SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(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, 1997
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 of (I.R.S. Employer Identification
organization) No.)
6707 DEMOCRACY BOULEVARD
SUITE 800
BETHESDA, MD 20817
(Address of Principal executive offices including zip code)
(301) 581-4600
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
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 29, 1997
(TITLE OF CLASS) 17,736,687 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. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant is $82,753,943. The aggregate market value was computed by using the
formula book value of the stock (calculated in accordance with the bylaws) as of
September 29, 1997.
Documents Incorporated by Reference
The registrant's definitive proxy statement for its 1997 annual meeting of
shareholders (which is to be filed pursuant to General Instruction G of Form
10-K not later than October 28, 1997), is incorporated by reference into Part
III of this Form 10-K.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Page
a) Financial Information ----
(1) Consolidated Financial Statements of Watson Wyatt & Company
Report of Independent Accountants F-1
Financial Statements:
Consolidated Statements of Operations for
the three years ended June 30, 1997 F-2
Consolidated Balance Sheets at June 30, 1997 and 1996 F-3
-2-
<PAGE>
Consolidated Statements of Cash Flows for the three
years ended June 30, 1997 F-4
Consolidated Statements of Changes in Permanent
Shareholders' Equity for the three years ended June 30, 1997 F-5
Notes to Consolidated Financial Statements F-6 to F-25
(2) Consolidated Financial Statement Schedule for the three years
ended June 30, 1997
Report of Independent Accountants on Financial Statement Schedule F-26
Valuation and Qualifying Accounts and Reserves (Schedule II) F-27
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 50% or less owned entities and unconsolidated
subsidiaries have been omitted, with the exception of Wellspring Resources,
LLC which is filed with this Form 10-K, because the registrant's
proportionate share of the income from continuing operations before income
taxes from such companies is less than 20% of the respective consolidated
amount. 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.
c) Exhibits (Previously filed with Form 10-K)
-3-
<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 and its subsidiaries at June 30, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, 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.
/S/ PRICE WATERHOUSE LLP
- ------------------------
PRICE WATERHOUSE LLP
Washington, D.C.
July 23, 1997
F-1
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
Year Ended June 30,
--------------------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Fees $ 510,998 $ 492,513 $ 474,521
Costs of providing services:
Salaries and employee benefits 252,302 241,648 248,708
Occupancy and communications 72,155 63,955 73,449
Professional and subcontracted services 82,782 76,243 56,594
Other 23,898 25,211 26,650
------------ ------------ -----------
431,137 407,057 405,401
General and administrative expenses 45,696 38,656 41,313
Depreciation and amortization 25,993 26,348 21,442
------------ ------------ -----------
502,826 472,061 468,156
Income from operations 8,172 20,452 6,365
Other:
Interest income 1,462 1,441 1,343
Interest expense (1,506) (930) (1,507)
Loss from affiliates (6,174) (2,275) (576)
------------ ------------ -----------
Income before income taxes, minority interest and
cumulative effect of a change in accounting 1,954 18,688 5,625
Provision for (benefit from) income taxes:
Current 4,149 15,781 2,492
Deferred (3,260) (6,578) 1,357
------------ ------------ -----------
889 9,203 3,849
------------ ------------ -----------
Income before minority interest and cumulative
effect of a change in accounting 1,065 9,485 1,776
Minority interest in net income of consolidated subsidiaries (167) (130) (127)
------------ ------------ -----------
898 9,355 1,649
Cumulative effect of a change in accounting for
postemployment benefits, net of tax benefit of $1,000 - - (800)
------------ ------------ -----------
Net income $ 898 $ 9,355 $ 849
============ ============ ===========
Earnings per share $ 0.05 $ 0.51 $ 0.09
Cumulative effect of a change in accounting 0.00 0.00 (0.04)
------------ ------------ -----------
Net income per share $ 0.05 $ 0.51 $ 0.05
============ ============ ===========
</TABLE>
See notes to the consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF U.S. DOLLARS)
June 30, June 30,
1997 1996
------------ -------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 26,257 $ 21,694
Receivables from clients:
Billed, net of allowances of $2,525 and $5,161 67,393 71,431
