
thousands, except per share data.
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<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------------------------
Statement of Operations Data: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Fees $492,513 $474,521 $433,441 $410,121 $411,553
Income (loss) before income taxes,
minority interest and cumulative
effect of a change in accounting 18,688 5,625 12,717 5,644 (13,839)
Cumulative effect of a change in
accounting -- (800) -- -- --
Net income (loss) 9,355 849 5,636 963 (10,807)
Earnings (loss) per share 0.51 0.05 0.29 0.05 (0.57)
Dividends per share $ -- $ -- $ -- $ -- $ --
Weighted average shares
outstanding 18,516 19,248 19,160 18,302 18,861
June 30,
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Balance Sheet Data: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Total assets $320,819 $286,622 $266,786 $242,994 $257,477
Note payable -- -- -- -- 20,300
Redeemable Common Stock 90,214 86,275 87,612 82,557 75,462
Formula book value
per share $ 4.94 $ 4.51 $ 4.44 $ 4.11 $ 4.23
Shares outstanding 18,262 19,130 19,732 20,087 17,840
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
The Company generated net income in fiscal year 1996 of $9.4 million compared to
net income in fiscal year 1995 of $.8 million. The improvement is due largely to
increases in associate utilization and new client growth. The rate of increased
revenues has outpaced both inflation and expense growth during the
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<PAGE>
period. Fiscal year 1996 results also include a postretirement curtailment gain
of $1.7 million, net of tax, arising primarily from participants who joined new
plans of the Company's affiliates. Fiscal year 1995 results include an after tax
charge of $.8 million related to the cumulative effect of a change in accounting
for postemployment benefits.
Fee revenue reached $492.5 million in fiscal year 1996, an increase of $18.0
million, or 4%, from $474.5 million in fiscal year 1995. Revenue growth has
occurred across most lines of business, including the outsourced benefits
administration business and the Company's Asia/Pacific operations. Average
billable hours per associate increased as compared with last year. Fiscal year
1995 results include fee revenues of $30.0 million related to the European
operations that were transferred to the Watsons affiliate and the newly formed
holding company, Watson Wyatt Holdings (Europe) Limited (WWHE) on April 1, 1995.
Excluding the effect of this transfer, fee revenue increased $48.0 million or
11% from 1995 to 1996.
For the year, salaries and employee benefit expenses were $241.6 million, a
decrease of $7.1 million from fiscal year 1995. The decrease is primarily caused
by the previously mentioned transfer of the European operations, sale of the
Minneapolis outsourcing center and the formation of Wellspring in the third
quarter of fiscal year 1996.
Occupancy and communication expenses for fiscal year 1996 were $64.0 million, a
decrease of $9.5 million, or 13% from the prior year. The decrease is due to the
transfer of the European operations, sale of the Minneapolis outsourcing center
and formation of Wellspring, partially offset by an increase in other occupancy
and communication expenses.
Professional and subcontracted services relating to consulting offices were
$76.2 million for fiscal year 1996, an increase of $19.6 million, or 35%, from
fiscal year 1995. The increase is primarily due to costs for outsourced benefits
administration clients.
For fiscal year 1996, other costs of providing services, including travel
expense, decreased $1.4 million, or 5%, from fiscal year 1995 to $25.2 million
due in part to nonrecurring expenses in 1995 relating to the affiliation with
Watsons.
General and administrative expenses for fiscal year 1996 were $38.7 million,
down $2.7 million or 6% from fiscal year 1995. The expenses for fiscal year 1995
were higher due to certain nonrecurring expenses incurred in completing the
affiliation with Watsons and the new management matrix structure. Also, earlier
in fiscal year 1996, the Company reduced general and administrative staff and
related costs, which is reflected in the decrease between years.
Depreciation and amortization increased $4.9 million in fiscal year 1996 to
$26.3 million. This increase is primarily due to new client administrative
systems placed in service during fiscal year 1996.
Income before income taxes, minority interest and the cumulative effect of a
change in accounting was $18.7 million in fiscal year 1996, which generated a
provision for income taxes of $9.2 million. This compares to income before
income taxes and minority interest of $5.6 million, and an income tax provision
of $3.8 million in fiscal year 1995.
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<PAGE>
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
The Company generated net income in fiscal year 1995 of $849,000 compared to net
income in fiscal year 1994 of $5.6 million. The Company recorded an $8.1 million
gain relating to partial settlements of the Company's non-qualified pension
arrangements in 1994, and an after-tax charge of $.8 million in connection with
the adoption of a required change in accounting during fiscal year 1995. During
fiscal year 1995, growth in revenue significantly exceeded inflation; however,
expenses grew at an even faster pace. Accordingly, net income decreased from the
prior year. This was due in part to expenses incurred to expand the outsourced
benefits administration business; however, consulting operations also performed
below expectations due to higher expense levels.
Fee revenue reached $474.5 million in fiscal year 1995, an increase of $41.1
million, or 10%, from $433.4 million in fiscal year 1994. The increase came
primarily from growth in consulting revenues, particularly in the Retirement and
Group Health practices. Average billable hours per associate were consistent
between the two years, but were lower than management's targets.
For the year, salaries and employee benefit expenses were $248.7 million, an
increase of $15.0 million, or 6%, from fiscal year 1994. The increase in fiscal
year 1995 costs was primarily attributable to higher pension and postemployment
benefit expenses. These were offset slightly by a lower accrued bonus expense.
Occupancy and communication expenses for fiscal year 1995 were $73.4 million, an
increase of $1.7 million, or 2%, from the prior year. This increase came from
increases in office and equipment rentals and telephone expenses.
Professional and subcontracted services relating to consulting offices were
$56.6 million for fiscal year 1995, an increase of $20.1 million from fiscal
year 1994. Subcontracted services are incurred in conjunction with certain
client work and increased consistent with fee growth. Higher professional
expenses resulted from systems consulting and recruiting costs incurred to
expand the WPC business, in addition to costs associated with enhancing many
client service processes throughout the Company.
For fiscal year 1995, other costs of providing services increased $4.8 million,
or 22%, from fiscal year 1994 to $26.6 million, primarily due to an increase in
travel, dues and entertainment expenses.
General and administrative expenses for fiscal year 1995 were $41.3 million, up
$5.8 million or 16% from fiscal year 1994. The increase arises primarily in
salary and benefit costs and professional expenses. During fiscal year 1995, the
Company completed the affiliation with Watsons and changed its operating
structure, through a redefinition of the roles of regional managers, office
managing consultants and practice directors. Steps were taken to improve the
financial decision making systems of the Company, including implementation of
new team and practice reporting, the development of financial modeling and
profit planning tools for office management which help balance chargeable time
and revenue with related costs, and training for consultants relating to
practice economics, including pricing, billing and collecting for services.
Depreciation and amortization increased $1.0 million in fiscal year 1995 to
$21.4 million. This increase is primarily due to higher amortization of deferred
software and development costs associated with outsourced benefits
administration clients.
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<PAGE>
Income before income taxes, minority interest and the cumulative effect of a
change in accounting was $5.6 million in fiscal year 1995, which generated a
provision for income taxes of $3.8 million. This compares to income before
income taxes and minority interest of $12.7 million, and an income tax provision
of $7.0 million in fiscal year 1994. The substantial increase in the effective
tax rate in 1995 is primarily due to foreign source losses for which no current
benefit is available, and non-deductible expenses caused by a change in tax
legislation; these were partially offset by foreign tax credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies primarily on funds from operations and short-term borrowings
as its source of liquidity. The Company believes that it has access to ample
financial resources to finance its growth as well as support ongoing operations.
The Company's cash and cash equivalents at June 30, 1996 totaled $21.7 million,
compared to $11.9 million at June 30, 1995. The Company did not have any
outstanding borrowings at either June 30, 1996 or 1995.
CASH FROM OPERATIONS. The Company's operating cash flow is generally stable and
typically does not fluctuate widely within an economic cycle. Operating cash
flow for the Company, however, totaled $72.2 million in 1996, compared to $34.0
million in the preceding year due primarily to increased working capital cash
flow and higher net income. The Company implemented improved billing and
collection practices in fiscal year 1996 to strengthen the role of working
capital management in its profit goals. The Company will continue to emphasize
working capital but expects working capital cash flow to return to an ordinary
level in 1997.
The Company's ratio of current assets to current liabilities was 1.15 at June
30, 1996 and 1.5 at June 30, 1995.
CASH FROM INVESTING ACTIVITIES. Investing activity cash outflow was $58.2
million in 1996, versus $45.8 million in 1995. The increase is primarily due to
investments in software under client contracts and the formation of Wellspring
outsourced benefits administration business partially offset by the sale of the
Minneapolis outsourcing operation.
Anticipated commitments of funds for fiscal year 1997 are estimated at $43.0
million, which includes expected purchases of fixed assets, 50% of the future
capital requirements of Wellspring, and 50.1% of the capital requirements of
WWHE. Operating cash flows should, in combination with the line of credit
described below, provide for the Company's ongoing cash needs.
The Company has an $80 million revolving credit line with a group of banks. The
line is currently scheduled to mature in January 2001. Fifty-five million
dollars of the credit line is available to the Company as revolving credit for
operating needs, subject to certain borrowing limitations. The remaining $25
million is available to secure loans to associates from financial institutions
for the purchase of Redeemable Common Stock made available under the Company's
stock purchase program. The Company guarantees these loans to its shareholders,
the aggregate outstanding balances of which totaled $17.5 million at June 30,
1996.
CASH FROM FINANCING ACTIVITIES. Financing activity cash outflow was $4.0 million
in 1996, versus $2.9 million in 1995, due to net repurchases of the Company's
Common Stock.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data are included as Item 14 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There are no changes in accountants or disagreements with accountants on
accounting principles and financial disclosures required to be disclosed in this
Item 9.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The response to this item will be included in a definitive proxy statement filed
within 120 days after the end of the Registrant's fiscal year, which proxy
statement is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION.
The response to this item will be included in a definitive proxy statement filed
within 120 days after the end of the Registrant's fiscal year, which proxy
statement is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The response to this item will be included in a definitive proxy statement filed
within 120 days after the end of the Registrant's fiscal year, which proxy
statement is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The response to this item will be included in a definitive proxy statement filed
within 120 days after the end of the Registrant's fiscal year, which proxy
statement is incorporated herein by this reference.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
PAGE
a) Financial Information
(1) Consolidated Financial Statements
Report of Independent Accountants F-1
Financial Statements:
Consolidated Statements of Operations for the
three years ended June 30, 1996 F-2
Consolidated Balance Sheets at June 30, 1996 and 1995 F-3
Consolidated Statements of Cash Flows for the
three years ended June 30, 1996 F-4
Consolidated Statements of Changes in Permanent
Shareholders' Equity for the three years ended June 30, 1996 F-5
Notes to Consolidated Financial Statements F-6 to F-24
(2) Consolidated Financial Statement Schedule for the three years ended
June 30, 1996
Report of Independent Accountants on Financial Statement Schedule F-25
Valuation and Qualifying Accounts and Reserves (Schedule II) F-26
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
Financial statements of unconsolidated subsidiaries have been omitted
because the registrant's proportionate share of the income from continuing
operations before income taxes, and total assets of each such company is
less than 20% of the respective consolidated amounts, and the investment
in and advances to each company is less than 20% of consolidated total
assets.
(3) Unaudited Supplementary Data
Not required.
b) Reports on Form 8-K
None.
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<PAGE>
c) Exhibits
3.1 Restated Certificate of Incorporation of Watson Wyatt & Company(5)
3.2 Restated Bylaws (as amended through November 1994)(2)
4 Form of Certificate Representing Common Stock(1)
10.1 Third Amended and Restated Credit and Security Agreement, dated
January 5, 1996(3)
10.2 First Amendment to The Third Amended and Restated Credit and Security
Agreement, dated June 14, 1996(5)
10.3 Management/Compensatory Contract(4)
10.4 Management/Compensatory Contract(5)
21 Subsidiaries of Watson Wyatt & Company(5)
23 Consent of Independent Accountants(5)
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(1) Incorporated by reference from Registrant's Initial Registration
Statement on Form 10 (File No. 0-20724), filed on October 13, 1992.
(2) Incorporated by reference from Registrant's Amended Registration
Statement on Form 10A (File No. 0-20724), filed on December 30, 1994.
(3) Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1996 (File No. 0-20724), filed
on May 13, 1996.
(4) Incorporated by reference from Registrant's Amended Quarterly Report on
Form 10-Q/A for the quarterly period ended September 30, 1995 (File No.
0-20724), filed on January 16, 1996.
(5) Filed herewith.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WATSON WYATT & COMPANY
(Registrant)
Date: September 20, 1996 By: /S/ A.W. Smith, Jr.
----------------------------
A.W. Smith, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
SIGNATURE TITLE Date
/S/ A.W. Smith, Jr. President, Chief Executive Officer 9/20/96
- ------------------------------ and Director
A.W. Smith, Jr.
/S/ Paul R. Daoust
- ------------------------------ Executive Vice President, Chief 9/20/96
Paul R. Daoust Operating Officer and Director
/S/ Barbara L. Landes Vice President and Chief 9/20/96
- ------------------------------ Financial Officer
Barbara L. Landes
/S/ B. Gene Patton Controller 9/20/96
- ------------------------------
B. Gene Patton
/S/ Walter W. Bardenwerper Director 9/20/96
- ------------------------------
Walter W. Bardenwerper
/S/ Charles A. Clemens Director 9/20/96
- ------------------------------
Charles A. Clemens
Director 9/20/96
- ------------------------------
John J. Gabarro
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<PAGE>
SIGNATURE TITLE DATE
/S/ Gary T. Hallenbeck Director 9/20/96
- ------------------------------
Gary T. Hallenbeck
Director 9/20/96
- ------------------------------
John J. Haley
/S/ Daniel B. Holmes Director 9/20/96
- ------------------------------
Daniel B. Holmes
/S/ Robert D. Masding Director 9/20/96
- ------------------------------
Robert D. Masding
Director 9/20/96
- ------------------------------
R. Michael McCullough
/S/ A. Grahame Stott Director 9/20/96
- ------------------------------
A. Grahame Stott
/S/ Sylvester J. Schieber Director 9/20/96
- ------------------------------
Sylvester J. Schieber
/S/ Angela H. Watson Director 9/20/96
- ------------------------------
Angela H. Watson
/S/ Robert J. Webb Director 9/20/96
- ------------------------------
Robert J. Webb
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Watson Wyatt & Company
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in permanent
shareholders' equity present fairly, in all material respects, the financial
position of Watson Wyatt & Company, formerly The Wyatt Company, and its
subsidiaries at June 30, 1996 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1996,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 6, on July 1, 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits."
/S/ PRICE WATERHOUSE LLP
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PRICE WATERHOUSE LLP
Washington, D.C.
