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
For the fiscal year ended June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
6707 DEMOCRACY BOULEVARD
SUITE 800
BETHESDA, MD 20817
(Address of principal executive offices including zip code)
(301) 581-4600
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
TO BE SO REGISTERED ON WHICH REGISTERED
NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $1.00 OUTSTANDING AT
PAR VALUE SEPTEMBER 28, 1999
(TITLE OF CLASS) 15,012,350 SHARES
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant is $97,871,018. The aggregate market value
was computed by using the Formula Book Value of the stock (calculated in
accordance with the bylaws) as of September 28, 1999.
Documents Incorporated by Reference
The registrant's definitive proxy statement for its 1999 annual meeting of
shareholders (which is to be filed pursuant to General Instruction G of Form
10-K not later than October 28, 1999), 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
employee benefits, human resources and human resources systems technology
consulting to major employers throughout the world. The Company and its
alliance partner, Watson Wyatt Partners, the leading United Kingdom-based
employee benefits partnership, operate seamlessly as Watson Wyatt Worldwide.
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, Suite 800, Bethesda, MD 20817. The Company was
founded in 1946; Watson Wyatt Partners was founded in 1878.
GLOBAL OPERATIONS
Watson Wyatt Worldwide employs approximately 5,300 associates in offices in
the United States, Canada, Asia and the South Pacific, Europe, Africa, Latin
America and the U.S. Caribbean.
Watson Wyatt & Company is primarily organized based on the following
geographic regions: U.S. East, U.S. Central, U.S. West, Asia/Pacific, Canada
and Latin America. The Company employs approximately 3,850 associates as
follows:
U.S. East 950
U.S. Central 975
U.S. West 450
Asia/Pacific 625
Canada 425
Latin America 80
Data Services 60
Corporate/Other 285
-------
3,850
=======
None of the Company's associates are subject to collective bargaining
agreements. The Company believes relations with associates are good.
On a worldwide basis, the Company is primarily managed through the geographic
regions listed above. Like many professional services firms, the Company also
uses a practice-based matrix form of organization within some regions. The
Company is developing and implementing systems and management reporting to
enhance practice-specific information on a Company-wide basis.
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The percentage of fees generated in the various geographic regions is as
follows:
1999 1998 1997
---- ---- ----
U.S. East 36% 32% 32%
U.S. Central 29 29 30
U.S. West 14 17 16
Asia/Pacific 9 9 10
Canada 8 8 8
Latin America 1 2 1
Data Services 3 3 3
----- ----- -----
Total 100% 100% 100%
Prior year percentages have been recalculated to conform to current
classification. For more information about industry segments see Note 13 of
Notes to the Consolidated Financial Statements, included in Item 14 of this
report.
PRINCIPAL SERVICES
Watson Wyatt focuses its services in four principal areas:
BENEFITS CONSULTING: The Benefits Consulting practice provides analysis,
design and implementation of retirement programs, including actuarial services
and required reporting of plan contributions and funding levels, group health
benefit plan design and provider selection, and defined contribution plan
design and related services.
HR TECHNOLOGIES CONSULTING: The HR Technologies Consulting practice develops
technology-based solutions to reduce employer costs and improve employee
service in human resources administration, including web-based applications.
HUMAN CAPITAL CONSULTING: The Human Capital Consulting practice provides
comprehensive consulting in compensation plan design, executive compensation,
salary management, benefits communication and organizational effectiveness
consulting.
DATA SERVICES: Watson Wyatt Data Services produces custom and standard
compensation, benefits and best practices surveys and reference works to
clients throughout the world. Over 5,000 companies participate in the
Company's surveys; its services include over seventy reference publications in
remuneration, benefits and employment practices which are utilized by global
and local companies in fifty countries.
Within the past two years, Watson Wyatt has divested several non-core
businesses - including benefits administration outsourcing, defined
contribution recordkeeping, and its North American risk management consulting
services - in order to focus on these core consulting areas.
While the Company groups services into functional categories, management
believes a primary strength is its ability to deliver its services without
boundaries to meet the requirements of its clients.
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COMPETITION
The human resource consulting business, including all of the Company's
principal services, is highly competitive. Barriers to entry relate primarily
to the need to assemble the specialized intellectual capital to provide
expertise demanded by clients. The Company's competitive position is strongest
in retirement, benefits and HR technology consulting, but there is not a
substantial difference between the competitive position of its overall
business as compared to its individual lines of business. Watson Wyatt ranks
number one in the consulting industry when it comes to delivering value to
clients and overall reputation according to a recent independent study
conducted by The Wall Street Journal among its subscribers. The Company's
competitors include other human resource consulting firms and certain public
accounting/consulting firms; its most direct competitors are five to seven
firms which offer similar services in the United States and, in several cases,
internationally. Buyers of consulting services in the Company's core
businesses consistently mention that their key selection criteria are quality,
the ability to tailor services to a client's unique needs, creativity and
overall value. In recent years, price has become a somewhat more significant
competitive factor in some aspects of the business. Other competitive factors
of increasing importance are the quality and effectiveness of available
technology and software and the ability to serve multinational clients.
AFFILIATES
Beginning in the 1970's, the Company (then "The Wyatt Company" or "Wyatt")
began to establish operations outside North America. In 1995, the Company
formed a strategic alliance with R. Watson & Sons ("Watsons"), one of the
leading actuarial/benefits consulting firms based in the United Kingdom. The
Company received a beneficial interest 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"), which is now jointly owned and controlled by the Company
(25%) and Watsons (75%). While Watson Wyatt & Company, Watson Wyatt Partners,
and WWHE remain separate legal entities, the companies are operating together
as Watson Wyatt Worldwide.
In 1996, the Company and State Street Bank and Trust Company ("State Street")
formed a limited liability company, Wellspring Resources LLC ("Wellspring"),
to provide outsourced benefits administration services. During the third
quarter of fiscal year 1998, the Company discontinued its benefits
administration outsourcing business, including its investment in Wellspring,
pursuant to a Restructuring Agreement by which Wellspring redeemed the
Company's 50% interest in Wellspring effective April 1, 1998. Pursuant to a
discontinuation plan approved by the Company's Board of Directors on February
18, 1998, in fiscal year 1998, the Company recorded a charge of $69.9 million
net of taxes for the discontinuation of its benefits administration
outsourcing business. In fiscal year 1999, the Company further clarified its
future obligations under the restructuring and reduced its discontinuation
liability by $8.7 million net of taxes. (See Note 16 of Notes to the
Consolidated Financial Statements, included in Item 14 of this report.)
ITEM 2. PROPERTIES.
Watson Wyatt Worldwide operates in approximately 90 offices in principal
markets throughout the world. Operations are carried out in leased offices
under operating leases that normally do not exceed ten years in length. The
Company does not anticipate difficulty in meeting its space needs at lease
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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 14% of total
assets at June 30, 1999 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 that arise
in the ordinary course of business. These disputes typically involve claims
relating to employment matters or the rendering of professional services. The
Company carries appropriate professional liability insurance, and management
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 28, 1999, there were 1,954 registered holders of the Company's
Common Stock. Transfers of the Company's Common Stock are made at Formula Book
Value, as defined in the Company's bylaws, and the current Formula Book Value
per share is calculated pursuant to the Company's bylaws to be $6.68 per share
at June 30, 1999, as further described in Note 10 of Notes to the Consolidated
Financial Statements, included in Item 14 of this report. This Formula Book
Value reflects an increase of approximately 10% from the Formula Book Value of
$6.05 per share at June 30, 1998.
DIVIDENDS
Under the Company's credit facility (see Note 9 of Notes to the Consolidated
Financial Statements, included in Item 14 of this report), the Company is
required 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 $20.3
million was available
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for the declaration or payment of dividends as of June 30, 1999. 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. Historically, while the
Company's performance would have permitted the payment of dividends, the
Company has chosen not to declare dividends every year since fiscal year 1991.
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<PAGE>
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,
1999. The selected consolidated financial data as of June 30, 1999 and 1998
and for each of the years in the three year period ended June 30, 1999 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, 1997, 1996, 1995, and for each of the years ended June 30, 1996 and
1995 have been derived from audited consolidated financial statements of
Watson Wyatt not included in this Form 10-K and have been restated to reflect
the Company's discontinued operations.
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 of this Form 10-K. Amounts are in thousands,
except per share data.
<TABLE>
<CAPTION>
Year Ended June 30
------------------------------------------------------------------
Statements of Operations Data: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Continuing operations
Fees $ 556,860 $ 512,660 $ 486,502 $ 475,298 $ 465,788
Income (loss) before income taxes and
minority interest (See Note 12 of Notes
to the Consolidated Financial Statements) 23,800 (42,966) 21,618 34,036 12,204
Income (loss) from continuing operations
(See Note 12 of Notes to the Consolidated
Financial Statements) 12,135 (56,212) 12,381 19,835 4,908
Earnings (loss) per share, continuing
operations $ 0.80 $ (3.27) $ 0.71 $ 1.07 $ 0.25
Discontinued operations - income(loss)
(See Note 16 of Notes to the Consolidated
Financial Statements) 8,678 (69,906) (11,483) (10,480) (4,059)
Net income (loss)(See Note 12 of Notes
to the Consolidated Financial Statements) 20,813 (126,118) 898 9,355 849
Earnings (loss) per share, net income (loss) $ 1.37 $ (7.34) $ 0.05 $ 0.51 $ 0.05
Weighted average shares outstanding 15,215 17,170 17,438 18,516 19,248
Year Ended June 30
------------------------------------------------------------------
Balance Sheet Data: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Working capital (1) $ 11,692 $ 23,748 $ 21,307 $ 18,788 $ 49,826
Total assets 313,960 268,310 331,778 320,819 286,622
Redeemable Common Stock 107,631 96,296 96,091 90,214 86,275
Formula Book Value
per share $ 6.68 $ 6.05 $ 5.30 $ 4.94 $ 4.51
Shares outstanding 16,112 15,917 18,130 18,262 19,130
<FN>
(1) See Management's discussion of Liquidity and Capital Resources.