Unbilled 56,368 53,122
------------ -------------
123,761 124,553
Other current assets 7,287 6,936
------------ -------------
Total current assets 157,305 153,183
Investment in affiliates 52,516 41,195
Fixed assets 37,045 36,466
Deferred income taxes 39,025 41,983
Deferred software and development costs 32,869 35,746
Other intangible assets 2,661 3,820
Other assets 10,357 8,426
------------ -------------
$ 331,778 $ 320,819
============ =============
Liabilities, Redeemable Common Stock, and Permanent Shareholders' Equity
Accounts payable and accrued liabilities $ 103,823 $ 88,203
Income taxes payable 3,563 11,362
Deferred income taxes 28,612 34,830
------------ -------------
Total current liabilities 135,998 134,395
Accrued retirement benefits 86,697 81,141
Deferred rent and accrued lease losses 14,938 9,904
Other noncurrent liabilities 9,908 10,635
Minority interest in subsidiaries 351 362
Redeemable Common Stock - $1 par value:
25,000,000 shares authorized;
18,130,429 and 18,261,963 issued
and outstanding; at redemption value 96,091 90,214
Permanent shareholders' equity:
Adjustment for redemption value greater than amounts paid in by shareholders (37,674) (37,549)
Retained earnings 24,633 30,677
Cumulative translation gain 836 1,040
Commitments and contingencies (Note 14)
------------ -------------
$ 331,778 $ 320,819
============ =============
</TABLE>
See notes to the consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF U.S. DOLLARS)
Year ended June 30,
---------------------------------------------------
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 898 $ 9,355 $ 849
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful receivables from clients 6,853 11,667 5,982
Depreciation 13,816 14,805 15,479
Amortization of deferred software and development costs
and other intangible assets 12,176 11,543 5,963
Change in deferred income taxes (3,260) (6,578) 303
Loss from affiliates 6,174 2,275 576
Minority interest in net income of consolidated subsidiaries 167 130 127
(Increase) decrease in assets:
Receivables from clients (6,061) 1,143 (17,619)
Income taxes receivable - 2,055 (2,055)
Other current assets (351) 30 (778)
Other assets (1,930) (1,904) (2,015)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 17,846 12,785 12,539
Income taxes payable (7,799) 10,926 (2,190)
Accrued retirement benefits 5,556 7,104 8,975
Deferred rent and deferred lease losses 5,034 (3,004) 399
Other noncurrent liabilities (727) 605 7,364
Other 656 99 (433)
---------- ------------ -----------
Net cash provided by operating activities 49,048 73,036 33,466
---------- ------------ -----------
Cash flows from investing activities:
Sale of short-term investments - - 2,530
Purchases of fixed assets (15,548) (21,672) (18,780)
Proceeds from sales of fixed assets and investments 446 8,160 533
Acquisitions (1,169) (2,445) (604)
Investment in software and development costs (7,597) (17,568) (21,645)
Investment in affiliates (18,404) (24,687) (7,879)
---------- ------------ -----------
Net cash used in investing activities (42,272) (58,212) (45,845)
---------- ------------ -----------
Cash flows from financing activities:
Issuances of Redeemable Common Stock 15,414 10,274 7,188
Repurchases of Redeemable Common Stock (16,604) (14,270) (10,144)
---------- ------------ -----------
Net cash used in financing activities (1,190) (3,996) (2,956)
---------- ------------ -----------
Effect of exchange rate changes on cash (1,023) (994) 936
---------- ------------ -----------
Increase (decrease) in cash and cash equivalents 4,563 9,834 (14,399)
Cash and cash equivalents at beginning of period 21,694 11,860 26,259
---------- ------------ -----------
Cash and cash equivalents at end of period $ 26,257 $ 21,694 $ 11,860
========== ============ ===========
</TABLE>
See notes to the consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN PERMANENT SHAREHOLDERS' EQUITY
(THOUSANDS OF U.S. DOLLARS)
Excess of Redemption
Cumulative Value Over Amounts
Retained Translation Paid in by
Earnings Gain Shareholders
------------- ---------------- ---------------
<S> <C> <C> <C>
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)
Net income 898 - -
Effect of repurchases of 3,258,203 shares of
common stock (various prices per share) (6,942) - 6,942
Foreign currency translation adjustment - (204) -
Adjustment of redemption value for change
in formula book value per share - - (7,067)
------------- ---------------- ---------------
Balance at June 30, 1997 $ 24,633 $ 836 $ (37,674)
============= ================ ===============
</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 - Watson Wyatt & Company ("Watson Wyatt" or the
"Company"), 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 July 1, 1996, The Wyatt Company changed
its name to Watson Wyatt & Company.