July 25, 1996
F-1
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of U.S. Dollars, Except Per Share Amounts)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Fees $ 492,513 $ 474,521 $ 433,441
Costs of providing services:
Salaries and employee benefits 241,648 248,708 233,673
Occupancy and communications 63,955 73,449 71,725
Professional and subcontracted services 76,243 56,594 36,537
Other 25,211 26,650 21,816
---------- ---------- -----------
407,057 405,401 363,751
General and administrative expenses 38,656 41,313 35,527
Depreciation and amortization 26,348 21,442 20,459
---------- ---------- -----------
472,061 468,156 419,737
Income from operations 20,452 6,365 13,704
Other:
Interest income 1,441 1,343 984
Interest expense (930) (1,507) (1,424)
Loss from affiliates (2,275) (576) (547)
---------- ---------- -----------
Income before income taxes, minority interest and
cumulative effect of a change in accounting 18,688 5,625 12,717
Provision for (benefit from) income taxes:
Current 15,781 2,492 4,349
Deferred (6,578) 1,357 2,673
---------- ---------- -----------
9,203 3,849 7,022
---------- ---------- -----------
Income before minority interest and cumulative
effect of a change in accounting 9,485 1,776 5,695
Minority interest in net income of consolidated subsidiaries (130) (127) (59)
---------- ---------- -----------
9,355 1,649 5,636
Cumulative effect of a change in accounting for
postemployment benefits, net of tax benefit of $1,000 - (800) -
---------- ---------- -----------
Net income $ 9,355 $ 849 $ 5,636
========== ========== ===========
Earnings (loss) per share:
Income before cumulative effect of a change in accounting $ 0.51 $ 0.09 $ 0.29
Cumulative effect of a change in accounting 0.00 (0.04) 0.00
---------- ---------- -----------
Net income $ 0.51 $ 0.05 $ 0.29
========== ========== ===========
</TABLE>
See notes to the consolidated financial statements.
F-2
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
June 30,
--------------------------
1996 1995
---------- -----------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 21,694 $ 11,860
Receivables from clients:
Billed, net of allowances of $5,161 and $1,508 71,431 82,072
Unbilled 53,122 55,291
---------- -----------
124,553 137,363
Income taxes receivable - 2,055
Other current assets 6,936 6,966
---------- -----------
Total current assets 153,183 158,244
Investments in affiliates 41,195 18,783
Fixed assets 36,466 36,776
Deferred income taxes 41,983 33,784
Deferred software and development costs 35,746 28,979
Other intangible assets 3,820 3,002
Other assets 8,426 7,054
---------- -----------
$ 320,819 $ 286,622
========== ===========
LIABILITIES, REDEEMABLE COMMON STOCK, AND PERMANENT SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 88,203 $ 74,773
Income taxes payable 11,362 436
Deferred income taxes 34,830 33,209
---------- -----------
Total current liabilities 134,395 108,418
Accrued retirement benefits 81,141 75,232
Deferred rent 9,904 12,908
Other noncurrent liabilities 10,635 10,030
Minority interest in subsidiaries 362 321
Redeemable Common Stock - $1 par value:
25,000,000 shares authorized;
18,261,963 and 19,129,706 issued
and outstanding; at redemption value 90,214 86,275
Permanent shareholders' equity:
Adjustment for redemption value greater than amounts paid in by shareholders (37,549) (35,179)
Retained earnings 30,677 26,887
Cumulative translation gain 1,040 1,730
Commitments and contingencies (Note 12)
---------- -----------
$ 320,819 $ 286,622
========== ==========
</TABLE>
See notes to the consolidated financial statements.
F-3
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,355 $ 849 $ 5,636
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful receivables from clients 11,667 5,982 4,768
Depreciation 14,805 15,479 14,868
Amortization of software and development costs
and intangible assets 11,543 5,963 5,592
Change in working capital 29,740 4,620 (963)
Change in deferred income taxes (6,578) 303 2,673
Loss from affiliates 2,275 576 547
Minority interest in net income of consolidated subsidiaries 130 127 59
Other (746) 111 493
--------- --------- ---------
Net cash provided by operating activities 72,191 34,010 33,673
--------- --------- ---------
Cash flows from investing activities:
Purchase of short-term investments - - (2,530)
Proceeds from maturity of short-term investments - 2,530 -
Purchases of fixed assets (21,672) (18,780) (15,526)
Proceeds from sales of assets 8,160 533 401
Acquisitions (2,445) (604) (350)
Investment in software and development costs (17,568) (21,645) (8,401)
Investment in affiliates (24,687) (7,879) (547)
--------- --------- ---------
Net cash used in investing activities (58,212) (45,845) (26,953)
--------- --------- ---------
Cash flows from financing activities:
Issuances of Redeemable Common Stock 10,274 7,188 10,160
Repurchases of Redeemable Common Stock (14,270) (10,144) (11,658)
--------- --------- ---------
Net cash used in financing activities (3,996) (2,956) (1,498)
--------- --------- ---------
Effect of exchange rate changes on cash (149) 392 65
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 9,834 (14,399) 5,287
Cash and cash equivalents at beginning of period 11,860 26,259 20,972
--------- --------- ---------
Cash and cash equivalents at end of period $ 21,694 $ 11,860 $ 26,259
========= ========= =========
</TABLE>
See notes to the consolidated financial statements.
F-4
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN PERMANENT SHAREHOLDERS' EQUITY
(Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Adjustment For Redemption
Cumulative Value Greater Than Amounts
Retained Translation Paid In By
Earnings Gain Shareholders
-------- ---- ------------
<S> <C> <C> <C>
Balance at June 30, 1993 $ 29,650 $ 192 $ (36,255)
Net income 5,636 - -
Effect of repurchases of 2,826,340 shares of
common stock (various prices per share) (4,942) - 4,942
Foreign currency translation adjustment - 502 -
Adjustment of redemption value for change
in formula book value per share - - (6,553)
--------- --------- --------
Balance at June 30, 1994 30,344 694 (37,866)
Net income 849 - -
Effect of repurchases of 2,221,419 shares of
common stock (various prices per share) (4,306) - 4,306
Foreign currency translation adjustment - 1,036 -
Adjustment of redemption value for change
in formula book value per share - - (1,619)
--------- --------- --------
Balance at June 30, 1995 26,887 1,730 (35,179)
Net income 9,355
Effect of repurchases of 3,146,899 shares of
common stock (various prices per share) (5,565) 5,565
Foreign currency translation adjustment - (690) -
Adjustment of redemption value for change
in formula book value per share - - (7,935)
--------- --------- --------
Balance at June 30, 1996 $ 30,677 $ 1,040 $ (37,549)
========= ========= ========
</TABLE>
See notes to the consolidated financial statements.
F-5
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Tabular Amounts in Thousands of Dollars Except Share and Percentage Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS - On July 1, 1996, The Wyatt Company changed its name to
Watson Wyatt & Company ("Watson Wyatt" or the "Company"). Watson Wyatt together
with its subsidiaries is a diversified international company engaged in the
business of providing professional services on a fee basis, primarily in the
employee benefit and compensation field, but also in other areas of
specialization such as risk management, insurance company consulting and asset
services. Substantially all of the Company's stock is held by or for the benefit
of employees.
On March 31, 1996, the Company transferred its employee outsourced benefits
administration operations including certain deferred systems development costs,
to a newly formed limited liability company, Wellspring Resources, LLC
("Wellspring"). Wellspring, which is owned 50% by the Company and 50% by State
Street Bank and Trust Company ("State Street"), provides benefits and human
resources administration outsourcing services. The transfer included $15,407,000
of deferred software development costs substantially incurred in anticipation of
this transaction, transaction costs of $2,834,000 and the sale of $3,800,000 of
fixed assets. In conjunction with the Wellspring transfer, the Company also sold
its rights to contracts and fixed assets for its Minneapolis benefit outsourcing
center directly to State Street for $3,500,000. No gain or loss was recorded on
the sale on either transaction. In connection with this formation of Wellspring,
Watson Wyatt retained certain client contracts for administrative and
recordkeeping services and entered into agreements, whereby Wellspring will
provide the services to Watson Wyatt and those clients on behalf of the Company
for a fee. In management's opinion, these agreements are on terms equivalent to
those which unaffiliated parties would deem reasonable.
USE OF ESTIMATES - 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,
disclosures 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. Estimates
are used when accounting for revenue, allowance for uncollectible receivables,
deferred software and development costs, investments in affiliates, depreciation
and amortization, asset write-downs, employee benefit plans and taxes.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements of the
Company include the accounts of the Company and its majority-owned and
controlled subsidiaries after elimination of intercompany accounts and
transactions. Investments in affiliated companies over which the Company has the
ability to exercise significant influence are accounted for using the equity
method.
RECLASSIFICATIONS - Certain amounts previously presented have been reclassified
to conform to the current presentation.
REVENUE RECOGNITION - For consulting services, fees from clients are recorded as
services are performed and are presented net of write-offs and uncollectible
amounts. Under certain long-term contracts for administrative and recordkeeping
services, fees are deferred until services become operational and are then
recognized ratably over the remaining life of the contract.
F-6
<PAGE>
CASH AND CASH EQUIVALENTS - The Company considers short-term, highly liquid
investments with original maturities of 90 days or less to be cash equivalents.
The Company had an overnight repurchase agreement with a financial institution
of $15,500,000 at June 30, 1996 and $6,500,000 at June 30, 1995.
RECEIVABLES FROM CLIENTS - Billed receivables from clients are presented at
their billed amount less an allowance for doubtful accounts. Unbilled
receivables are stated at their estimated net realizable value.
DEFERRED SOFTWARE AND DEVELOPMENT COSTS - Deferred software costs include costs
associated with products that are licensed to clients and used in providing
services to clients. Deferred system development costs include certain
pre-operational costs, primarily systems development and enhancement costs,
which are specifically identifiable and associated with long-term contracts for
outsourcing and recordkeeping services. Deferred software costs are amortized
over the useful lives of the products ranging from three to five years. Deferred
systems development costs are amortized ratably over the estimated remaining
life of the respective contract upon the commencement of services under the
contract. Accumulated amortization was $18,871,000 and $15,226,000 at June 30,
1996 and June 30, 1995, respectively. The Company receives fee revenues from its
clients for the implementation of the contracts. The recognition of such fees is
deferred until such time at which the contract becomes operational. Deferred fee
income was $7,259,000 and $8,474,000 at June 30, 1996 and 1995, respectively.
The Company assesses impairment based upon whether it is probable that
undiscounted future cash flows will be less than the net book value of the
deferred costs.
OTHER INTANGIBLE ASSETS - Other intangible assets consist primarily of goodwill
related to the excess cost over net assets of purchased companies. Goodwill is
generally amortized on a straight-line basis over ten years. The Company
regularly assesses the recoverability of unamortized goodwill and other
long-lived assets based upon whether it is probable that undiscounted future
cash flows will be less than the net book value of the underlying assets.
Accumulated amortization of other intangible assets was $11,931,000 and
$10,322,000 at June 30, 1996 and June 30, 1995, respectively.
EMPLOYEE RECEIVABLES - The Company had outstanding employee receivables included
in other current and noncurrent assets of $4,474,000 and $4,214,000 at June 30,
1996 and June 30, 1995, respectively.
FOREIGN CURRENCY TRANSLATION - Gains and losses on foreign currency transactions
are recognized currently in the consolidated statements of operations. Assets
and liabilities of the Company's subsidiaries outside the United States are
translated into the reporting currency based on the exchange rates at the
balance sheet date. Revenue and expenses of the Company's subsidiaries outside
the United States are translated into U.S. dollars at the average exchange rates
during the year. Gains and losses on translation of the Company's equity
interests in its subsidiaries outside the United States are not included in the
consolidated statements of operations but are reported separately and
accumulated as the cumulative translation gain or loss within permanent
shareholders' equity in the consolidated balance sheets.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount of the Company's cash
and cash equivalents, short-term investments, receivables from clients and
accounts payable and accrued liabilities approximates fair value because of the
short maturity and ready liquidity of those instruments. The Company's policy is
to estimate the fair value of its notes payable, if any, by discounting required
future cash flows under such notes using interest rates at which similar types
of borrowing arrangements could be currently obtained by the Company. At June
30, 1996 and June 30, 1995, the Company had no amounts outstanding under its
F-7
<PAGE>
note payable. The Company knows of no event of default which would require it to
satisfy the guarantees described in Note 9, and therefore, the fair value of
these contingent liabilities is considered immaterial.
CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of certain cash
and cash equivalents, short-term investments and receivables from clients. The
Company invests its excess cash with high credit quality financial institutions.
Concentrations of credit risk with respect to receivables from clients are
limited due to the Company's large number of customers and their dispersion
across many industries and geographic regions.
EARNINGS PER SHARE - The computation of earnings per share is based upon the
weighted average number of shares of Redeemable Common Stock outstanding. The
number of shares (in thousands) used in the computation is 18,516 in fiscal year
1996, 19,248 in fiscal year 1995, and 19,160 in fiscal year 1994.
NOTE 2 - CASH FLOW INFORMATION
Net cash provided by operating activities in the consolidated statements of cash
flows includes cash payments for:
YEAR ENDED JUNE 30,
1996 1995 1994
---- ---- ----
Interest expense and bank fees $ 930 $1,507 $1,424
Income taxes 2,800 6,955 5,337
NOTE 3 - INVESTMENTS IN AFFILIATES
Entities accounted for under the equity method:
OWNERSHIP JUNE 30,
INTEREST 1996 1995
-------- ---- ----
Watson Wyatt Partners 10.0% $ 7,561 $12,648
Watson Wyatt Holdings (Europe) Limited 50.1% 10,390 5,875
Wellspring Resources, LLC 50.0% 22,833 --
Professional Consultants Insurance Company, Inc. 22.5% 411 260
======== =======
Total investment in affiliates $41,195 $18,783
======== =======
F-8
<PAGE>
On April 1, 1995, the Company transferred its United Kingdom (U.K.) operations
to Watson Wyatt Partners, formerly R Watson & Sons ("Watsons"), an actuarial
partnership based in the U.K., and received a beneficial interest and a 10%
interest in a defined profit pool of the partnership. The Company also
transferred its Continental European operations to a newly formed holding
company, Watson Wyatt Holdings (Europe) Limited (WWHE), jointly owned and
controlled by the Company and Watsons in exchange for 50.1% of its shares. The
Company's historical basis in the assets and liabilities carried over.
At June 30, 1996, the Company's investment in WWHE, Watsons and Wellspring
exceeded the Company's share of the underlying investments by $7,650,000 due
primarily to the capitalization of transaction costs incurred by the Company.
This basis differential is being amortized over 15 years.
The Company's pre-tax loss from affiliates includes the following:
YEAR ENDED JUNE 30,
1996 1995 1994
---- ---- ----
Equity investment losses $ (1,639) $ (510) $ (547)
Amortization of basis differential (636) (66) --
======== ======== ========
Loss from affiliates $ (2,275) $ (576) $ (547)
======== ======== ========
Combined summarized balance sheet information for the Company's affiliates
follows:
JUNE 30,
1996 1995
---- ----
Current assets $ 117,223 $ 83,571
Noncurrent assets 37,294 16,201
========= =========
Total assets $ 154,517 $ 99,772
========= =========
Current liabilities $ 47,663 $ 33,614
Noncurrent liabilities 24,955 20,995
Shareholders' equity 81,899 45,163
========= =========
Total liabilities & shareholders' equity $ 154,517 $ 99,772
========= =========
F-9
<PAGE>
The operating results include the Company's proportionate share of income from
equity investments from the dates of investment. Combined summarized operating
results reported by the affiliates follow:
YEAR ENDED JUNE 30,
1996 1995 1994
---- ---- ----
Revenue $ 136,784 $ 108,199 $ 1,433
Operating expenses 112,737 86,716 2,680
--------- --------- ---------
Income (loss) before tax 24,047 21,483 (1,247)
--------- --------- ---------
Net income (loss) $ 24,512 $ 21,636 $ (823)
========= ========= =========
NOTE 4 - FIXED ASSETS
Furniture, fixtures, equipment, and leasehold improvements are recorded at cost,
and presented net of accumulated depreciation or amortization. Furniture,
fixtures and equipment are depreciated using straight-line and accelerated
methods over lives ranging from three to seven years. Leasehold improvements are
amortized on a straight-line basis over the shorter of the assets' lives or
lease terms.
