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, 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)
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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 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>
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.
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 6707 Democracy Boulevard, Bethesda, MD 20817. Together with its
affiliates, it operates globally as Watson Wyatt Worldwide.
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 Bangkok, Beijing, Delhi, Johannesburg, Mumbai, Sao Paulo, Sri
Lanka, and Zurich.
Together Watson Wyatt Worldwide employs approximately 4,500 associates. Of this
total, the Company employs approximately 3,240 full-time associates in the
following geographic areas:
North America 2,640
Asia Pacific 520
Latin America 80
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3,240
======
None of the Company's associates are subject to collective bargaining
agreements. The Company believes relations with associates are good.
For geographic segment information, see Note 12 of Notes to the Consolidated
Financial Statements.
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 defined
benefit retirement programs, including actuarial services and required reporting
of plan contributions and funding levels, and defined contribution plan design
and related services comprised 44%, 46% and 48% of fees in fiscal years 1997,
1996, and 1995, respectively.
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COMPENSATION AND COMMUNICATIONS CONSULTING: Compensation plan design, benefits
communication, and organization effectiveness comprised 13%, 12% and 11% of fees
in fiscal years 1997, 1996 and 1995, respectively.
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 8%, 8%
and 9% of fees in fiscal years 1997, 1996 and 1995, respectively.
OTHER STRATEGIC CONSULTING SERVICES: Watson Wyatt provides other types of
strategic consulting services, which individually represent less than 10% of
total fees, and which accounted in the aggregate for 35%, 34% and 32% of fees in
fiscal years 1997, 1996 and 1995, respectively. These services include
consulting in the areas of risk management, investment consulting, outsourced
benefits administration, international benefits consulting, and research and
surveys.
Prior year percentages have been recalculated to conform to current
classification.
COMPETITION
The human resource consulting business, including all of the Company's principal
services, is highly competitive and has relatively low barriers to entry. There
is no substantial difference between the competitive position of the Company's
overall business as compared to its individual lines of business. 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 ranks Watson Wyatt as the
third largest employee benefit 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.
AFFILIATES
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 in Watsons and a 10% interest in a defined profit pool of Watsons.
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 outsourced employee 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
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resources administration. In connection with the formation of Wellspring, the
Company retained three pre-existing long term administrative and recordkeeping
contracts and contracted with Wellspring to service those clients ("Retained
Clients") (see Note 13 of Notes to Consolidated Financial Statements).
Wellspring's financial statements are included as Exhibit 25 to this Form 10-K.
ITEM 2. PROPERTIES.
Watson Wyatt Worldwide operates in approximately 97 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, 1997 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 24,
1997, there were 2,121 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 $5.30 per share at June 30,
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1997, as further described in the Consolidated Financial Statements. This
Formula Book Value reflects an increase of approximately 7.3% from the Formula
Book Value of $4.94 per share at June 30, 1996.
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 declaration or payment of dividends. Under the most
restrictive of these covenants, approximately $11.7 million was available for
the declaration or payment of dividends as of June 30, 1997. 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,
1997. The selected consolidated financial data as of June 30, 1997 and 1996 and
for each of the years in the three year period ended June 30, 1997 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, 1995,
1994, 1993, and for each of the years ended June 30, 1994 and 1993 have been
derived from audited consolidated financial statements of Watson Wyatt not
included in this Form 10-K.
The transfer of the Company's UK and European operations, as more fully
described in Item 1, occurred in the fourth quarter of fiscal 1995. The
formation of Wellspring at the end of the third quarter of fiscal 1996 is also
described in Item 1. Since the dates of inception, these transactions have been
accounted for in accordance with the equity method.
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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<TABLE>
<CAPTION>
Year ended June 30,
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Statement of Operations Data: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Fees $ 510,998 $ 492,513 $ 474,521 $ 433,441 $ 410,121
Loss from affiliates (6,174) (2,275) (576) (547) (144)
Income before income taxes, minority interest and
cumulative effect of a change in accounting 1,954 18,688 5,625 12,717 5,644
Cumulative effect of a change in accounting - - (800) - -
Net income 898 9,355 849 5,636 963
Earnings per share $ 0.05 $ 0.51 $ 0.05 $ 0.29 $ 0.05
Dividends per share - - - - -
Weighted average shares
outstanding (in thousands) 17,438 18,516 19,248 19,160 18,302
June 30,
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Balance Sheet Data: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Investment in affiliates $ 52,516 $ 41,195 $ 18,783 $ 383 $ 930
Deferred software and development costs 32,869 35,746 28,979 12,479 9,401
Total assets 331,778 320,819 286,622 266,786 242,994
Redeemable Common Stock 96,091 90,214 86,275 87,612 82,557
Formula Book Value
per share (1) $ 5.30 $ 4.94 $ 4.51 $ 4.44 $ 4.11
Shares outstanding (in thousands) 18,130 18,262 19,130 19,732 20,087
</TABLE>
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(1)As described more fully in Note 10 of Notes to the Consolidated Financial
Statements, effective with the fiscal year ended June 30, 1997, the Company
modified its bylaws for calculating Formula Book Value per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
The Company generated net income in fiscal year 1997 of $0.9 million compared to
net income in fiscal year 1996 of $9.4 million. The primary factor in the
reduction of net income, as further explained below, is the sublease loss of
$12.1 million resulting from the relocation of offices, which will be more than
offset by future rent savings. Revenue growth of $18.5 million outpaced
inflation, but the improvement was offset by expense growth during the period.
Increases in expenses are attributable to increased compensation costs of $10.7
million for associates, higher costs for professional and subcontracted services
of $6.5 million and increased occupancy and communications costs of $8.2
million.
Fee revenue reached $511.0 million in fiscal year 1997, an increase of $18.5
million, or 4%, from $492.5 million in fiscal year 1996. Revenue growth has
occurred across all major lines of business and all geographic regions.
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For the year, salaries and employee benefit expenses were $252.3 million, an
increase of $10.7 million from fiscal year 1996 due primarily to increases in
base salaries and associate bonuses.
Occupancy and communications expense increased $8.2 million in 1997. The Company
relocated its corporate and some operating offices to lower cost suburban
facilities in 1997 recognizing sublease losses of $12.1 million. This charge is
offset primarily by savings in other occupancy and office expenses.
Professional and subcontracted services were $82.8 million for fiscal year 1997,
an increase of $6.5 million, or 9%, from fiscal year 1996. This net increase is
due to the increased payments to Wellspring for outsourcing services provided to
the Retained Clients. In fiscal year 1996, payments to Wellspring, representing
one fiscal quarter of activity, were $10.8 million whereas the full year cost
incurred in fiscal year 1997 was $40.3 million, representing an increase of
$29.5 million. This increase was offset by decreased payments to independent
software contractors of $13.0 million which are now incurred by Wellspring and a
further reduction of $5.0 million for costs incurred in fiscal year 1996 by
WPC-Minneapolis which was sold in fiscal year 1996 and other decreases of $5.0
million.
Other costs of providing services decreased $1.3 million in 1997 as the Company
controlled general office expenditures.
General and administrative expenses for fiscal year 1997 were $45.7 million, an
increase of $7.0 million or 18% from fiscal year 1996 due to increased spending
on marketing and strategic planning initiatives.
Depreciation and amortization decreased $0.4 million in fiscal year 1997 to
$26.0 million. This decrease is primarily due to the disposal of assets in the
prior year and lower levels of capital expenditures in the current fiscal year.
Loss from affiliates for the year is primarily affected by the results of the
Company's affiliate, Wellspring (See Note 3 of Notes to the Consolidated
Financial Statements). As previously reported, Wellspring was formed in March
1996 as a successor to the Company's prior outsourced employee benefits
administration business, Wyatt PREFERRED CHOICE(R). Wellspring provides benefits
administration outsourcing services and renders services to the Retained Clients
on behalf of the Company. (See Part 1, Item 1 and Notes 1 ("Deferred Software
and Development Costs") and 13 of Notes to the Consolidated Financial
Statements).
During fiscal year 1997, Wellspring experienced software development and systems
implementation delays. The combination of delayed revenues arising from late
systems implementations for clients, as well as unanticipated operating
expenses, resulted in a significantly higher investment in the outsourcing
business than had been anticipated. During fiscal year 1997, the Company
invested $17.0 million in Wellspring and made certain guarantees on behalf of
Wellspring as more fully described in Note 14 of Notes to the Consolidated
Financial Statements. The $17.0 million invested in fiscal year 1997 brought the
Company's total capital contribution to $36.75 million (State Street's
cumulative investment being at an equal level) or $6.75 million in excess of the
cumulative partner capital to which each of State Street and the Company
committed when the Wellspring joint venture was formed.
The Company anticipates that in fiscal year 1998 Wellspring will require cash
resources of $15.1 million, and that its share of Wellspring's operating losses
will be $5.7 million. As described above, the level of investment required has
exceeded expectations due to systems and software delays and higher operating
costs, both of which conditions, the Company believes, have also been
experienced by Wellspring's
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competitors in this emerging business. Wellspring has recently achieved
operating milestones, including completion of both Retained Client and
Wellspring client implementations and a successful acceptance test on its
"NextGen" operating system.
The Company and State Street have indicated their intention to fund Wellspring's
cash requirements as needed. Additionally the Company has received inquiries
from interested third parties as to potential investments in Wellspring. These
discussions are in preliminary stages and the Company cannot, therefore, assess
the probable outcome.
The Company anticipates that in fiscal year 1998 the Retained Clients will
require $3.5 million of cash resources, substantially improved from the negative
cash flow to the Company from these contracts of $21.0 million in fiscal 1997,
primarily due to the completion of two major client implementations in the first
quarter of fiscal year 1998. The Company anticipates losses totalling $8.3
million for the Retained Client operations in fiscal year 1998 compared with the
$17.3 million loss incurred in fiscal year 1997. The Company's remaining
investment in the Retained Clients is described in Note 1 ("Deferred Software
and Development Costs") of Notes to the Consolidated Financial Statements.
The information concerning Wellspring and the Retained Clients in the preceding
three paragraphs includes "forward-looking statements" within the meaning of the
Private Securities Legislation Reform Act of 1995. Any such "forward-looking
statements" are not guarantees of future performance. The Company's ability to
realize such "forward-looking statements" is subject to risks and uncertainties
which could cause actual results to differ materially from those described in
such "forward-looking statements." Such risks and uncertainties include
Wellspring's ability to put NextGen into operation, to meet scheduled client
implementations, to control development costs, and to control operating costs
for both the Wellspring clients and the Retained Clients.
Income before income taxes, minority interest and the cumulative effect of a
change in accounting was $2.0 million in fiscal year 1997. The provision for
income taxes of $.9 million reflects a 45% effective tax rate compared to an
effective tax rate of 49% in fiscal year 1996. The decrease in the effective tax
rate is due to increased tax credits in 1997.
