SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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.
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PART I
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ITEM 1. BUSINESS.
GENERAL
Watson Wyatt & Company, including its subsidiaries, (collectively, "Watson
Wyatt" or the "Company") is a global provider of human capital consulting
services. The Company operates on a geographical basis from 59 offices in 18
countries throughout North America, Asia-Pacific and Latin America. The Company
provides services in three principal practice areas: employee benefits, human
resources technologies and human capital consulting. The Company was
incorporated in Delaware on February 17, 1958. Including predecessors, the
Company has been in business since 1946. The Company conducted business as The
Wyatt Company until changing its corporate name to Watson Wyatt & Company in
connection with the establishment of the Watson Wyatt Worldwide alliance. In
1995, the Company entered into an alliance agreement with R. Watson & Sons (now
Watson Wyatt Partners), a United Kingdom-based actuarial, benefits and human
resources consulting partnership that was founded in 1878. Since 1995, the
Company has marketed its services globally under the Watson Wyatt Worldwide
brand, sharing resources, technologies, processes and business referrals.
Watson Wyatt is owned almost entirely by its active employees. The Company's
principal executive offices are located at 6707 Democracy Boulevard, Suite 800,
Bethesda, MD 20817.
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
improve 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 also produces custom and standard compensation,
benefits and best practices surveys and reference works to clients throughout
the world. Over 5,000 companies participate in its surveys and its services
include over seventy remuneration, benefits and employment practices references
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 risk management consulting services - in order
to focus on these core consulting areas.
While the company groups services into functional categories, management
believes its primary strength is the ability to deliver its services without
boundaries to meet the requirements of its clients.
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COMPETITION
The human resource consulting business is highly competitive. The Company
believes that there are several barriers to entry, such as the need to assemble
specialized intellectual capital to provide expertise on a global scale, and
that it has developed significant competitive advantages in providing human
resources consulting services. However, the Company faces intense competition
from several different sources.
Current and anticipated competitors include:
- - major human resources consulting firms, such as William M. Mercer and
Towers Perrin and the administration/consulting firm Hewitt Associates;
- - smaller benefits and compensation consulting firms, such as Buck
Consultants, The Segal Company and Hay Group;
- - the human resources consulting practices of public accounting and
consulting firms, such as PricewaterhouseCoopers and Booz, Allen &
Hamilton;
- - information technology consulting firms, such as Andersen Consulting and
Internet/intranet development firms; and
- - boutique consulting firms comprised primarily of professionals formerly
associated with the firms mentioned above.
Watson Wyatt is ranked fourth or fifth among the top HR consulting companies,
based on revenues, according to surveys of HR consulting companies from the
1998 Kennedy Information Research Group report, June 1999 Consultants News and
December 1999 Business Insurance rankings.
The market for the Company's services is subject to change as a result of
regulatory, legislative, competitive and technological developments and to
increased competition from established and new competitors. The Company
believes that the primary determinants of selecting a human resources
consulting firm include reputation, ability to provide measurable increases to
shareholder value, global scale, service quality, and the ability to tailor
services to a client's unique needs. The Company believes that it competes
favorably with respect to these factors.
AFFILIATES
Watson Wyatt Worldwide Alliance: Recognizing that a global organization is
essential to service the needs of its clients, the Company established
operations throughout Europe in the late 1970's by acquiring local firms and
opening new offices. Responding to the rapidly increasing globalization of the
world economy, the Company made a strategic decision in 1995 to strengthen its
European capabilities significantly and extend its global reach by entering
into an alliance agreement with R. Watson & Sons (now Watson Wyatt Partners), a
United Kingdom-based actuarial, benefits and human resources consulting
partnership that was founded in 1878. Since 1995, the Company has marketed its
services globally under the Watson Wyatt Worldwide brand, sharing resources,
technologies, processes and business referrals.
The Watson Wyatt Worldwide global alliance maintains 85 offices in 31 countries
and employs over 5,300 employees. Watson Wyatt & Company operates 59 offices in
18 countries in North America, Latin America and Asia-Pacific. Watson Wyatt
Partners operates 12 offices in the United Kingdom, Ireland, Africa and the
Caribbean. The alliance operates 14 offices in 9 continental European countries
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principally through a jointly owned holding company, Watson Wyatt Holdings
(Europe) Limited, which is 25% owned by the Company and 75% owned by Watson
Wyatt Partners.