The components of fixed assets are:
JUNE 30,
1996 1995
---- ----
Furniture, fixtures and equipment $ 110,117 $ 113,493
Leasehold improvements 22,098 19,737
----------- -----------
132,215 133,230
Less: accumulated depreciation
and amortization (95,749) (96,454)
----------- -----------
Net fixed assets $ 36,466 $ 36,776
=========== ===========
F-10
<PAGE>
NOTE 5 - PENSION AND PROFIT SHARING PLANS
The noncurrent portions of accrued costs related to the Company's principal
retirement plans are:
JUNE 30,
1996 1995
---- ----
Reserves for defined benefit retirement plans $38,916 $36,908
Reserves for Canadian Separation Allowance Plan 5,966 8,066
Reserves for postretirement benefits other than pensions 36,259 30,258
------ ------
Accrued retirement benefits $81,141 $75,232
====== ======
DEFINED BENEFIT PLANS
The Company sponsors both qualified and non-qualified non-contributory defined
benefit pension plans covering substantially all of its associates. Under the
Company's principal plans (U.S., Canada, and Hong Kong), benefits are based on
the number of years of service and the associates' compensation during the three
highest paid consecutive years of service. Consolidated pension plan expense for
the Company's principal defined benefit plans for fiscal years 1996, 1995 and
1994 amounted to $10,952,000, $10,027,000, and $11,520,000, respectively.
Contributions are limited to amounts that are currently deductible for tax
purposes, and the excess of expense over such contributions and direct payments
under non-qualified plan provisions is accrued. At June 30, 1996, the Company's
non-qualified plans had accumulated benefits in excess of related plan assets.
F-11
<PAGE>
The following table sets forth the principal plans' funded status as reflected
in the consolidated balance sheets:
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 150,510 $ 15,499 $ 127,205 $ 8,480
======== ======== ======== ========
Accumulated benefit obligation $ 170,959 $ 17,786 $ 150,026 $ 13,034
======== ======== ======== ========
Projected benefit obligation for
service rendered to date 220,052 43,670 199,266 43,918
Plan assets at fair value, primarily
marketable equity securities 271,000 -- 227,406 --
-------- -------- -------- --------
Projected benefit obligation (less than)
in excess of plan assets (50,948) 43,670 (28,140) 43,918
Remaining unrecognized transition
obligation (708) (661) (992) (712)
Unrecognized prior service cost 4,086 (11,274) 4,176 (11,964)
Unrecognized net gain subsequent
to transition 49,346 5,117 27,872 3,282
-------- -------- -------- --------
Accrued pension obligation $ 1,776 $ 36,852 $ 2,916 $ 34,524
======== ======== ======== ========
</TABLE>
Net periodic pension cost for the principal plans included the following
components:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during
the period $ 16,601 $ 14,134 $ 16,347
Interest cost on projected benefit
obligation 18,425 15,951 17,701
Amortization of unrecognized net obligation
and other deferred amounts 24,798 17,738 (17,344)
Actual return on plan assets (48,872) (37,796) (5,184)
----------- ----------- -----------
Net periodic pension cost $ 10,952 $ 10,027 $ 11,520
=========== =========== ===========
</TABLE>
F-12
<PAGE>
During fiscal year 1996, the Company sold its daily valuation defined
contribution recordkeeping operations and transferred the employee benefits
administrative outsourcing operations of WPC to a newly formed limited liability
company. In connection with this transaction, the Company recognized a
curtailment gain of approximately $2,919,000, which is included in the
accompanying statement of operations for fiscal year 1996, but is excluded from
the previous table detailing net periodic pension cost.
During fiscal year 1995, the Company suspended its U.K. pension plan as a result
of the transaction with Watsons. The suspension of the U.K. pension plan
resulted in a curtailment loss of approximately $2,600,000, which is included in
the accompanying statement of operations for fiscal year 1995, but is excluded
from the previous table detailing net periodic pension cost.
During fiscal years 1995 and 1994, the Company had certain key executive
retirements. These retirements resulted in a net loss of approximately $346,000
in fiscal year 1995 and a net gain of approximately $8,071,000 in fiscal year
1994 associated with settlements of the U.S. pension plan.
Assumptions used in the valuation for the U.S. plan, which comprises the
majority of the principal defined benefit pension plans, include:
JUNE 30,
1996 1995 1994
---- ---- ----
Discount rate, projected benefit obligation 7.5% 7.5% 8.0%
Discount rate, net periodic pension cost 7.5% 8.0% 8.0%
Rate of increase in compensation levels 5.8% 5.8% 6.3%
Expected long-term rate of return on assets 9.5% 9.5% 11.0%
Based upon an analysis of recent experience, anticipated future experience, and
market and economic factors, the Company changed certain actuarial assumptions
used in its pension valuations for fiscal years 1996, 1995 and 1994. Changes in
actuarial assumptions from fiscal year 1995 to fiscal year 1996 increased
pension expense by approximately $1,039,000. Changes in actuarial assumptions
from fiscal year 1994 to fiscal year 1995 decreased pension expense by
approximately $4,358,000. Changes in actuarial assumptions from fiscal year 1993
to fiscal year 1994 increased pension expense for fiscal year 1994 by
approximately $3,900,000.
DEFINED CONTRIBUTION PLANS
The Company sponsors a profit sharing plan which provides benefits to
substantially all U.S. associates and to which the Company makes discretionary
irrevocable annual contributions. The Company also sponsors a Canadian
Separation Allowance Plan (CSAP) which provides benefits to substantially all
Canadian associates. The CSAP is an unfunded book reserve arrangement; as such,
the amounts due to associates are recorded as a liability in the consolidated
balance sheets of the Company. The Company made no profit sharing contributions
during fiscal years 1996, 1995 or 1994. CSAP expense for fiscal years 1996, 1995
and 1994 amounted to $509,000, $679,000, and $799,000, respectively.
F-13
<PAGE>
NOTE 6 - BENEFITS OTHER THAN PENSIONS
HEALTH CARE BENEFITS
The Company sponsors a contributory health care plan which provides
hospitalization, medical and dental benefits to substantially all U.S.
associates. The Company accrues a liability for estimated incurred but
unreported claims based on projected use of the plan as well as paid claims of
prior periods. The liability totaled $1,867,000 and $1,923,000 at June 30, 1996
and 1995, respectively, and is included in accounts payable and accrued
liabilities in the consolidated balance sheets.
POSTEMPLOYMENT BENEFITS
The Company provides certain postemployment health care and life insurance
benefits for terminated or inactive associates other than retirees. Prior to
fiscal year 1995, the Company recognized these expenses as they were reported.
Effective July 1, 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 112, "Employers' Accounting for Postemployment Benefits,"
which requires that the Company estimate and accrue future benefits. The
cumulative effect upon adoption of SFAS No. 112, which relates to years prior to
fiscal year 1995, was an expense of $1,800,000 ($800,000 after-tax or $0.04 per
share). As compared to the previous accounting method, the fiscal year 1995
impact of adopting SFAS No. 112 resulted in an increase of expense of
approximately $671,000.
POSTRETIREMENT BENEFITS
The Company provides certain health care and life insurance benefits for retired
associates. The principal plans cover associates in the U.S. and Canada who have
met certain eligibility requirements. The Company's principal plans are
unfunded.
F-14
<PAGE>
The following table sets forth the principal plans' status as reflected in the
consolidated balance sheets:
<TABLE>
<CAPTION>
JUNE 30,
1996 1995
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 13,142 $ 12,960
Fully eligible active plan participants 5,987 5,419
Other active plan participants 17,608 18,014
---------- -----------
Accumulated postretirement benefit obligation 36,737 36,393
Unrecognized prior service cost (3,831) (4,625)
Unrecognized net gain subsequent to transition 4,842 4,584
Unrecognized transition obligation (930) (5,392)
---------- -----------
Accrued postretirement benefit obligation $ 36,818 $ 30,960
========== ===========
</TABLE>
Net periodic postretirement benefit cost for the principal plans included the
following components:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 3,881 $ 2,145 $ 2,286
Interest cost on accumulated postretirement
benefit obligation 2,685 2,038 2,273
Net amortization of prior service cost and net gain
subsequent to transition 138 (935) (521)
Amortization of transition obligation over 20 years 347 349 452
-------- --------- --------
Net periodic postretirement benefit cost $ 7,051 $ 3,597 $ 4,490
======== ========= ========
</TABLE>
As a result of the transaction with State Street, the Company terminated
benefits for certain associates, which resulted in the recognition of a
curtailment gain of approximately $654,000 in fiscal year 1996.
As a result of the transaction with Watsons, the Company suspended its United
Kingdom postretirement benefit plan during fiscal year 1995. In connection with
the suspension of the plan, the Company recognized a curtailment loss of
approximately $657,000 in fiscal year 1995.
F-15
<PAGE>
Assumptions used in the valuation for the U.S. plan, which comprises the
majority of the principal plans, include:
<TABLE>
<CAPTION>
JUNE 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Health care cost trend rate, accumulated benefit obligation:
Pre-65 benefits
(decreasing to 5.0% for 2004 and thereafter) 9.8% 10.6% 11.3%
Post-65 benefits
(decreasing to 5.0% for 2007 and thereafter) 8.8% 9.9% 9.9%
Health care cost trend rate, net periodic postretirement benefit cost:
Pre-65 benefits
(decreasing to 5.0% for 2004 and thereafter) 10.6% 11.3% 14.0%
Post-65 benefits
(decreasing to 5.0% for 2007 and thereafter) 9.4% 9.9% 11.2%
Discount rate, accumulated benefit obligation 7.5% 7.5% 8.0%
Discount rate, net periodic postretirement benefit cost 7.5% 8.0% 8.0%
</TABLE>
Based on an analysis of market and economic trends, the Company changed certain
actuarial assumptions used in determining net periodic postretirement benefit
cost in fiscal years 1996, 1995 and 1994. Changes in actuarial assumptions from
fiscal year 1995 to fiscal year 1996 increased expense by approximately $259,000
in fiscal year 1996. The effect was to reduce net income for fiscal year 1996 by
approximately $121,000 or $.01 per share. Changes in actuarial assumptions from
fiscal year 1994 to fiscal year 1995 decreased expense by approximately $869,000
in fiscal year 1995. The effect was to increase net income for fiscal year 1995
by approximately $420,000 or $.02 per share. Changes in actuarial assumptions
from fiscal year 1993 to fiscal year 1994 increased expense by approximately
$1,000,000 in fiscal year 1994. The effect was to reduce net income for fiscal
year 1994 by approximately $575,000 or $.03 per share.
An increase in the assumed health care cost trend rate by 1% each year would
have the following effect on the principal plans:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Increase in accumulated postretirement benefit obligation $5,242 $5,503 $4,269
Increase in service and interest cost components of net periodic
postretirement benefit cost 1,301 677 718
</TABLE>
F-16
<PAGE>
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of:
JUNE 30,
1996 1995
---- ----
Accounts payable and accrued liabilities $33,697 $33,074
Accrued salaries and bonuses 32,141 21,330
Current portion of reserves for principal defined benefit
retirement plans 3,220 2,472
Current portion of reserves for postretirement
benefits other than pensions 559 702
Accrued vacation 12,183 11,009
Deferred fee income 6,403 6,186
----- -----
Total accounts payable and accrued liabilities $88,203 $74,773
====== ======
NOTE 8 - LEASES
The Company leases office space and various computer equipment under operating
lease agreements with terms ranging from one to 25 years. The Company has
entered into sublease agreements for some of its leased space. The rental
expense was $45,749,000, $51,604,000, and $48,854,000 for fiscal years 1996,
1995 and 1994, respectively. Sublease income was $1,810,000, $2,868,000, and
$2,204,000 for fiscal years 1996, 1995 and 1994, respectively. Future cash
outlays for operating lease commitments and cash inflows for sublease income
are:
LEASE SUBLEASE
YEARS ENDING JUNE 30, COMMITMENTS INCOME
----------- ----------
1997 $ 43,422 $ 1,044
1998 38,893 778
1999 32,791 134
2000 31,589 134
2001 27,472 134
Thereafter 34,083 63
---------- ----------
$208,250 $ 2,287
========== ==========
As a result of relocations and the subleasing of excess office space, the
Company recognized lease termination losses of approximately $500,000,
$1,200,000 and $3,100,000 in fiscal years 1996, 1995 and 1994, respectively.
F-17
<PAGE>
NOTE 9 - NOTE PAYABLE
The Company has an $80 million revolving credit line with a group of banks at an
interest rate which varies with the prime rate. The credit facility requires the
Company to observe certain covenants (including requirements as to minimum net
worth and other financial and restrictive covenants) and is secured by the
Company's receivables. The line is currently scheduled to mature on January 5,
2001. Of the credit line, $55 million is available to the Company as revolving
credit for operating needs, subject to certain borrowing limitations. The
remaining $25 million is available to secure loans to associates from financial
institutions for the purchase of Redeemable Common Stock made available under
the Company's stock purchase program. The Company guarantees these loans to its
shareholders, the aggregate outstanding balances of which totaled $17,534,000
and $18,600,000 at June 30, 1996 and 1995, respectively. Shares totaling
4,800,000 and 6,600,000 of the Company's Redeemable Common Stock were pledged by
shareholders to secure the associates' loans at June 30, 1996 and 1995,
respectively.
NOTE 10 - REDEEMABLE COMMON STOCK
Substantially all of the Company's Redeemable Common Stock is held by or for the
benefit of its employees and, pursuant to the Company's bylaws, is subject to
certain restrictions. In connection with these restrictions, the Company has the
following rights and obligations regarding purchases and sales of its common
stock:
a) The Company has the first option to purchase, or to designate associates
who are eligible to purchase, any shares offered for sale by a
shareholder. Shares not purchased by the Company or its designees may be
sold to other associates, subject to the same restrictions.
b) Upon the termination of employment, bankruptcy of a shareholder, or the
imposition of a lien or attachment on any stock, the shares held by the
shareholder or subject to attachment are considered to be offered for
sale. In these circumstances, the Company is obligated to purchase any
shares not otherwise purchased through the exercise of its option by its
designees or by others.
Pursuant to the Company's bylaws, the price for all purchases and sales of
Redeemable Common Stock is the formula book value per share (defined in the
bylaws as "Net Book Value") of such stock as of the last day of the preceding
year. Additional amounts may be paid for purchases of Redeemable Common Stock
reflecting the pro rata appreciation in the formula book value per share from
the last day of the preceding year to the end of the current year and pro rata
dividends paid during the year. As defined in the bylaws, Net Book Value is
equal to the sum of Redeemable Common Stock, adjustment for redemption value
greater than amounts paid in by shareholders, retained earnings, and cumulative
translation adjustment, adjusted by compensation survey items as defined in the
Company's bylaws. The formula book value per share, as defined above, was $4.94,
$4.51 and $4.44 at June 30, 1996, 1995 and 1994, respectively. Redeemable Common
Stock is equal to the number of shares outstanding multiplied by the formula
book value per share.