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 $0.8 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
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 affiliate. Fiscal year 1995 results include an after tax
charge of $0.8 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 the last year. Fiscal
year 1995 results include fee revenues of $30.0 million related to the European
operations prior to their transfer 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.
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For fiscal year 1996, salaries and employee benefit expenses were $241.6
million, a decrease of $7.1 million from fiscal year 1995. The decrease is due
to the transfer of the European operations in the fourth quarter of fiscal year
1995, $17.0 million, and the sale of the Minneapolis outsourcing center and the
formation of Wellspring in the third quarter of fiscal year 1996, $10.0 million,
offset by normal salary increases and higher associate bonuses.
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
primarily to the transfer of the Company's European operations to WWHE.
Professional and subcontracted services 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 software subcontractor costs related to outsourcing benefits
administration at WPC.
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. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies primarily on funds from operations and short-term borrowings
as its sources of liquidity. The Company believes that it has access to ample
financial resources to finance its growth, meet its commitments to affiliates as
well as support ongoing operations. The Company's cash and cash equivalents at
June 30, 1997 totaled $26.3 million, compared to $21.7 million at June 30, 1996.
The Company did not have any outstanding borrowings at June 30, 1997 or 1996.
CASH FROM OPERATIONS. The Company's annual pattern of cash flow is generally
stable and typically does not fluctuate widely between operating cycles.
Operating cash flow for the Company, however, totaled $49.0 million in 1997,
compared to $73.0 million in the preceding year with the decrease due primarily
to lower net income of $8.5 million and tax payments of $11.9 million. The
Company continued its focus on billing and collection practices in fiscal year
1997 to strengthen the role of working capital management in its profit goals.
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The Company's foreign operations do not materially impact its liquidity or
capital resources. At June 30, 1997, $6.1 million of the total cash balance of
$26.3 million was held outside of North America, all of which the Company has
the ability to readily access, if necessary. There are no significant
repatriation restrictions or adverse economic consequences associated with
repatriation. The foreign operations are substantially self-sufficient, and the
Company does not anticipate any material future funding requirements for these
operations. Likewise, the Company does not anticipate the need to access such
cash under its line of credit.
There was no reduction in available foreign operating losses as a result of the
transfer of the European operating subsidiaries to WWHE in 1995, and such losses
remain available to the Company. For financial statement purposes, the Company
has not recognized any income tax benefits for these net operating loss
carryforwards due to the uncertainty associated with their eventual realization.
Due to the nature of the Company's operations (billing and collecting for
services within each country in that country's local currency), the Company has
little foreign currency transaction risk. Therefore, the Company has not
implemented a formal hedging policy or program. Any foreign currency risk would
be primarily associated with the Company's investments in its non-U.S.
subsidiaries. The Company has evaluated the cost of hedging this balance sheet
exposure, and concluded that the cost exceeds the benefit relative to the
associated level of exposure.
The Company's ratio of current assets to current liabilities increased slightly
between fiscal years 1997 and 1996 at 1.2 and 1.1, respectively.
CASH FROM INVESTING ACTIVITIES. Investing activity cash outflow was $42.3
million in 1997, versus $58.2 million in 1996. The decrease is primarily due to
decreased fixed asset purchases net of lower proceeds from sales of fixed assets
and lower investments in software development and affiliates.
Anticipated commitments of funds for fiscal year 1998 are estimated at $39.0
million, which includes expected purchases of fixed assets, 50% of the capital
requirements of Wellspring, and 50.1% of the capital requirements of WWHE. The
company expects operating cashflows to provide for the Company's cash needs.
The Company has an $80.0 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 $25.0
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. At June 30, 1997, $40.6 million of the credit line is
available to the Company as revolving credit for operations.
CASH FROM FINANCING ACTIVITIES. Financing activity cash outflow was $1.2 million
in 1997, versus $4.0 million in 1996, due to the net of sales and repurchases of
the Company's Redeemable Common Stock.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data are included as Item 14 of this
report.
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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.
PART IV
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
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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
3.1 Restated Certificate of Incorporation of Watson Wyatt & Company(4)
3.2 Restated Bylaws (as amended through August 1997)(5)
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(4)
- ----------
(1) Incorporated by reference from Registrant's Initial 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 Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (file no. 0-20724), filed on
September 16, 1996
(5) Filed herewith
-12-
<PAGE>
10.3 Second Amendment to The Third Amended and Restated Credit and Security
Agreement, dated as of April 30, 1997(5)
21 Subsidiaries of Watson Wyatt & Company(5)
23 Consent of the Company's Independent Accountants(5)
24 Consent of Wellspring's Independent Accountants(5)
99 Wellspring Resources, LLC Financial Statements(5)
- ----------
(5) Filed herewith
-13-
<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 29, 1997 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 9/29/97
A.W. Smith, Jr. Officer and Director
/S/ Paul R. Daoust
- ------------------------------ Executive Vice President, Chief 9/29/97
Paul R. Daoust Operating Officer and Director
/S/ Barbara L. Landes
- ------------------------------ Vice President and Chief 9/29/97
Barbara L. Landes Financial Officer
/S/ Carl D. Mautz
- ------------------------------ Controller 9/29/97
Carl D. Mautz
/S/ Walter W. Bardenwerper
- ------------------------------ Director 9/29/97
Walter W. Bardenwerper
/S/ Charles A. Clemens
- ------------------------------ Director 9/29/97
Charles A. Clemens
-14-
<PAGE>
SIGNATURE TITLE DATE
- --------- ----- ----
- ------------------------------ Director 9/29/97
John J. Gabarro
/S/ John J. Haley
- ------------------------------ Director 9/29/97
John J. Haley
- ------------------------------ Director 9/29/97
Gary T. Hallenbeck
/S/ Ira T. Kay
- ------------------------------ Director 9/29/97
Ira T. Kay
/S/ Brian E. Kennedy
- ------------------------------ Director 9/29/97
Brian E. Kennedy
/S/ Robert D. Masding
- ------------------------------ Director 9/29/97
Robert D. Masding
- ------------------------------ Director 9/29/97
R. Michael McCullough
/S/ John A. Steinbrunner
- ------------------------------ Director 9/29/97
John A. Steinbrunner
- ------------------------------ Director 9/29/97
A. Grahame Stott
-15-
<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 $ 421,595 $ 413,757 $ 405,821
Cost of Providing Services 268,124 245,368 241,777
Depreciation and amortization 18,016 23,084 23,860
Income from operations before ---------- ---------- ----------
General and Administrative Expenses $ 130,387 $ 144,529 $ 146,028
---------- ---------- ----------
Foreign Operations
Fees $ 89,403 $ 78,756 $ 68,700
Cost of Providing Services 163,013 161,689 163,624
Depreciation and amortization 2,909 2,488 3,426
---------- ---------- ----------
Income from operations before
General and Administrative Expenses $ (76,519) $ (85,421) $ (98,350)
---------- ---------- ----------
All Operations
Fees $ 510,998 $ 492,513 $ 474,521
Cost of Providing Services 431,137 407,057 405,401
Depreciation and amortization 21,442 25,993 26,348
---------- ---------- ----------
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
WATSON WYATT & COMPANY
RESTATED BYLAWS
(INCLUDES CHANGES APPROVED THROUGH AUGUST 22, 1997)
* * * * * *
SHAREHOLDERS' MEETINGS
Section 1.1 PLACE OF MEETINGS. All meetings of the shareholders may be held at
such place and time as shall be stated in the notice of the meeting, or in a
duly executed waiver of notice thereof.
Section 1.2 ANNUAL MEETINGS. An annual meeting of shareholders shall be held in
each year on a date and at a time determined by the Board of Directors and set
forth in the notice of such meeting. At such annual meeting, the shareholders
shall elect a Board of Directors and transact such other business as may
properly be brought before the meeting.
Section 1.3 SHAREHOLDERS' LIST. At least ten days before every election of
directors, a complete list of the shareholders entitled to vote at said election
arranged in alphabetical order, with the residence of each and the number of
voting shares held by each, shall be prepared by the Secretary. Such list shall
be open for said ten days to the examination of any shareholder during normal
business hours at the place where the election is to be held or at such other
place in the city where the election is to be held as is designated by the
Secretary and is specified in the notice for such meeting, and shall be produced
and kept at the time and place of election during the whole time thereof, and
subject to the inspection of any shareholder who may be present.
Section 1.4 SPECIAL MEETINGS. Special meetings of the shareholders, for any
purpose or purposes, unless otherwise prescribed by the Delaware General
Corporation Law as amended from time to time (the "DGCL") or by the Restated
Certificate of Incorporation, shall be called by the President or Secretary at
the request in writing of a majority of the Board of Directors, or at the
request in writing of shareholders owning ten percent (10%) of the entire
capital stock of the Corporation issued and outstanding and entitled to vote.
Such request shall state the purpose or purposes of the proposed meeting.
Section 1.5 NOTICE OF MEETINGS. Written notice of a meeting of the shareholders,
stating the time and place and object thereof, shall be served upon or mailed to
each shareholder entitled to vote thereat at such address as appears on the
books of the Corporation at least 10 but not more than 60 days before the
meeting.
Section 1.6 QUORUM. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall be requisite and shall constitute a quorum at all meetings of the
shareholders for the transaction of business except as otherwise provided by the
DGCL, by the Restated Certificate of Incorporation or by these Bylaws. In the
event that a separate vote by class of stock may be required at such meeting,
holders of the majority of each such class of stock issued and outstanding
entitled to vote thereat, present in person or represented by proxy, shall be
requisite and shall constitute a quorum. If, however, such quorum shall not be
present or represented at any meeting of the shareholders, the shareholders
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the
<PAGE>
meeting, until a quorum shall be present or represented. Any such adjourned
meeting as to which there may be a new record date, or which has been adjourned
for more than 30 days, shall be subject to the notice requirements as set forth
in Section 1.5 hereof. At such adjourned meeting at which a quorum shall be
present or represented any business may be transacted which might have been
transacted at the meeting as originally notified.
Section 1.7 VOTING. When a quorum is present at any meeting, the vote of the
holders of stock representing a majority of the voting power present in person
or represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the DGCL or of the
Restated Certificate of Incorporation or of these Bylaws, a different vote is
required in which case such express provision shall govern and control the
decision of such question. Each shareholder shall have the number of votes for
each share of stock having voting power, registered in his name on the books of
the Corporation, as is provided for in the Restated Certificate of
Incorporation. Except where the transfer books of the Corporation shall have
been closed or a date shall have been fixed as a record date for the
determination of its shareholders entitled to vote, no share of stock shall be
voted on at any election of directors which shall have been transferred on the
books of the Corporation twenty days next preceding such election of directors.