</FN>
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998.
The Company generated net income in fiscal year 1999 of $20.8 million compared
to a net loss in fiscal year 1998 of $126.1 million. The fiscal year 1998
results included a non-recurring compensation charge and the after-tax effect
of the discontinuation of the Benefits Administration Outsourcing Business
(see discussion of 1998 financial results found in "Year Ended June 30, 1998
Compared to Year Ended June 30, 1997" on pages 6 and 7). Income (loss) before
income taxes and minority interest in 1999 was $23.8 million compared to $26.9
million in 1998 without the effect of the non-recurring compensation charge.
These results reflect growth of share value of 10.4% and a larger bonus pool
allocated at the discretion of the Company's Board of Directors.
Fee revenue from continuing operations reached $556.9 million in fiscal year
1999, an increase of $44.2 million from $512.7 million in fiscal year 1998.
This represents a 9% growth in revenue. This increase occurred primarily in
the Company's U.S. East, U.S. Central and Asia/Pacific consulting regions. In
North America, the Retirement and HR Technologies practices experienced strong
revenue growth; the Human Capital practice revenues declined modestly amid a
reorganization of the practice. Revenues for fiscal year 1999 also reflect the
sale late in fiscal year 1998 of the Company's North American risk and
insurance consulting practice and its exit from the defined contribution
recordkeeping business.
For the fiscal year 1999, salaries and employee benefit expenses were $321.5
million, an increase of $52.9 million, or 20%, from fiscal year 1998. This
increase is due primarily to increased bonuses, a 6% increase in headcount,
and increases in annual compensation and benefits.
Occupancy and communications expense increased $0.9 million or 1% in fiscal
year 1999. This low percentage increase reflects the Company's adoption of an
office space standard as well as its ability to negotiate advantageous leases
of office space.
Professional and subcontracted services were $47.9 million for fiscal year
1999, a decrease of $2.0 million, or 4%, from fiscal year 1998 due to reduced
corporate expenses.
Other costs of providing services increased $3.0 million in 1999, which is
mainly attributable to increased travel.
General and administrative expenses for fiscal year 1999 were $56.6 million,
an increase of $4.8 million, or 9%, from fiscal year 1998 due to the increased
cost of providing technology support to core consulting areas.
Depreciation and amortization decreased $9.7 million in fiscal year 1999 to
$15.2 million. This decrease is due to higher amortization of software in 1998
of $11.6 million, primarily due to a reevaluation and subsequent reduction of
the useful lives of the related products. Without this item, depreciation and
amortization expense increased $1.9 million in 1999 due to the increased
purchases of capital assets.
Income from affiliates was $2.5 million in 1999 compared to $0.3 million in
1998. The increase reflects heightened synergies and focus within the European
operations as well as improved business operations in the United Kingdom.
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<PAGE>
Income before income taxes, minority interest and discontinued operations was
$23.8 million in fiscal year 1999, which, considering taxes of $11.4 million,
reflects an effective tax rate of 48% compared to 49% in 1998 without the
effect of the non-recurring compensation charge.
In fiscal 1999, the Company further resolved its future obligations related to
the discontinuation of its Benefits Administration Outsourcing Business and
reduced the expected loss on disposal by $8.7 million net of taxes. The
Company believes it has adequate provisions for any remaining costs related to
the discontinuation.
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997. (1997 has
been reclassified to reflect discontinued operations. See Note 16 of Notes
to the Consolidated Financial Statements.)
The Company had strong operating results in 1998 from continuing operations.
Two major events also affected financial results in fiscal year 1998. The
first event, the discontinuation of the Company's Benefits Administration
Outsourcing Business, resulted in a $69.9 million loss due to the withdrawal
from this line of business and is reported as a discontinued operation. The
loss on discontinuation, net of taxes of $69.9 million, included the write-off
of its investment in Wellspring Resources, net capitalized software
development costs for the Retained Clients (as defined in Note 16 of Notes to
the Consolidated Financial Statements) and a provision for the completion of
any obligations to clients, vendors or its former joint venture partner.
The second event, a $69.9 million non-recurring compensation charge, was due
to a required method of accounting for the change in the Company's bylaws to
modify the Formula Book Value of the Company's stock to exclude the
discontinued operations from the Formula Book Value calculation. This charge
was reported as a component of continuing operations. The charge was measured
by the difference between what the value per share was at June 30, 1998 and
what it would have been at that date without the modification. The charge did
not reduce company resources but did reduce operating income from continuing
operations.
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Management believes the Company's results from continuing operations are more
comparable to prior years and are a better indication of current year results
if they are analyzed without giving effect to such charge. In such case, the
Costs of providing services in 1998 would have been $407.4 million instead of
$477.3 million and continuing operations would have shown a profit of $13.7
million instead of a loss of $56.2 million. The net loss for the Company would
have been $56.2 million including the loss from discontinued operations,
rather than $126.1 million.
The following table presents the Company's results of operations without the
non-recurring compensation charge and the same captions as reported in the
Company's audited financial statements.
<TABLE>
<CAPTION>
1998 Results of Operations
-------------------------------------------
Pro Forma Without Non-
Recurring Compensation Charge As Reported
----------------------------- -----------
<S> <C> <C>
Fees $ 512,660 $ 512,660
Costs of providing services 407,358 477,264
General & administrative costs, depreciation and amortization 76,753 76,753
---------- ----------
484,111 554,017
---------- ----------
Income (loss) from operations 28,549 (41,357)
Interest income/expense and income from affiliates (1,609) (1,609)
---------- ----------
Income (loss) before income taxes and minority interest 26,940 (42,966)
Income taxes and minority interest (13,246) (13,246)
---------- ----------
Income(loss)from continuing operations 13,694 (56,212)
---------- ----------
Discontinued operations - net loss (69,906) (69,906)
---------- ----------
Net loss $ (56,212) $ (126,118)
========== ==========
Earnings per share:
Earnings (loss) per share, continuing operations $ 0.80 $ (3.27)
========== ==========
Loss per share, discontinued operations $ (4.07) $ (4.07)
========== ==========
Loss per share, net loss $ (3.27) $ (7.34)
========== ==========
</TABLE>
Although the Company generated a net loss in fiscal year 1998 of $126.1
million compared to net income in fiscal year 1997 of $0.9 million, these
results include the non-recurring compensation charge explained above and the
after tax effect of the discontinuation of the Benefits Administration
Outsourcing Business for both fiscal years. Without the non-recurring
compensation charge, results of continuing operations in 1998 before income
taxes and minority interest would have been $26.9 million compared to $21.6
million in 1997, or a 24% increase. The Company's revenue growth of $26.2
million, or 5%, outpaced inflation and leveraged the expense base to improve
return on revenue before taxes to 5% in 1998 from 4% in 1997.
Fee revenue from continuing operations reached $512.7 million in fiscal year
1998, an increase of $26.2 million, or 5%, from $486.5 million in fiscal year
1997. This increase occurred primarily in the Company's U.S. East, U.S.
Central and U.S. West regions, offsetting a decline in the Asia/Pacific
region, and is due to the realization of billing rate increases. In North
America, the Retirement, Human Capital, and HR Technologies practices
experienced strong revenue growth.
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<PAGE>
For the fiscal year 1998, salaries and employee benefit expenses were $268.6
million excluding the non-recurring compensation charges, an increase of
$16.3 million or 6% from fiscal year 1997 due primarily to a 2% increase in
headcount and annual salary increases.
Occupancy and communications expense decreased $10.1 million in 1998. The
Company relocated its corporate office to lower cost suburban facilities in
1997, recognizing sublease losses of $12.1 million. Excluding these lease
losses, occupancy and communications increased $2.0 million or 3%, with the
largest growth occurring in telecommunications expense.
Professional and subcontracted services were $49.9 million for fiscal year
1998, an increase of $1.1 million, or 2%, from fiscal year 1997.
Other costs of providing services increased $2.9 million in 1998 due to
travel and local office promotion expenses.
General and administrative expenses for fiscal year 1998 were $51.8 million,
an increase of $6.1 million or 13% from fiscal year 1997 due to increased
spending on business strategy initiatives and higher corporate advertising
and promotional expense.
Depreciation and amortization increased $2.9 million in fiscal year 1998 to
$25.0 million. This increase is primarily due to management's decision to
accelerate the amortization of software in 1998 by $6.8 million based upon a
reevaluation and subsequent reduction of the useful lives of the related
products. Without this item, depreciation and amortization expense declined
18% due to the decreased base of capital assets.
Loss before income taxes, minority interest and discontinued operations was
$43.0 million in fiscal year 1998. This loss reflects the $69.9 million
non-recurring charge that is not a taxable transaction. Pre-tax income without
this amount was $26.9 million with taxes of $13.1 million, or an effective tax
rate of 49% compared to 42% in 1997. The increase in the effective tax rate is
due to changes in income in various tax jurisdictions with differing tax
rates, particularly foreign jurisdictions.