F-18
<PAGE>
The following schedule computes the formula book value per share at June 30:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Consolidated net worth (as defined in the Company's
bylaws) $ 84,382 $ 79,713 $ 80,784
Adjustment for the compensation survey items:
50% of consolidated income received
from compensation survey business 5,915 6,524 6,757
Less: Subscriber lists, computer software and
data banks used principally in compensation
survey business included in consolidated net
worth (as defined) -- -- --
-------- -------- --------
Formula book value of Redeemable Common Stock $ 90,297 $ 86,237 $ 87,541
======== ======== ========
Number of shares of Redeemable Common Stock outstanding 18,262 19,130 19,732
======== ======== ========
Formula book value per share of Redeemable Common Stock $4.94 $4.51 $4.44
======== ======== ========
</TABLE>
In view of the Company's obligation to repurchase its Redeemable Common Stock,
the Securities and Exchange Commission requires that the redemption value of
outstanding shares be classified as Redeemable Common Stock and not be portrayed
as permanent capital. The changes in this balance for the three years ended June
30, 1996 were as follows:
F-19
<PAGE>
NUMBER OF REDEEMABLE
SHARES COMMON STOCK
----------- -----------
Balance at June 30, 1993 20,086,761 $ 82,557
Redemption of shares (2,826,340) (11,658)
Issuance of shares 2,472,002 10,160
Adjustment of redemption value for
change in formula book value per share -- 6,553
----------- ----------
Balance at June 30, 1994 19,732,423 87,612
Redemption of shares (2,221,419) (10,143)
Issuance of shares 1,618,702 7,187
Adjustment of redemption values for
change in formula book vaue per share -- 1,619
----------- ----------
Balance at June 30, 1995 19,129,706 86,275
Redemption of shares (3,146,899) (14,270)
Issuance of shares 2,279,156 10,274
Adjustment of redemption value for
change in formula book value per share -- 7,935
----------- ----------
Balance at June 30, 1996 18,261,963 $ 90,214
=========== ==========
The Company has filed with the Securities and Exchange Commission a definitive
Proxy Statement for its upcoming Annual Meeting of Shareholders, which includes
a proposed amendment to the Company's bylaws, subject to approval by shareholder
vote, that would modify calculations of formula book value occurring after June
30, 1996.
The Company sponsors a Stock Purchase Plan (SPP) and a Stock Ownership Plan
(SOP), which allows virtually all associates to become shareholders. In each of
the last three years, the Company paid each associate purchasing stock $1.00 per
share purchased under the SPP. This resulted in expense for fiscal years 1996,
1995, and 1994 of $1.7 million, $1.6 million, and $2.5 million, respectively.
The Company issued no shares of stock under the SOP in fiscal years 1996, 1995
or 1994.
F-20
<PAGE>
NOTE 11 - INCOME TAXES
The provision for income taxes is based upon reported income before income taxes
and includes deferred income taxes resulting from differences between assets and
liabilities recognized for financial reporting purposes and such amounts
recognized for income tax purposes. In accordance with SFAS No. 109 "Accounting
for Income Taxes," the Company measures deferred taxes by applying currently
enacted tax laws, recognizes deferred tax assets if it is more likely than not
that a benefit will be realized, and provides a valuation allowance on deferred
tax assets to the extent that it is more likely than not that a benefit will not
be realized.
The components of the income tax provision before the cumulative effect of the
accounting change include:
YEAR ENDED JUNE 30,
1996 1995 1994
---- ---- ----
Current tax expense (benefit):
U.S. $ 11,415 $ (1,269) $ 1,550
State and local 2,735 659 1,221
Foreign 1,631 3,102 1,578
--------- --------- ---------
15,781 2,492 4,349
--------- --------- ---------
Deferred tax expense (benefit):
U.S. $ (4,579) $ 1,101 $ 3,412
State and local (1,298) 92 646
Foreign (701) 164 (1,385)
--------- --------- ---------
(6,578) 1,357 2,673
--------- --------- ---------
Total provision for income taxes $ 9,203 $ 3,849 $ 7,022
========= ========= =========
F-21
<PAGE>
Deferred income tax assets (liabilities) included in the consolidated balance
sheets at June 30, 1996 and June 30, 1995 are comprised of the following:
JUNE 30,
1996 1995
---- ----
Cash method of accounting for U.S. income
tax purposes $ (34,061) $ (35,058)
Amortization of deferred software and
development costs (4,351) (5,178)
Foreign temporary difference (975) (177)
Partnership income (744) --
Other (144) (581)
---------- ----------
Gross deferred tax liabilities (40,275) (40,994)
---------- ----------
Accrued retirement benefits 36,177 33,860
Non-deductible foreign expenses 1,172 --
Accelerated depreciation in book provision
in excess of deduction for tax purposes 1,704 2,269
Amortization of deferred rent 4,313 4,861
Foreign temporary difference 1,306 479
Foreign net operating loss carryforwards 2,159 2,251
Other 3,928 100
---------- ----------
Gross deferred tax assets 50,759 43,820
---------- ----------
Deferred tax assets valuation allowance (3,331) (2,251)
---------- ----------
Net deferred tax asset $ 7,153 $ 575
========== ==========
The Company has no foreign tax credit carryforwards for U.S. tax purposes. At
June 30, 1996, the Company has unused loss carryforwards for tax purposes in
various jurisdictions outside the U.S. amounting to $6,168,000, of which
$4,256,000 can be indefinitely carried forward under local statutes. The
majority of the remaining loss carryforwards will expire, if unused, after the
end of fiscal year 2001. The valuation allowance applies to the tax effect of
the foreign net operating loss carryforwards ($2,159,000), and the tax effect of
nondeductible foreign expenses ($1,172,000) for which realizability is
considered uncertain.
The net change in the valuation allowance of $1,080,000 in fiscal year 1996 is
due primarily to the tax effect of the non-deductible foreign expenses. The net
change in the valuation allowance of $2,958,000 in fiscal year 1995 is due
primarily to the reduction in available foreign operating losses as a result of
the transfer of European operating subsidiaries to WWHE.
F-22
<PAGE>
Domestic and foreign components of income before taxes, minority interest and
cumulative effect of a change in accounting for the three years ended June 30,
1996 are follows:
YEAR ENDED JUNE 30,
1996 1995 1994
---- ---- ----
Domestic $ 11,477 $ 6,817 $ 15,326
Foreign 7,211 (1,192) (2,609)
-------- --------- --------
$ 18,688 $ 5,625 $ 12,717
======== ========= ========
The reported income tax provision differs from the amounts that would have
resulted had the reported income before income taxes been taxed at the U.S.
federal statutory rate. The principal reasons for the differences between the
actual amounts provided and those which would have resulted from the application
of the U.S. federal statutory tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Calculated income tax provision at U.S.
federal statutory tax rate of 35% $ 6,541 $ 1,969 $ 4,451
Increase (reduction) resulting from:
Results of non-U.S. affiliates taxed at other
than statutory rates 120 (759) (153)
Losses of non-U.S. affiliates for which no
current benefit is available 792 1,043 503
State income taxes, net of federal tax
benefit 620 336 1,055
Foreign income taxes, net of federal tax
benefit -- -- 111
Non-deductible amortization and other
expenses 1,668 1,183 624
Foreign tax credit (311) (207) --
Other (227) 284 431
--------- --------- ---------
Income tax provision before cumulative
effect of a change in accounting $ 9,203 $ 3,849 $ 7,022
========= ========= =========
</TABLE>
F-23
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a defendant in certain lawsuits arising in the normal course of
business, some of which are in their earliest stages. Management currently
foresees no material liability resulting from such litigation, and management
believes that the Company carries adequate insurance, above reasonable
deductibles, against any foreseeable outcome of such litigation.
As of June 30, 1996, the Company had outstanding letters of credit of
$2,225,000.
NOTE 13 - SUBSEQUENT EVENTS
On August 27, 1996, the Company entered into a lease agreement on new office
space and subleased part of its existing space, which will allow the Company to
relocate some or all of its corporate operations to less expensive facilities.
In connection with the sublease, the Company will record a pre-tax loss of
approximately $5.0 million in the first quarter of fiscal year 1997.
If the Company proceeds to sublease the remaining corporate office space, an
additional pre-tax loss of up to $5.2 million may be recorded during fiscal year
1997 with a related reduction of occupancy expense in future years.
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Shareholders of Watson Wyatt & Company
Our audits of the consolidated financial statements referred to in our report
dated July 25, 1996 appearing on page F-1 of the Form 10-K also included an
audit of the Financial Statement Schedule listed in item 14(a) of this Form
10-K. In our opinion, the Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/S/ PRICE WATERHOUSE LLP
- -------------------------
PRICE WATERHOUSE LLP
Washington, D.C.
July 25, 1996
F-25
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Thousands of Dollars)
ADDITIONS
---------
CHARGED TO BALANCE AT
BALANCE AT CHARGED AGAINST OTHER END OF
DESCRIPTION BEGINNING OF YEAR FEES ACCOUNTS DEDUCTIONS YEAR
---------- ---------- ---------- ---------- ---------- ----------
YEAR ENDED JUNE 30, 1996
------------------------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful $1,508 $8,014 $ -- $(4,361) $5,161
accounts
Valuation
allowance for 2,251 -- 1,080(1) -- 3,331
deferred tax
assets
YEAR ENDED JUNE 30, 1995
------------------------
Allowance for
doubtful 1,026 5,982 -- (5,500) 1,508
accounts
Valuation
allowance for 5,209 -- 235(1) (3,193)(2) 2,251
deferred tax
assets
YEAR ENDED JUNE 30, 1994
------------------------
Allowance for
doubtful 863 4,768 -- (4,605) 1,026
accounts
Valuation
allowance for -- -- 5,209(1) -- 5,209
deferred tax
assets
</TABLE>
- ----------------
(1) Represents current year net operating loss carryforwards and the
nondeductible foreign expenses for which realizability is considered
uncertain.
(2) Represents expiring net operating loss carryforwards and reduction of net
operating loss carryforwards resulting from the transfer of certain
subsidiaries to a newly formed entity.
F-26
CERTIFICATE OF OWNERSHIP AND MERGER OF
WATSON WYATT & COMPANY INTO
THE WYATT COMPANY
The undersigned corporations organized and existing under and in accordance with
the General Corporation Law of the State of Delaware
DO HEREBY CERTIFY:
FIRST: That the name and state of incorporation of each of the constituent
corporations of the merger are as follows:
NAME STATE OF INCORPORATION
Watson Wyatt & Company Delaware
The Wyatt Company Delaware
SECOND: Watson Wyatt & Company is a wholly-owned subsidiary of The Wyatt
Company.
THIRD: That an Agreement and Plan of Merger dated May 28, 1996 among the parties
to the merger ("Merger Agreement") has been approved, adopted, certified,
executed and acknowledged by each of the constituent corporations in accordance
with the requirements of Section 253 of the General Corporation Law of the State
of Delaware.
FOURTH: That the name of the surviving corporation of the merger is The Wyatt
Company, a Delaware corporation.
FIFTH: That the Certificate of Incorporation of The Wyatt Company shall be the
Certificate of Incorporation of the surviving corporation, except that the first
section of the Certificate of Incorporation of The Wyatt Company shall be
deleted in its entirety and shall be replaced by the following section:
FIRST: The name of the corporation is WATSON WYATT & COMPANY.
SIXTH: That the Executed Merger Agreement is on file at the principal place of
business of the surviving corporation which is located at 601 Thirteenth Street,
N.W., Suite 900, Washington, D.C. 20005.
SEVENTH: That a copy of the Merger Agreement will be furnished by the surviving
corporation, on request and without cost, to any stockholder of any constituent
corporation.
EIGHTH: That this Certificate of Merger shall be effective as of 12:01 a.m. on
July 1, 1996.
NINTH: That The Wyatt Company's Board of Director resolutions pertaining to
this merger is dated February 15-17, 1996, and is attached hereto.
THE WYATT COMPANY WATSON WYATT & COMPANY
<PAGE>
By: A.W. Smith, Jr. \s\ By: Paul R. Daoust \s\
A.W. Smith, Jr. Paul R. Daoust
Attest: Attest:
By: Walter W. Bardenwerper \s\ By: Walter W. Bardenwerper \s\
Walter W. Bardenwerper Walter W. Bardenwerper
Secretary Secretary
<PAGE>
Following discussion, and upon motion duly made and seconded, the following
resolution was adopted:
#10 RESOLVED, that the Company shall change its name to "Watson Wyatt &
Company" effective July 1, 1996 in conjunction with the adoption of '
the name "Watson Wyatt & Partners" by the partners of R. Watson & Sons;
FURTHER RESOLVED, that the Company effect the foregoing change of name
by forming a subsidiary with the name "Watson Wyatt & Company" and
entering into an Agreement and Plan of Merger with such subsidiary
pursuant to which the Company would be the surviving corporation and
take the name "Watson Wyatt & Company"; and
FURTHER RESOLVED, that the Executive Committee, the President, the
Executive Vice President and the Secretary are hereby authorized to
take any further action or execute any documents or instruments deemed
necessary or advisable to effect the foregoing resolutions.
<PAGE>
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF THE WYATT COMPANY
THE WYATT COMPANY, a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation, at a meeting
held on July 12, 1989, duly adopted resolutions providing for proposed
amendments to the Restated Certificate of Incorporation of said
corporation, declared said amendments advisable and directed that the
proposed amendments be prepared by the President and Secretary to be
considered at the next annual meeting of the stockholders of said
corporation. The resolutions setting forth proposed amendments are as
follows:
RESOLVED, that (subject to further evaluation by the General
Counsel as directed by this Board with respect to the impact
of shareholder divorces on stock ownership) Article FOURTEENTH
of the Company's Restated Certificate of Incorporation and
Section 9 of the Company's Bylaws be amended to permit the
ownership of shares of stock of the Corporation by personal
holding corporations, or equivalent entities provided for
under local, law, in jurisdictions outside of the United
States, subject in each case to the prior approval of the
Secretary of the Company; and
FURTHER RESOLVED, that the Board of Directors declares the
advisability of and recommends to the stockholders the
adoption of appropriate amendments to the Company's Restated
Certificate of Incorporation and Bylaws and hereby directs
that the President and Secretary prepare such proposed
amendments to be considered by the stockholders of the Company
at a meeting to be held at a date to be determined by the
Secretary; and
FURTHER RESOLVED, that, upon approval of the Company's
stockholders, the proper officers are hereby authorized and
directed to execute, file and record an appropriate
Certificate of Amendment to the Company's Restated Certificate
of Incorporation to effect these resolutions and to do and to
perform all such other further acts and things as they may
deem necessary and appropriate to carry out the purposes of
the foregoing resolutions.
SECOND: That pursuant to the recommendation of the Presidents and the
Secretary the first sentence of Article FOURTEENTH of the Company's
Restated Certificate of Incorporation shall be amended to be and read
as follows:
<PAGE>
"The Corporation shall not issue or transfer by way of sale or
any other disposition, any shares of any class of capital
stock ("Stock") in the Corporation, whether treasury stock or
authorized and unissued stock, to any person or entity which
is not either (a) a full-time employee, or a partner engaged
full-time in a partnership practice, if applicable, of the
Corporation or any of its Subsidiaries or Affiliates or (b)
otherwise permitted by Section 9 of the Bylaws of the
Corporation to own share of Stock in the Corporation."
THIRD: That thereafter, at the annual meeting of stockholders duly
called and held on November 9, 1989, upon notice in accordance with the
provisions of the Bylaws of the Corporation and the laws of the State
of Delaware, the amendment was approved and adopted by a vote of more
than eighty percent (80%) of the outstanding shares of all stock of the
corporation.
FOURTH: That said amendment was duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, The Wyatt Company has caused this certificate to be signed
by its Vice President-Finance and attested by its Assistant Secretary, this 27th
day of February, 1990.
Attest: THE WYATT COMPANY
Walter W. Bardenwerper_/s/ Wilson H. Phillips, Jr._/s/
Walter W. Bardenwerper Wilson H. Phillips, Jr.