Section 1.8 PROXIES. At any meeting of the shareholders every shareholder having
the right to vote shall be entitled to vote in person, or by proxy appointed by
an instrument in writing (or other means permitted by the DGCL) and bearing a
date not more than three years prior to said meeting, unless said instrument
provides for a longer period.
Section 1.9. MAJORITY CONSENT. Whenever the vote of shareholders at a meeting
thereof is required or permitted to be taken in connection with any corporate
action by the DGCL or the Restated Certificate of Incorporation or these Bylaws,
the meeting and vote of shareholders may be dispensed with, if the holders of
the outstanding stock having not less than the minimum number that would be
necessary to authorize or take such action at a meeting if such meeting were
held, shall consent in writing to such corporate action being taken in
accordance with the DGCL.
DIRECTORS
Section 2.1 NUMBER AND TENURE OF DIRECTORS. The number of directors which shall
constitute the whole Board shall not be less than 7 nor more than 25, as
determined by the Board of Directors. The directors shall be elected at the
Annual Meeting of Shareholders, except as provided in Section 2.3. Each director
elected shall hold office until his successor is elected and qualified, except
that for any director who is an employee of the Corporation or any of its
affiliates at the time of election to the Board it shall be a qualification for
service as a director that such director shall remain so employed so that the
term of any such director shall automatically terminate upon termination of such
director's employment with the Corporation or such affiliate for any reason,
unless the Board, by majority vote, shall otherwise determine. Directors need
not be shareholders.
Section 2.2 PLACE OF MEETING. Meetings of the Board of Directors shall be held
at such place either within or without the State of Delaware or by telephone
conference call as shall be specified in the respective notices or waivers of
notice of such meetings.
Section 2.3 VACANCIES. If the office of any director or directors becomes vacant
by reason of death, resignation, retirement, disqualification, removal from
office, or otherwise, or a new directorship is created, a majority of the
remaining directors, though less than a quorum, may
<PAGE>
choose a successor or successors, or a director to fill the newly created
directorship, who shall hold office for the unexpired term or until the next
election of directors.
Section 2.4 GENERAL POWERS. The property and business of the Corporation shall
be managed by its Board of Directors which may exercise all such powers of the
Corporation and do all such lawful acts and things as are not, by the DGCL or by
the Restated Certificate of Incorporation or by these Bylaws, directed or
required to be exercised or done by the shareholders. The Board of Directors may
exercise the hereinbefore described powers, and any duly constituted and
authorized committee of the Board of Directors may exercise such powers as have
been delegated to it by the Board of Directors, without a meeting by the
unanimous execution of an instrument in writing.
Section 2.5 COMMITTEES OF DIRECTORS. The Board of Directors may designate one or
more committees, each committee to consist of two or more of the directors of
the Corporation which, to the extent provided by resolution of the Board of
Directors, shall have and may exercise the powers of the Board of Directors in
the management of the business and affairs of the Corporation; but no such
committee shall have the power or authority in reference to the following
matters: (a) approving or adopting, or recommending to the stockholders, any
action or matter expressly required by the DGCL to be submitted to shareholders
for approval or (b) adopting, amending or repealing any bylaw of the
Corporation. Such committees shall have such name or names as may be determined
from time to time by resolution adopted by the Board of Directors and, when
required by the Board, shall keep regular minutes of their proceedings and
report the same to the Board. The Board of Directors may appoint persons who are
not directors to serve on Board committees, provided that to the extent any such
committee exercises powers of the Board of Directors that have been specifically
delegated to it, such committee shall act solely by vote of members of the
committee who are also members of the Board of Directors.
Section 2.6 COMPENSATION OF DIRECTORS. Directors who are employees shall not
receive any stated salary for their services as directors, but, pursuant to
normal corporate expense reimbursement policies, shall receive reimbursement for
expenses of attendance at such meetings; provided that nothing herein contained
may be construed to preclude any Director from serving the Corporation in any
other capacity and receiving compensation therefore.
Section 2.7 ANNUAL MEETING. The annual meeting of the Board of Directors shall
be held immediately following and at the same place as the annual meeting of the
shareholders, or at such time and place as may be specified or fixed by the
Board of Directors, the Chairman of the Board, if any, the President or the
Secretary in the notice of such meeting or waiver thereof.
Section 2.8 NOTICES OF BOARD OF DIRECTORS MEETINGS; SPECIAL MEETINGS. Special
meetings of the Board of Directors may be held at any time on the call of the
Chairman of the Board, if any, or the President or at the request in writing of
any six (6) directors. Notice of any regular or special meeting, unless waived,
shall be given by mail or facsimile or courier to each director at his address
as the same appears on the records of the Corporation not less than one (1) day
prior to the day on which such meeting is to be held if such notice is by
facsimile or courier, and not less than five (5) business days prior to the day
on which the meeting is to be held if such notice is by mail. If the Secretary
shall fail or refuse to give such notice, then the notice may be given by the
officer or any one of the directors making the call. Any such meeting may be
held at such place as the Board may fix from time to time or as may be specified
or fixed in such notice or waiver thereof. Notice may be waived in writing by
any director, either before or after the meeting. Any meeting of the Board of
Directors shall be a legal meeting without any notice thereof having been given,
if all the directors shall be present thereat, and no notice of a meeting shall
be required to be given to any director who shall attend such meeting.
<PAGE>
Section 2.9 QUORUM AND MANNER OF ACTING. Except as otherwise provided in these
Bylaws, a majority of the total number of directors shall constitute a quorum at
any regular or special meeting of the Board of Directors. Except as otherwise
provided by the DGCL or by the Restated Certificate of Incorporation as amended,
or by these Bylaws, the act of a majority of the directors present at any
meeting at which a quorum is present shall be the act of the Board of Directors.
In the absence of a quorum, a majority of the directors present may adjourn the
meeting from time to time until a quorum be had. Notice of any adjourned meeting
need not be given.
Section 2.10 NOTICES. Whenever under the provisions of the DGCL or of the
Restated Certificate of Incorporation or of these Bylaws, notice is required to
be given to any director or shareholder, it shall not be construed to mean
personal notice, but such notice may be given in writing, by mail, by depositing
the same in a post office or letter box, in a post-paid sealed wrapper, or by
facsimile or courier, addressed to such director or shareholder at such address
as appears on the books of the Corporation, and such notice shall be deemed to
be given at the time when the same shall be thus mailed or sent by facsimile or
courier.
Section 2.11 WAIVERS OF NOTICE. Whenever any notice is required to be given
under the provisions of the DGCL or of the Restated Certificate of
Incorporation, or of these Bylaws, a waiver thereof in writing signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, or such person's or persons' attendance at such meeting, unless
such attendance is for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, shall be deemed equivalent thereto.
OFFICERS
Section 3.1 OFFICERS DESIGNATED. The officers of the Corporation shall be
elected by the Board of Directors at its annual meeting or any special meeting.
They may include a Chairman of the Board and shall include a President, a
Secretary, and such other officers as the Board of Directors may determine. One
person may hold any two of said offices except the offices of President and
Secretary.
Section 3.2 TENURE OF OFFICE. The officers of the Corporation shall hold office
until the next annual meeting of the Board of Directors and until their
respective successors are chosen and qualified, except (a) that the term of
office of any officer who is an employee of the Corporation shall automatically
terminate upon termination of such officer's employment by the Corporation for
any reason and (b) in case of the officer's prior resignation, death or removal.
The Board of Directors may also remove any officer at any time with or without
cause by the vote of a majority of the directors in office at the time.
Subordinate officers appointed by the President in accordance with Section 3.4
may be removed by the President.
Section 3.3 POWERS AND DUTIES OF OFFICERS. The officers of the Corporation shall
have such powers and duties in the management of the Corporation as may be
prescribed by the Board of Directors or delegated by the President and, to the
extent not so provided, as generally pertain to their respective offices,
subject to the control of the Board of Directors.
Section 3.4 SUBORDINATE OFFICERS, ETC. The President of the Corporation may
appoint such Assistant Vice Presidents, Assistant Secretaries, Assistant
Treasurers, or other Officers, and such agents as the President may determine,
to hold office for such period, and with such authority and to perform such
duties as the President may from time to time determine.
<PAGE>
Section 3.5 RESIGNATIONS. Any officer may resign at any time by giving written
notice to the Board of Directors or to the President or the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 3.6 VACANCIES. A vacancy in the office of President or Secretary for any
reason must be filled. A vacancy in any other office may be filled. Any vacancy
which is filled shall be filled for the unexpired portion of the term in the
same manner in which an officer to fill said office may be chosen pursuant to
Sections 3.1, 3.2 and 3.4.
SHARES OF STOCK
Section 4.1 REGULATIONS. Subject to the terms of any contract of the Corporation
and the DGCL, the Board of Directors may make such rules and regulations as it
may deem expedient concerning the issue, transfer, and registration of
certificates and uncertificated shares evidencing the ownership of shares of the
stock of the Corporation, including the issue of new certificates or the
registration on the Corporation's books of uncertificated shares, for lost or
destroyed certificates, and including the appointment of transfer agents and
registrars.
Section 4.2 TRANSFER OF SHARES. The Corporation may from time to time enter into
an agreement or agreements with one or more of its shareholders restricting the
transferability of its stock in accord with the general corporate purpose to
have its stock owned by persons actively engaged in the corporate business.
Subject to the terms of any such agreement, shares of the capital stock of the
Corporation shall be transferable on the books of the Corporation by the holder
thereof in person or by his duly authorized attorney, upon (i) the surrender and
cancellation of a certificate or certificates for a like number of shares;
and/or (ii) upon registration on the books of the Corporation of the transfer of
the respective uncertificated shares and the transmittal to the new registered
owner, any former registered owner, and any applicable pledgee of a written
statement advising of such transfer (as required pursuant to the DGCL). As
against the Corporation a transfer of shares can be made only on the books of
the Corporation and in the manner hereinabove provided, and the Corporation
shall be entitled to treat the registered holder of any share as the owner
thereof and shall not be bound to recognize any equitable or other claim to or
interest in such share on the part of any other person, whether or not it shall
have express or other notice thereof, save as expressly provided by the DGCL. In
the event shares of the Corporation are held by an Employee Trust under Section
[9.3], no transfer on the books of the Corporation shall be made if said
transfer would cause a violation of any provision of Title I of the Employee
Retirement Income Security Act of 1974 or the prohibited transaction rules of
Section 4975 of the Internal Revenue Code of 1986, as amended.