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, 1999 totaled $36.0 million, compared to
$13.4 million at June 30, 1998. The company had no borrowings at June 30,
1999, compared to $9.0 million of borrowings at June 30, 1998. The decrease in
borrowings and increased cash balances were the result of the Company's stock
sale in fiscal year 1999, and from reduced operating and closedown costs
associated with the discontinuation of the Benefits Administration Outsourcing
Business.
The Company has a $120.0 million credit line that is currently scheduled to
mature in June 2003. Ninety-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 for the purchase of Redeemable Common Stock made
available under the Company's Stock Purchase Program.
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CASH FROM OPERATIONS. Net cash provided by operating activities increased in
1999 compared to 1998 by $33.3 million. The increase was primarily due to the
$43.2 million increase in accounts payable and accrued liabilities from fiscal
year 1999 operating expenses that will be paid in fiscal year 2000. This
increase was augmented by the $13.0 million decrease in the cash needed in the
closedown of discontinued operations. The change in receivables from clients
increased $14.4 million, thereby decreasing cash that would have been provided
by operations. Deferred income taxes increased $7.3 million in conjunction
with the increase in accounts payable and accrued liabilities.
CASH FROM INVESTING ACTIVITIES. Uses of cash for investing activities
decreased $8.7 million from 1998, principally due to reduced cash needs of
the discontinued operations.
CASH FROM FINANCING ACTIVITIES. The Company used more cash in fiscal year 1999
as it paid down its outstanding debt. The Company's net stock activity had
virtually no impact on cash used by financing activities in 1999.
The Company's foreign operations do not materially impact its liquidity or
capital resources. At June 30, 1999, $14.4 million of the total cash balance
of $36.0 million was held outside of North America, which the Company has the
ability to readily access, if necessary. There are no significant repatriation
restrictions other than local or U.S. taxes associated with repatriation. The
foreign operations in total are substantially self-sufficient.
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 historically had moderate foreign currency transaction risk. 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. This risk is mitigated by the Company's intention to
leave the investments in place rather than repatriating them.
The Company's ratio of current assets to current liabilities declined to 1.1
in fiscal year 1999 from 1.2 in fiscal year 1998. The Company's working
capital decreased $12.1 million from 1999 to 1998, mainly due to the increase
in 1999 fiscal year-end accruals related to discretionary payments.
Anticipated commitments of funds for fiscal year 2000 are estimated at $30.1
million, which includes expected purchases of fixed assets and payments
related to the purchase of certain consulting operations. The Company expects
operating cash flows and seasonal use of its credit line to provide for the
Company's cash needs.
YEAR 2000 ISSUE
The Company has continued to address the Year 2000 problem as it affects the
Company's business. While the Company has successfully passed several
important Year 2000 milestones, management believes that effort will be
required through the end of 1999 and beyond to enable the Company to meet its
Year 2000 goals. Based on the work completed during the past year,
management continues to be confident that the Year 2000 problem is not likely
to have a material effect on the Company's business, results of operations,
or financial condition. Nevertheless, since the effects of the Year 2000
problem are likely to be unpredictable, management does not expect that the
Company's Year 2000 compliance program will eliminate all risk to the Company
associated with the Year 2000 problem.
Based on its ongoing review, management continues to believe that the most
significant risk facing the Company in connection with Year 2000 issues
relates to software provided by the Company for use by,
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or on behalf of, its clients. This software has been provided principally by
the HR Technologies practice (including benefit administration software and
call center services) and the Retirement practice (principally
spreadsheet-based benefit calculators). The risks presented include the
possibility of errors or contractual liability caused by non-compliant
software that is not identified or corrected and costs of replacing or
repairing client systems. Other risks identified by the Company include: risk
of a general economic downturn as a result of the Year 2000 problem; risk
arising from the failure of infrastructure, including power, water,
telecommunications, and building services; and risks from operations outside
North America. The Company s Year 2000 compliance program will not address or
prevent adverse effects to the Company because of economic disruption or
failure of public infrastructure.
The Company's Year 2000 compliance plan relies on geographic and practice
leaders to assess and oversee repair or replacement of software and hardware
used in their domain. Except in the case of software provided to or
maintained for clients by the HR Technologies practice, substantially all
assessment and remediation work has been completed, but formal verification
and documentation of this effort is still in process. The Company expects to
complete verification and documentation by September 30, 1999.
The Company has completed assessment, repair, and testing of all its internal
information technology systems, including WyVal, the Company's actuarial
valuation software. The Company has completed an inventory of its vendors
and is monitoring Year 2000 compliance efforts by its major vendors. Because
of the nature of the Company's business and the widely distributed locations
of the Company's operations, management believes that the Company does not
face significant risks from Year 2000 failures in systems relied upon by its
vendors. The Company has not reviewed the Year 2000 compliance status of its
clients, some of which may be affected by Year 2000 problems. Management
believes that the effect of client problems on the Company's own operations
is not likely to be material because of the broad, diversified nature of the
Company's client base. The Company will continue to develop and revise
contingency procedures to address the Year 2000 situation. In many cases,
the Company will rely on existing contingency plans relating to failures in
information technology systems. A principal focus of the Company s
contingency planning is maintaining communications among employees and with
clients in the event of short-term telecommunications failures or short-term
disruptions limiting access to the Company's offices.
While the Company has made progress toward meeting its compliance goals for
software provided to or used on behalf of clients, the Company continues to
be behind in its schedule for compliance activity for such systems. The
Company's deadline for bringing systems into compliance was June 30, 1999.
The following summarizes the status of the Company's Year 2000 compliance
efforts related to client software:
As of August 31, 1999, remediation and testing were complete on
substantially all of the systems inventoried by the Retirement practice in
North America. This assessment, however, does not include certain internal
systems with limited application (such as calculators used to estimate
benefits for a single client plan). The Company will remediate and test
such systems as a part of its normal quality review process when such
systems are next used.
As of August 31, 1999, the HR Technologies practice has completed
assessment on more than 70% of the systems inventoried in North America.
Testing and remediation have been completed on approximately 45% of such
systems. Testing and remediation of the remaining systems are scheduled to
be completed before the end of 1999. A substantial number of the remaining
systems are used to support open enrollment in benefit plans; these systems
are normally modified late in the
-12-
<PAGE>
calendar year and any required Year 2000 remediation will be performed as a
part of such modifications.
The Company has established a program of contacting clients to discuss Year
2000 issues. As of August 31, 1999, the Company had completed approximately
90% of the projected effort for this program. The Company expects to
complete its client contact program by October 31, 1999.
The Company's Year 2000 compliance program includes its operations outside
North America. Because of the size of these operations, management does not
expect that Year 2000 problems outside North America will have a material
effect on the Company.
The Company's cost to address Year 2000 compliance issues exceeded $4.0
million for fiscal year 1999. The Company's principal expenditures were for
repair and testing of internal and client software, costs associated with the
Company's Year 2000 compliance program and costs of outside consultants. The
Company expects that its costs for Year 2000 compliance will be lower in
fiscal year 2000. Funds for costs associated with the Company's Year 2000
compliance efforts will come from operating cash flows for all areas of the
Company's operations and will be expensed as incurred.
The information concerning the Company's Year 2000 compliance effort includes
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties, and other factors that may cause actual
events or costs to be materially different than indicated by such
forward-looking statements. These factors include, among others, unanticipated
costs of remediation and replacement, the Company's inability to meet its
targeted dates as scheduled and extensive failures of governmental and
municipal infrastructures. Any estimates and projections described have been
developed by the management of the Company and are based on the Company's best
judgments together with the information that is available to date. Due to the
many uncertainties surrounding the Year 2000 problem, the shareholders of the
Company are cautioned not to place undue reliance on such forward-looking
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data are included as Item 14 of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There are no changes in accountants or disagreements with accountants on
accounting principles and financial disclosures required to be disclosed in
this Item 9.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The response to this item will be included in a definitive proxy statement
filed within 120 days after the end of the Registrant's fiscal year, which
proxy statement is incorporated herein by this reference.