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
either transaction, (See also Notes 3, 13 and 14).
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.
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 $17,200,000 at June 30, 1997 and $15,500,000 at June 30, 1996.
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.
F-6
<PAGE>
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, implementation fees are deferred until services become operational and
are then recognized ratably over the remaining life of the initial contract.
Total current and non-current deferred implementation fees were $9,043,000 and
$7,259,000 at June 30, 1997 and 1996, respectively. Fees for administrative and
recordkeeping operations are recognized as earned by the Company.
DEFERRED SOFTWARE AND DEVELOPMENT COSTS - Labor and other direct costs incurred
to develop software and systems are deferred on the Company's balance sheets.
Deferred software costs include costs primarily associated with products 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 usually from three to five years.
Deferred systems development costs are amortized ratably over the estimated
remaining life of the respective contract (excluding renewals) upon the
commencement of services under the contract. Accumulated amortization was
$21,325,000 and $18,871,000 at June 30, 1997 and June 30, 1996, respectively.
The Company assesses impairment quarterly on individual contracts by comparing
probable undiscounted future cash flows with the net book value of the deferred
costs. Losses so identified are then measured as the difference between net book
value of the deferred costs and the discounted present value of the cash flows
and are recorded when identified. Permanent impairment of $3.7 million on two of
three contracts for administrative and recordkeeping services was recognized
during fiscal year 1997 and is included in Professional and subcontracted
services, (See also Note 13). This impairment resulted from changes in estimated
future cash flows primarily related to third party vendor 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 to fifteen years. The
Company regularly assesses the recoverability of unamortized goodwill and other
long-lived assets by comparing the probable undiscounted future cash flows with
the net book value of the underlying assets. Accumulated amortization of other
intangible assets was $12,201,000 and $11,931,000 at June 30, 1997 and June 30,
1996, respectively.
EMPLOYEE RECEIVABLES - The Company had outstanding employee receivables included
in other current and noncurrent assets of $3,505,000 and $4,474,000 at June 30,
1997 and June 30, 1996, respectively, related primarily to employee relocations.
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, the U.S. dollar, based on 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.
F-7
<PAGE>
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, 1997 and June 30, 1996, the Company had no amounts outstanding under its
note payable. The Company knows of no event of default which would require it to
satisfy the guarantees described in Notes 9 and 14, 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 17,438 in fiscal year
1997, 18,516 in fiscal year 1996, and 19,248 in fiscal year 1995.
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,
------------------------------------------
1997 1996 1995
---- ---- ----
Interest expense and bank fees $ 1,506 $ 930 $ 1,507
Income taxes paid $ 11,947 $ 2,800 $ 6,955
F-8
<PAGE>
NOTE 3 - INVESTMENTS IN AFFILIATES
Entities accounted for under the equity method are:
June 30,
Ownership ---------------------------
Interest 1997 1996
-------- ---- ----
Watson Wyatt Holdings (Europe) Limited 50.1% $ 7,614 $ 7,585
Watson Wyatt Partners 10.0% 12,582 10,366
Wellspring Resources, LLC 50.0% 31,894 22,833
Professional Consultants Insurance
Company, Inc. 22.5% 426 411
------------ -----------
Total investment in affiliates $ 52,516 $ 41,195
============ ===========
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 in Watsons and
a 10% interest in a defined profit pool of Watsons. 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.
The Company accounts for its interest in Watsons using the equity method of
accounting because it is an investment in a general partnership. The Company
accounts for its interest in WWHE and Wellspring using the equity method of
accounting because it exercises significant influence, but does not control, the
operations of the entities.
At June 30, 1997, the Company's investment in WWHE, Watsons and Wellspring
exceeded the Company's share of the underlying net assets by $6,772,000 due
primarily to the capitalization of external transaction costs incurred by the
Company. This basis differential is being amortized over periods of 10 to 15
years (See also Notes 13 and 14).