Section 4.3 DATE FOR DETERMINATION OF SHAREHOLDERS OF RECORD. The Board of
Directors of the Corporation shall have the power to fix in advance a date as a
record date for the determination of shareholders entitled to notice of, and to
vote at, any meeting of shareholders of the Corporation, and any adjournment
thereof; or entitled to receive the payment of any dividend; or the date for the
allotment of rights, or the date when any rights in respect of any change or
conversion or exchange of capital stock of the Corporation shall go into effect
or in connection with obtaining the consent of shareholders for any purpose.
Notwithstanding the transfer of any stock on the books of the Corporation after
any such record date fixed as aforesaid, only such shareholders as shall be
shareholders as of such record date shall be entitled notice of, and to vote at,
such meeting and any adjournment thereof, to receive payment of such dividend,
or to receive such allotment of rights, or to exercise such rights, or to give
such consent, as the case may be. If
<PAGE>
the Board of Directors shall fail to determine the record date for determining
shareholders entitled to notice of, and to vote at, any meeting of shareholders
of the Corporation, such date shall be established as provided by the DGCL.
MISCELLANEOUS PROVISIONS
Section 5.1 FISCAL YEAR. The fiscal year of the Corporation shall end on
June 30th of each year.
Section 5.2 BOOKS. The books of the Corporation may be kept (subject to any
provision contained in the DGCL) within or without the State of Delaware at such
place or places as may be designated from time to time by the Board of
Directors.
Section 5.3 FACSIMILES. Any copy, facsimile telecommunication or other reliable
reproduction of a writing, transmission or signature may be substituted or used
in lieu of the original writing, transmission or signature for any and all
purposes for which the original writing, transmission or signature could be
used, provided that such copy, facsimile telecommunication or other reproduction
shall be a complete reproduction of the entire original writing, transmission or
signature, as the case may be.
Section 5.4 DEPOSITORIES. The Board of Directors, the Chairman of the Board, if
any, the President, and such other officers as may be delegated authority by the
Board of Directors or one of the foregoing officers, and each of them, may
designate the banks, trust companies, or other depositories in which shall be
deposited from time to time, the money or securities of the Corporation. In the
case of a designation by the aforementioned officers, any such designation shall
require the approval of two of such officers, one of whom shall be the Treasurer
or the Vice President and Chief Financial Officer.
Section 5.5 CHECKS, DRAFTS, NOTES, ETC. All checks, drafts or other orders for
the payment of money and all notes or other evidences of indebtedness issued in
the name of the Corporation shall be signed by such officer or officers or agent
or agents as shall from time to time be designated by the Board of Directors or
as shall be designated by any two of the Chairman of the Board, if any, the
President, and the Executive Vice President or Chief Financial Officer, if any,
or one of the foregoing officers and another officer elected by the Board of
Directors pursuant to Section 3.1 hereof.
Section 5.6 CONTRACTS, ETC., HOW EXECUTED. Except as in the Bylaws otherwise
provide, the Board of Directors may authorize any officer, agent or agents, to
enter into any contract or execute and deliver any instrument in the name and on
behalf of the Corporation, and such authority may be general or confined to
specific instances.
Section 5.7 STOCK IN OTHER CORPORATIONS. Any shares of stock in any other
corporation which may from time to time be held by the Corporation may be
represented and voted at any meeting of shareholders of such other corporation
by the President, the Treasurer or the Secretary of the Corporation or by any
other person or persons thereunto authorized by Board of Directors or designated
by the President, or by any proxy designated by written instrument of
appointment executed in the name of this Corporation by its President or by such
officers as may be designated by him and attested by the Secretary or Assistant
Secretary.
<PAGE>
Section 5.8 INDEMNIFICATION.
(a) Each person who was or is a party or is threatened to be made a party to or
is involved in any action, suit or proceeding or alternative dispute
resolution procedure, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he
or she, or a person of whom he or she is the legal representative, is or
was a director or officer of the Corporation or is or was a director or
officer serving at the request of the Corporation as a director, manager,
officer, partner, trustee, employee or agent of another corporation or of a
partnership, limited liability company, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, shall
be indemnified and held harmless by the Corporation to the fullest extent
authorized by the laws of Delaware as the same now or may hereafter exist
(but, in the case of any change, only to the extent that such change
authorizes the Corporation to provide broader indemnification rights than
said law permitted the Corporation to provide prior to such change) against
all costs, charges, expenses, liabilities and losses (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or
to be paid in settlement) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a person
who has ceased to be a director or officer and shall inure to the benefit
of his or her heirs, executors and administrators. Until such time as there
has been a final judgment to the contrary, a person shall be presumed to be
entitled to be indemnified under this Section 5.8(a). The right to
indemnification conferred in this Section shall be a contract right and
shall include the right to be paid by the Corporation the expenses incurred
in defending any such proceeding in advance of its final disposition upon
receipt by the Corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it shall
ultimately be determined that the director or officer is not entitled to be
indemnified under this Section or otherwise. The Corporation may, by action
of its Board of Directors, provide indemnification to employees and agents
of the Corporation with the same scope and effect as the foregoing
indemnification of directors and officers.
(b) If a claim under subsection (a) of this Section is not paid in full by the
Corporation within thirty days after a written claim has been received by
the Corporation the claimant may at any time thereafter bring suit against
the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall also be entitled to be
paid the expense of prosecuting such claim. It shall be a defense to any
action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition
where the required undertaking has been tendered to the Corporation) that
the claimant has failed to meet a standard of conduct which makes it
permissible to indemnify the claimant for the amount claimed, but the
burden of proving such defense shall be on the Corporation. Neither the
failure of the Corporation (including its Board of Directors, independent
legal counsel, or its shareholders) to have made a determination prior to
the commencement of such action that indemnification of the claimant is
permissible in the circumstances because he or she has met such standard of
conduct, nor an actual determination by the Corporation (including its
Board of Directors, independent legal counsel, or its shareholders) that
the claimant has not met such standard of conduct, nor the termination of
any proceeding by judgment, order, settlement, conviction or upon a plea of
nolo contendere or its equivalent, shall be a defense to the action or
create a presumption that the claimant has failed to meet the required
standard of conduct.
(c) The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in
this Section shall not be exclusive of any other right which any person may
have or hereafter acquire under any
<PAGE>
statute, provision of the Restated Certificate of Incorporation, Bylaw,
agreement, vote of shareholders or disinterested directors or otherwise.
(d) The Corporation may maintain insurance, at its expense, to protect itself
and any director, manager, officer, partner, trustee, employee or agent of
the Corporation or another corporation, partnership, limited liability
company, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under
Delaware law.
(e) To the extent that any director, officer, employee or agent of the
Corporation is by reason of such position, or a position with another
entity at the request of the Corporation, a witness in any proceeding, he
or she shall be indemnified against all costs and expenses actually and
reasonably incurred by him or her or on his or her behalf in connection
therewith.
(f) Notwithstanding any amendment of this section which may have been approved
by the shareholders, this section may be added to, altered, amended or
repealed pursuant to Section 5.9 of these Bylaws.
(g) Any amendment, repeal or modification of any provision of this Section by
the shareholders or the directors of the Corporation shall not adversely
affect any right or protection of a director or officer of the Corporation
existing at the time of such amendment, repeal or modification.
Section 5.9 AMENDMENT OF BYLAWS. Except for Section 9 of these Bylaws (which by
its terms may be altered, amended or repealed only upon the affirmative vote of
holders of stock possessing at least 80% of the outstanding voting rights), in
accordance with authority expressly contained in the Restated Certificate of
Incorporation, these Bylaws may be added to, altered, amended, or repealed, and
new or other Bylaws may be made and adopted by vote of a majority of the Board
of Directors at any regular or special meeting of the Board, and without prior
notice of intent so to do.
Sections 6 - 8 [RESERVED]
RESTRICTION ON TRANSFERS OF STOCK
Section 9.1 RESTRICTION ON STOCK. Except for (i) transfers to the Corporation or
to trusts, personal holding companies or other entities satisfying the terms and
conditions of Section 9.2 or 9.3 below, (ii) reversions from trusts described in
Section 9.2 to the grantors thereof or their estates, or (iii) transfers from
personal holding companies or similar entities described in Section 9.2 to the
sole shareholders there of, no present or future shareholder shall transfer,
whether by way of sale, gift, hypothecation, trust distribution, will, intestacy
or any other disposition, any shares of any class of capital stock ("Stock") in
the Corporation now owned or hereafter acquired by such shareholder (including,
without limitation, shares of Stock acquired upon conversion or exchange of
other shares of Stock), without first giving the Corporation prior written
notice of his intention to so dispose of such Stock. Said notice to the
Corporation ("Disposition Notice") shall state the terms and conditions of the
proposed disposition, including the names of the transferees, the purchase price
and payment terms, if any, the type of disposition, and the number
<PAGE>
of shares to be transferred ("Offered Shares"). A shareholder giving a
Disposition Notice is herein sometimes called an "Offering Stockholder".
(a) The Corporation shall have the option for a period of thirty days following
the receipt of a Disposition Notice from an Offering Stockholder to buy on
such Closing Date, as is determined by the President or Secretary, part or
all of the Offered Shares at the price per share determined in accordance
with Section 9.5 of this Section 9, provided that the Corporation may buy
less than all of the Offered Shares if the balance of the Offered Shares is
contemporaneously purchased by Eligible Purchasers (or otherwise disposed
of in accordance with these Bylaws) or if the Offering Stockholder elects
to accept offers by the Corporation and/or Eligible Purchasers to purchase
less than all of the Offered Shares and to retain the balance of the
Offered Shares. If the Corporation does not elect to purchase all Offered
Shares, within thirty days after receipt of the Offering Stockholder's
Disposition Notice, it shall forward to the Offering Stockholder a list of
the names and addresses of all Eligible Purchasers together with a
description of their respective rights to purchase Offered Shares not
initially purchased by the Corporation.
The Offering Stockholder shall within fifteen days after receipt of such
list of Eligible Purchasers offer to sell the balance of the Offered Shares
to such Eligible Purchasers in accordance with their respective rights to
purchase set forth in such list.
(b) Elections by Eligible Purchasers to purchase Offered Shares under
subsection (a) hereof shall be by written notice delivered both to the
Corporation and to the Offering Stockholder within thirty days following
the receipt of the offer to sell from the Offering Stockholder as provided
in Section 9.1(a) hereof.
(c) The Corporation shall have the further option to buy or furnish Eligible
Purchasers for any Offered Shares not initially to be purchased by the
Corporation or by Eligible Purchasers under subsections (a) or (b) hereof
within 120 days following receipt by the Corporation of the Disposition
Notice.