-13-
<PAGE>
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 each of the
three years ended June 30, 1999 F-2
Consolidated Balance Sheets at June 30, 1999 and 1998 F-3
Consolidated Statements of Cash Flows for each of the
three years ended June 30, 1999 F-4
Consolidated Statements of Changes in Permanent
Shareholders' Equity for each of the three years
ended June 30, 1999 F-5
Notes to the Consolidated Financial Statements F-6 to F-25
(2) Consolidated Financial Statement Schedule for each of the three
years ended June 30, 1999
Valuation and Qualifying Accounts and Reserves (Schedule II) F-26
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
-14-
<PAGE>
Financial statements of 50% or less owned entities and unconsolidated
subsidiaries have been omitted, with the exception of Wellspring
Resources LLC for the fiscal year ended June 30, 1997 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 & Company2
3.2 Restated Bylaws (as amended through June 30, 1999)3
4 Form of Certificate Representing Common Stock1
10 Credit Agreement Among NationsBank, N.A. and Others dated June 30, 19984
21 Subsidiaries of Watson Wyatt & Company5
23 Consent of the Company's Independent Accountants5
24 Consent of Wellspring's Independent Accountants5
99 Wellspring Resources LLC Financial Statements5
- -----------------------------------------
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 Annual Report on Form 10-K for
the fiscal year ended June 30, 1996 (File No. 0-20724), filed on
September 16, 1996
3 Incorporated by reference from Registrant's Report on Form S-8
(File No. 33-369545), filed on December 23, 1998
4 Incorporated by reference from Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998 (File No. 0-20724), filed on
September 24, 1998
5 Filed herewithin
-15-
<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 28, 1999 By: /S/ John J. Haley
-----------------
John J. Haley
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/ John J. Haley President, Chief Executive Officer 9/28/99
- ----------------- and Director
John J. Haley
/S/ Carl D. Mautz Vice President and Chief 9/28/99
- ----------------- Financial Officer
Carl D. Mautz
/S/ Peter L. Childs Controller 9/28/99
- -------------------
Peter L. Childs
/S/ Thomas W. Barratt Vice President and Director 9/28/99
- ---------------------
Thomas W. Barratt
/S/ Paula A. DeLisle Vice President and Director 9/28/99
- --------------------
Paula A. DeLisle
/S/ David B. Friend Vice President and Director 9/28/99
- -------------------
David B. Friend
/S/ Ira T. Kay Vice President and Director 9/28/99
- --------------
Ira T. Kay
-16-
<PAGE>
Signature Title Date
- --------- ----- ----
/S/ Brian E. Kennedy Vice President and Director 9/28/99
- --------------------
Brian E. Kennedy
/S/ Eric P. Lofgren Vice President and Director 9/28/99
- -------------------
Eric P. Lofgren
/S/ Robert D. Masding Director 9/28/99
- ---------------------
Robert D. Masding
/S/ R. Michael McCullough Director 9/28/99
- -------------------------
R. Michael McCullough
/S/ Gail E. McKee Vice President and Director 9/28/99
- -----------------
Gail E. McKee
/S/ John A. Steinbrunner Vice President and Director 9/28/99
- ------------------------
John A. Steinbrunner
/S/ A. Grahame Stott Vice President and Director 9/28/99
- -------------------
A. Grahame Stott
-17-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Watson Wyatt & Company
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 14 of this Form 10-K present fairly, in
all material respects, the financial position of Watson Wyatt & Company and
its subsidiaries at June 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(2) on page 14 presents fairly,
in all material respects, the information set forth therein when read in
connection with the related consolidated financial statements. These financial
statements and financial statement schedule 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.
PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
September 8, 1999
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,
------------------------------------------
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Fees $ 556,860 $ 512,660 $ 486,502
Costs of providing services:
Salaries and employee benefits 321,525 268,611 252,302
Non-recurring compensation charge (see Note 12) - 69,906 -
Occupancy and communications 62,915 62,061 72,155
Professional and subcontracted services 47,863 49,907 48,827
Other 29,753 26,779 23,871
------------ ------------ ------------
462,056 477,264 397,155
General and administrative expenses 56,578 51,759 45,696
Depreciation and amortization 15,248 24,994 22,094
------------ ------------ ------------
533,882 554,017 464,945
Income (loss) from operations (see Note 12) 22,978 (41,357) 21,557
Other:
Interest income 944 901 1,462
Interest expense (2,646) (2,768) (1,506)
Income from affiliates 2,524 258 105
------------ ------------ ------------
Income (loss) before income taxes and minority interest (see Note 12) 23,800 (42,966) 21,618
Provision for (benefit from) income taxes:
Current 18,744 15,116 12,627
Deferred (7,296) (1,982) (3,557)
------------ ------------ ------------
11,448 13,134 9,070
------------ ------------ ------------
Income (loss) before minority interest (see Note 12) 12,352 (56,100) 12,548
Minority interest in net loss of consolidated subsidiaries (217) (112) (167)
------------ ------------ ------------
Income(loss)from continuing operations (see Note 12) 12,135 (56,212) 12,381
Discontinued operations:
Loss from operations of discontinued Outsourcing Business (less
applicable income tax benefit of $0, $5,053 and $8,181 respectively) - (6,821) (11,483)
Adjustment (loss) on disposal of discontinued Outsourcing Business
(1999 adjustment is net of applicable income tax expense of $6,322;
1998 loss is net of applicable income tax benefit of $46,715) 8,678 (63,085) -
------------ ------------ ------------
Net Income (loss) (see Note 12) $ 20,813 $ (126,118) $ 898
============ ============ ============
Earnings (loss) per share, continuing operations $ 0.80 $ (3.27) $ 0.71
============ ============ ============
Earnings (loss) per share, discontinued operations $ 0.57 $ (4.07) $ (0.66)
============ ============ ============
Earnings (loss) per share, net income (loss) $ 1.37 $ (7.34) $ 0.05
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES
F-2
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF U.S. DOLLARS)
June 30, June 30,
1999 1998
---------- ----------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 35,985 $ 13,405
Receivables from clients:
Billed, net of allowances of $3,701 and $2,142 72,798 69,671
Unbilled 63,068 59,725
---------- ----------
135,866 129,396
Income taxes receivable - 2,216
Other current assets 10,834 6,945
---------- ----------
Total current assets 182,685 151,962
Investment in affiliates 15,306 17,666
Fixed assets 42,797 37,368
Deferred income taxes 56,206 48,911
Intangible assets 7,455 2,412
Other assets 9,511 9,991
---------- ----------
$ 313,960 $ 268,310
========== ==========
LIABILITIES, REDEEMABLE COMMON STOCK, AND PERMANENT SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 152,371 $ 116,548
Note payable and book overdrafts 248 11,666
Income taxes payable 18,374 -
---------- ----------
Total current liabilities 170,993 128,214
Accrued retirement benefits 77,140 82,528
Deferred rent and accrued lease losses 9,270 12,676
Other noncurrent liabilities 22,608 32,784
Minority interest in subsidiaries 669 322
Redeemable Common Stock - $1 par value:
25,000,000 shares authorized;
16,112,416 and 15,916,757 issued
and outstanding; at redemption value 107,631 96,296
Permanent shareholders'equity:
Adjustment for redemption value less than
amounts paid in by shareholders 11,420 25,240
Retained deficit (83,209) (106,834)
Cumulative translation loss (2,562) (2,916)
Commitments and contingencies
---------- ----------
$ 313,960 $ 268,310
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES
F-3
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF U.S. DOLLARS)
Year Ended June 30
-----------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from (used for) operating activities:
Net income(loss) $ 20,813 $ (126,118) $ 898
Adjustments to reconcile net income(loss) to net cash
provided by operating activities:
Non-cash non-recurring compensation charge - 69,906 -
Net (adjustment) loss from Discontinued Operations (8,678) 69,906 11,483
Provision for doubtful receivables from clients 9,503 5,613 6,853
Depreciation 13,680 12,849 13,816
Amortization of deferred software and development costs
and other intangible assets 1,568 12,143 8,277
Provision for deferred income taxes (7,295) (1,982) (3,557)
Income from affiliates (2,524) (258) (105)
Minority interest in net income of consolidated subsidiaries 217 112 167
(Increase) decrease in assets (net of discontinued operations):
Receivables from clients (25,488) (11,115) (2,794)
Income taxes receivable 2,216 4,558 3,327
Other current assets (3,889) 342 (351)
Other assets 480 76 (1,930)
Increase (decrease) in liabilities (net of discontinued operations):
Accounts payable and accrued liabilities 54,567 11,318 1,300
Income taxes payable 12,052 (3,563) (7,799)
Accrued retirement benefits (5,388) (4,169) 5,556
Deferred rent and accrued lease losses (3,406) (2,262) 5,034
Other noncurrent liabilities 1,132 840 687
Other, net 514 1,603 656
Discontinued operations, net (5,537) (18,554) 7,530
----------- ---------- ----------
Net cash provided by operating activities 54,537 21,245 49,048
----------- ---------- ----------
Cash flows (used in) from investing activities:
Purchases of fixed assets (19,684) (16,034) (15,548)
Proceeds from sales of fixed assets and investments 237 623 446
Acquisitions (6,207) - (1,169)
Investment in software and development costs - (3,000) (4,554)
Investment in affiliates 4,220 3,076 (1,385)
Discontinued operations - (14,750) (20,062)
----------- ---------- ----------
Net cash used in investing activities (21,434) (30,085) (42,272)
----------- ---------- ----------
Cash flows (used by) from financing activities:
Borrowings and bank overdrafts (11,418) 11,258 -
Issuances of Redeemable Common Stock 15,451 1,005 15,414
Repurchases of Redeemable Common Stock (15,124) (13,141) (16,604)
----------- ---------- ----------
Net cash used by financing activities (11,091) (878) (1,190)
----------- ---------- ----------
Effect of exchange rates on cash 568 (3,134) (1,023)
----------- ---------- ----------
Increase (decrease) in cash and cash equivalents 22,580 (12,852) 4,563
Cash and cash equivalents at beginning of period 13,405 26,257 21,694
----------- ---------- ----------
Cash and cash equivalents at end of period $ 35,985 $ 13,405 $ 26,257
=========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES
F-4
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN PERMANENT SHAREHOLDERS' EQUITY
(THOUSANDS OF U.S. DOLLARS)
Adjustment for
Redemption
Value
(Greater) Less
Retained Cumulative Than Amounts
Earnings Translation Paid in by
(Deficit) Gain (Loss) Shareholders
------------- ------------- -------------
<S> <C> <C> <C>
Balance at June 30, 1996 $ 30,677 $ 1,040 $ (37,549)
Comprehensive income:
Net income 898 - -
Foreign currency translation adjustment - (204) -
------------- ------------ -------------
Total comprehensive income 898 (204) -
Effect of repurchases of 3,258,203 shares of
common stock (various prices per share) (6,942) - 6,942
Adjustment of redemption value for change
in formula book value per share - - (7,067)
------------- ------------ -------------
Balance at June 30, 1997 $ 24,633 $ 836 $ (37,674)
Comprehensive loss:
Net loss (126,118) - -
Foreign currency translation adjustment - (3,752) -
------------- ------------ -------------
Total comprehensive loss (126,118) (3,752) -
Effect of repurchases of 2,410,425 shares of
common stock (various prices per share) (5,349) - 5,349
Adjustment of redemption value for change
in formula book value per share - - (12,341)
Adjustment of redemption value for non-recurring
compensation charge (see Note 12) - - 69,906
------------- ------------ -------------
Balance at June 30, 1998 $ (106,834) $ (2,916) $ 25,240
Comprehensive income:
Net income 20,813 - -
Foreign currency translation adjustment - 354 -
------------- ------------ -------------
Total comprehensive income 20,813 354 -
Effect of repurchases of 2,361,542 shares of
common stock (various prices per share) 2,812 - (2,812)
Adjustment of redemption value for change
in formula book value per share - - (11,008)
------------- ------------ -------------
Balance at June 30, 1999 $ (83,209) $ (2,562) $ 11,420
============= ============ =============
</TABLE>
SEE ACCOMPANYING NOTES
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 an international company
engaged in the business of providing professional consultative services on a
fee basis, primarily in the human resource areas of employee benefits and
compensation, but also in other areas of specialization such as human capital
consulting and human resource related technology consulting. 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.