The Company's pre-tax loss from affiliates includes the following:
Year ended June 30,
-----------------------------------------
1997 1996 1995
---- ---- ----
Wellspring $ (6,087) $ (1,408) $ -
All others 827 (231) (510)
------------ ------------ -------------
Equity investment losses (5,260) (1,639) (510)
Amortization of basis differential (914) (636) (66)
------------ ------------ -------------
Loss from affiliates $ (6,174) $ (2,275) $ (576)
============ ============ =============
F-9
<PAGE>
Combined summarized balance sheet information at June 30 for the Company's
affiliates follows:
1997 1996
---- ----
50% or 50% or
Unconsolidated Less Owned Unconsolidated Less Owned
Subsidiaries Entities Subsidiaries Entities
------------ -------- ------------ --------
Current assets $ 12,487 $ 130,948 $ 15,713 $ 101,434
Noncurrent assets 1,972 61,157 2,058 33,560
--------- --------- --------- ---------
Total assets $ 14,459 $ 192,105 $ 17,771 $ 134,994
========= ========= ========= =========
Current liabilities $ 7,820 $ 47,983 $ 15,340 $ 33,688
Noncurrent liabilities 13,561 21,990 11,715 13,476
Shareholders' equity (6,922) 122,132 (9,284) 87,830
--------- --------- --------- ---------
Total liabilities &
shareholders' equity $ 14,459 $ 192,105 $ 17,771 $ 134,994
========= ========= ========= =========
The Company's operating results include its proportionate share of income from
equity investments from the dates of investment. Combined summarized operating
results for the years ended June 30, reported by the affiliates follow:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Unconsolidated 50% or less Unconsolidated 50% or less Unconsolidated 50% or less
Subsidiaries Owned Entities Subsidiaries Owned Entities Subsidiaries Owned Entities
------------ -------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 29,410 $ 182,529 $ 20,082 $ 127,531 $ 19,208 $ 90,129
Operating expenses 31,443 152,203 23,493 100,073 20,730 66,820
---------- ---------- ---------- ---------- ---------- ----------
Income(loss) before tax $ (2,033) $ 30,326 $ (3,411) $ 27,458 $ (1,522) $ 23,309
========== ========== ========== ========== ========== ==========
Net income (loss) $ (2,220) $ 29,996 $ (3,249) $ 27,761 $ (1,562) $ 23,503
========== ========== ========== ========== ========== ==========
</TABLE>
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.
F-10
<PAGE>
The components of fixed assets are:
June 30,
--------------------------
1997 1996
---- ----
Furniture, fixtures and equipment $ 105,704 $ 110,117
Leasehold improvements 23,688 22,098
---------- ----------
129,392 132,215
Less: accumulated depreciation
and amortization (92,347) (95,749)
---------- ----------
Net fixed assets $ 37,045 $ 36,466
========== ==========
NOTE 5 - PENSION AND PROFIT SHARING PLANS
The noncurrent portions of accrued costs related to the Company's principal
retirement plans are:
June 30,
--------------------------
1997 1996
---- ----
Reserves for defined benefit retirement plans $ 42,212 $ 38,916
Reserves for Canadian Separation Allowance Plan 6,229 5,966
Reserves for postretirement benefits other
than pensions 38,256 36,259
---------- ----------
Accrued retirement benefits $ 86,697 $ 81,141
========== ==========
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 1997, 1996 and
1995 amounted to $6,595,000, $10,952,000 and $10,027,000 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, 1997 and 1996, the
Company's non-qualified plans had accumulated benefits in excess of related plan
assets.
As of January 1, 1997, changes were made to the U.S. pension program. The
pension plan definition of compensation was revised to include overtime and
annual bonuses. The pension benefit formula was changed to integrate with Social
Security benefits on a step-rate basis. The total years of service included in
the benefit calculation were reduced from 28-1/3 years to 25 years.
F-11
<PAGE>
The following table sets forth the principal plans' funded status as reflected
in the consolidated balance sheets:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
------------------------------- -------------------------------
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 $ 162,769 $ 32,689 $ 150,510 $ 15,499
========== ========== ========== ==========
Accumulated benefit obligation $ 184,582 $ 36,239 $ 170,959 $ 17,786
========== ========== ========== ==========
Projected benefit obligation for
service rendered to date 225,987 69,258 220,052 43,670
Plan assets at fair value, primarily
marketable equity securities 322,485 - 271,000 -
---------- ---------- ---------- ----------
Projected benefit obligation (less than)
in excess of plan assets (96,498) 69,258 (50,948) 43,670
Remaining unrecognized transition
obligation (576) (598) (708) (661)
Unrecognized prior service cost (benefit) 15,385 (27,676) 4,086 (11,274)
Unrecognized net gain subsequent
to transition 78,635 885 49,346 5,117
---------- ---------- --------- ----------
Accrued pension obligation (benefit) $ (3,054) $ 41,869 $ 1,776 $ 36,852
========== ========== ========= ==========
</TABLE>
Net periodic pension cost for the principal plans included the following
components:
Year ended June 30,
-----------------------------------
1997 1996 1995
---- ---- ----
Service cost - benefits earned during
the period $ 16,962 $ 16,601 $ 14,134
Interest cost on projected benefit
obligation 19,651 18,425 15,951
Amortization of unrecognized net obligation
and other deferred amounts 26,860 24,798 17,738
Actual return on plan assets (56,877) (48,872) (37,796)
---------- ---------- ---------
Net periodic pension cost $ 6,596 $ 10,952 $ 10,027
========== ========== =========
During fiscal year 1996, the Company sold its Minneapolis benefit outsourcing
center 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.