(d) The Offered Shares, if any, not purchased under subsections (a), (b), or
(c) of this Section 9.1 may be disposed of within 150 days after receipt by
the Corporation of the Disposition Notice, but only to persons and only on
the terms and conditions set forth in the Disposition Notice. Any Offered
Shares not so transferred within such 150-day period may not thereafter be
transferred, except upon compliance with the terms of this Section 9 of the
Bylaws and as if they had not been previously offered hereunder. Any
attempt to transfer any Stock of the Corporation in contravention of the
provisions of this Section 9 shall be null and void and without legal
effect, except that such attempted transfer shall constitute a continuing
offer to sell all such Stock under Section 9.1(a) hereof. The price at
which such Stock may be purchased by the Corporation or Eligible Purchasers
shall be determined pursuant to Section 9.5 of this Section 9; such Stock
will be deemed to have been offered at the date of the attempted transfer;
and, for purposes hereof, such attempted transfer shall be deemed to
constitute the giving of a Disposition Notice under Section 9.1, but there
shall be no limitations on the time periods within which the Corporation
and/or Eligible Purchasers shall be required to exercise their rights
hereunder.
<PAGE>
Section 9.2 REVOCABLE TRUSTS; PERSONAL HOLDING CORPORATIONS.
(a) Anything in this Section 9 to the contrary notwithstanding, any shareholder
may, with the approval of the Board of Directors or such officer(s) as may
be designated by the Board of Directors for such purpose, transfer any or
all Stock of the Corporation now owned or hereafter acquired by him to a
revocable trust for the sole benefit of himself during his lifetime,
provided that:
(i) the trust instrument acknowledges that the Stock is held subject
to the terms and conditions of these Bylaws;
(ii) the trust, by its terms, provides that on the first to occur of:
(A) the termination of the trust,
(B) the ceasing of the shareholder to act as sole trustee of
the trust, or
(C) any event described in Section 9.4 with respect to the
settlor, all stock of the Corporation then held by the trust
will either revert to the shareholder or be offered for sale
by the same procedure as set forth in Section 9.1 hereof.
(iii) the shareholder is the sole trustee of said trust and the trust
grants to the shareholder and to no other person, corporation or
other entity full powers as trustee with respect to all Stock of the
Corporation at any time held by the Trust, including powers to
attend all meetings of shareholders, vote such shares and give
proxies with respect thereto, make all decisions with respect to the
trust's sale or purchase thereof, including the power to direct the
sale of some or all of the Stock of the Corporation at any time for
any reason deemed valid by said shareholder;
(iv) a copy of the trust, as from time to time amended, is at all times
kept on file by the Trustee thereof with the Secretary of the
Corporation; and
(v) the trust, by its terms, provides that any amendment that in any way
affects the Stock of the Corporation held by the trust or any of the
provisions relating to such Stock set forth in subparagraphs
[(a)](i) through [d](iv) above, must be approved in advance by the
President, Treasurer or Secretary of the Corporation or shall be
null and void and of no effect with respect to such Stock.
(b) Personal Holding Corporations. Anything in this Section 9 to the contrary
notwithstanding, any non-U.S. resident shareholder of the Corporation's
stock (for purposes of this paragraph, the "Shareholder") may, with the
approval of the Board of Directors or such officer(s) as may be designated
by the Board of Directors for such purpose, transfer any or all Stock of
the Corporation now issued or hereafter acquired by him (or direct the
Corporation to issue stock allocated by the Corporation to him) to a
personal holding corporation incorporated under the laws of a jurisdiction
outside of the United States which corporation is wholly-owned by such
Shareholder (or such similar entity under the laws of the jurisdiction in
which such Shareholder is domiciled which is wholly-owned by such
Shareholder and which is approved by the General Counsel of the Corporation
in his discretion), provided that:
<PAGE>
(i) One hundred percent (100%) of the stock of such personal holding
corporation is owned solely by the Shareholder (or the ownership of
such other similar approved entity is one hundred percent (100%)
vested in the Shareholder) and no person, corporation or other entity
other than the Shareholder shall have any rights or powers with
respect to the ownership, control or direction of any stock of such
personal holding corporation or other similar approved entity or any
stock of the Corporation at any time held by such personal holding
corporation or other similar approved entity, including, without
limitation, any right to attend meetings of shareholders, vote such
shares or give proxies with respect thereto;
(ii) the Articles of Incorporation, Bylaws and any other charter or
governing documents of such personal holding corporation or other
similar approved entity contain restrictions on the transfer of its
stock which have substantially the same effect as the stock transfer
restrictions contained in these Bylaws, and are approved in writing by
the General Counsel of the Corporation, are not amended without such
approval, and certified or notarized copies thereof are at all times
kept on file with the Secretary of the Corporation;
(iii)all stock certificates of the personal holding corporation (or
similar documents evidencing ownership of such other similar approved
entity) contain a legend identifying the existence of such transfer
restrictions;
(iv) such personal holding corporation or similar approved entity shall
agree in writing with the Corporation not to issue or allot any
additional stock of any class to anyone other than the Shareholder;
(v) the Shareholder and the personal holding corporation or other similar
approved entity agree with the Corporation in writing, in a form
approved by the General Counsel of the Corporation, that they will
abide by all of the terms restricting the transfer of the
Corporation's stock as set forth in these Bylaws (as they may be
amended from time to time) and that they will take or cause to be
taken all steps which may be required in order to assure compliance
with the stock transfer restrictions contained in these Bylaws,
including an agreement not to transfer the stock of the personal
holding corporation (or other evidence of ownership of a similar
approved entity); and
(vi) the personal holding corporation (or similar approved entity) and the
Shareholder shall agree in writing with each other and the Corporation
that, upon the first to occur of:
(A) any event described in Section 9.4 with respect to the
Shareholder;
(B) the bankruptcy, insolvency, dissolution (either voluntary or
involuntary), sale or merger of the personal holding corporation
or other similar approved entity, or the sale or attempted sale
of any of its stock, other than in accordance with these Bylaws,
or its assets, or the imposition of any lien upon the stock of
the Corporation or other assets owned by the personal holding
corporation or other similar approved entity; or
(C) the amendment of the Articles of Incorporation, Bylaws, or other
charter or governing documents of such personal holding
corporation or other similar approved entity, which amendment is
not approved in writing by
<PAGE>
the General Counsel of the Corporation, or any breach of any of
the provisions of subparagraphs (i) through (v) of this
subsection;
all stock of the Corporation then owned by the personal holding
corporation or other similar approved entity will be deemed to be
offered for sale by the same procedures as set forth in Section 9.1
hereof.
Section 9.3 EMPLOYEE TRUSTS. Anything in this Section 9 to the contrary
notwithstanding, Stock of the Corporation may be owned by one or more trusts
maintained exclusively for the benefit of employees of the Corporation and/or
any of its present or future subsidiaries and either qualified under Section
401(a) or 501(a) of the Internal Revenue Code of 1986 (or any successor
statute), or approved by the Board of Directors of the Corporation, provided
that:
(a) upon the occurrence of any event specified in Section 9.4 with respect to
any employee who is then a beneficiary of such trust, the trust shall
offer for sale in accordance with the terms and provisions of Section 9.4
hereof:
(i) all Stock of the Corporation, if any, allocated to the separate
account of such employee under the trust's terms; and
(ii) a pro rata portion of all Stock of the Corporation held by such
trust and not allocated to the separate accounts of beneficiaries,
such pro rata portion to be based upon such actuarial and other
considerations as the trustees of the trust and the Board of
Directors of the Corporation shall, in their absolute discretion,
deem appropriate.
Section 9.4 DEATH, TERMINATION OF EMPLOYMENT, BANKRUPTCY, LIENS. On the death of
a shareholder, or upon the termination of a shareholder's employment with the
Corporation or any subsidiary of the Corporation, whether said termination be by
retirement, voluntary or involuntary termination, or for any other reason, or
upon the Corporation receiving actual knowledge that a shareholder or any
personal holding corporation or similar approved entity as described in Section
9.2 has become bankrupt or suffered or permitted the imposition of any lien or
attachment on any Stock of the Corporation owned by such shareholder or any
trust, personal holding company or other similar approved entity holding Stock
for his benefit, whichever first occurs ("Determination Date"), all Stock of the
Corporation then owned by such shareholder or his representative or held for his
benefit in any trust, personal holding company or other entity permitted
hereunder shall be deemed offered for sale and to constitute Offered Shares
subject to purchase by the same procedure as set forth in Section 9.1 of this
Section 9, excepting that, purchase of such shares shall occur on such Closing
Date (not more than 245 days after the Determination Date), as the President or
Secretary shall determine with payment to be made in accordance with Section 9.6
hereof. Any of such shares of Stock not elected to be purchased by the
Corporation or by Eligible Purchasers within 245 days after the Determination
Date shall be purchased by the Corporation unless and to the extent that the
Corporation is prohibited from doing so by the DGCL. For purposes of this
Section 9.4, notwithstanding any other provision of this Bylaw, a shareholder
shall be deemed to own all Stock transferred by him to a trust satisfying the
terms and conditions of Section 9.2 hereof and such trust shall have the same
obligations with respect to the sale of such Stock hereunder as the shareholder
would have had if the Stock had not been transferred to said trust.
<PAGE>
Section 9.5 PURCHASE PRICE.
(a) The Purchase Price for any Stock of the Corporation shall be determined in
accordance with this Section 9.5, excepting that if a Disposition Notice
given under Section 9.1 indicates an intention to make a bona fide sale of
Stock for value, then the Purchase Price for any Stock which is the subject
of such notice (including Stock which is being offered pursuant to the
terms of Section 9.2 or 9.3) shall equal the price set forth in such
notice, if such price is lower than the Purchase Price determined
hereunder.
(b) Except as provided in subparagraph (a) hereof and subject to subparagraph
(e) hereof, the Purchase Price for any Stock purchased by an Eligible
Purchaser on or after July 1, 1996 shall be the Formula Book Value of such
Stock as of the last day of the Corporation's fiscal year coincident with
or next preceding the Closing Date with respect to such purchase.
(c) Except as provided in subparagraph (a) hereof, the Purchase Price for any
Stock purchased by the Corporation hereunder shall be determined as follows
(subject to appropriate adjustment to reflect stock splits, stock
dividends, combinations of shares and similar recapitalizations):
The Purchase Price (P) per share for purchases by the Corporation
with a date of Disposition Notice or a Determination Date on or
after July 1, 1990 shall be determined by the following formula:
P= [B x(l +(r x n/12))] +(d x n/12)
B = Formula Book Value of such Stock as of the last day of the
Corporation's fiscal year coincident with or next preceding the
date of Disposition Notice under Section 9.1 or a Determination
Date under Section 9.4, whichever is applicable;
r = the actual percentage increase, if any, in the Formula Book
Value of such Stock as of the last day of the Corporation's
fiscal year during which such Disposition Notice or Determination
Date occurs over the Formula Book Value as of the last day of the
Corporation's prior fiscal year;
n = the number of completed months between (1) the last day of
the Corporation's fiscal year coincident with or next preceding
such Disposition Notice or Determination Date, and (2) the date
of such Disposition Notice or such Determination Date, whichever
is applicable; and
d = The dividend, if any, per share declared for such Stock for
the fiscal year during which such Disposition Notice or
Determination Date occurs (unless the shareholder actually
receives the dividend for such year, in which case d = 0).