WELLSPRING: 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 & Company operates in 59 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 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
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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
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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 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.
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/A. 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/A and have been restated to reflect the Company's
discontinued operations.
The 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/A. Amounts are in thousands except per
share data.
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<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA: 1999 1998 1997 1996 1995
(amounts are in thousands, except per share data) ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Fees $ 556,860 $ 512,660 $ 486,502 $ 475,298 $ 465,788
Operating expenses:
Salaries and benefits 298,925 268,611 252,302 250,103 250,507
Stock incentive bonus plan 22,600
Non-recurring compensation charge
related to formula book value change - 69,906 - - -
Occupancy & communications 62,915 62,061 72,155 60,566 71,173
Professional and subcontracted services 47,863 49,907 48,827 42,450 43,613
Other 29,753 26,779 23,871 23,637 25,135
---------- --------- --------- --------- ---------
462,056 477,264 397,155 376,756 390,428
General & administrative expenses 56,578 51,759 45,696 38,656 41,313
Depreciation & amortization 15,248 24,994 22,094 25,541 21,103
---------- --------- --------- --------- ---------
533,882 554,017 464,945 440,953 452,844
---------- --------- --------- --------- ---------
Income (loss) from operations 22,978 (41,357) 21,557 34,345 12,944
Other:
Net interest income 944 901 1,462 1,441 1,343
Net interest (expense) (2,646) (2,768) (1,506) (930) (1,507)
Income (loss) from affiliates 2,524 258 105 (820) (576)
---------- --------- --------- --------- ---------
Income (loss) before income taxes and
minority interest 23,800 (42,966) 21,618 34,036 12,204
Income taxes 11,448 13,134 9,070 14,071 6,369
Minority interest (217) (112) (167) (130) (127)
Cumulative effect of change in accounting for
postemployment benefits, net of tax benefit
of $1,000 - - - - (800)
---------- --------- --------- --------- ---------
Income (loss) from continuing operations 12,135 (56,212) 12,381 19,835 4,908
Discontinued operations 8,678 (69,906) (11,483) (10,480) (4,059)
Net income (loss) $ 20,813 $(126,118) $ 898 $ 9,355 $ 849
========== ========= ========= ========= =========
Earnings (loss) per share, continuing
operations, basic and fully diluted $ 0.80 $ (3.27) $ 0.71 $ 1.07 $ 0.25
Earnings (loss) per share, basic and
fully diluted $ 1.37 $ (7.34) $ 0.05 $ 0.51 $ 0.05
Weighted average shares outstanding 15,215 17,170 17,438 18,516 19,248
As of June 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents $ 35,985 $ 13,405 $ 26,257 $ 21,694 $ 11,860
Net working capital 11,692 23,748 21,307 18,788 49,826
Total assets 313,960 268,310 331,778 320,819 286,622
Notes payable and book overdrafts 248 11,666 408 --- ---
Redeemable common stock 107,631 96,296 96,091 90,214 86,275
Total stockholders' (deficit) (74,351) (84,510) (12,205) (5,832) (6,562)
Shares outstanding 16,112 15,917 18,130 18,262 19,130
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Watson Wyatt & Company, including its subsidiaries, is a global provider of
human capital consulting services. The Company operates on a geographic basis
from 59 offices in 18 countries throughout North America, Asia-Pacific and
Latin America. The Company provides services in three principal practice areas:
employee benefits, human resources technologies and human capital consulting.
Although the Company operates globally as an alliance with its affiliates, its
revenues and operating expenses reflect solely the results of operations of
Watson Wyatt & Company. The Company's share of the results of its affiliates,
recorded using the equity method of accounting is reflected in the "Income/loss
from affiliates" line. The Company's principal affiliates are Watson Wyatt
Partners, in which it holds a 10% interest in a defined distribution pool, and
Watson Wyatt Holdings (Europe) Limited, a holding company through which the
Company conducts continental European operations. The Company owns 25% of
Watson Wyatt Holdings (Europe) Limited and Watson Wyatt Partners owns the
remaining 75%.