In 1998, the Company discontinued its Benefits Administration Outsourcing
Business as further described in Note 16. The Consolidated Statements of
Operations in 1999 and 1998 reflect the charges recorded for that
discontinuation as well as for the operating results of the discontinued
operations in 1998 and 1997.
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, allowances for
uncollectible receivables, investments in affiliates, depreciation and
amortization, profits on long-term contracts, asset write-downs, employee
benefit plans, taxes, discontinued operations and Year 2000 costs.
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 inter-company 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. Such investments were $21,700,000 at June 30, 1999.
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.
REVENUE RECOGNITION - For consulting services, fees from clients are recorded
as services are performed and are presented net of write-offs and
uncollectible amounts. Revenues from long-term contracts are recognized on the
percentage of completion basis. Anticipated contract losses are recognized as
they become known. Fees for administrative and recordkeeping operations are
recognized as earned by the Company.
F-6
<PAGE>
INTANGIBLE ASSETS - 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 seven 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. Losses so identified
are then measured as the difference between the net book value of the asset
and the discounted present value of the cash flows and are recorded as
identified.
EMPLOYEE RECEIVABLES - The Company had outstanding employee receivables
included in other current and noncurrent assets of $2,440,000 and $3,165,000
at June 30, 1999 and June 30, 1998, 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. Foreign currency translation gains or losses on
inter-company receivables and payables are generally not recognized because
such amounts are usually considered to be permanent and are not expected to
be liquidated.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount of the Company's
cash and cash equivalents, short-term investments, receivables from clients
and notes and accounts payable and accrued liabilities approximates fair
value because of the short maturity and ready liquidity of those
instruments. At June 30, 1999, the outstanding balance under its revolving
credit agreement was zero, while at June 30, 1998 the Company had $9,000,000
outstanding. The Company knows of no event of default that would require it
to satisfy the guarantees described in Notes 9 and 15 other than as reflected
in the Consolidated Financial Statements.
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 15,215 in
fiscal year 1999, 17,170 in fiscal year 1998, and 17,438 in fiscal year 1997
(see Note 10).
COMPREHENSIVE INCOME - In fiscal year 1999, the Company adopted Statement of
Financial Accounting Standards ( SFAS ) No. 130 Reporting Comprehensive
Income. Comprehensive income includes net income and changes in the cumulative
foreign currency translation gain or loss. For the years ended June 30, 1999,
1998 and 1997, comprehensive income (loss) totaled $21,167,000,
$(129,870,000), and $694,000, respectively.
F-7
<PAGE>
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
--------------------------------
1999 1998 1997
-------- -------- --------
Interest expense $ 1,889 $ 2,639 $ 1,506
Income taxes paid $ 5,462 $ 18,679 $ 11,947
NOTE 3 - INVESTMENTS IN AFFILIATES
Entities accounted for under the equity method are:
June 30
--------------------
Ownership
Interest 1999 1998
-------- ---- ----
Watson Wyatt Partners 10.0% $ 9,265 $ 11,040
Watson Wyatt Holdings (Europe) Limited 25.0% 6,041 6,626
Professional Consultants Insurance Company, Inc. 27.4% - -
--------- --------
Total Investment in Affiliates $ 15,306 $ 17,666
========= ========
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.
Effective July 1, 1998, the Company sold one half of its investment in WWHE to
Watsons; no gain or loss was recognized on the transaction.
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 using the equity method of accounting
because it has the ability to exercise significant influence over the
operations of the entity.
At June 30, 1999, the Company's investment in WWHE and Watsons exceeded the
Company's share of the underlying net assets by $2,257,000 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.
F-8
<PAGE>
The Company's pre-tax income from affiliates includes the following:
Year Ended June 30
-------------------------------
1999 1998 1997
------- ------ -------
Equity investment income $ 2,760 $ 724 $ 1,019
Amortization of basis differential (236) (466) (914)
------- ------ -------
Income from affiliates $ 2,524 $ 258 $ 105
======= ====== =======
Combined summarized balance sheet information at June 30 for the Company's
affiliates follows:
1999 1998
--------- ---------
Current assets $ 117,717 $ 118,116
Noncurrent assets 17,286 10,886
--------- ---------
Total assets $ 135,003 $ 129,002
========= =========
Current liabilities $ 65,171 $ 54,278
Noncurrent liabilities 30,810 39,344
Shareholders' equity 39,022 35,380
--------- ---------
Total liabilities & shareholders'equity $ 135,003 $ 129,002
========= =========
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:
1999 1998 1997
--------- --------- ---------
Revenue $ 206,463 $ 173,012 $ 166,851
Operating expenses 155,330 135,577 126,338
--------- --------- ---------
Income before tax $ 51,133 $ 37,435 $ 40,513
========= ========= =========
Net income $ 51,116 $ 38,176 $ 39,996
========= ========= =========
F-9
<PAGE>
NOTE 4 - FIXED ASSETS
Furniture, fixtures, equipment, and leasehold improvements are recorded at
cost, and presented net of accumulated depreciation or amortization.
Furniture, fixtures and equipment are depreciated using straight-line and
accelerated methods over lives ranging from three to seven years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
assets lives or lease terms.
The components of fixed assets are:
June 30
-------
1999 1998
-------- --------
Furniture, fixtures and equipment $ 96,096 $ 90,727
Leasehold improvements 27,069 22,294
-------- --------
123,165 113,021
Less: accumulated depreciation
and amortization (80,368) (75,653)
-------- --------
Net fixed assets $ 42,797 $ 37,368
======== ========
NOTE 5 - PENSION AND SAVINGS PLANS
In fiscal year 1999, the Company adopted the revised disclosure requirements
of SFAS No. 132, "Employers" Disclosures about Pensions and Other
Postretirement Benefits. SFAS 132 standardized the disclosure of pensions and
other postretirement benefits but did not change the accounting for these
benefits. Prior years information has been reclassified to conform to the 1999
disclosure format.
The noncurrent portions of accrued costs related to the Company's principal
retirement plans are:
June 30
---------------------
1999 1998
--------- ---------
Defined benefit retirement plans $ 28,149 $ 35,263
Canadian Separation Allowance Plan 5,953 6,264
Postretirement benefits other than pensions 43,038 41,001
--------- ---------
Accrued retirement benefits $ 77,140 $ 82,528
========= =========
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 associate's compensation during the
three highest paid consecutive years of service.
F-10
<PAGE>
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. 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.
The following table sets forth the principal plans' funded status as reflected
in the consolidated balance sheets:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
-------------------------------- ---------------------------------
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Assets Benefits Exceed Assets
(Qualified) (Non-qualified) (Qualified) (Non-qualified)
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Accumulated benefit obligation $ 245,890 $ 42,740 $ 230,886 $ 38,474
============= ============== ============= ==============
Projected benefit obligation $ 290,704 $ 86,703 $ 275,139 $ 78,519
Fair value of plan assets 411,102 - 381,398 -
------------- -------------- ------------- --------------
Over(under)funded $ 120,398 $ (86,703) $ 106,259 $ (78,519)
============= ============== ============= ==============
Net prepaid (accrued) benefit cost $ 26,691 $ (58,527) $ 13,778 $ (47,974)
============= ============== ============= ==============
</TABLE>
The following table sets forth the net periodic pension cost, contributions
and benefits paid for the principal plans:
Year Ended June 30
------------------------------
1999 1998 1997
-------- -------- --------
Net periodic pension cost $ 5,511 $ 4,411 $ 6,596
Company contributions 7,878 9,311 7,171
Participant contributions 54 - -
Benefits paid 14,593 16,040 12,697
During fiscal year 1999, the Company acquired a portion of KPMG's actuarial
consulting services. In connection with this transaction, the Company
recognized additional pension expense of $665,000.