(d) If, and only if, the Closing Date for the purchase by the Corporation or an
Eligible Purchaser of any Stock under Section 9.4 hereof is more than
thirty (30) days after the Determination Date, the Corporation will pay the
selling shareholder interest on the amount of the Net Book Value denoted as
"B" in the formula set forth in subparagraph (c) hereof at the Loan Rate
(as described in Section 9.6(b)(iii) hereof) from the Determination Date to
the Closing Date.
(e) Except as provided in subparagraph (a) hereof, with respect to any
purchases of Stock by an Eligible Purchaser from a shareholder other than
the Corporation, the Corporation
<PAGE>
will pay the selling shareholder an amount which is equal to "P" minus "B"
in the formula set forth in subparagraph (c) hereof.
Section 9.6 PAYMENT.
(a) The Purchase Price for Stock of the Corporation purchased hereunder by an
Eligible Purchaser shall be paid in cash on the Closing Date, subject to
Section 9.5(e) hereof, except as the purchaser and seller may otherwise
agree.
(b.i) Payments by the Corporation of the portion of the Purchase Price
representing the pro rata increase, if any, in the Net Book Value of
the Stock and the pro rata dividend may be made in multiple
installments as may be determined by the President or Secretary from
time-to-time, but no such installment shall be made later than
eighteen (18) months after the Closing Date except as provided in
subparagraph (b)(ii) hereof.
(b.ii)Notwithstanding the provisions of subparagraph (b)(i) hereof, the
Purchase Price for Stock of the Corporation purchased hereunder by
the Corporation may be paid, at the option of the Corporation, (i)
all in cash, or (ii) twenty-five percent (25%) in cash and the
balance in a non-negotiable promissory note of the Corporation
payable over a period of not more than three (3) years following the
Closing Date, no part of such note to be paid in the same calendar
year in which the stock is purchased unless such note is paid in
full within such calendar year, such note to bear interest on the
unpaid balance thereof at the Loan Rate (as hereinafter defined), or
(iii) on such other terms as seller and the Corporation may agree in
writing.
(b.iii) "Loan Rate" shall mean the interest rate for Wyatt shareholder
loans in effect at such bank or banks as the Board of Directors, the
President or the President's designee shall have approved for such
loans on the date of issue of a note pursuant to subparagraph
(b)(ii) hereof, or the Determination Date pursuant to Section 9.5(d)
hereof, or 10% per annum, whichever is lower.
Section 9.7 ENDORSEMENT ON STOCK CERTIFICATES. All certificates representing
Stock of the Corporation shall be conspicuously endorsed with a legend
substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, HYPOTHECATED OR
OTHERWISE DISPOSED OF EXCEPT UNDER THE CIRCUMSTANCES SPECIFIED IN SECTION
9. OF THE BYLAWS OF THE CORPORATION, A COPY OF WHICH MAY BE OBTAINED FROM
THE SECRETARY OF WATSON WYATT & COMPANY WHO WILL MAIL A COPY THEREOF
WITHOUT CHARGE TO THE HOLDER HEREOF WITHIN 5 DAYS OF A WRITTEN REQUEST
THEREFOR."
Section 9.8 [RESERVED]
<PAGE>
Section 9.9 DEFINITIONS.
(a) The term "Eligible Purchasers", as used herein, shall mean any of the
following persons or entities:
(i) full-time employees or regular part-time employees of the
Corporation or its subsidiaries who satisfy criteria approved from
time-to-time by the Board of Directors;
(ii) a partner engaged full-time in a partnership practice of any
affiliate or subsidiary, if applicable, of the Corporation;
(iii) a director of the Corporation or any subsidiary of the
Corporation;
(iv) a corporation, partnership, association, or other entity with which
the Corporation has an affiliated business relationship, as
designated from time to time by the Board of Directors; or
(v) full-time employees or regular part-time employees of any
corporation, partnership, association, or other entity with which
the Corporation has an affiliated business relationship as
designated from time to time by the Board of Directors and who
satisfy criteria approved from time to time by the Board of
Directors.
The Board of Directors shall designate which persons in the categories of
persons set forth above shall be deemed to be Eligible Purchasers with
respect to any particular transaction. Designation as an Eligible Purchaser
in connection with any offer and sale shall not create or imply any right
to be so designated in connection with any other offer or sale or, if so
designated, to be designated on the same terms and conditions.
(b) Net Book Value of Common Stock as used herein shall mean the consolidated
net book value of the Common Stock of the Corporation determined, on an
accrual basis, by generally accepted accounting principles except that in
computing such Net Book Value as of June 30, 1984, or any subsequent fiscal
year end, consolidated assets of the Corporation consisting of subscriber
lists, computer software and data banks used principally in compensation
survey or related businesses carried on by the Corporation or any
subsidiary shall be valued at 50% of the Consolidated income received by
the Corporation in respect of such business during the fiscal year then
ended. Formula Book Value as used herein shall mean 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. Formula Book
Value shall be determined by the independent certified public accountants
of the Corporation from the Corporation's consolidated financial statement
prepared on an accrual basis in accordance with generally accepted
accounting principles as certified by such accountants, except as described
above. Such determinations shall be conclusive and binding upon the
Corporation and all holders of stock.
(c) The term "Closing Date" hereunder shall mean the time established by the
President or Secretary pursuant to Section 9.1, 9.4 or 9.5 hereof.
<PAGE>
(d) The term "Corporation" as used herein in Section 9 shall mean the
Corporation, a Subsidiary, or an Affiliate as defined in ARTICLE
FOURTEENTH of the Restated Certificate of Incorporation.
Section 9.10 BENEFIT. The rights and restrictions contained herein shall be
binding upon and inure to the benefit of all present and future shareholders of
the Corporation, their heirs, executors, administrators, successors and assigns.
Section 9.11 AMENDMENT. Except as provided below, this Section 9 of the Bylaws
of the Corporation 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.
If any such alteration, amendment or repeal affects any class or classes
adversely, then, in addition to the affirmative vote required above, the
affirmative vote of holders of at least a majority of the outstanding shares of
each class so affected, voting separately as a class, shall be required, unless
the effect of such alteration, amendment or repeal is adverse to all classes on
a substantially equivalent basis. Notwithstanding the foregoing, any amendment
to this Section 9 of the Bylaws of the Corporation describing the Purchase Price
of any class of Stock hereafter authorized shall require only such affirmative
vote of shareholders as Section 242 of the DGCL, as then in effect, requires to
amend the Corporation's Restated Certificate of Incorporation to authorize the
issuance of such class.
SECOND AMENDMENT
TO
THIRD AMENDED AND RESTATED
CREDIT AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AND SECURITY
AGREEMENT (this "Second Amendment"), dated as of April 30, 1997, is entered into
among Watson Wyatt & Company (formerly known as The Wyatt Company) (d/b/a Watson
Wyatt Worldwide) ("Wyatt"), Watson Wyatt Investment Consulting, Inc. (formerly
known as Wyatt Investment Consulting, Inc.) ("WWIC" and, together with Wyatt,
the "Companies"), NationsBank, N.A. ("NationsBank"), as a Bank and 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 the Wellspring Joint
Venture.
C. Wellspring Joint Venture is in the final stages of negotiating a five
year services agreement with Federal Express Corporation ("Federal Express")
scheduled to commence September 1, 1997. As a condition to entering into the
agreement, Federal Express is requesting a separate guaranty from Wyatt and from
State Street Bank and Trust Company, for the benefit of Wellspring Joint
Venture, in the amount of $5,310,000 each (the "Federal Express Guaranty").
D. The Companies have requested that the Banks agree to modify certain of
the covenants and agreements contained in the Credit Agreement to permit the
Federal Express Guaranty.
E. The Banks have agreed to execute and deliver this Second
Amendment on the terms and conditions set forth herein.
<PAGE>
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. Amendment.
Section 7.2(a) of the Credit Agreement is hereby amended by replacing
subsection (iv) thereof in its entirety with the following:
(iv) guaranty and other contingent obligations, excluding
contingencies arising out of office and equipment leases and the Guaranty,
which shall not be greater than $7,500,000 in the aggregate at the end of
any fiscal quarter.
2. Condition Precedent. This Second Amendment shall not be
effective until the Agent has received copies of this Second Amendment duly
executed by the Companies and the Majority Banks.
3. 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 Second Amendment shall in no manner adversely affect or impair such liens
and security interests.
4. Representations and Warranties. Each Company hereby represents and
warrants to the Banks and the Agent that (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 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 Second 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
such Company other than as previously disclosed to the Banks.
5. No Other Changes. Except as expressly modified and amended in
this Second Amendment, all of the terms, provisions and conditions of the
Credit Agreement and the other Loan Documents shall remain unchanged.
6. Counterparts. This Second 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.
<PAGE>
7. ENTIRETY. THIS SECOND 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.
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment
as of the date first above written.
COMPANIES
WATSON WYATT & COMPANY (f/k/a
The Wyatt Company) (d/b/a Watson
Wyatt Worldwide)
ATTEST: /S/Eric B. Schweizer By: /S/Barbara L. Landes
Name: Eric B. Schweizer Name: Barbara L. Landes
Title: Treasurer Title: V.P. Finance and CFO
WATSON WYATT INVESTMENT
CONSULTING, INC. (f/k/a Wyatt
Investment Consulting, Inc.)
WITNESS: /S/Elaine S. Wiggins By: /S/Walter W. Bardenwerper
Name: Elaine S. Wiggins Name: Walter W. Bardenwerper
Title: Notary Public Title: Secretary
[Signatures Continued]
<PAGE>
BANKS
NATIONSBANK, N.A., as Agent
and as a Bank
By: /S/Elizabeth S. Duff
Name: Elizabeth S. Duff
Title: Vice President
THE FIRST NATIONAL BANK OF
CHICAGO (successor in interest to
NBD Bank)
By: /S/Amy L. Golz
Name: Amy L. Golz
Title: Vice President
MELLON BANK, N.A.