F-12
<PAGE>
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 year 1995, the Company had certain key executive retirements.
These retirements resulted in a net loss of approximately $346,000 in fiscal
year 1995 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,
----------------------------------
1997 1996 1995
---- ---- ----
Discount rate, projected benefit obligation 7.5% 7.5% 7.5%
Discount rate, net periodic pension cost 7.5% 7.5% 8.0%
Rate of increase in compensation levels 5.8% 5.8% 5.8%
Expected long-term rate of return on assets 10.0% 9.5% 9.5%
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 1997, 1996, and 1995. Changes in
actuarial assumptions from fiscal year 1996 to fiscal year 1997 decreased
pension expense by approximately $1,182,000. 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.
DEFINED CONTRIBUTION PLANS
The Company sponsors a profit sharing plan which provides benefits to
substantially all U.S. associates and to which the Company can make
discretionary irrevocable annual contributions and matches employee
contributions. The Profit Sharing Plan was changed in 1997 to The Savings Plan
with a company match of 50% of the first 6% of total pay (which includes base
salary, overtime and annual performance based bonuses) on associate 401(k)
contributions. Vesting of the Company match occurs after 3 years for new
employees and is 100% for all employees hired before January 1, 1997. The
expense in fiscal year 1997 for the match was $2.0 million. The Company made no
profit sharing contributions during fiscal years 1997, 1996 or 1995. 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. CSAP expense for
fiscal years 1997, 1996 and 1995 amounted to $414,000, $509,000, and $679,000,
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 $2,195,000 and $1,867,000 at June 30, 1997
and 1996, 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).
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.
Effective January 1, 1997, premiums paid on the retiree medical plan are tied to
the retiree's years of service. The Company contribution is capped at 200% of
1997 per capita claims cost. Benefits have been redefined to ensure a retiree
benefit comparable to the Watson Wyatt Plan for active employees.
F-14
<PAGE>
The following table sets forth the principal plans' status as reflected in the
consolidated balance sheets:
June 30,
--------------------------
1997 1996
---- ----
Accumulated postretirement benefit obligation:
Retirees $ 12,453 $ 13,142
Fully eligible active plan participants 1,918 5,987
Other active plan participants 15,661 17,608
---------- ----------
Accumulated postretirement benefit obligation 30,032 36,737
Unrecognized prior service cost (benefit) 1,563 (3,831)
Unrecognized net gain subsequent to transition 8,367 4,842
Unrecognized transition obligation (792) (930)
---------- ----------
Accrued postretirement benefit obligation $ 39,170 $ 36,818
========== ==========
Net periodic postretirement benefit cost for the principal plans included the
following components:
Year ended June 30,
----------------------------
1997 1996 1995
---- ---- ----
Service cost - benefits earned during the period $ 1,891 $ 3,881 $ 2,145
Interest cost on accumulated postretirement
benefit obligation 1,987 2,685 2,038
Net amortization of prior service cost and net gain
subsequent to transition (685) 138 (935)
Amortization of transition obligation over 20 years 50 347 349
-------- -------- -------
Net periodic postretirement benefit cost $ 3,243 $ 7,051 $ 3,597
======== ======== =======
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,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Health care cost trend rate, accumulated benefit obligation:
Pre-65 benefits (decreasing to 5.0% for 2004 and thereafter) 9.1% 9.8% 10.6%
Post-65 benefits (decreasing to 5.0% for 2007 and thereafter) 8.3% 8.8% 9.9%
Health care cost trend rate, net periodic postretirement benefit cost:
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% 9.4% 9.9%
Discount rate, accumulated benefit obligation 7.5% 7.5% 7.5%
Discount rate, net periodic postretirement benefit cost 7.5% 7.5% 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 1997, 1996 and 1995. Changes in actuarial assumptions from
fiscal year 1996 to fiscal year 1997 decreased expense by approximately
$3,182,000 in fiscal year 1997. The effect was to increase net income for fiscal
year 1997 by approximately $1,877,000 or $.11 per share. 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.