F-11
<PAGE>
Assumptions used in the valuation for the U.S. plan, which comprises the
majority of the principal defined benefit pension plans, include:
June 30
-------
1999 1998 1997
---- ---- ----
Discount rate, projected benefit obligation 7.0% 6.8% 7.5%
Discount rate, net periodic pension cost 6.8% 7.5% 7.5%
Expected long-term rate of return on assets 10.0% 10.0% 10.0%
Rate of increase in compensation levels 5.3% 5.8% 5.8%
DEFINED CONTRIBUTION PLANS
The Company sponsors a savings plan which provides benefits to substantially
all U.S. associates and under which the Company matches employee
contributions at 50% of the first 6% of total pay (which includes base
salary, overtime and annual performance-based bonuses). Vesting of the
Company match occurs after three years for new employees and is 100% for all
employees hired before January 1, 1997. The expense in fiscal years 1999,
1998 and 1997 for the match was $4.5 million, $5.1 million and $2.0 million,
respectively. Under the plan, the Company also has the ability to make
discretionary profit-sharing contributions. The Company made no profit
sharing contributions during fiscal years 1999, 1998 or 1997. 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 1999, 1998 and 1997 amounted to $377,000, $293,000
and $414,000, respectively.
NOTE 6 - BENEFITS OTHER THAN PENSIONS
HEALTH CARE BENEFITS
The Company sponsors a contributory health care plan that 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 $2,495,000 at June 30, 1999 and
1998, and is included in accounts payable and accrued liabilities in the
consolidated balance sheets.
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-12
<PAGE>
The following table sets forth the principal plans' status as reflected in the
consolidated balance sheets:
June 30
----------------------
1999 1998
--------- ---------
Accumulated postretirement benefit obligation $ 34,981 $ 32,326
========= =========
Accrued benefit cost $ 44,419 $ 41,743
========= =========
The following table sets forth the net periodic postretirement benefit cost
for the principal plans:
Year Ended June 30
------------------------------------
1999 1998 1997
-------- -------- --------
Net periodic postretirement cost $ 3,507 $ 3,316 $ 3,243
Company contributions 1,092 660 883
Participant contributions 175 189 112
Benefits paid 1,267 849 995
Assumptions used in the valuation for the U.S. plan, which comprises the
majority of the principal postretirement plans, include:
<TABLE>
<CAPTION>
June 30
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Health care cost trend, accumulated benefit obligation:
Pre-65 benefits
(decreasing to 5.0% for 2004 and thereafter) 7.7% 8.4% 9.1%
Post-65 benefits
(decreasing to 5.0% for 2007 and thereafter) 7.1% 7.7% 8.3%
Discount rate, accumulated benefit obligation
postretirement benefit 7.0% 6.8% 7.5%
Discount rate, net periodic cost 7.0% 6.8% 7.5%
</TABLE>
F-13
<PAGE>
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of:
June 30
-----------------------
1999 1998
--------- ---------
Accounts payable and accrued liabilities $ 53,586 $ 55,865
Accrued salaries and bonuses 68,405 37,567
Current portion of defined benefit retirement plans
and postretirement benefits other than pensions 9,948 4,191
Accrued vacation 13,578 13,300
Advance billings 6,854 5,625
--------- ---------
Total accounts payable and accrued liabilities $ 152,371 $ 116,548
========= =========
NOTE 8 - LEASES
The Company leases office space and various computer equipment under operating
lease agreements with terms generally ranging from one to ten years. The
Company has entered into sublease agreements for some of its leased space. The
rental expense was $43,631,000, $43,133,000 and $42,079,000 for fiscal years
1999, 1998 and 1997, respectively. Sublease income was $4,208,000, $3,905,000
and $1,702,000 for fiscal years 1999, 1998 and 1997, respectively.
Future cash outlays for operating lease commitments and cash inflows for
sublease income are:
Lease Sublease
Commitments Income
----------- ---------
2000 $ 43,771 $ 3,388
2001 38,709 3,315
2002 30,614 2,963
2003 18,074 115
2004 14,043 -
thereafter 25,770 -
----------- ---------
$ 170,981 $ 9,781
=========== =========
As a result of relocations and the subleasing of excess office space, the
Company recognized lease termination losses of $341,000, $790,000 and
$12,107,000 in fiscal years 1999, 1998 and 1997, respectively.
NOTE 9 - NOTE PAYABLE
The Company has a $120,000,000 credit facility with a group of banks at an
interest rate that varies with LIBOR and/or the Prime Rate, plus an annual
commitment fee that varies with the Company's financial leverage and is paid
on the unused portion of the credit facility. No amounts were outstanding
under the revolving portion of the credit facility as of June 30, 1999;
$9,000,000 was outstanding at June 30, 1998. The credit facility requires
the Company to observe certain covenants (including requirements as to
F-14
<PAGE>
minimum net worth and other financial and restrictive covenants) and is
secured by a blanket lien on all assets. At June 30, 1999 the Company was in
compliance with all covenants under the credit facility. The revolving
portion of the credit facility is scheduled to mature on June 29, 2003.
Of the total credit line, $95,000,000 is available to the Company as
revolving credit for operating needs. The remaining $25,000,000 is available
to secure loans to associates 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 $20,316,000 and $15,617,000 at June 30, 1999 and
1998, respectively. Shares totaling 4,735,000 and 4,897,000 of the Company's
Redeemable Common Stock were pledged by shareholders to secure these loans at
June 30, 1999 and 1998, 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 sales by the Company 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. Amounts paid by the Company to repurchase Redeemable Common
Stock reflect 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 Company's
Redeemable Common Stock as of June 30, 1996, increased or decreased by net
income or losses, and all other Generally Accepted Accounting Principals
("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, (ii) eliminate annual
changes in the Currency Translation Adjustment occurring after June 30, 1996,
and (iii) eliminate the after tax increases or decreases in Net Book Value
recorded in accordance with GAAP as a result of the discontinuation of the
Benefits Administration Outsourcing Business. The Formula Book Value was $6.68
at June 30, 1999 and $6.05 at June 30, 1998.
F-15
<PAGE>
The following schedule computes the Formula Book Value per share at June 30:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Consolidated net worth (1) $ 36,882 $ 15,742
Adjustment for the compensation survey items:
50% of consolidated income received
from compensation survey business 5,915 5,915
Add: Adjustment for after-tax effect of discontinuation
of Benefits Administration Outsourcing Business 61,228 69,906
Add: Adjustment for after-tax effect of lease losses 3,606 4,733
--------- ---------
Formula Book Value of Redeemable Common Stock $ 107,631 $ 96,296
========= =========
Number of shares of Redeemable Common Stock outstanding 16,112 15,917
========= =========
Formula Book Value per share of Redeemable Common Stock $ 6.68 $ 6.05
========= =========
<FN>
(1)After adjusting for currency translation as specified in the Company's
bylaws of $3,602 in 1999 and $3,956 in 1998.
</FN>
</TABLE>
F-16
<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, 1999 were as follows:
Number of Redeemable
Shares Common Stock
---------- ------------
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
Redemption of shares (2,410,425) (13,141)
Issuance of shares 196,752 1,005
Adjustment of redemption value for
change in Formula Book Value per share - 12,341
---------- ------------
Balance at June 30, 1998 15,916,757 $ 96,296
Redemption of shares (2,361,542) (15,124)
Issuance of shares 2,557,201 15,451
Adjustment of redemption value for
change in Formula Book Value per share - 11,008
---------- ------------
Balance at June 30, 1999 16,112,416 $ 107,631
========== ============
The Company sponsors a Stock Purchase Plan ("SPP") which allows virtually all
associates to become shareholders. During 1999, the Company received
$15,451,000 from the sale of 2,557,201 shares of stock under the SPP. There
was no formal stock sale in fiscal year 1998, although for the fiscal year
ended June 30, 1998, the Company received $1,005,000 from the sale of 196,752
shares of stock outside of the SPP. During fiscal year 1997, the Company
received $15,414,000 from the sale of 3,126,670 shares of stock under the
SPP. During 1997, the Company paid each associate purchasing stock $0.50
per share, resulting in expense of $1,300,000.