By: /S/J. Michael Troutman
Name: J. Michael Troutman
Title: Vice President
LIST OF SUBSIDIARIES OF WATSON WYATT & COMPANY
WATSON WYATT & COMPANY
SUBSIDIARIES AND AFFILIATES
OWNERSHIP BY
COUNTRY COMPANY NAME THE COMPANY
- ------- ------------ ------------
United States Watson Wyatt Investment Consulting, Inc. 100%
(including Wellspring Resources LLC(14) 50%
Puerto Rico) Wyatt Data Services, Inc. 100%
Wyatt Preferred Choice, L.L.C. 100%
Wyatt Asset Services, Inc. 100%
Watson Wyatt & Company II 100%
Watson Wyatt International, Inc. 100%
Wyatt Software Services, Inc. 100%
Argentina Watson Wyatt Argentina S.A. (4) 100%
Australia Watson Wyatt Australia Pty Ltd 100%
WyComp Pty. Limited(15) 100%
Barbados Watson Wyatt (Barbados) Limited(4) 100%
Watson Wyatt Management (Barbados) Limited(4) 100%
Belgium G&H Consulting Actuaries B.V.(6) 100%
Watson Wyatt S.A. 50.10%
Brazil Watson Wyatt Brasil Ltda. (9) 99%
Canada Watson Wyatt Company Limited 100%
China Watson Wyatt China Ltd. being formed
Colombia Watson Wyatt Colombia S.A. (4) 100%
France Watson Wyatt S.A.R.L. 50.10%
Germany Watson Wyatt GmbH 50.10%
Wyatt Bode Grabner GmbH(10) 50%
Hong Kong Watson Wyatt Hong Kong Limited(4) 100%
Watson Wyatt Systems Limited (13) 100%
India Watson Wyatt India Private Limited(5) 60%
Indonesia P.T. Wyatt Purbajaga(3) 60%
Italy Watson Wyatt S.r.l. 50.10%
Japan Watson Wyatt K.K. (4) 100%
Malaysia Watson Wyatt (Malaysia) Sdn. Bhd. (4) 100%
Mauritius Watson Wyatt Holdings (Mauritius) Limited(11) 100%
Mexico Watson Wyatt Mexico, S.A. de C.V. (4) 100%
Netherlands Watson Wyatt B.V. 50.10%
New Zealand Retirement Advisory Services (NZ) Limited 100%
Retirement Trustees NZ Limited 100%
Watson Wyatt New Zealand Limited4 100%
Philippines Watson Wyatt Philippines, Inc. (2) 40%
Shanghai Watson Wyatt Shanghai being formed
Singapore Watson Wyatt Singapore Pte. Ltd. (4) 100%
Spain Watson Wyatt de Espana, S.A. 50.10%
Sri Lanka Watson Wyatt Lanka (Private) Limited(12) 100%
Sweden Watson Wyatt AB 50.10%
Switzerland Watson Wyatt SA 50.10%
Thailand Watson Wyatt Thailand Limited being formed
U.K. Graham & Company Limited(7) 100%
PCL (1991) Limited(7) 100%
PCL Limited(7) 100%
The Wyatt Company (UK) Limited(7) 100%
The Wyatt Company Holdings Limited(4) 100%
Watson Wyatt Holdings (Europe) Limited 50.10%
Watson Wyatt International Pension Trustees, Ltd. 50.10%
Watson Wyatt Limited 50.10%
Wyatt Financial Services Limited(7) 100%
Wyatt Pension Plan Trustee Limited(7) 100%
- ----------
(1) Includes direct and indirect ownership by Watson Wyatt & Company
(2) Other 60% held by Philippine nationals; nominee shareholders
(3) Name change pending
(4) 100% held by Watson Wyatt International, Inc.
(5) Joint Venture; Other 40% held by ABC Consultants Private, Limited
(6) 100% held by Watson Wyatt SA (Switzerland subsidiary)
(7) 100% held by The Wyatt Company Holdings Limited
(8) Owned beneficially 100% by Watson Wyatt & Company
(9) Other 1% held by Wyatt Data Services, Inc.
(10) Other 50% held by Drs. Bode and Grabner
(11) 60% held by Watson Wyatt International, Inc.; 20% held by each of Watson
Wyatt Hong Kong Limited and Watson Wyatt Company Limited
(12) 100% held by Watson Wyatt Singapore Pte. Ltd.
(13) 100% held by Watson Wyatt Hong Kong Limited
(14) Joint Venture; Other 50% held by State Street Bank & Trust Company
(15) 100% held by Watson Wyatt Australia Pty. Ltd.
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (33-317553) of Watson Wyatt & Company of our report dated
July 23, 1997 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-26 of this Form 10-K.
/S/ PRICE WATERHOUSE LLP
- ------------------------
PRICE WATERHOUSE LLP
Washington, D.C.
September 24, 1997
Exhibit 24
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Form S-8 (33-317553) pertaining to the Wyatt Stock Purchase Plan of Watson
Wyatt and Company, formerly the Wyatt Company, of our report dated July 18,
1997, with respect to the financial statements of Wellspring Resources LLC
included in Form 10-K of Watson Wyatt and Company for the year ended June 30,
1997.
/S/ Ernst & Young LLP
- ---------------------
Ernst & Young LLP
Jacksonville, Florida
September 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jun-30-1997
<PERIOD-START> Jul-01-1996
<PERIOD-END> Jun-30-1997
<CASH> 26,257
<SECURITIES> 0
<RECEIVABLES> 126,286
<ALLOWANCES> 2,525
<INVENTORY> 0
<CURRENT-ASSETS> 157,305
<PP&E> 129,392
<DEPRECIATION> 92,347
<TOTAL-ASSETS> 331,778
<CURRENT-LIABILITIES> 135,998
<BONDS> 111,543
0
0
<COMMON> 18,130
<OTHER-SE> 65,756
<TOTAL-LIABILITY-AND-EQUITY> 331,778
<SALES> 0
<TOTAL-REVENUES> 510,998
<CGS> 431,137
<TOTAL-COSTS> 502,826
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,506
<INCOME-PRETAX> 1,954
<INCOME-TAX> 889
<INCOME-CONTINUING> 1,605
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 898
<EPS-PRIMARY> .05
<EPS-DILUTED> 0
</TABLE>
Financial Statements
Wellspring Resources LLC
Year ended June 30, 1997 and
Three Months ended June 30, 1996
with Report of Independent Auditors
<PAGE>
Wellspring Resources LLC
Financial Statements
Year ended June 30, 1997 and
Three Months ended June 30, 1996
Contents
Report of Independent Auditors..............................................1
Audited Financial Statements
Balance Sheets..............................................................2
Statements of Operations....................................................3
Statements of Changes in Partners' Equity...................................4
Statements of Cash Flows....................................................5
Notes to Financial Statements...............................................6
<PAGE>
Report of Independent Auditors
Board of Directors
Wellspring Resources LLC
We have audited the accompanying balance sheets of Wellspring Resources LLC (the
Company) as of June 30, 1997 and 1996, and the related statements of operations,
and cash flows for the twelve and three month periods then ended. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at June 30, 1997
and 1996, and the results of its operations and its cash flows for the twelve
and three month periods then ended, in conformity with generally accepted
accounting principles.
/S/ Ernst & Young LLP
- ---------------------
Ernst & Young LLP
Jacksonville, Florida
July 18, 1997
-1-
<PAGE>
Wellspring Resources LLC
Balance Sheets
<TABLE>
<CAPTION>
June 30
ASSETS 1997 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,159,664 $ 6,326,590
Receivables from clients 3,077,787 -
Receivable from affiliates, net 11,009,153 11,248,157
Deferred client implementation costs - current portion, net of
accumulated amortization 3,133,109 -
Other current assets 135,595 143,048
------------- -------------
Total current assets 20,515,308 17,717,795
Fixed assets, net of accumulated depreciation 9,883,020 6,001,699
Deferred software development costs, net of accumulated amortization
37,157,057 16,309,000
Deferred client implementation costs - non-current, net of accumulated
amortization 10,595,776 3,794,883
Other intangible assets, net of accumulated amortization 500,000 916,667
============= =============
Total assets $78,651,161 $44,740,044
============= =============
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $11,220,020 $ 7,858,200
Deferred revenue - current portion 1,699,124 -
------------- -------------
Total current liabilities 12,919,144 7,858,200
Non-current liabilities:
Deferred revenue - non-current portion 6,961,094 235,000
Accrued retirement benefits 306,168 -
------------- -------------
Total non-current liabilities 7,267,262 235,000
Commitments and contingent liabilities
------------- -------------
Total liabilities 20,186,406 8,093,200
Partners' equity
Partners' contributions 73,500,000 39,462,000
Retained (deficit) (15,035,245) (2,815,156)
------------- -------------
Total partners' equity 58,464,755 36,646,844
------------- -------------
Total liabilities and partners' equity $78,651,161 $44,740,044
============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
-2-
<PAGE>
Wellspring Resources LLC
Statements of Operations
<TABLE>
<CAPTION>
Three
Months
Year ended ended
June 30, June 30,
1997 1996
------------- -------------
<S> <C> <C>
Client Fees $45,088,170 $10,829,487
Operating costs:
Salaries and benefits 23,038,910 4,853,592
Subcontracted services 20,014,717 6,025,063
Occupancy and communications 5,908,028 879,377
Office expense 3,862,196 914,145
Depreciation 1,792,082 966,490
Amortization 2,312,767 83,333
------------- -------------
Total operating costs 56,928,700 13,722,000
------------- -------------
Loss from operations (11,840,530) (2,892,513)
Non-operating income (expense):
Interest income 206,257 77,357
Interest expense (585,816) -
============= =============
Net loss $(12,220,089) $(2,815,156)
============= =============
</TABLE>
SEE ACCOMPANYING NOTES.
-3-
<PAGE>
Wellspring Resources LLC
Statements of Changes in Partners' Equity
<TABLE>
<CAPTION>
Total
Retained Partners' Partners'
(Deficit) Contributions Equity
------------- ------------- -------------
<S> <C> <C> <C>
Balance at April 1, 1996 $ - $ - $ -
Net loss (2,815,156) - (2,815,156)
Partners' contributions - 39,462,000 39,462,000
------------- ------------- ------------
Balance at June 30, 1996 (2,815,156) 39,462,000 36,646,844
Net loss (12,220,089) - (12,220,089)
Partners' contributions - 34,038,000 34,038,000
------------- ------------- ------------
Balance at June 30, 1997 $(15,035,245) $73,500,000 $58,464,755
============= ============= ============
</TABLE>
SEE ACCOMPANYING NOTES.