The Company derives substantially all of its revenue from fees for consulting
services, which generally are billed at standard hourly rates or on a fixed-fee
basis; management believes the approximate percentages are 60% and 40%,
respectively. Clients are typically invoiced on a monthly basis with revenue
recognized as services are performed. For the most recent three fiscal years,
fees from U.S. consulting operations have comprised approximately 80% of
consolidated revenues. No single client accounted for more than 3% of the
Company's consolidated revenues for any of the most recent three fiscal years.
The Company's most significant expense is compensation to employees, which
typically comprises over 60% of total costs of providing services. In addition
to payroll and related benefits and taxes, compensation to employees also
includes incentive bonus expense, which is linked to the Company's operating
performance. Other significant costs of providing services include office rent
and related costs, communications and professional and subcontracted services.
Historically, the Company has paid incentive bonuses to associates under a
fiscal year-end bonus program. Beginning in fiscal year 1999, in addition to
annual fiscal year-end bonuses, the Company provided supplemental bonus
compensation to its employee shareholders pursuant to a the stock incentive
bonus plan in an amount representing all income in excess of a targeted amount.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998.
REVENUES. 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 9% growth in revenue. This increase is mainly
attributable to increases in various North American regions totaling $40.4
million and a further $5.9 million, or 13% increase in the Company's
Asia-Pacific region. The individual regions within North American showed the
following trends: U.S. East, a $34.6 million, or 21% increase; U.S. Central, a
$15.0 million, or 10% increase; and, U.S. West, a $9.7 million, or 11%,
decline. The fee increase in these regions can be attributed to increased
chargeable hours, accounting for approximately $32.6 million, and to the
realization of billing rate increases, accounting for approximately $7.8
million. Within North America the following individual lines of business, not
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all inclusive, showed the following trends: Benefits Group, a $35.1 million
increase, including $11.5 million of additional revenues from the first fiscal
quarter acquisition of selected units of KPMG's benefits consulting business;
HR Technologies Group, a $16.5 million increase, despite the sale in early
fiscal year 1999 of the defined contribution recordkeeping business which had
generated revenues in fiscal year 1998 of $6.0 million; Human Capital Group, a
$3.4 million decline in revenues amid a reorganization of the practice; and, no
risk and insurance consulting revenues due to the sale of this practice in late
fiscal year 1998, which had generated $9.2 million in fiscal year 1998
revenues.
COMPENSATION AND BENEFITS. For fiscal year 1999, salaries and employee benefits
expenses were $298.9 million, an increase of $30.3 million, or 11%, from fiscal
year 1998. This increase is due primarily to a 6% increase in headcount, and
annual increases in compensation and benefits. In fiscal year 1999, the Company
accrued, for the first time, a supplemental bonus under its stock incentive
bonus plan of $22.6 million, which amounts were paid in January 2000.
OCCUPANCY AND COMMUNICATIONS. 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 success in
negotiating advantageous leases of office space.
PROFESSIONAL AND SUBCONTRACTED SERVICES. 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. Other costs of providing services increased $3.0 million in 1999, which
is mainly attributable to increased travel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for fiscal year
1999 were $56.6 million, an increase of $4.8 million, or 9%, from fiscal year
1998. The increase was attributable to $4.8 million for providing technology
support to core consulting areas and $1.6 million for Year 2000 readiness.
These increases were offset by a $1.6 million decrease in marketing expenses
for business strategy initiatives from fiscal year 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased $9.7
million in fiscal year 1999 to $15.2 million. This decrease is due to higher
amortization of internally developed software in fiscal year 1998 of $11.6
million, primarily due to a reevaluation and subsequent reduction of the useful
lives of the related products. Without this item in fiscal year 1998,
depreciation and amortization expense increased $1.9 million in fiscal year
1999 related to purchases of capital assets.
INCOME FROM AFFILIATES. Income from affiliates was $2.5 million in fiscal year
1999 compared to $0.3 million in fiscal year 1998. The increase reflects
heightened synergies and focus within the Company's affiliated European
operations as well as improved business operations in the United Kingdom.
PROVISION (BENEFIT) FOR INCOME TAXES. 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%. Income tax expense of $13.1 million in fiscal year 1998 relates to a loss
before taxes, minority interest and discontinued operations of $43.0 million,
for an effective tax rate of (30.6%). The reason for reporting a tax expense
when the Company had a pretax loss and the disparity in effective tax rates is
the non-recurring compensation charge of $69.9 million in fiscal year 1998,
included in the loss before taxes of $43.0 million, which is permanently
non-deductible for tax purposes.