F-17
<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 continuing operations income tax provision before
minority interest and discontinued operations include:
Year Ended June 30
------------------------------
1999 1998 1997
-------- -------- --------
Current tax expense:
U.S. $ 10,817 $ 9,972 $ 8,370
State and local 4,050 3,324 2,773
Foreign 3,877 1,820 1,484
-------- -------- --------
18,744 15,116 12,627
-------- -------- --------
Deferred tax (benefit) expense:
U.S. (5,776) (337) (4,188)
State and local (1,407) (1,706) (1,507)
Foreign (113) 61 2,138
-------- -------- --------
(7,296) (1,982) (3,557)
-------- -------- --------
Total provision for income taxes $ 11,448 $ 13,134 $ 9,070
======== ======== ========
F-18
<PAGE>
Deferred income tax assets (liabilities) included in the consolidated balance
sheets at June 30, 1999 and June 30, 1998 are comprised of the following:
June 30
-------
1999 1998
-------- ---------
Cash method of accounting for U.S. income
tax purposes $ - $ (15,561)
Difference between book and tax depreciation - (1,987)
Foreign temporary difference (2,595) (914)
-------- ---------
Gross deferred tax liabilities (2,595) (18,462)
Cash method of accounting for U.S. income
tax purposes 3,744 -
Difference between book and tax depreciation 3,202 -
Accrued retirement benefits 37,137 39,255
Amortization of deferred rent 5,697 6,794
Foreign temporary difference 6,367 3,092
Foreign net operating loss carryforwards 1,989 4,942
Discontinued operations exit costs 7,230 19,559
Other 317 2
-------- --------
Gross deferred tax assets 65,683 73,644
-------- --------
Deferred tax assets valuation allowance (6,882) (6,271)
-------- --------
Net deferred tax asset $ 56,206 $ 48,911
======== ========
The Company has foreign tax credit carryforwards for U.S. tax purposes of
$305,000. At June 30, 1999, the Company has unused loss carryforwards for
tax purposes in various jurisdictions outside the U.S. amounting to
$6,352,000, of which $4,350,000 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
($1,944,000), the tax effect of certain foreign temporary expenses
($4,563,000) and foreign tax credit carryforwards and other items ($375,000)
for which realizability is considered uncertain.
The net change in the valuation allowance of $611,000 in fiscal year 1999 and
$2,569,000 in fiscal year 1998 is due primarily to the tax effect of the
change in realizable foreign net operating losses, foreign tax credits and
non-deductible foreign expenses.
F-19
<PAGE>
Domestic and foreign components of income before taxes, minority interest and
discontinued operations for each of the three years ended June 30 are as
follows:
1999 1998 1997
-------- --------- --------
Domestic $ 15,203 $ (47,435) $ 14,861
Foreign 8,597 4,469 6,757
-------- --------- --------
$ 23,800 $ (42,966) $ 21,618
======== ========= ========
The reported income tax provision for continuing operations differs from the
amounts that would have resulted had the reported income before income taxes
been taxed at the U.S. federal statutory rate. The principal reasons for the
differences between the actual amounts provided and those which would have
resulted from the application of the U.S. federal statutory tax rate are as
follows:
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Calculated income tax provision at U.S.
federal statutory tax rate of 35% $ 8,330 $ (15,038) $ 7,507
Increase (reduction) resulting from:
Non-deductible compensation expense - 24,467 -
Results of non-U.S. affiliates taxed at other
than statutory rates (377) (324) (463)
Losses of non-U.S. affiliates for which no
current benefit is available 881 852 599
State income taxes, net of federal tax
benefit 1,207 1,618 1,266
Non-deductible amortization and other
expenses 849 758 700
Tax credits - (353) (888)
Other 558 1,154 349
--------- --------- --------
Income tax provision $ 11,448 $ 13,134 $ 9,070
========= ========= ========
</TABLE>
NOTE 12 - NON-RECURRING COMPENSATION CHARGE
In accordance with generally accepted accounting principles, the Company has
recorded a charge against operating results of $69,906,000 in 1998 as
compensation expense. This charge arises because the Company changed the
method of calculation of its Formula Book Value during 1998, through a
shareholder vote, to eliminate from the Formula Book Value calculation the
effect of the charge taken for discontinued operations resulting from the
discontinuation of the Company's Benefits Administration Outsourcing Business.
F-20
<PAGE>
The non-recurring compensation charge does not represent a call against
Company resources and will not recur unless the Company modifies its Formula
Book Value calculation again. The Company has separately disclosed in the
Statement of Operations the amount of the charge so that readers of the
financial statements may consider its effect on earnings and infrequent
nature. Excluding this charge, income from continuing operations for the
Company in 1998 would have been $13,700,000 compared to the reported net loss
from continuing operations.
NOTE 13 - SEGMENT INFORMATION
In fiscal year 1999, the Company adopted SFAS No. 131 Disclosures about
Segments of an Enterprise and Related Information. The Company is primarily
organized geographically and has seven reportable segments:
(1) U.S. East
(2) U.S. Central
(3) U.S. West
(4) Asia/Pacific
(5) Canada
(6) Latin America
(7) Data Services
The Company evaluates the performance of its segments and allocates resources
to them based on net operating income. Prior year data has been restated to be
consistent with current year classifications for comparative purposes.
F-21
<PAGE>
The table below presents specified information about reported segments as of
and for the year ended June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. U.S. Asia/ Latin Data
East Central West Pacific Canada America Services Total
---- ------- ---- ------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External fees $ 150,959 $ 130,568 $ 54,496 $ 44,404 $ 36,515 $ 5,691 $ 12,796 $ 435,429
Intersegment fees 37,738 24,369 18,957 4,284 5,010 1,424 329 92,111
Net operating
income 45,287 27,087 1,236 7,085 3,488 223 3,736 88,142
Interest expense 1,158 856 471 17 300 98 5 2,905
Depreciation &
amortization 5,950 4,414 3,351 1,281 1,186 143 185 16,510
Receivables 47,198 39,905 18,730 12,729 12,491 2,527 - 133,580
Income from
affiliates 2,524
</TABLE>
The table below presents specified information about reported segments as of
and for the year ended June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. U.S. Asia/ Latin Data
East Central West Pacific Canada America Services Total
---- ------- ---- ------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External fees $ 129,337 $ 125,639 $ 68,076 $ 38,429 $ 36,221 $ 6,062 $ 13,004 $ 416,768
Intersegment fees 28,187 15,296 14,210 3,945 4,443 1,153 249 67,483
Net operating
income 28,286 25,127 10,476 65 4,315 574 3,742 72,585
Interest expense 963 710 494 33 314 68 14 2,596
Depreciation &
amortization 5,801 3,758 2,822 1,458 1,077 149 166 15,231
Receivables 36,044 33,113 21,375 11,719 11,992 2,097 - 116,340
Income from
affiliates 258
</TABLE>
The table below presents specified information about reported segments as of
and for the year ended June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. U.S. Asia/ Latin Data
East Central West Pacific Canada America Services Total
---- ------- ---- ------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External fees $ 126,077 $ 121,613 $ 63,989 $ 45,468 $ 34,743 $ 5,024 $ 12,062 $ 408,976
Intersegment fees 17,518 12,739 8,002 2,851 2,789 784 573 45,256
Net operating
income 18,169 26,797 11,595 5,162 2,595 225 3,146 67,689
Interest expense 1,165 799 322 10 262 35 17 2,610
Depreciation &
amortization 5,838 3,555 2,353 1,599 1,006 132 193 14,676
Receivables 34,042 32,416 15,134 17,821 10,812 2,345 - 112,570
Income from
affiliates 105
</TABLE>
Information about interest income and tax expense is not presented as it is
not produced internally.
F-22
<PAGE>
A reconciliation of the information reported by segment to the consolidated
amounts follows for the years ended June 30:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
FEES:
Total segment external and intersegment fees $ 527,540 $ 484,251 $ 454,232
Reimbursable expenses not included in segment fees 30,426 28,686 30,091
Other, net (1,106) (277) 2,179
Consolidated fees --------- --------- ---------
$ 556,860 $ 512,660 $ 486,502
========= ========= =========
NET OPERATING INCOME:
Total segment income $ 88,142 $ 72,585 $ 67,689
Non-recurring compensation charge - (69,906) -
Sublease loss (341) (790) (12,107)
Income from affiliates 2,524 258 105
Differences in allocation methods for depreciation,
G&A and pension costs 1,277 (6,208) 3,913
Gain on sale of business units 2,723 3,093 -
Discretionary payments (67,194) (37,400) (34,703)
Other, net (3,331) (4,598) (3,279)
--------- --------- ---------
Consolidated pretax income(loss)from continuing operations $ 23,800 $ (42,966) $ 21,618
========= ========= =========
INTEREST EXPENSE:
Total segment expense $ 2,905 $ 2,596 $ 2,610
Differences in allocation method (259) 172 (1,104)
--------- --------- ---------
Consolidated interest expense $ 2,646 $ 2,768 $ 1,506
========= ========= =========
DEPRECIATION & AMORTIZATION:
Total segment expense $ 16,510 $ 15,231 $ 14,676
Capitalized software amortization, not allocated to segments - 12,267 9,451
Goodwill amortization, not allocated to segments 1,568 549 695
Differences in allocation method and other (2,830) (3,053) (2,728)
--------- --------- ---------
Consolidated depreciation and amortization expense $ 15,248 $ 24,994 $ 22,094
========= ========= =========
RECEIVABLES:
Total segment receivables $ 133,580 $ 116,340 $ 112,570
Net valuation differences and receivables of discontinued operations 2,286 13,056 11,191
--------- --------- ---------
Total billed and unbilled receivables 135,866 129,396 123,761
Assets not reported by segment 178,094 138,914 208,017
Consolidated assets --------- --------- ---------
$ 313,960 $ 268,310 $ 331,778
========= ========= =========
</TABLE>
F-23
<PAGE>
The following represents total fees and long lived assets information by
geographic area as of and for the years ended June 30:
<TABLE>
<CAPTION>
Fees Long Lived Assets
--------------------------------- ---------------------------------
1999 1998 1997 1999 1998 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
United States $ 464,521 $ 424,246 $ 395,351 $ 105,481 $ 95,617 $ 156,692
Foreign 92,339 88,414 91,151 25,794 20,731 17,781
--------- --------- --------- --------- --------- ---------
$ 556,860 $ 512,660 $ 486,502 $ 131,275 $ 116,348 $ 174,473
========= ========= ========= ========= ========= =========
</TABLE>
Fee revenue is based on the country of domicile for the legal entity which
originated the fees. Exclusive of the United States, fees from no single
country constituted more than 10% of consolidated revenues. Fees from no
single customer constituted more than 10% of consolidated revenues.