Assistant Secretary Vice President, Finance
(Seal)
<PAGE>
RESTATED
CERTIFICATE OF INCORPORATION
OF
THE WYATT CORPORATION
The original Certificate of Incorporation of the Wyatt Company was
filed with the Secretary of State of Delaware on February 17, 1958 under the
name of YATTCO, INC. The following Restated Certificate of Incorporation serves
to restate, integrate, and further amend the provisions of the Corporation's
prior Restated Certificate of Incorporation, filed on July 20, 1984 and all
amendments thereto:
FIRST: The name of the Corporation is THE WYATT COMPANY.
SECOND: The registered office of the Corporation in the State of
Delaware shall be located at the Corporation Trust Center, 1209 Orange Street,
Wilmington, Delaware 19801, in the City of Wilmington, County of New Castle, and
the registered agent at such address is The Corporation Trust Company.
THIRD: The nature of the business of the Corporation and the objects
or purposes to be transacted, promoted or carried on are as follows:
1. to undertake, transact, buy sell and deal in all kinds of
services relating to employer-employee and personnel problems
of every class and description, and to conduct researches,
survey, investigations and examinations of businesses and
enterprises of every kind and description for the purpose of
securing, analyzing, compiling, publishing, distributing and
disseminating information and particulars relating to
employer-employee relations and personnel problems;
2. to act as actuaries, business advisors, financial advisors,
appraisers and personnel engineer for all persons, firms,
partnerships, associations, corporations and business
enterprises of every kind (except that the Corporation shall
not be authorized to engage in practices which might be
construed by the courts as the unauthorized practice of law),
and to make statistical, actuarial, mathematical, industrial
relations, personnel and financial studies of persons, firms,
corporations, associations and other business enterprises and
to report the result of such studies (except that the
Corporation shall not be authorized to practice the profession
of accounting);
3. to devise, create, compile, publish, promote, install,
establish, maintain, sell, distribute and service all kinds of
forms of compensation, bonus, stock purchase, profit sharing,
insurance, recreational and employee benefit plans, and to
assist employers, management, administrators and others in
promoting, establishing, installing, maintaining and carrying
out such plans;
4. to act as insurance brokers and insurance agents and in
general to carry on an insurance agency and insurance
brokerage business, but not to engage in the business of an
insurance company;
<PAGE>
5. to manufacture, construct, lease, purchase and otherwise
acquire, to hold, own, repair, maintain, operate and invest,
trade and deal in, to lien, mortgage, pledge and otherwise
encumber and to let, assign, transfer, sell and otherwise
dispose of goods, wares and merchandise and personal property
of every kind and description and wherever situated;
6. to the same extent as natural persons might or could do, to
purchase or otherwise acquire, hold, own, maintain, work,
develop, sell, lease, sublease, exchange, hire, convey,
mortgage or otherwise dispose of, and turn to account and deal
in, lands, leaseholds, any interests, estates and rights in
real property, any personal or mixed property, and franchises,
rights, licenses, permits or privileges of every character;
7. to acquire by purchase, exchange or otherwise all, or any part
of, or any interest in, the properties, assets, business and
goodwill of any one or more persons, firms, associations,
corporations or syndicates engaged in the business which the
Corporation is authorized to engage in; to pay for the same in
cash, property or its own or other securities; to hold, operate,
reorganize, liquidate, sell or in any manner dispose of the whole
or any part thereof; and in connection therewith to assume or
guarantee performance of any liabilities, obligations or
contracts of such persons, firms, associations, corporations or
syndicates, and to conduct in any lawful manner the whole or any
part of any business thus acquired;
8. to acquire by purchase, subscription, contract or otherwise, and
to hold for investment or otherwise, sell, exchange, mortgage,
pledge or otherwise dispose of, or turn to account or realize
upon, and generally to deal in and with, any and all kinds of
securities issued or created by, or interests in, corporations,
associations, partnerships, firms, trustees, syndicates,
individuals, municipalities or other political or governmental
divisions or subdivisions, or any agencies thereof, or by any
combinations, organizations or entities whatsoever, irrespective
of their form or the name by which they may be described; and to
exercise any and all rights, powers and privileges of individual
ownership or interest in respect of any and all such securities
and interests, including the right to vote thereon and to consent
and otherwise act with respect thereto; to do any and all acts
and things for the preservation, protection, improvement and
enhancement in value of any and all such securities or interests,
and to aid by loan, subsidy, guaranty or in any other manner
permitted by law those issuing, creating or responsible for any
such securities or interests;
9. to develop, apply for, obtain, register, purchase, lease, take
licenses in respect of or otherwise acquire, and to hold, own,
use, operate, enjoy, turn to account, grant licenses in respect
of, manufacturer under, introduce, sell, assign, mortgage, pledge
or otherwise dispose of any and all inventions, devices,
formulae, processes, improvements and modifications thereof,
letters patent and all rights connected therewith or appertaining
thereunto, copyrights, trademarks, trade names, trade symbols and
other indications of origin and ownership, franchises, licenses,
grants and concessions granted by or recognized under the laws of
the United States of America or of any state or subdivision
thereof or of any other country or subdivision thereof:
<PAGE>
10. to loan money upon the security or real and/or personal
property of whatsoever name, nature or description,
with or without security; and
11. to borrow money for any of the purposes of the Corporation,
from time to time, and without limit as to amount; to issue
and sell its own securities in such amounts, on such terms and
conditions, for such purposes and for such prices, as its
Board of Directors shall determine; and to secure such
securities, by mortgage upon, or the pledge of, or the
conveyance or assignment in trust of, the whole or any part of
the properties, assets, business and good will of the
Corporation, then owned or thereafter acquired.
It is the intention that the objects and purposes set forth in the
foregoing clauses of this Article THIRD shall not, unless otherwise specified
herein, be in any wise limited or restricted by reference to, or inference from,
the terms of any other clause of this or any other article in this Certificate,
but that the objects and purposes specified in each of said clauses shall be
regarded as independent objects and purposes.
It is also the intention that the foregoing clauses shall be construed
as powers as well as objects and purposes; that the Corporation shall be
authorized to conduct its business or hold property in any part of the United
States and its possessions and foreign countries; that the foregoing enumeration
of specific powers shall not be held to limit or restrict in any manner the
general powers of the Corporation; and that generally the Corporation shall be
authorized to exercise and enjoy all other powers conferred on corporations by
the laws of Delaware.
FOURTH: The number of shares of all classes of stock which the
Corporation is authorized to issue is 25,000,000 shares of Common Stock, par
value $1 per share (hereinafter called "Common Stock").
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions of the Common Stock shall be as
follows:
1. Dividends payable on the Corporation's Common Stock may be
paid in shares having a preference as to dividends, and other
preferences over the Corporation's Common Stock.
2. The holders of Common Stock shall be entitled to receive
notices of all meetings of the shareholders of the Corporation
and to cast one vote for each share of Common Stock upon all
matters presented to the shareholders and, except as otherwise
provided herein or required by law, the holders of Common
Stock shall vote together as a single class on all such
matters.
3. No holder of Common Stock of the Corporation shall have any
preemptive or preferential right to acquire any shares of any
class of stock of the Corporation now or hereafter authorized
or securities of any kind convertible into, or evidencing the
right to purchase, shares of the Corporation of any class now
or hereafter authorized.
FIFTH: The amount of capital of the Corporation upon the filing of this
Restated Certificate of Incorporation is not less than One Million Six Thousand
Nine Hundred Fifty Dollars ($1,006,950).
<PAGE>
SIXTH: The existence of the Corporation, is to be perpetual.
SEVENTH: The private property of the stockholders of the Corpora-
tion shall not be subject to the payment of the corporate
debts to any extent whatever.
EIGHTH: The number of directors of the Corporation shall be the number
fixed from time to time in the Bylaws of the Corporation, but in no event shall
such number be fewer than three (3). Directors of the Corporation need not be
stockholders thereof.
NINTH: In furtherance and not in limitation of the powers
conferred by the laws of the State of Delaware, the Board of Directors is
expressly authorized empowered:
(a) in the manner provided in the Bylaws of the Corporation, to
make, alter, amend and repeal the Bylaws of the Corporation,
in any respect not inconsistent with the laws of the State of
Delaware or with the Certificate of Incorporation of the
Corporation, subject to the power of the stockholders of the
Corporation to amend, alter or repeal any Bylaws made by the
Board of Directors;
(b) by resolution or resolutions passed by a majority of the whole
Board of Directors, to designate one or more committees, each
committee to consist of two or more of the Directors of the
Corporation, which, to the extend provided in said resolution
or resolutions or in the Bylaws of the Corporation, shall have
and may exercise the powers of the Board of Directors in the
management of the business and affairs of the Corporation to
be affixed to all papers which may require it; and such
committee or committees shall have such name or names as may
be stated in the Bylaws of the Corporation or as may be
determined from time to time by resolution adopted by the
Board of Directors;
(c) subject to any applicable provisions of the Bylaws of the
Corporation then in effect, to determine, from time to time,
whether and to what extend and at what times and places and
under what conditions and regulations the accounts and books
of the Corporation, or any of them, shall be open to the
inspection of the stockholders; and no stockholder shall have
any right to inspect any account or book or document of the
Corporation, except as conferred by the laws of the State of
Delaware, unless and until authorized so to do by resolution
by the Board of Directors or of the stockholders of the
Corporation;
(d) to fix from time to time the amount of the surplus or profits
of the Corporation to be reserved as working capital or for
any other lawful purpose; and
(e) without any action by the stockholders, to authorize the
borrowing of moneys for any of the purposes of the Corporation
and, from time to time without limit as to amount, to
authorize and cause the making, execution, issuance, sale or
other disposition of promissory notes, drafts, bonds,
debentures and other negotiable or non-negotiable instruments
and evidences of indebtedness, and the securing of the same by
mortgage, pledge, deed of trust or otherwise.
In addition to the powers and authorities hereinbefore or by statute
expressly conferred upon it, the Board of Directors may exercise all such powers
and do all such acts and things as may be exercised
<PAGE>
or done by the Corporation,
subject, nevertheless, to the provisions of the laws of the State of Delaware,
this Restated Certificate of Incorporation and the Bylaws of the Corporation.
Any contract, transaction or act of the Corporation or of the directors
or of any committee, which shall be ratified by the holders of a majority of the
shares of stock of the Corporation present in person or by proxy and voting at
any annual meeting or at any special meeting called for such purpose, shall,
insofar as permitted by law or by this Restated Certificate of Incorporation, be
as valid and as binding as though ratified by every stockholder of the
Corporation.
TENTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code, or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders, of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application had been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
ELEVENTH: Meetings of stockholders may be held outside the State of
Delaware, if the Bylaws so provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation. Elections of directors
need not be by ballot unless the Bylaws of the Corporation shall so provide.
TWELFTH: No contract or other transaction between the Corporation and
any other corporation shall be affected or invalidated by the fact that any one
or more of the directors of the Corporation is or are interested in, or is a
director or officer or are directors or officers of, such other corporation, and
any director or directors, individually or jointly, may be a party or parties to
or may be interested in any contract or transaction of the Corporation or in
which the Corporation is interested; and no contract, act or transaction of the
Corporation with any person or persons, firms or corporations, shall be affected
or invalidated by the fact that any director or directors of the Corporation is
a party or are parties to, or interested in, such contract, act or transaction,
or in any way connected with such person or persons, firm or association; and
each and every person who may become a director of the Corporation is hereby
relieved from any liability that might otherwise exist from contracting with the
Corporation for the benefit of himself or any firm or corporation in which he
may be in any wise interested.
THIRTEENTH: The Corporation reserves the right to amend, alter, change
or repeal any provision contained in this Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
FOURTEENTH: The Corporation shall not issue or transfer by way of sale
or any other disposition, any shares of any class of capital stock ("Stock") in
the Corporation, whether treasury stock
<PAGE>
or authorized and unissued stock, to any person who is not either (a) a
full-time employee, or a partner engaged full-time in a partnership practice, if
applicable, of the Corporation or any of its Subsidiaries or Affiliates or (b)
otherwise permitted by Section 9 of the Bylaws of the Corporation to own shares
of stock in the Corporation. For purposes of this Article Fourteenth, the term
"Subsidiary" means any corporation, partnership, association or other entity in
which the Corporation, directly or indirectly, owns securities or other interest
possessing at least fifty percent (50%) of the total combined voting power of
all classes of stock or other interests entitled to vote and at least fifty
percent (50%) of the total number of shares of all other classes of stock or
other interests. In the case of any corporation, partnership, association or
other entity formed under the laws of any jurisdiction in which the Corporation
is, by law, prohibited from owning fifty percent (50%), such corporation,
partnership, association or other entity shall be deemed a "Subsidiary" of the
Corporation if the Corporation, directly or indirectly, owns the maximum percent
(rounded down to the nearest whole percent) of securities or other interests
permitted under the laws of such jurisdiction. Further, for purposes of this
Article Fourteenth, the term "Affiliate" means any corporation, partnership,
association or other entity domiciled outside the United States and engaged in
provided professional services primarily outside the United States deemed by the
Board of Directors as compatible with the professional service objectives of the
Corporation, in which the Corporation, directly or indirectly, owns securities
or other interests possessing a least ten percent (10%) of the total
combined voting power of all classes of stock or other interests entitled to
vote, and at least 10% of the combined equity of such corporation, partnership,
association or other entity. Notwithstanding article thirteenth hereof, this
article may be altered, amended or repealed only upon the affirmative vote of
the holders of stock possessing at least 80% of the outstanding voting rights of
the capital stock of the corporation, voting as one aggregate class.
FIFTEENTH: A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (a) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the General Corporation Law
of the State of Delaware or (d) for any transaction from which the director
derived an improper personal benefit.
If the General Corporation Law of the State of Delaware is amended
after approval of this Article by the stockholders to authorize the further
elimination or limitation of the liability of directors, then the liability of
directors shall be eliminated or limited to the full extent authorized by the
General Corporation Law of the State of Delaware, as so amended.
Any repeal or modification of this Article shall not adversely affect
any right or protection of a director of the Corporation existing at the time of
such repeal or modification.
The Board of Directors of the Wyatt Company, at a regular meeting of
its members held on May 19, 1988, duly adopted resolutions implementing
amendment to the prior Restated Certificate of Incorporation (filed July 20,
1984). These amendment are included as part of the foregoing Restated
Certificate of Incorporation which was adopted by the Unanimous Written Consent
of the Board, dated January 16, 1989. The foregoing Restated Certificate of
Incorporation thereby serves to restate, integrate and further amend the
provisions of the Corporation's prior Restated Certificate of Incorporation, as
amended, all in accordance with the provisions of Sections 242 and 245 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, The Wyatt Company has caused this certificate to be
signed by its Vice President, Finance and attested by its Assistant Secretary,
this 23rd day of January, 1989.
<PAGE>
Attest:
Wilson H. Phillips_/s/ Walter W. Bardenwerper_/s/
Wilson H. Phillips, Jr. Walter W. Bardenwerper
Vice President, Finance Assistant Secretary
FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
This First Amendment to third amended and restated credit and security agreement
(this "First Amendment"), dated as of June 14, 1996, is entered into among The
Wyatt Company (d/b/a Watson Wyatt Worldwide) ("Wyatt"), Wyatt Preferred Choice,
LLC ("WPC-LLC"), Wyatt Preferred Choice, L.P. ("WPC-LP"), Wyatt Investment
Consulting, Inc. ("WIC" and, together with Wyatt, WPC-LLC and WPC-LLC and
WPC-LP, the "Companies"), NationsBank, N.A. ("NationsBank"), as Agent (the
"Agent") for the Banks, and the banks identified as such on the signature pages
hereto (the "Banks"). Terms used but not otherwise defined herein shall have the
meanings provided in the Credit Agreement (as defined below).