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DISCONTINUED OPERATIONS. In fiscal year 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.
NET INCOME (LOSS). 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.
Continuing operations income before income taxes and minority interest in
fiscal year 1999 of $23.8 million compares to the loss of $43.0 million in
fiscal year 1998, which includes the $69.9 million non-recurring compensation
charge related to the change in formula book value for stock repurchases. The
fiscal year 1999 results reflect significantly improved operating performance
and the accrual of bonuses under the stock incentive bonus plan, at the
discretion of the Company's Board of Directors.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
REVENUES. 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 is primarily attributable to an increase in
various North American regions totaling $34.0 million. The individual regions
within North America showed the following trends: a $12.0 million, or 15% rise
in fees generated by the U.S. West consulting region, a $12.0 million, or 8%
increase in the U.S. East region, and a $5.9 million, or 4% rise in fees in the
U.S. Central region. The increases are due primarily to the realization of
billing rate increases. Within North America the following individual lines of
business, not all inclusive, showed the following trends: Benefits Group, a
$4.3 million increase; Human Capital Group, a $10.8 million increase; and HR
Technologies Group, a 15.7 million increase. These North American increases
were partially offset by a decline of $5.4 million, or 11%, in the Asia-Pacific
region, largely reflecting regional economic issues.
COMPENSATION AND BENEFITS. For fiscal year 1998, salaries and employee benefit
expenses were $268.6 million, an increase of $16.3 million, or 6% from fiscal
year 1997. This is due primarily to a 2% increase in headcount and annual
salary increases.
NON-RECURRING COMPENSATION CHARGE. In fiscal year 1998, the Company recorded a
non-cash, non-recurring compensation charge of $69.9 million because it changed
the method of calculating the formula book value of its common stock to exclude
the effect of the discontinuance of its benefits administration outsourcing
business. There was no such charge in fiscal year 1997.
OCCUPANCY AND COMMUNICATIONS. Occupancy and communications expenses decreased
$10.1 million in fiscal year 1998. The Company relocated its corporate office
to a lower-cost suburban location 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
expenses.
PROFESSIONAL AND SUBCONTRACTED SERVICES. 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. Other costs of providing services increased $2.9 million in fiscal year
1998 due to increased travel and local office promotion expenses.
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GENERAL AND ADMINISTRATIVE. General and administrative expenses for fiscal year
1998 were $51.8 million, an increase of $6.1 million, or 13%, from fiscal year
1997. The increase is due to increased spending on corporate advertising and
promotional expenses of $4.0 million and business strategy initiatives of $2.0
million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $2.9
million in fiscal year 1998 to $25.0 million. This increase is primarily due to
the Company's decision to accelerate the amortization of internally developed
software in fiscal year 1998 by $6.8 million based upon a reevaluation and
subsequent reduction of the useful lives of the related products. Without this
acceleration, depreciation and amortization expense declined 18% due to a
decrease in the base of capital assets of $16.4 million in fiscal year 1998
from fiscal year 1997.
PROVISION (BENEFIT) FOR INCOME TAXES. Loss before income taxes, minority
interest and discontinued operations was $43.0 million in fiscal year 1998; the
provision for taxes was $13.1 million. The resulting effective tax rate of
(30.6%) compares with an effective tax rate of 42% for fiscal year 1997. The
major reason for the difference in effective tax rates is the fiscal year 1998
non-recurring compensation charge of $69.9 million included in the loss before
taxes of $43.0 million, which is permanently non-deductible for tax purposes.
Further, the effective tax rate increased in fiscal year 1998 by seven
percentage points due to changes in various tax jurisdictions with differing
rates, particularly foreign jurisdictions, and lower tax credits.
DISCONTINUED OPERATIONS. In the early 1990's the Company entered the employee
benefits administration outsourcing business and took on long-term contracts in
this area. In 1996, recognizing the significant capital requirements needed for
expansion in this area, the Company formed a joint venture called Wellspring
Resources with State Street Bank and Trust Company. In 1996 and 1997,
Wellspring Resources continued to require significant cash outlays and suffered
development and implementation delays. The combination of Wellspring Resources'
financial performance, which failed to meet the Company's expectations, as well
as a strategy evaluation that concluded that benefits administration
outsourcing did not leverage its consulting strengths, led the Board of
Directors to approve a plan of discontinuation of the benefits administration
outsourcing business in fiscal year 1998, the financial effect of which is
further described below.