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,
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Increase in accumulated postretirement benefit obligation $ 1,441 $ 5,242 $ 5,503
Increase in service and interest cost components of net
periodic postretirement benefit cost $ 260 $ 1,301 $ 677
</TABLE>
F-16
<PAGE>
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of:
June 30,
---------------------------
1997 1996
---- ----
Accounts payable and accrued liabilities $ 47,902 $ 33,697
Accrued salaries and bonuses 33,221 32,141
Current portion of reserves for principal defined
benefit retirement plans 1,351 3,220
Current portion of reserves for postretirement
benefits other than pensions 891 559
Accrued vacation 12,260 12,183
Deferred fee income - current portion 8,198 6,403
---------- ----------
Total accounts payable and accrued liabilities $ 103,823 $ 88,203
========== ==========
NOTE 8 - LEASES
The Company leases office space and various computer equipment under operating
lease agreements with terms generally ranging from one to 10 years. The Company
has entered into sublease agreements for some of its leased space. The rental
expense was $42,079,000, $45,749,000, and $51,604,000 for fiscal years 1997,
1996 and 1995, respectively. Sublease income was $1,702,000, $1,810,000, and
$2,868,000 for fiscal years 1997, 1996 and 1995, respectively. Future cash
outlays for operating lease commitments and cash inflows for sublease income
are:
Lease Sublease
Commitments Income
----------- ------
1998 $ 42,863 $ 2,024
1999 36,217 1,353
2000 34,489 1,358
2001 30,675 1,216
2002 24,857 966
thereafter 35,782 -
---------- ----------
$ 204,883 $ 6,917
========== ==========
As a result of relocations and the subleasing of excess office space, the
Company recognized lease termination losses of approximately $12,100,000,
$500,000, and $1,200,000 in fiscal years 1997, 1996, and 1995, 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 current 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 $20,920,000 and $17,534,000 at June 30, 1997 and 1996, respectively.
Shares totaling 5,718,000 and 4,800,000 of the Company's Redeemable Common Stock
were pledged by shareholders to secure these loans at June 30, 1997 and 1996,
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
identified transferees, subject to the restrictions contained in the
bylaws.
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 such
shares.
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 "Formula 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. Formula Book Value as used herein means
the Net Book Value of the Corporation's Common Stock as of June 30, 1996,
increased or decreased by net income or losses, and all other GAAP basis
increases or decreases to Net Book Value occurring after June 30, 1996, adjusted
to (i) spread the economic impact of certain real estate sublease losses over
the remaining life of the sublease; and (ii) eliminate annual changes in the
Currency Translation Adjustment ("CTA") occurring after June 30, 1996. The
Formula Book Value per share was $5.30 at June 30, 1997. In prior years, the Net
Book Value was defined in the bylaws as the sum of Redeemable Common Stock,
adjustments for redemption value greater than amounts paid in by shareholders,
retained earnings, and cumulative translation adjustment, adjusted by
compensation survey items. The Formula Book Value per share, as defined above,
was $4.94 and $4.51 at June 30, 1996 and 1995, 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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Consolidated net worth (as defined in the Company's
bylaws) $ 84,091 $ 84,382 $ 79,713
Adjustment for the compensation survey items:
50% of consolidated income received
from compensation survey business 5,915 5,915 6,524
Add: Adjustment for after tax affect of lease losses 6,003 N/A N/A
---------- ---------- ----------
Formula Book Value of Redeemable Common Stock $ 96,009 $ 90,297 $ 86,237
========== ========== ==========
Number of shares of Redeemable Common Stock outstanding 18,130 18,262 19,130
========== ========== ==========
Formula Book Value per share of Redeemable Common Stock $ 5.30 $ 4.94 $ 4.51
========== ========== ==========
</TABLE>
F-19
<PAGE>
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, 1997 were as follows:
Number of Redeemable
Shares Common Stock
------ ------------
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
============ ============
Redemption of shares (3,258,203) (16,604)
Issuance of shares 3,126,670 15,414
Adjustment of redemption value for
change in formula book value per share - 7,067
------------ ------------
Balance at June 30, 1997 18,130,430 $ 96,091
============ ============
The Company sponsors a Stock Purchase Plan (SPP) which allows virtually all
associates to become shareholders. For the fiscal year ended June 30, 1997, the
Company paid each associate purchasing stock $.50 per share purchased under the
SPP. For fiscal years ended 1996 and 1995, the Company paid each associate
purchasing stock $1.00 per share purchased under the SPP. This resulted in
expense for fiscal years 1997, 1996, and 1995 of $1,300,000, $1,700,000, and
$1,600,000, respectively.