RECITALS
A. The Companies, as Borrowers, the Banks and the Agent entered into that
certain Third Amended and Restated Credit Agreement dated as of January 5, 1996
(as amended and supplemented from time to time, the "Credit Agreement") and that
certain Consent and Agreement dated as of March 6, 1996 (the "Consent" and,
together with the Credit Agreement, the "Agreements").
B. Effective March 31, 1996, Wyatt entered into a joint venture, known as
"Wellspring Resources, LLC," with State Street Bank and Trust Company (the
"Wellspring Joint Venture") and certain related transactions (such transactions,
collectively with the Wellspring Joint Venture, the "Wellspring Transactions"),
all as more fully described in the attached Description of the Proposed Joint
Venture/Wyatt Preferred Choice/Watson Wyatt Worldwide and State Street Bank (the
"Transaction Description").
C. Pursuant to the Wellspring Transactions, the operations and assets of WPC-LLC
and WPC-LP have been sold to the Wellspring Joint Venture and/or State Street
Bank and Trust Company.
D. The Companies have requested that the Banks (i) consent to the Wellspring
Transactions and waive certain Events of Default and Incipient Defaults arising
under the Credit Agreement as a result of the Wellspring Transactions, (ii)
agree to remove WPC-LLC and WPC-LP as Borrowers under, and parties to, the
Credit Agreement and (iii) agree to modify certain of the covenants and
agreements contained in the Credit Agreement to accommodate the Wellspring
Transactions.
E. The Banks have agreed to execute and deliver this First Amendment on
the terms and conditions set forth herein.
AGREEMENT
Now, therefore, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
1. Consent and Waiver. Subject to the provisions hereof, the Banks hereby
consent to the consummation by Wyatt and its Subsidiaries of the Wellspring
Transactions as described in the Transaction Description and waive any rights
and remedies which the Banks would otherwise have with respect to Events of
Default or Incipient Defaults that are based on noncompliance with Section 7.3
or 7.5 of the Credit Agreement, to the extent that such noncompliance is caused
by the consummation of the Wellspring
<PAGE>
Transactions. This is a limited one-time
waiver and does not (a) modify or amend Section 7.3 or 7.5 of the Credit
Agreement, (b) allow the company to be in violation of Section 7.3 or 7.5 of the
Credit Agreement at any other time or (c) constitute a waiver of any other Event
of Default or Incipient Default that otherwise may exist under the terms of the
Credit Agreement.
2. Amendments.
(a) The introductory paragraph and definition of "Borrowers" in Section 1.1 of
the Credit Agreement are hereby amended to exclude WPC-LLC and WPC-LP from the
definition of Borrowers.
(b) Section 1.1 of the Credit Agreement is further amended by adding a new
definition as follows: "Wellspring Joint Venture" means the joint venture known
as Wellspring Resources, LLC, which was created by Wyatt and State Street Bank
and Trust Company effective March 31, 1996, with each of Wyatt and State Street
Bank and Trust Company being, initially, a 50% co-owner in such joint venture.
(c) Section 7.1(c) of the Credit Agreement is hereby amended by adding a new
subclause (iii) to the end of "except that" clause as follows: and (iii) Wyatt
may further acquire an interest that is greater than 50% in the Wellspring Joint
Venture, provided that Wyatt and its Subsidiaries comply with the limits on
Investments in the Wellspring Joint Venture set forth in Section 7.5.
(d) Section 7.5 of the Credit Agreement is hereby amended by replacing
subsection (b) thereof in its entirety with the following: (b) except, in the
case of Wyatt and its Subsidiaries, in the Wellspring Joint Venture in an
aggregate amount not to exceed (i) $22.5 million for the fiscal year ending June
30, 1996 and (ii) $20.0 million in any fiscal year thereafter; provided that the
amounts set forth in this subsection (b) shall include cash and the dollar value
of any non-cash assets contributed by Wyatt or any of its Subsidiaries.
(e) Section 7.9 of the Credit Agreement is hereby amended by adding the
following clause to the end of the section: ; provided, however, that the
Capital Expenditures permitted above shall be reduced by the aggregate amount of
any and all capital contributions and other Investments actually made by Wyatt
and its Subsidiaries to or in the Wellspring Joint Venture in the relevant
fiscal year.
(f) Section 10.14 of the Credit Agreement is hereby amended in its entirety to
read as follows: Asset Services, WPC-LLC and WPC-LP No Longer Parties. The
parties hereby agree that, from and after the date hereof, Asset Services shall
no longer be a party to this Agreement, and from and after June 14, 1996,
WPC-LLC and WPC-LP shall no longer be parties to this Agreement and the
representations and warranties, covenants and agreements made herein by WPC-LLC
and WPC-LP shall no longer have any force or effect.
3. Condition Precedent. This First Amendment shall not be effective until
the Agent has received copies of this First Amendment duly executed by the
Companies and the Majority Banks.
4. Liens. The companies affirm the liens and security interests created and
granted in the Credit Agreement and the other Loan Documents and agree that this
First Amendment shall in no manner adversely affect or impair such liens and
security interests.
5. Representations and Warranties. Each Company hereby represents and warrants
to the Banks and the Agent (a) no Event of Default or Incipient Default exists
and is continuing under the Credit Agreement except as is being waived pursuant
to paragraph 1 above; (b) such Company has no claims, counterclaims, offsets,
credits or defenses to the Loan Documents and the performance of its obligations
<PAGE>
thereunder, or if such Company has any such claims, counterclaims, offsets,
credits or defenses to the Loan Documents or any transaction related to the Loan
Documents, the same are hereby waived, relinquished and released in
consideration of the Majority Banks' execution and delivery of this First
Amendment; and c) since the date of the last financial statements of the
Companies delivered to the Banks, no material adverse change has occurred in the
business, financial condition, operations or prospects of the Company other than
as previously disclosed to the Banks.
6. No Other Changes. Except as expressly modified and amended in the
First Amendment, all of the terms, provisions and conditions of the Credit
Agreement and the other Loan Documents shall remain unchanged.
7. Counterparts. This First Amendment may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which taken together shall constitute one and the same instrument.
8. Entirety. This First Amendment and the other loan documents embody the entire
Agreement between the parties and supersede all prior agreements and
understandings, if any, relating to the subject matter hereof. These loan
documents represent the final agreement between the parties and may not be
contradicted by evidence of prior, contemporaneous or subsequent oral agreements
of the parties.
In witness whereof, the parties hereto have executed this First Amendment as of
the date first above written.
Companies:
The Wyatt company (d/b/a Watson Wyatt Worldwide)
By: __Barbara L. Landes /s/_________
Name: Barbara L. Landes
Title: Vice President and Chief Financial Officer
<PAGE>
Attest: _James S. Minogue /s/_______
Name: James S. Minogue
Title: Assistant Secretary
Wyatt Preferred Choice, LLC
By: __David Moir /s/ ____________
Name: David Moir
Title: Chief Financial Officer
Attest: _Cynthia W. Boyle /s/______
Name: Cynthia W. Boyle
Title: Assistant Secretary
Wyatt Preferred Choice, L.P.
By: The Wyatt Company (d/b/a Watson Wyatt Worldwide), Its General Partner
By: __Barbara L. Landes /s/________
Name: Barbara L. Landes
Title: Vice President and Chief Financial Officer
Attest: _James S. Minogue /s/ _____
Name: James S. Minogue
Title: Assistant Secretary
Wyatt Investment Consulting, Inc.
By ___Roger Bransford /s/__________
Name: Roger Bransford
Title: President
Witness: _Eric B. Schweizer /s/____
Name: Eric B. Schweizer
Title: Treasurer
BANKS
NationsBank, N.A., as Agent and as a Bank
By: __Michael Heredia /s/___________
Name: _Michael Heredia_______________
Title: _______________________________
NBD Bank
By: _Larry Schuster /s/____________
Name: _Larry Schuster______________
Title: _Authorized Agent____________
Mellon Bank
By: _David H. Reed /s/_____________
Name: _David H. Reed_________________
Title: _Vice President_______________
<PAGE>
Description of the Proposed Joint Venture
Wyatt Preferred Choice
Watson Wyatt and State Street Bank
Summary
Watson Wyatt (through The Wyatt Company) and State Street Bank and Trust Company
intend to form a Joint Venture company to serve customers outsourcing benefits
administration. The two partners also envision working towards marketing a
comprehensive array of benefit and pension services to the global market, in
connection with outsourcing. These services ultimately could include activities
in Administration, Recordkeeping, Custody, Trust, Investment Management and
Non-traditional Benefits.
Watson Wyatt will retain ownership of its current contractual rights and
obligations for Qualified Domestic Relations Order (QDRO) administration for IBM
and for total benefits outsourcing with NYNEX, Rockwell and Westinghouse (the
existing Wyatt "jumbo" outsourcing clients) with those obligations being
serviced through a service agreement with the Joint Venture.
The Joint Venture will service the current clients to the full extent of Watson
Wyatt's current and future total benefits outsourcing contractual obligations.
The Joint Venture will charge Watson Wyatt an
<PAGE>
appropriate fee for performing
these services. Any new benefits administration outsourcing business for the
existing clients will first be offered to the Joint Venture, which will assume
the contractual relationship for this new business, unless Watson Wyatt, State
Street and the Joint Venture agree it is more appropriate for Watson Wyatt to
assume the contractual relationship. As their existing contracts are renewed,
and with their consent to being transferred to NextGen technology, the current
clients will be moved to the Joint Venture.
Business Purpose of the Venture
The Watson Wyatt Board of Directors realized a year ago when it adopted the
strategy of seeking a partner for the outsourcing business, that it is very
difficult for a professional service firm to raise sufficient capital to compete
successfully over the long term in a capital-intensive business like benefits
administration outsourcing. It appears our traditional competitors are also
facing limitations on what they can afford to invest on their own.
Since Fidelity Investments and other major financial institutions are now
investing heavily to compete in the outsourcing business, it is likely that the
Company will be required to invest even more over the next few years to retain
its market leadership position. Having a financial partner such as State Street
will relieve some of the pressure of future capital requirements.
State Street also brings financial, custodial, and operations management
capabilities to the Joint Venture. This is the first outsourcing business that
will combine the domain knowledge and software expertise of a benefits
consulting firm with the resources and competencies of a global financial
institution. Based on these combined strengths and our joint goals for growing
the business, it is our expectation that 50% of the future profits of the joint
venture will be greater than 100% of the profits that could have been generated
on our own.
Financial Terms and Structure
As its contribution to the initial capitalization of the Joint Venture, Watson
Wyatt will contribute its Jacksonville service unit (including its system
support operation in Washington, DC) and the software development and new client
implementation work performed through the closing date, referred to as NextGen.
State Street will contribute an amount equal to the NextGen expenditure, in the
form of cash at closing (this amount is anticipated to be $10-12 million at the
time of closing). After these initial contributions, the parties will fund
future capital requirements on a 50/50 basis, with a minimum total capital
contribution of $20 million each (this includes the $10-12 initial contribution
of NextGen). It is expected that the minimum contribution will be made curing
FY96 and FY97.
Concurrent with the closing of the Joint Venture agreement, Watson Wyatt will
transfer to State Street its Minneapolis daily defined contribution service unit
(including a perpetual use royalty free unrestricted multi-site license to
WyStar--Wyatt's defined contribution recordkeeping system), certain employees
determined by State Street in its discretion, the right to service its clients
and the identifiable assets, for a one-time cash payment by State Street to
Watson Wyatt of $3.5 million.
The Joint Venture will purchase from Watson Wyatt, for the sum of $2.1 million
(net book value), the identifiable fixed assets currently in use at its
Jacksonville and Washington, DC (1850 M Street) locations.
A special distribution will be made to Watson Wyatt from the Joint Venture cash
flow after the Joint Venture has provided each partner a specified cumulative
return on its initial and subsequent capital.
<PAGE>
On an ongoing basis, Watson Wyatt and State Street will agree to contribute
adequate capital from time to time to run the business. If a partner does not
meet a capital call, the other partner may satisfy the call, and the partner
which does not meet the call will be diluted with respect to ownership, based on
the tangible book value.
Watson Wyatt will grant to the Joint Venture a perpetual royalty-free
unrestricted multi-site license to use and modify the defined benefit (HR Pen),
and flex (HR Choice) systems for a total license fee of $1 million.
Ownership of the Joint Venture will be 50/50. The Joint Venture will be
controlled by a Board of Directors composed of an equal number of
representatives of Watson Wyatt and State Street plus the CEO.
WATSON WYATT WORLDWIDE
Watson Wyatt & Company
General Counsel's Office
Suite 900
601 Thirteenth Street, N.W.
Washington, DC 20005
Telephone: 202 624 0600
Fax 202 639 8542
May 10, 1996
Mr. Bruce I. Rollick
Vice President
Watson Wyatt Worldwide
Suite 700
401 West Georgia Street
Vancouver, B.C. V6B 5A1
Subject: Your Transition to Retirement
Dear Bruce:
This letter sets forth the terms and conditions to which we have agreed
pertaining to your retirement from the Wyatt Company (referred to hereafter as
"Watson Wyatt") and your future relationship with the firm.
All amounts referred to in this agreement are in Canadian dollars unless
otherwise specified.
A. Purpose
The purpose of this agreement is to help you to transition to retirement while
preserving and growing the client base of our Vancouver office.
B. Vancouver Management and Management Succession
You will step down as Managing Consultant of the Vancouver office on June 30,
1996, at which time Salim Shariff will be appointed as your successor. You will
work with Salim between now and June 30 to ensure a smooth transition to his
leadership of the office, and you will agree to provide him support after June
30 to facilitate and ensure the effective transition of your client
relationships to Salim and other key associates of the Vancouver Watson Wyatt
office.
C. Retirement
You will retire from employment with Watson Wyatt as of June 30, 1996, subject
to the terms of this agreement. At that time, you will also resign from the
Board of Directors and all related committees.
In recognition of your early retirement and long service, Watson Wyatt will
calculate your pension (including the Registered Basic, Excess, and Supplemental
Plans) with early retirement factors applied as if you were age 55 as of June
30, 1996. The payment of your Canadian Excess Retiring Allowance Plan and
Canadian Supplemental Retiring Allowance Plan ("Excess and Supplemental Plans")
shall be made in a lump sum on or before July 31, 1996 based on an estimated
FY'96 bonus. The amount shall be
<PAGE>
recalculated to take into account your actual
FY'96 bonus in October, 1996 and a further payment will be made in October,
1996, to reflect the difference. The recalculation is to be based on July 1,
1996 actuarial assumptions with interest added to the extra payment at the
assumed rate in these assumptions from July to October, 1996.
Payment of amounts due from Watson Wyatt to you under the basic Registered
Pension Plan shall commence July 1, 1996 in accordance with the terms of that
plan.
D. FY'96 Bonus
Your fiscal 1996 bonus will be calculated by allocating to you the same
percentage of your target bonus as the Vancouver office FY'96 bonus pool
(excluding your bonus) is as a percentage of total FY'96 target bonuses
(excluding your target bonus), adjusted for meeting the current Vancouver office
profit plan (the "mini-budget") as shown on Schedule A.