NOTE 14 - RELATED PARTY TRANSACTIONS
In connection with the contractual servicing of the Retained Clients (as
defined in Note 16) which continued through September 1998, Wellspring
provided the services to those clients on behalf of the Company. Expenses
charged to the Company by Wellspring for such services for fiscal 1999, 1998
and 1997 were $11,600,000, $41,811,000 and $40,313,000, respectively. The
Company's obligation to service the Retained Clients ceased in fiscal year
1999 and there were no amounts due to Wellspring at June 30, 1999, compared
with $1,186,000 at June 30, 1998.
NOTE 15 - 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 to the Company resulting from such litigation,
and management believes that the Company carries adequate insurance, above
reasonable deductibles, or has appropriately accrued against any foreseeable
outcome of such litigation.
As of June 30, 1999, the Company and its affiliates had outstanding letters
of credit of $2,225,000.
The Company continues to guarantee certain leases for office premises and
equipment for Wellspring. Minimum remaining payments guaranteed under these
leases at June 30, 1999 total $59,800,000, which expire at various dates
through 2007. These leases are also jointly and severally guaranteed by the
Company's former partner in Wellspring, State Street. The estimated loss from
the potential exercise of these guarantees has been included in the loss on
disposal of the Benefits Administration Outsourcing Business.
Anticipated commitments of funds for fiscal year 2000 are estimated at
$30,100,000, which includes expected purchases of fixed assets and an
installment payment during the fiscal year related to the purchase of one
consulting operation. The Company expects operating cash flows to provide for
the Company's cash needs.
F-24
<PAGE>
NOTE 16 - DISCONTINUED OPERATIONS
During the third quarter of fiscal year 1998, the Company discontinued its
Benefits Administration Outsourcing Business, including its investment in its
affiliate Wellspring Resources LLC ("Wellspring"), pursuant to a Redemption,
Restructuring, and Indemnity Agreement ("the Restructuring Agreement") by
which Wellspring redeemed the Company's 50% interest in Wellspring effective
April 1, 1998. The restructuring effected, pursuant to the Restructuring
Agreement, the implementation of a discontinuation plan approved by the
Company's Board of Directors on February 18, 1998. Under the Restructuring
Agreement, certain outsourcing contracts retained by the Company when
Wellspring was initially formed in 1996 ("Retained Clients") would continue to
be performed until their respective contract expirations.
In connection with the restructuring, the Company agreed to indemnify
Wellspring for certain costs and losses as a result of services provided by
Wellspring on the Company's behalf. Further, the Company was released from
certain liabilities relating to the Wellspring business in connection with the
redemption.
In 1998, the Company recorded a pre-tax loss on discontinuation of
$109,800,000, which included the $45,200,000 write-off of its investment in
Wellspring, a $14,000,000 write-off of net capitalized software development
costs for the Retained Clients and a $50,600,000 provision for completion of
any obligations to clients, vendors or its former venture partner.
In October 1998, the Company consummated agreements with the remaining
Retained Clients, Wellspring, and its former venture partner to transfer
operating responsibility for these clients to Wellspring, clarifying the
remaining future obligations and costs related to the discontinuation.
Management believes that savings of $25,000,000 compared with initial
estimates made in the third quarter of fiscal 1998 and $15,000,000 from the
amount provided at June 30, 1998 will be realized from these events. The
Company reduced the amount of its provision for losses from disposal of the
Benefits Administration Outsourcing Business in the second quarter of fiscal
year 1999. A credit to income of $15,000,000, less the associated tax expense
of $6,322,000, is reflected in the Consolidated Statement of Operations for
fiscal year 1999 in the line "Adjustment (loss) on disposal of discontinued
Outsourcing Business".
F-25
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(THOUSANDS OF DOLLARS)
Additions Additions Balance at
Balance at Charged Charged to End of
Description Beginning of Year Against Fees Other Accounts Deductions Year
----------- ----------------- ------------ -------------- ---------- ----
Year Ended June 30, 1999
------------------------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts $ 2,142 $ 9,503 $ - $ (7,944) $ 3,701
Valuation allowance
for deferred tax assets 6,271 - 611(1) - 6,882
Year Ended June 30, 1998
------------------------
Allowance for
doubtful accounts $ 2,525 $ 5,613 $ - $ (5,996) $ 2,142
Valuation allowance
for deferred tax assets 3,702 - 2,569(1) - 6,271
Year Ended June 30, 1997
------------------------
Allowance for
doubtful accounts $ 5,161 $ 6,853 $ - $ (9,489) $ 2,525
Valuation allowance
for deferred tax assets 3,331 - 371(1) - 3,702
<FN>
(1) Represents current year net operating loss carryforwards and the
nondeductible foreign expenses for which realizability is considered
uncertain.
</FN>
</TABLE>
F-26
WATSON WYATT & COMPANY
SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY NAME JURISDICTION OF Name(s) under which
INCORPORATION/ such subsidiary does
ORGANIZATION business (if
different)*
- --------------- --------------- --------------------
Watson Wyatt Argentina S.A. Argentina
Watson Wyatt Australia Pty Ltd Australia
Wycomp Pty Ltd Australia
Watson Wyatt S.A. Belgium
G&H Consulting Actuaries B.V. Belgium
Watson Wyatt Brasil Ltda. Brazil
Watson Wyatt Company Limited Canada
Watson Wyatt Consultancy (Shanghai) China
Ltd.
Watson Wyatt Colombia S.A. Colombia
Watson Wyatt S.A.R.L. France
Watson Wyatt GmbH Germany
Wyatt Bode Grabner GmbH Germany
Watson Wyatt International Pension
Trustees Ltd. Guernsey, Channel
Islands
Watson Wyatt Hong Kong Limited Hong Kong
Watson Wyatt Systems Ltd. Hong Kong
Watson Wyatt India Private Limited India
P.T. Watson Wyatt Purbajaga Indonesia
Watson Wyatt ISSO s.r.l. Italy
Watson Wyatt K.K. Japan
Watson Wyatt (Malaysia) Sdn. Bhd. Malaysia
Watson Wyatt Holdings (Mauritius) Mauritius
Limited
Wyatt Internacional, S.A. de C.V. Mexico
Watson Wyatt Mexico, S.A. de C.V. Mexico
Watson Wyatt B.V. Netherlands
Watson Wyatt European Region B.V. Netherlands
Watson Wyatt New Zealand Limited New Zealand
Retirement Advisory Services (NZ)
Limited New Zealand
Retirement Trustees NZ Limited New Zealand
Watson Wyatt Philippines, Inc. Philippines
Watson Wyatt Puerto Rico, Inc. Puerto Rico
Watson Wyatt Singapore Pte. Ltd. Singapore
Watson Wyatt de Espana, S.A. Spain
Watson Wyatt Lanka (Private) Limited Sri Lanka
Watson Wyatt AB Sweden
Watson Wyatt AG Switzerland
Watson Wyatt (Thailand) Limited Thailand
Graham & Company Limited U.K.
PCL (1991) Limited U.K.
PCL Limited U.K.
The Wyatt Company (UK) Limited U.K.
The Wyatt Company Holdings Limited U.K.
Watson Wyatt Holdings (Europe) U.K.
Limited
Watson Wyatt Limited U.K.
Wyatt Financial Services Limted U.K.
Wyatt Pension Plan Trustee Limited U.K.
Watson Wyatt Investment Consulting, U.S. Delaware
Inc.
Wyatt Preferred Choice, L.P. U.S. Delaware
Wyatt Data Services, Inc. U.S. Delaware
Wyatt Preferred Choice, L.L.C. U.S. Delaware
Wyatt Asset Services, Inc. U.S. Massachusetts
Watson Wyatt International, Inc. U.S. Nevada
Watson Wyatt & Company II U.S. Nevada
*All of these subsidiaries do business under their own name or under the name
Watson Wyatt Worldwide.
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 September 8, 1999 relating to the financial statements and financial
statment schedule, which appears in this Form 10-K.
/S/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
September 28, 1999
Exhibit 24
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 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,
1999.
/S/ Ernst & Young LLP
- ---------------------
Ernst & Young LLP
Jacksonville, Florida
September 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-START> Jul-01-1998
<PERIOD-END> Jun-30-1999
<CASH> 35,985
<SECURITIES> 0
<RECEIVABLES> 139,567
<ALLOWANCES> 3,701
<INVENTORY> 0
<CURRENT-ASSETS> 182,685
<PP&E> 123,165
<DEPRECIATION> 80,368
<TOTAL-ASSETS> 313,960
<CURRENT-LIABILITIES> 170,993
<BONDS> 109,018
0
0
<COMMON> 16,112
<OTHER-SE> 17,168
<TOTAL-LIABILITY-AND-EQUITY> 313,960
<SALES> 0
<TOTAL-REVENUES> 556,860
<CGS> 462,056
<TOTAL-COSTS> 533,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,646
<INCOME-PRETAX> 23,800
<INCOME-TAX> 11,448
<INCOME-CONTINUING> 12,352
<DISCONTINUED> 8,678
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,813
<EPS-BASIC> 1.37
<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.
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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.
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