NET INCOME (LOSS). Although the Company incurred 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 aggregate charges totaling $139.8 million on an after-tax
basis for the special compensation charge and the discontinued operations
charge. Fiscal year 1997 results include $11.5 million in after-tax charges for
the results of operations of the benefits administration outsourcing business,
prior to its discontinuation in fiscal year 1998.
The charges totaling $139.8 million in fiscal year 1998 were both associated
with the Company's discontinued operations in fiscal year 1998. The
discontinuation of its benefits administration outsourcing business resulted in
a $69.9 million loss net of taxes due to the withdrawal from this line of
business and is reported as a discontinued operation. Included in this amount
is the $6.8 million loss from operations prior to discontinuance and $63.1
million for the loss upon exit. The loss upon exit includes the write-off of
the Company's investment in Wellspring Resources, net capitalized software
development costs for the benefits administration outsourcing clients not
included in the Wellspring Resources joint venture and a provision for the
completion of any obligations to clients, vendors or the Company's former joint
venture partner.
-10-
<PAGE>
In connection with the discontinuation, the Company changed its bylaws to
modify the formula book value repurchase price of its stock to exclude the
effect of the discontinued operations from the formula book value calculation.
The applicable accounting rules required the Company to take a $69.9 million
non-cash, non-recurring compensation charge for this. This charge was reported
as a special compensation expense as a component of continuing operations. The
charge was measured by the difference between what the formula book value per
share was at June 30, 1998 and what it would have been at that date without the
modification. The non-cash charge had no effect on the Company's liquidity or
capital resources but significantly reduced its income from continuing
operations.
LIQUIDITY AND CAPITAL RESOURCES
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 on June 30, 2003. Ninety-five million dollars of the credit line is
allocated as revolving credit for operating needs, subject to certain borrowing
limitations. Of this amount, $92.8 million was available to the Company at June
30, 1999 and $2.2 million was unavailable as a result of support required for
letters of credit issued under the credit line. 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.
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 increase in receivables from clients
of $14.4 million decreased cash that would have been provided by operations.
The deferred income tax asset increased $7.3 million in fiscal year 1999 in
conjunction with the increase in accounts payable and accrued liabilities,
compared with a $2.0 million increase in fiscal year 1998.
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 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 relies primarily on funds from operations and short-term borrowings
for liquidity. The Company believes that it has access to ample financial
resources to finance anticipated growth, meet commitments to affiliates, as
well as support ongoing operations. Anticipated commitments of funds are
estimated at $30.1 million for fiscal year 2000, mainly for computer hardware
purchases and for office relocations and renovations. The Company expects
operating cash flows to provide for these cash needs. In future fiscal years,
the Company would expect that its capital needs would be similar in nature to
what it has incurred in the past. Capital expenditures will be required in
conjunction with office lease renewals and relocations required to support the
Company's growth strategy. Additionally, its consultants will need to have
access to hardware and software that will support servicing its client base. In
a rapidly changing technological environment, the Company anticipates it will
need to make investments in its knowledge sharing and financial systems
-11-
<PAGE>
infrastructure. The Company would expect cash from operations in conjunction
with its existing credit facility to adequately provide for these cash needs.
The Company's foreign operations do not materially impact 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 for their working
capital needs.
MARKET RISK
The Company is exposed to market risks in the ordinary course of business.
These risks include interest rate risk and foreign currency exchange risk. The
Company has examined its exposure to these risks and concluded that none of its
exposures in these areas are material to fair values, cash flow or earnings.
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, 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
-12-
<PAGE>
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 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.
-13-
<PAGE>
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.
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.
-14-
<PAGE>
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.
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.