E. Wyatt Stock
You will agree to sell your Wyatt shares back to the Company on June 30, 1996 on
the same terms as for other shareholders, except that the Company will agree to
repurchase your shares at U.S. $4.51 per share with a cash payment on or before
June 30, 1996, with an adjustment for the final FY'96 stock price paid within
two months after the final June 30, 1996 share price is determined.
If at any time prior to July 1, 1998 the price of Wyatt stock exceeds U.S. $6.50
per share due to a change in the stock valuation formula, a sale of the Company,
or any other change not related to Wyatt operating results, Wyatt shall pay you
the difference between the established stock price and U.S. $6.50 multiplied by
300,000. Payment will be made within 30 days of the date the stock price is
established (above the U.S. $6.50 level).
This provision will survive the termination of this agreement.
F. Transition Payments
To ensure the smooth transition of your clients to the Vancouver office, Watson
Wyatt will pay special transition payments to a holding company established by
you ("Conco") and acceptable to Watson Wyatt. These payments will be made on a
quarterly basis over a four year period commencing with the first quarter of the
Company's 1997 fiscal year, and will be calculated as 3% of the work in progress
generated in each quarterly period for the clients described in the list
attached as Schedule B to this agreement. Each quarterly payment will be made by
Watson Wyatt to Conco by the 30th day of the month following the end of each
calendar quarter.
Work in progress shall have the same meaning as set forth in Section G of this
agreement. If a negative ratio is determined for a fiscal year in respect of
billings and work in progress pursuant to section G below, then the payments
made to Conco under this Section F shall be reduced by the amount of such
negative ratio. The amount of the reduction shall be recovered from future
payments to Conco or deducted from the last quarterly payment due to Conco in
each fiscal year, or paid directly by Conco to Watson Wyatt.
These transition payments are to be made in the expectation that you/Conco will
promote the transition of client relationships from you to senior Watson Wyatt
consultants in Vancouver. For purposes of this agreement, these transitions will
be deemed to have been made when in the judgment of the Managing Consultant of
the Vancouver office, or based on objective evidence, you have introduced a new
client relationship manager or account manager to your key accounts (as listed
in Attachment B to this
<PAGE>
agreement), who has been accepted by the client as
having ongoing responsibility for the relationships you currently or formerly
have maintained with these clients.
Your failure to make these transitions by June 30, 1996 can be considered a
breach of this agreement, entitling Watson Wyatt to terminate this Agreement and
the Consulting Agreement. If Watson Wyatt elects to terminate for your failure
to make the transitions, Watson Wyatt will not be obliged to make any further
payments pursuant to this Agreement or the Consulting Agreement.
G. Consulting Relationship
While your clients are being transitioned to Watson Wyatt consultants in
Vancouver, we expect that some clients will want you personally to continue to
provide consulting services to them. With the approval of the Vancouver Managing
Consultant, which shall not be unreasonably withheld, you will be permitted
under this agreement to provide these services.
To enable you to do this, effective July 1, 1996, Watson Wyatt will engage Conco
under a Consulting Agreement attached hereto as Schedule C (the "Consulting
Agreement") to provide consulting services to Watson Wyatt clients and to
develop new business, particularly with respect to union and multi-employer plan
clients. The term of this Consulting Agreement shall be three years, or until
terminated under the terms of this agreement.
During this period, Watson Wyatt will pay Conco under the Consulting Agreement
for each hour of your recorded consulting time for approved clients (those
listed in Schedule B or as otherwise approved by the Vancouver Managing
Consultant) at the rate of 50% of the billable rate established from time to
time by Conco. The initial billing rate will be $400 per hour, which will be
increased from time to time consistent with billing rates in the Vancouver
office with the approval of the Managing Consultant.
We acknowledge that Conco will provide certain "strategic consulting" services
to organizations that are not currently clients of Watson Wyatt, provided that
in the judgment of the Vancouver Managing Consultant such services are not
services that could otherwise be provided by Watson Wyatt consultants in the
Vancouver office. Such strategic consulting services shall mean advice and
counsel in respect of all aspects of the actuarial, group health, and benefit
and asset services consulting field but shall not include such work as actuarial
valuations, government filings, or pricing for negotiations, nor shall it
include consulting in other practice areas which constitute consulting services
provided by other Watson Wyatt associates in North America.
Watson Wyatt will make monthly payments to Conco by the 30th of each month for
consulting services based on the consulting hours recorded by you as work in
progress against Watson Wyatt clients in the preceding month. A record in
respect of billings will be maintained during each fiscal year. The net of all
billings less work in progress for all clients listed in Schedule B to this
Agreement for consulting services rendered by Watson Wyatt to such clients in
each fiscal year shall be calculated. If the net of all billings less work in
progress is negative, then the ratio of such negative number to the total work
in progress that generated the fiscal year total billings shall be computed. An
adjustment will be made in the amounts paid to Conco in respect to such fiscal
year by Watson Wyatt equal to the negative ratio described above multiplied by
the value of the consulting time recorded as work in progress by you/Conco in
respect to such designated clients for such fiscal year.
If an adjustment is necessary to the amounts paid Conco in respect of a given
fiscal year, Watson Wyatt shall withhold such adjustments from the last monthly
payment to be made to Conco for the fiscal year or from other consulting
payments due to Conco under this agreement.
<PAGE>
If the net of all billings less work in progress in respect to the designated
clients, for a fiscal year, is positive, this amount shall enure to the benefit
of Watson Wyatt.
Work in progress which is used to determine the amount billed to clients shall
include time recorded by all associates for services rendered plus expenses
incurred on behalf of each client recorded as part of work in progress.
H. Business Development
Subject to the Managing Consultant's or Watson Wyatt's approval of
Rollick/Conco's target clients, Watson Wyatt will pay to Conco $90 per hour for
time recorded by Rollick/Conco in attempting to generate business from new
clients (i.e., clients that were not Watson Wyatt clients as of July 1, 1996)
and new work assignments from existing Watson Wyatt clients not included in
Schedule B. These payments are to be made by the 30th of each month, based on
the hours recorded each month by Rollick/Conco.
Watson Wyatt will pay a further 5% of the work in progress created in each
fiscal year from new clients for the fiscal year in which the services are first
provided to the new client or new client assignments in respect to existing
clients, and for the following three fiscal years, such amounts to be offset by
all amounts paid to Rollick/Conco pursuant to this Section on an hourly basis
for time spent generating the new client. Such payments will be made quarterly,
based on work in progress created with respect to the new client or new
assignments from existing clients in that quarter, and shall be paid to Conco by
the 30th day of the month following the end of each calendar quarter, adjusted
for realization (net billings less work in progress) as in Section F above.
I. Non-Compete
Through June 30, 1999 or twelve months after the date of termination of the
Consulting Agreement, if earlier than July 1, 1998, Rollick/Conco will not: 1.
Without Watson Wyatt's specific written consent, solicit or hire for employment
in any business venture in competition with the business of Watson Wyatt, any
person who is an employee of Watson Wyatt, or to attempt to influence any such
person to terminate his or her employment with Watson Wyatt. (This clause shall
not apply to Janet Olsen.) 2. Without Watson Wyatt's specific prior written
consent, provide any services that are provided by Watson Wyatt consultants in
North America (except for "strategic consulting" services as defined in Section
G and provided personally by you), to any Watson Wyatt clients except pursuant
to this Agreement as set forth herein.
These provisions will apply except as outlined in paragraph J below.
J. Replacement of Vancouver Managing Consultant
If, prior to June 30, 1999, Salim Shariff ceases to be Managing Consultant in
the Vancouver office and another person is appointed as the Vancouver office
Managing Consultant, you will have the right to continue arrangements under the
Consulting Agreement or to terminate these agreements. If you elect to terminate
these agreements and to continue not to compete with Watson Wyatt as outlined in
paragraph I above, Watson Wyatt will pay Conco $25,000 per month for each full
month from the date of the appointment of the new Managing Consultant to June
30, 1998. We will also continue to pay the transition payments (Section F) and
for new business generated (Section H). If you terminate these agreements and
compete with Watson Wyatt, all future payments under these agreements will
cease. It is understood that in the event Salim Shariff ceases to be the
Managing Consultant in the Vancouver office, it will be in the best interests of
all involved to have his replacement appointed in a timely manner.
<PAGE>
K. Litigation Support
While this Agreement is in effect, you agree to support Watson Wyatt in any
litigation or dispute involving your responsibilities or actions as a
consultant, actuary, Manager, and Director. This includes by is not limited to
the litigation involving the Regina police. Watson Wyatt will pay you for all
time spent preparing for and/or attending at and/or assisting with any
litigation or dispute at the same hourly rate you/Conco are to be paid for
performing client work for Watson Wyatt.
L. Non-disparagement
Rollick and Watson Wyatt agree that an effective consulting business requires
clear management direction, business focus, and ordinary business etiquette. To
enhance the effectiveness of the Watson Wyatt Vancouver office, Rollick and
Watson Wyatt agree that differences of opinion involving the day-to-day
implementation of this agreement, as well as Watson Wyatt's business strategy,
services, products, or management decisions, will be resolved in a business-like
manner, among Rollick and the Vancouver Managing Consultant, the Regional
Manager for Canada, and Watson Wyatt senior management, as appropriate. Rollick
and Watson Wyatt will, to the fullest extent possible, endeavor to minimize
involvement of other Watson Wyatt associates in such issues.
M. Expenses
Through July 1, 1999, Watson Wyatt will provide you office space, business
equipment, and administrative support in our offices in Vancouver, subject to
the continuing agreement of the Vancouver Managing Consultant. Watson Wyatt will
also continue to pay your monthly parking fees, your monthly mileage allowance,
and your cellular car telephone bills for business use. Watson Wyatt also agrees
that subject to her continued employment with Watson Wyatt and subject to her
consent to continue to serve in this role, Janet Olsen will continue to serve as
your Executive Assistant so long as the Consulting Agreement is in effect.
While this Agreement remains in effect, Watson Wyatt will reimburse you for
business class travel and meals and lodging expenses for all approved client and
new business related travel made by Rollick on behalf of Watson Wyatt.
Additionally, Watson Wyatt will pay you for any normal business expenses
incurred in the ordinary course of performing consulting and new business
services for Watson Wyatt.
If you and/or the Vancouver Managing Consultant decide that it would be
preferable for you to move to offices outside the Vancouver office prior to July
1, 1999, Watson Wyatt will pay Conco a monthly allowance, to be negotiated
between Conco and the Vancouver Office Managing Consultant, from the date of
your move through July 1, 1999 or the termination of this Agreement, whichever
comes first. This monthly payment will be intended to pay a proportionate share
(based on the percentage of Conco revenues that represent work for Watson Wyatt)
of your total office expenses, administrative assistance, business equipment,
etc., and will be in lieu of the services described in the first paragraph of
this Section of the Agreement.
N. Availability of Watson Wyatt Staff
While the Consulting Agreement remains in effect, Watson Wyatt will make
available to Rollick such Watson Wyatt associates as are needed to support
Rollick/Conco in providing client services and developing new business as
described in the Agreement. With the agreement of the Vancouver Managing
Consultant, whose approval shall not be unreasonably withheld, these support
services and associates will be made available to you/Conco on a basis
comparable to that which existed prior to this Agreement.
O. Liability Coverage
<PAGE>
Watson Wyatt will cover Rollick under its liability insurance program for all
services or work performed by Rollick for Watson Wyatt clients under this
agreement and the Consulting Agreement. Rollick/Conco acknowledge that the
Watson liability coverage does not apply to strategic consulting or other
consulting work done by Rollick/Conco outside these agreements.
P. Miscellaneous
1. You and Conco will remain subject to all obligations of Watson Wyatt
associates regarding confidential information while providing services
under the Consulting Agreement.
2. You and Conco will conduct business in accordance with the professional and
actuarial standards that apply to Watson Wyatt associates, as directed by
the Managing Consultant, while this agreement remains in effect.
3. You acknowledge that the amounts paid to you pursuant to this agreement
include but are not limited to all amounts owing for notice and /or
severance pay under the common law and the Employment Standards Act of
British Columbia and you also acknowledge that you are retiring early
pursuant to this Agreement.
4. This agreement shall be governed and construed in accordance with the laws
of the Province of British Columbia. If any part of this agreement is
determined to be unenforceable or illegal, that provision or provisions
shall be severable from this agreement to the extent of such
unenforceability or illegality without affecting the remaining portions of
this agreement.
5. Any dispute between you/Conco and Watson Wyatt under this agreement shall be
resolved pursuant to the provisions of the Commercial Arbitration Act of
British Columbia. In the event of any arbitration proceedings with respect
to this Agreement, the successful party will be entitled to payment from the
unsuccessful part of special costs on a full indemnity basis including fees,
disbursements, and taxes related to the determination of the dispute by
arbitration.
6. You acknowledge that your acceptance of this Agreement constitutes a full
and final settlement of any and all claims or demands which you may have,
or in the future may have, against Watson Wyatt or any of its officers,
directors, employees, successors, or assigns, arising out of your
employment by or ownership interest in Watson Wyatt. You further release
and waive Watson Wyatt and its officers, directors, and employees from any
action or liability relating to your employment with or ownership interest
in or termination from Watson Wyatt, including, without limitation, any
right you may have under the Employment Standards Act of British Columbia.
7. Watson Wyatt releases and discharges Rollick from liability with respect to
any and all claims, known or unknown, arising from his actions or conduct
(except willful misconduct or fraud) in the course of his performing the
management functions of Office Manager of the Vancouver office (but not
from any claims arising from performance of his roles as director, actuary
or consultant) up to the date of this Agreement. To the best of its
knowledge, Watson Wyatt does not have legal claims to assert against
Rollick, nor is Watson Wyatt currently contemplating asserting any such
claims against Rollick.
8. You agree to keep these agreements and the terms thereof confidential, to
be discussed only with
<PAGE>
family members, Janet Olsen, your counsel and other
professional advisors, the Vancouver Managing Consultant, the Regional
Manager for Canada, and the Wyatt Board of Directors.
9. Watson Wyatt will provide Rollick/Conco with copies of all appropriate
Vancouver office accounting records on reasonable notice that are needed
to determine amounts payable to Rollick/ Conco pursuant to this Agreement
and the Consulting Agreement.
10. Watson Wyatt and Rollick, respectively, each acknowledge that they will,
in good faith, use their best efforts to act in a manner reasonably
contemplated to carry out the terms of this Agreement.
Sincerely,
A. W. Smith, Jr. \s\
A. W. Smith Jr.
Accepted by:
Bruce I. Rollick \s\
Bruce I. Rollick
<PAGE>
SCHEDULE A
Formula for Determining Rollick FY `96 Bonus
Base salary: $ 515,000
Target bonus: 40%
Target bonus: $ 206,000
Steps for determining Rollick FY `96 bonus
Step 1: Determine Vancouver bonus pool (excluding Rollick) as
percentage of Vancouver target bonus pool (excluding
Rollick)
Step 2: Multiply percentage from step 1 by Rollick target bonus
Step 3: Multiply result of step 2 by profit plan adjustment factor
from table below
Step 4: Result is final Rollick bonus for FY `96.
Profit Plan Adjustment Table
Percentage Profit Plan
of Profit Plan Adjustment
Achieved Factor
--------------- ------------
120 % or more 120%
115% 115%
110% 110%
105% 105%
100% 100%
95% 95%
90% 90%
85% 85%
80% or less 80%
Notes:
1. All dollar figures are in Canadian dollars.
2. For purposes of this Schedule A, the Profit Plan of the Vancouver
office for fiscal 1996 shall mean the NOI, calculated on the basis
employed in the regular monthly accounting reports produced by Watson
Wyatt's accounting department, of $1.6 million Canadian.