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. 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 any
accounting change include:
Year ended June 30,
------------------------------------
1997 1996 1995
---- ---- ----
Current tax expense (benefit):
U.S. $ 1,699 $ 11,415 $ (1,269)
State and local
966 2,735 659
Foreign
1,484 1,631 3,102
---------- ---------- ----------
$ 4,149 $ 15,781 $ 2,492
---------- ---------- ----------
Deferred tax expense (benefit):
U.S. $ (4,002) $ (4,579) $ 1,101
State and local
(1,396) (1,298) 92
Foreign
2,138 (701) 164
---------- ---------- ----------
$ (3,260) $ (6,578) $ 1,357
---------- ---------- ----------
Total provision for income taxes $ 889 $ 9,203 $ 3,849
========== ========== ==========
F-21
<PAGE>
Deferred income tax assets (liabilities) included in the consolidated balance
sheets at June 30, 1997 and June 30, 1996 are comprised of the following:
June 30,
-----------------------------
1997 1996
---- ----
Cash method of accounting for U.S. income
tax purposes $ (23,468) $ (34,061)
Amortization of deferred software and
development costs (3,470) (4,351)
Foreign temporary difference (1,036) (975)
Partnership income (4,289) (744)
Other (9) (144)
----------- -----------
Gross deferred tax liabilities (32,272) (40,275)
----------- -----------
Accrued retirement benefits 36,619 36,177
Non-deductible foreign expenses 1,172 1,172
Difference between book and tax depreciation (2,576) 1,704
Amortization of deferred rent 3,419 4,313
Foreign temporary difference 1,281 1,306
Foreign net operating loss carryforwards 2,530 2,159
Other 3,942 3,928
----------- -----------
Gross deferred tax assets 46,387 50,759
----------- -----------
Deferred tax assets valuation allowance (3,702) (3,331)
----------- -----------
Net deferred tax asset $ 10,413 $ 7,153
=========== ===========
The Company has foreign tax credit carryforwards for U.S. tax purposes of
$441,000. At June 30, 1997, the Company has unused loss carryforwards for tax
purposes in various jurisdictions outside the U.S. amounting to $6,171,000, of
which $3,804,000 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 2002. The valuation allowance applies to the tax effect of
the foreign net operating loss carryforwards ($2,530,000), 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 $371,000 in fiscal year 1997 and
$1,080,000 in fiscal year 1996 are due primarily to the tax effect of the change
in foreign net operating losses and non-deductible foreign expenses.
F-22
<PAGE>
Domestic and foreign components of income before taxes, minority interest and
cumulative effect of a change in accounting for each of the three years ended
June 30, are follows:
1997 1996 1995
---- ---- ----
Domestic $ (4,803) $ 11,477 $ 6,817
Foreign 6,757 7,211 (1,192)
---------- ---------- ----------
$ 1,954 $ 18,688 $ 5,625
========== ========== ==========
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:
Year ended June 30,
------------------------------
1997 1996 1995
---- ---- ----
Calculated income tax provision at U.S.