-4-
<PAGE>
Wellspring Resources LLC
Statements of Cash Flows
<TABLE>
<CAPTION>
Three
Months
Year ended Ended
June 30, June 30,
1997 1996
------------- --------------
------------- --------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(12,220,089) $(2,815,156)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 1,792,082 966,490
Amortization of software development costs, implementation costs and
intangible assets 2,312,767 83,333
Change in working capital 836,659 (3,533,005)
------------- -------------
Net cash used in operating activities (7,278,581) (5,298,338)
Cash flows from investing activities
Purchases of fixed assets (5,673,404) (6,968,189)
Investment in software development (21,949,159) (17,309,000)
Investment in client implementations (2,303,782) (3,559,883)
------------- -------------
Net cash used in investing activities (29,926,345) (27,837,072)
Cash flows from financing activities
Capital contributions from affiliates 34,038,000 39,462,000
------------- --------------
Net cash provided by financing activities 34,038,000 39,462,000
------------- --------------
Net (decrease) increase in cash and cash equivalents (3,166,926) 6,326,590
Cash and cash equivalents at beginning of period 6,326,590 -
============= =============
Cash and cash equivalents at end of period $ 3,159,664 $ 6,326,590
============= =============
</TABLE>
-5-
SEE ACCOMPANYING NOTES.
<PAGE>
Wellspring Resources LLC
Notes to Financial Statements
June 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Wellspring Resources LLC (the Company) was formed on April 1, 1996 as a joint
venture of Watson Wyatt Worldwide (Wyatt) and State Street Global Advisors
(State Street) with equal ownership. The Company previously operated as a
separate division of Wyatt under the name of Wyatt Preferred Choice (WPC). The
Company operates principally as an employee benefits outsourcing firm with
ranges of services including administration and processing of corporate savings
plans, defined benefit and contribution plans, and health and welfare plans.
The Company was created with the Wyatt contribution of software development
costs related to WPC, along with an equal contribution consisting of cash and
certain fixed assets from State Street. The Company, from its inception, has
focused on building and maintaining its own client base as well as servicing
certain contractual relationships owned by Wyatt. The Company has leveraged the
use of the contributed software technology to service its own client base which
it continues to build.
The Company, operating as a limited liability partnership, is a pass-through
entity which incurs no federal income taxes; however, it is obligated for
payments of various state income taxes and ad valorem taxes which ultimately are
passed to the joint venture partners.
ACCOUNTING PERIODS
The Company's two accounting periods referred to hereafter are the twelve months
ended June 30, 1997 and the three months ended June 30, 1996.
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, deferred software and development costs, depreciation and amortization,
asset write-downs and employee benefit plans.
-6-
<PAGE>
Wellspring Resources LLC
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Fees related to long-term contracts for administrative and recordkeeping
services are recognized as income when earned based on terms of the contract.
CASH AND CASH EQUIVALENTS
The Company considers short-term, highly liquid investments with original
maturities of 90 days or less to be cash equivalents.
RECEIVABLES FROM CLIENTS
Billed receivables from clients are presented at their billed amount less an
allowance for doubtful accounts, if any. Unbilled receivables are stated at
their estimated net realizable value. The Company has determined that none of
its receivables were uncollectible as of June 30, 1997 and 1996. The total
amount of unbilled receivables at June 30, 1997 was $792,262; there were no
unbilled receivables at June 30, 1996.
DEFERRED SOFTWARE DEVELOPMENT COSTS
Deferred software development costs includes costs associated with products that
are under development by the Company for use in providing services to current
and future clients. Deferred software development costs includes certain systems
development and enhancement costs, which are specifically identifiable and which
will be associated with long-term contracts for outsourcing and recordkeeping
services. Deferred software development costs will be amortized over the useful
lives of the products.
The Company had invested $38,256,057 and $16,309,000 in deferred software
development at June 30, 1997 and 1996, respectively. Accumulated amortization of
deferred software development costs was $1,099,000 at June 30, 1997.
There was no accumulated amortization at June 30, 1996.
-7-
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company assesses the potential for impairment of its deferred software
development assets based upon whether it is probable that undiscounted future
cash flows will be less than the net book value of the deferred costs. At June
30, 1997 and 1996, management does not believe that any such impairment exists.
DEFERRED CLIENT IMPLEMENTATION COSTS AND REVENUES
The Company incurs costs associated with converting and/or creating employee
databases which are required for providing services to its clients. Such
pre-operational costs are deferred until the initiation of operations (on a
client/service specific basis). Upon commencement of a service for a specific
client all deferred implementation costs associated with such service are
ratably amortized over the remaining life of the contract governing the specific
client service.
The Company had invested $14,523,883 and $3,794,883 in deferred client
implementation costs at June 30, 1997 and 1996, respectively. Accumulated
amortization of deferred client implementation costs was $797,100 at June 30,
1997. There was no accumulated amortization at June 30, 1996.
The Company receives fee revenues from its clients for the implementation of
contracts. The recognition of such fees is also deferred until the related
contracts become operational. Deferred fee income was $8,660,218 and $235,000 at
June 30, 1997 and 1996, respectively.
The Company assesses the potential for impairment of its deferred client
implementation assets based upon whether it is probable that undiscounted future
cash flows will be less than the net book value of the deferred costs. At June
30, 1997 and 1996, management does not believe that any such impairment exists.
OTHER INTANGIBLES
The Company's other intangibles include purchased employee benefit software
packages from Wyatt. Accordingly, the $1,000,000 original cost of these packages
had accumulated amortization of $500,000 and $83,333 as of June 30, 1997 and
1996, respectively.
-8-
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash and cash equivalents, receivables from
clients and accounts payable and accrued liabilities approximates fair value
because of the short maturity and ready liquidity of those instruments.
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 in
high credit quality financial institutions.
The Company has relatively few customers that make up its customer base.
Concentrations of credit risk with respect to receivables from those clients are
reduced due to the credit worthiness of the customer base.
2. 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 the straight-line method 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 underlying lease
terms.
The components of fixed assets are:
June 30
1997 1996
------------- -------------
Furniture, fixtures and equipment $8,942,315 $6,813,836
Leasehold improvements 3,699,278 154,353
------------- -------------
12,641,593 6,968,189
Less accumulated depreciation and amortization (2,758,573) (966,490)
============= =============
$9,883,020 $6,001,699
============= =============
-9-
<PAGE>
3. EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company has a qualified defined benefit pension plan that is available to
substantially all of its employees. This plan, formed on January 1, 1997,
succeeds a defined benefit plan from Wyatt which covered employees that had
previously been employees of the Company and WPC.
Pension benefits are based on a multi-variable formula which takes into
consideration age, years of service, and average compensation levels with
compensation increases projected at 5% and the benefit liability discounted
currently at 7.5%. Employees are eligible for benefits upon retirement at age
65. As of June 30, 1997, the Company had no retirement benefits currently
payable to eligible participants and accordingly, had no plan assets nor funding
as of the end of this period. However, the accrued liability for the plan was
$306,168 which was comprised of an accumulated benefit obligation of $259,919
and a vested benefit obligation of $46,249.
LONG TERM SAVINGS PLAN
Effective January 1, 1997, the Company sponsored a deferred savings plan set up
as a 401(k). Under this plan, the Company matches up to 50% of employee
contributions made subject to a maximum of 3% of their compensation. The Company
incurred $325,976 in expenses for this plan during fiscal year 1997.
Contributions are limited to amounts that are currently deductible for tax
purposes.
OTHER NONQUALIFIED PLANS
At June 30, 1997, the Company had established nonqualified plans including a
salary deferral plan and a defined benefit plan. Effective upon retirement,
benefits will be paid according to these plans which are otherwise subject to
certain limitations imposed by the Internal Revenue Code.
No contributions were made during 1996, however, contributions of $61,996 for
the salary deferral plan was made for 1997.
-10-
<PAGE>
4. SELF INSURANCE RESERVES
The Company provides certain medical and dental benefits to its employees at no
cost. These benefits had previously been provided by Wyatt up to December 31,
1996. Expense for the medical benefits and dental benefits provided were
$1,494,506 and $377,603 for the periods ended June 30, 1997 and 1996,
respectively. As the Company is self insured for these benefits up to a certain
amount, reserve for claims development is estimated for reported and unreported
claims and is reflected as a liability in the accompanying financial statements.
The Company has specific case indemnification for individual losses that exceed
$160,000 up to a $1,000,000 maximum. As of June 30, 1997, the liability for
reported and unreported claims was estimated at $595,540.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of:
June 30
1997 1996
------------- -------------
Accounts payable and accrued liabilities $ 7,433,988 $6,734,251
Accrued salaries and bonuses 2,363,636 413,016
Accrued vacation 826,856 710,933
Self insurance reserves 595,540 -
============= ============
Total accounts payable and accrued liabilities $ 11,220,020 $7,858,200
============= ============
-11-
<PAGE>
6. LEASES
The Company leases office space and various computer equipment under operating
lease agreements with terms ranging from one to ten years. The rental expense
was $4,849,248 and $341,007 for fiscal years 1997 and 1996, respectively. Future
minimum lease payments for operating lease commitments are:
LEASE
YEARS ENDING JUNE 30 COMMITMENTS
-------------------- ----------------
1998 $ 7,659,054
1999 8,845,669
2000 9,296,342
2001 9,071,949
2002 6,823,480
Thereafter 30,002,877
=================
$71,699,371
=================
7. RELATED PARTIES
The Company's Board of Managers is comprised of officers and management of both
Wyatt and State Street as well as the Company's Chief Executive Officer who
serves as its Chairman. Due to the spin-off of Wyatt's previous division, WPC,
the Company was reliant on various Wyatt financial reporting processes through
the end of fiscal year 1997. The Company was charged approximately $78,000 for
these services during fiscal year 1997.
Capital contributed by Wyatt and State Street at June 30, 1997 and 1996 were
$73,500,000 and $39,462,000, respectively. Of the $39,462,000 of capital
contributed at June 30, 1996, $12,060,117 was receivable from State Street which
is included in receivable from affiliates in the balance sheet. As of June 30,
1997, all of the capital contributed had been funded.
Under an agreement between the Company and Wyatt, the Company provides services
to certain clients whose contracts were retained by Wyatt. The client service
agreement provides (in part) that the Company may bill Wyatt for 100% of the
costs associated with providing services to the retained clients. As of June 30,
1997, Wyatt owed the Company $11,009,153 for retained client services. Client
fees and cost billed to Wyatt amounted to $40,313,000 and $10,829,000,
respectively, in 1997 and 1996.
-12-
<PAGE>
8. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is currently negotiating settlement of a long standing dispute over
the pricing of certain services from one of its major service providers. As of
June 30, 1997, the Company has recognized its liability to the service provider
to the extent of the Company's position in the negotiations. Should the dispute
be settled in favor of the service provider, the Company could be exposed to as
much as $2,200,000 in additional liability to the service provider. Of the
$2,200,000, approximately $1,900,000 would be recoverable from Wyatt under the
client services agreement.
-13-