3. If the accounting department adjusts its method of accounting for WIP,
reserves, or NOI in regarding to the FY'96 financial statements before
the final calculation of office NOI's, an appropriate adjustment will
be made to the financial goal included in #2 above.
<PAGE>
SCHEDULE B
Client Billings for Fiscal 95 WIP
Teamster Canada Pension Plan
- Inventory lines 85186/85187 $1,310,723
TMTIRB 465,189
TWU (all existing and new WIP lines,
except 88086, 85527, 08773, 08774, 08775,
08783, 10488 and 10881). TWU does not
include 21670, 88021, 94350, 94351 and
10922 949,095
Operating Engineers (67850 and 67851), 165,565
not 21873
Pulp and Paper Industry Pension Plan
(73230 and 72299) 809,748
B. C. Central Credit Union
- 12520 106,227
- 12526 106,594
TCG
- 87210 159,030
- 02982 37,382
UFCWU
- 74680 224,922
- 74710 60,582
TOTAL $4,395,327
*shall also include any new inventory lines created in respect of new work
generated from clients in Schedule B subsequent to June 30, 1996.
<PAGE>
SCHEDULE C
Consulting Agreement
This Agreement is made effective the 1st day of July, 1996
Between:
The Wyatt Company, a company incorporated under the laws of the State of
Delaware, carrying on business under the name and style of "Watson Wyatt
Worldwide", with its head office located at Suite 1000, 601 Thirteenth Street,
N.W., Washington, DC 20005-3808.
(hereinafter called "Watson Wyatt")
And:
Karisa Investments Limited, a company incorporated under the laws of the
Province of British Columbia, having its registered and records office located
at 2100 - 505 Burrard Street, Vancouver, British Columbia V7X 1R4.
(hereinafter called "Karisa")
And:
Bruce I. Rollick, c/o Suite 700-401 West Georgia Street, Vancouver, British
Columbia, V6B 5A1
(hereinafter called "Rollick")
Whereas Karisa has agreed to provide Watson Wyatt with certain consulting
services and Watson Wyatt has requested Karisa to provide certain consulting
services subject to the terms and conditions set out.
Now therefore this agreement witnesseth that in consideration their mutual
covenants and agreements herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
each of the parties, the parties covenant and agree as follows:
1. Definitions
For the purposes of this Agreement:
(a) "Strategic Consulting Services" means advice and counsel in respect of all
aspects of the actuarial, group health and benefit and asset services consulting
field but shall not include such work as actuarial valuations, government
filings or pricing for negotiation nor shall it include consulting in other
practice areas which constitute consulting services provided by other Watson
Wyatt services in North America.
(b) "Term" means the period commencing on July 1, 1996 and ending on the earlier
of: (i) June 30, 1999, or, (ii) the earlier termination of this Agreement in
accordance with paragraph 14 of this Agreement.
(c) "Work in Progress" means time recorded to determine the amount to be billed
to clients and shall include time recorded by associates of Watson Wyatt for
services rendered plus expenses incurred on behalf of each client recorded as
part of work in progress.
(d) "Vancouver Managing Consultant" shall mean the Managing Consultant of Watson
Wyatt's Vancouver office appointed by Watson Wyatt from time to time.
<PAGE>
2. Consulting Relationship
(a) During the Term, Karisa shall provide consulting services to Watson Wyatt
clients and develop new business, particularly with respect to union and
multi-employer plan clients.
(b) During the Term, Karisa shall be entitled to provide Strategic Consulting
Services to organizations that are not currently clients of Watson Wyatt,
provided that in the judgment of the Vancouver Managing Consultant such services
are not services which could otherwise be provided by Watson Wyatt consultants
in the Vancouver office.
(c) (i) During the Term, Watson Wyatt will pay to Karisa for each hour of time
recorded performing consulting services for those clients listed in Schedule A
attached hereto or as otherwise approved by the Vancouver Managing Consultant at
a rate of 50% of the billable rate established from time to time. The initial
billing rate will be $400 per hour, which will be increased from time to time
consistent with billing rates in the Vancouver office and the approval of the
Vancouver Managing Consultant.
(ii) Watson Wyatt will make monthly payments to Karisa on or before the 30th day
of each month for consulting services based upon the consulting hours recorded
by Karisa as Work in Progress for Watson Wyatt clients in the preceding month.
(iii) A record in respect of billings will be maintained during each fiscal year
and at the end of each fiscal year, the net of all billings less Work in
Progress recorded for all clients listed in Schedule "A" to this Agreement for
consulting services rendered by Watson Wyatt to such clients in each fiscal year
shall be calculated. If the net of all billings less Work in Progress recorded
is negative, then the ratio of such negative number to the total Work in
Progress that generated the fiscal year total billings shall be computed. An
adjustment will be made in the amount paid to Karisa in respect of such fiscal
year by Watson Wyatt in an amount equal to the negative ratio described above
multiplied by the value of consulting time recorded as Work in Progress by
Karisa in respect of the clients listed on Schedule "A" to this Agreement.
(iv) If an adjustment is necessary to the amount paid to Karisa in respect of a
given fiscal year, Watson Wyatt shall withhold such adjustment from the last
monthly payment to be made to Karisa for the fiscal year or from other
consulting payments due Karisa under this Agreement.
(v) If, for a fiscal year, net of all billings less Work in Progress in respect
to the clients listed in Schedule "A" hereto is positive, the amount shall enure
to the benefit of Watson Wyatt.
3. Business Development
(a) (i) Subject to the Vancouver Managing Consultant's or Watson Wyatt's
approval of Rollick/Karisa's target clients, Watson Wyatt will pay to Karisa $90
per hour for the time recorded by Rollick/Karisa in attempting to generate
business from new clients (i.e. clients that were not Watson Wyatt clients as of
July 1, 1996) and new work assignments from existing Watson Wyatt clients not
included in Schedule "A" hereto.
(ii) The payments to be made pursuant to paragraph (i) above shall be made on or
before the 30th day of each month based on the hours recorded each month by
Rollick/Karisa;
(b) (i) Watson Wyatt will pay to Karisa a further 5% of the Work in Progress
created in each fiscal year from new clients or new client assignments in
respect to existing clients for the fiscal year in which the services are first
provided to new clients or new client assignments in respect to existing
clients, and for
<PAGE>
the following three fiscal years, such amounts to be offset by
all amounts paid to Karisa pursuant to paragraph 3(a) above and shall be
adjusted as described in paragraph 2(c)(iv).
(ii) Such payments shall be made quarterly, based on Work in Progress created
with respect to the new client or new assignments from existing clients in that
quarter and shall be paid to Karisa on or before the 30th day of the month
following the end of each calendar quarter.
4. Expenses
(a) During the term, Watson Wyatt will provide to Rollick office space, business
equipment and administrative support in Watson Wyatt's Vancouver office, subject
to the continuing agreement of the Vancouver Managing Consultant. Watson Wyatt
will also pay monthly parking fees, monthly mileage allowance, cellular car
telephone bills for business use, and normal business expenses incurred in the
ordinary course of performing consulting and new business services for Watson
Wyatt.
(b) During the Term, Watson Wyatt will reimburse Rollick/Karisa for business
class travel, meals, and lodging expenses for all approved client and new client
business related travel by Rollick for Watson Wyatt.
(c) Watson Wyatt agrees that subject to her continued employment with Watson
Wyatt and subject to her consent to continue to serve in this role, Janet Olsen
will continue to serve as the Executive Assistant to Rollick during the Term of
the Agreement.
(d) If Rollick/Karisa and/or the Vancouver Managing Consultant decide that it
would be preferable for Rollick to move to offices outside of the Vancouver
offices prior to the end of the Term, Watson Wyatt will pay Karisa a monthly
allowance to be negotiated between Karisa and the Vancouver Managing Consultant
from the date of Rollick's move to the end of the Term. the monthly payment will
be intended to pay a proportionate share (based on the percentage of Karisa
revenues that represent work for Watson Wyatt) of Karisa's total office
expenses, administrative assistance, business equipment, etc. and will be in
lieu of the services described in paragraph 4(a) of this Agreement.
5. Availability
During the Term, Watson Wyatt will make available to Rollick/Karisa such Watson
Wyatt associates as are needed to support Rollick/Karisa in providing client
services and developing new business. With the agreement of the Vancouver
Managing Consultant, whose approval shall not be unreasonably withheld, those
support services and associates will be made available to Karisa/Rollick on a
basis comparable to that which existed with Rollick prior to the commencement of
the Consulting Agreement.
6. Liability Coverage
Watson Wyatt will cover Karisa and Rollick under its liability insurance program
for all services of work performed by Rollick and/or Karisa for Watson Wyatt
clients under this Agreement. Rollick/Karisa acknowledge that the Watson Wyatt
liability coverage does not apply to Strategic Consulting or other consulting
work done by Rollick/Karisa outside of this Agreement.
7. Entire Agreement
This Agreement constitutes the entire understanding contract and agreement
between Karisa and Watson Wyatt and supersedes all prior oral or written
understanding, agreements, contracts or representations, formal or informal
between Watson Wyatt and Karisa or their respective representatives with respect
to the provision of consulting services by Karisa to Watson Wyatt.
8. Headings
<PAGE>
The headings of this Agreement have been inserted for convenience of reference
only and form no part of this Agreement.
9. Assignment
Neither party may assign this Agreement without the prior written consent of the
other party hereto.
10. Currency
All references to money currency are express in lawful money of Canada.
11. Notices
All notices, communications and documents made or provided for in this Agreement
shall be in writing and shall be deemed to have been delivered on the fourth
business day next following the date of mailing, if mail by prepaid registered
mail addressed to the relevant party as is addressed and set out on page 1 of
this Agreement.
12. Relationship
The relationship between Karisa and Watson Wyatt is and shall remain that of
independent contractors and nothing in this Agreement shall or shall be
construed for any purpose whatsoever to create any relationship between Karisa
and Watson Wyatt of employment, agency, partnership of any kind whatsoever other
than that of independent contractors.
13. Early Termination
Either Watson Wyatt or Karisa may terminate this Agreement in accordance with
the terms of the letter agreement dated the 10th day of May, 1996 from Watson
Wyatt to Mr. Bruce I. Rollick.
14. Confidentiality
Karisa and its employees will remain subject to all obligations of Watson Wyatt
associates regarding confidential information while providing services under
this Agreement.
15. Business Conduct
Karisa and its employees will conduct business in accordance with the
professional and actuarial standards that apply to Watson Wyatt associates while
this Agreement remains in effect.
16. Watson Wyatt and Rollick, respectively, each acknowledge that they will, in
good faith, use their best efforts to act in a manner reasonably contemplated to
carry out the terms of this Agreement.
17. Governing Law
This Agreement shall be governed and construed in accordance with the laws of
the Province of British Columbia. If any part of this Agreement is determined to
be unenforceable or legal, that provision or provisions shall be severable from
this Agreement to the extent of such unenforceability or illegality without
effecting the remaining portions of this Agreement.
18. Arbitration
Any dispute between Karisa and Watson Wyatt under this Agreement shall be
resolved pursuant to the provisions of the Commercial Arbitration Act of British
Columbia. In the event of any arbitration proceedings with respect to this
Agreement, the successful party will be entitled to payment from the
unsuccessful party of special costs on a full indemnity basis including fees,
disbursements and taxes related to the determination of the dispute by
arbitration. This provision shall not be construed to limit any rights which the
parties may have to apply to any court of competent jurisdiction for injunctive
or similar provisional relief.
<PAGE>
In witness whereof the parties have executed this Agreement.
The Wyatt Company
Per:
A.W. Smith, Jr. \s\
Authorized Signatory
- -----------------------
Authorized Signatory
Karisa Investments Limited
Per:
Bruce Rollick \s\
Authorized Signatory
- -----------------------
Authorized Signatory
Bruce I. Rollick
Bruce Rollick \s\
Schedule "A"
Client*
Teamster Canada Pension Plan
Inventory lines 85186/85187
TMTIRB
TWU (all existing and new WIP lines, except 88086, 83527, 08773, 08774, 08775,
08783, 10488, and 10881). TWU does not include 21670, 88021, 94351 and 10922
Operating Engineers (57850 and 67851)
(not 21873)
Pulp and Paper Industry Pension Plan
(73230 and 72299)
B.C. Central Credit Union
12520
12526
TCG
87210
02982
<PAGE>
UFCWU
74680
74710
* Shall also include new inventory lines created in respect of new work
generated from clients in this Schedule subsequent to June 30, 1996.
LIST OF SUBSIDIARIES OF WATSON WYATT & COMPANY
COUNTRY COMPANY NAME OWNERSHIP BY
THE COMPANY
Unites States (including Puerto Wyatt Data Services, Inc. 100%
Rico) Wyatt Asset Services, Inc. 100%
Wyatt Software Services, Inc. 100%
Wyatt Preferred Choice, L.L.C. 100%*
Wyatt Preferred Choice, L.P. 100%*
Watson Wyatt Investment
Consulting, Inc. 100%
David Corporation 100%*
Watson Wyatt International, Inc. 100%
Wellspring Resources, LLC 50%+
Argentina Watson Wyatt Argentina S.A. 100%*
Australia Watson Wyatt Australia Pty. Ltd. 100%*
Barbados Watson Wyatt Management
(Barbados) Limited 100%*
Watson Wyatt (Barbados) Limited 100%*
Belgium Watson Wyatt, S.A. 50.1%*x
Canada Watson Wyatt Company Limited 100%
Columbia Actuarios Asociados Wyatt S.A. 100%*
France Watson Wyatt S.A.R.L. 50.1%*x
Germany Wyatt Bode Grabner GmbH 50%
Watson Wyatt GmbH 50.1%*x
Hong Kong and Macau Watson Wyatt Hong Kong Limited 100%*
Indonesia P.T. Wyatt Purbajaga 60%+
Italy Watson Wyatt, S.r.l. 50.1%*x
Japan Watson Wyatt K.K. 100%*
Malaysia Watson Wyatt (Malaysia) Sdn. Bhd. 100%*
Mexico Wyatt Consultores, S.A. de C.V. 100%*
Netherlands Watson Wyatt B.V. 50.1%*x
New Zealand Watson Wyatt New Zealand Limited 100%*
Norway Watson Wyatt A/S 50.1%*x
Aktuarsoftware A/S 50.1%*x
Philippines Watson Wyatt Philippines, Inc. 40%*
Singapore The Wyatt Company (S.E.A.) Pte. Ltd. 100%*
Spain Watson Wyatt de Espaa, S.A. 50.1%*x
Sweden Watson Wyatt A.B. 50.1%*x
Switzerland Watson Wyatt S.A. 50.1%*x
United Kingdom Watson Wyatt Holdings Limited 100%*
The Wyatt Company (U.K.) Limited 100%*
Watson Wyatt Limited 50.1%*x
<PAGE>
Watson Wyatt Holdings (Europe)
Limited 50.1%*x
Wyatt Pension Plan Trustee Limited 100%*
- --------------------
*Indirectly through one or more subsidiaries
+Joint Venture
x49.9% owned by Watson Wyatt Partners
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (33-88080) of Watson Wyatt & Company, formerly The Wyatt
Company, of our report dated July 25, 1996 appearing on page F-1 of this Form
10-K. We also consent to the incorporation by reference of our report on the
Financial Statement Schedule, which appears on page F-25 of this Form 10-K.
/S/ PRICE WATERHOUSE LLP
- --------------------------
PRICE WATERHOUSE LLP
Washington, D.C.
September 20, 1996
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