federal statutory tax rate of 35% $ 684 $ 6,541 $ 1,969
(Reduction) increase resulting from:
Results of non-U.S. affiliates taxed
at other than statutory rates (463) 120 (759)
Losses of non-U.S. affiliates for which
no current benefit is available 599 792 1,043
State income taxes, net of federal tax
benefit (430) 620 336
Non-deductible amortization and other
expenses 700 1,668 1,183
Tax credits (258) (311) (207)
Other 57 (227) 284
------- ------- -------
Income tax provision before cumulative
effect of a change in accounting $ 889 $ 9,203 $ 3,849
======= ======= =======
F-23
<PAGE>
NOTE 12 - GEOGRAPHIC SEGMENT INFORMATION
The following table presents segment information for U.S. and consolidated
foreign operations including Canada, Latin America, and Asia Pacific
subsidiaries. Summary financial information follow:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
---- ---- ----
U.S. Operations
Fees $ 419,847 $ 410,969 $ 370,462
Cost of Providing Services 347,852 332,192 305,555
Depreciation and amortization 23,038 23,575 17,805
Income from operations before ---------- ---------- ----------
General and Administrative Expenses $ 48,957 $ 55,202 $ 47,102
---------- ---------- ----------
Foreign Operations
Fees $ 91,151 $ 81,544 $ 104,059
Cost of Providing Services 83,285 74,865 99,846
Depreciation and amortization 2,955 2,773 3,637
---------- ---------- ----------
Income from operations before
General and Administrative Expenses $ 4,911 $ 3,906 $ 576
---------- ---------- ----------
All Operations
Fees $ 510,998 $ 492,513 $ 474,521
Cost of Providing Services 431,137 407,057 405,401
Depreciation and amortization 25,993 26,348 21,442
---------- ---------- ----------
Income from operations before
General and Administrative Expenses $ 53,868 $ 59,108 $ 47,678
---------- ---------- ----------
General and Administrative Expenses $ 45,696 $ 38,656 $ 41,313
---------- ---------- ----------
Income from operations $ 8,172 $ 20,452 $ 6,365
========== ========== ==========
As of June 30,
------------------------------------------
1997 1996 1995
---- ---- ----
Total Assets:
U.S. Operations $ 306,779 $ 300,472 $ 267,677
Foreign Operations 24,999 20,347 18,945
---------- ---------- ----------
All Operations $ 331,778 $ 320,819 $ 286,622
========== ========== ==========
</TABLE>
General and Administrative expenses include corporate functions primarily in the
U.S.
F-24
<PAGE>
NOTE 13 - RELATED PARTY TRANSACTIONS
In connection with the formation of Wellspring, Watson Wyatt retained three
contracts for administrative and recordkeeping services and entered into
agreements whereby Wellspring provides the services to those clients on behalf
of the Company for a fee equal to the cost of servicing those clients. Expenses
charged to the Company by Wellspring for such services for fiscal 1997 and 1996
were $40,313,000 and $10,829,000, respectively. At June 30, 1997, the Company
owed Wellspring $11,009,000 for such services. At June 30, 1996 Wellspring owed
the Company $736,000 (See also Notes 1 and 14).
NOTE 14 - 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, 1997, the Company had outstanding letters of credit of
$2,225,000.
The Company guarantees certain leases for office premises and equipment for one
of its affiliates. Minimum remaining payments guaranteed under these leases at
June 30, 1997 total $73,200,000, which expire at various dates through 2007.
These leases are also jointly and severally guaranteed by the Company's partner.
In addition, the Company guarantees its affiliate's obligation to a customer in
the event of termination without cause. The amount of the guarantee at June 30,
1997 is $5,310,000. This amount declines monthly beginning in September 1997 and
expires in 2002.
It is not practical to estimate fair value of these guarantees; however, the
Company believes the likelihood of significant loss from these guarantees is
remote.
Anticipated commitments of funds for fiscal year 1998 are estimated at
$39,000,000, and include expected purchases of fixed assets, 50% of the capital
requirements of Wellspring, and 50.1% of the capital requirements of WWHE. It is
the intention of the Company to fund Wellspring's and WWHE's cash requirements
as needed (See also Notes 3 and 13).
F-25
<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 23, 1997 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 23, 1997
F-26
<PAGE>
WATSON WYATT & COMPANY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Balance at Additions Additions Balance at
Beginning Charged charged to End of
Description of Year against fees other accounts Deductions Year
----------- ----------- ------------ -------------- ---------- ----------
Year Ended June 30, 1997
------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts $5,161 $6,853 $ - $(9,489) $2,525
Valuation allowance for
deferred tax assets 3,331 - 371(1) - 3,702
Year ended June 30, 1996
------------------------
Allowance for doubtful
accounts 1,508 11,667 - (8,014) 5,161
Valuation allowance for
deferred tax assets 2,251 - 1,080(1) - 3,331
Year ended June 30, 1995
------------------------
Allowance for doubtful
accounts 1,026 5,982 - (5,500) 1,508
Valuation allowance for
deferred tax assets $5,209 $ - $235(1) $(3,193)(2) $2,251
</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-27