-15-
<PAGE>
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
-16-
<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:May 15 , 2000 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 5/15/00
- ----------------- and Director
John J. Haley
/S/ Carl D. Mautz Vice President and Chief 5/15/00
- ----------------- Financial Officer
Carl D. Mautz
/S/ Peter L. Childs Controller 5/15/00
- -------------------
Peter L. Childs
/S/ Thomas W. Barratt Vice President and Director 5/15/00
- ---------------------
Thomas W. Barratt
/S/ Paula A. DeLisle Vice President and Director 5/15/00
- --------------------
Paula A. DeLisle
- -------------------
Barbara H. Franklin Director
/S/ David B. Friend Vice President and Director 5/15/00
- -------------------
David B. Friend
- -------------------
John J. Gabarro Director
-17-
<PAGE>
Signature Title Date
- --------- ----- ----
/S/ Ira T. Kay Vice President and Director 5/15/00
- --------------
Ira T. Kay
/S/ Brian E. Kennedy Vice President and Director 5/15/00
- --------------------
Brian E. Kennedy
/S/ Eric P. Lofgren Vice President and Director 5/15/00
- -------------------
Eric P. Lofgren
/S/ Robert D. Masding Director 5/15/00
- ---------------------
Robert D. Masding
- -------------------------
R. Michael McCullough Director
/S/ Gail E. McKee Vice President and Director 5/15/00
- -----------------
Gail E. McKee
- -------------------
Kevin L. Meehan Vice President and Director
- -------------------
Gilbert T. Ray Director
/S/ John A. Steinbrunner Vice President and Director 5/15/00
- ------------------------
John A. Steinbrunner
/S/ A. Grahame Stott Vice President and Director 5/15/00
- --------------------
A. Grahame Stott
/S/ Charles P. Wood, Jr.
- ------------------------
Charles P. Wood, Jr. Vice President and Director
-18-
<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 15 of this Form 10-K/A 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 accounting principles generally accepted in the United
States. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 14(a)(2) on page 15 of this Form 10-K/A 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 and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/S/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Washington, D.C.
September 8, 1999, except as to the
information presented in Notes 5 and 6,
for which the date is December 9, 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 298,915 268,611 252,302
Stock incentive bonus 22,610 - -
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 (income) 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, basic and fully diluted $ 0.80 $ (3.27) $ 0.71
============ ============ ============
Earnings (loss) per share, discontinued operations, basic and fully diluted $ 0.57 $ (4.07) $ (0.66)
============ ============ ============
Earnings (loss) per share, net income (loss), basic and fully diluted $ 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
(accumulated other comprehensive 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 Total
------------- ------------- ------------- -----
<S> <C> <C> <C> <C>
Balance at June 30, 1996 $ 30,677 $ 1,040 $ (37,549) $ (5,832)
Comprehensive income:
Net income 898 - - 898
Foreign currency translation adjustment - (204) - (204)
------------- ------------ ------------- -----------
Total comprehensive income 898 (204) - 694
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) (7,067)
------------- ------------ ------------- -----------
Balance at June 30, 1997 $ 24,633 $ 836 $ (37,674) (12,205)
Comprehensive loss:
Net loss (126,118) - - (126,118)
Foreign currency translation adjustment - (3,752) - (3,752)
------------- ------------ ------------- -----------
Total comprehensive loss (126,118) (3,752) - (129,870)
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) (12,341)
Adjustment of redemption value for non-recurring
compensation charge (see Note 12) - - 69,906 69,906
------------- ------------ ------------- -----------
Balance at June 30, 1998 $ (106,834) $ (2,916) $ 25,240 (84,510)
Comprehensive income:
Net income 20,813 - - 20,813
Foreign currency translation adjustment - 354 - 354
------------- ------------ ------------- -----------
Total comprehensive income 20,813 354 - 21,167
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) (11,008)
------------- ------------ ------------- -----------
Balance at June 30, 1999 $ (83,209) $ (2,562) $ 11,420 (74,351)
============= ============ ============= ===========
</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 intercompany accounts and
transactions. Investments in affiliated companies over which the Company has
the ability to exercise significant influence are accounted for using the
equity method.
RECLASSIFICATIONS - Certain amounts previously presented have been reclassified
to conform to the current presentation.
CASH AND CASH EQUIVALENTS - The Company considers short-term, highly liquid
investments with original maturities of 90 days or less to be cash equivalents.
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. Services rendered
are generally billed on a monthly basis using fee arrangements defined at the
inception of the project. 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 intercompany 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:
Ownership June 30
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
======== ======== ========
NOTE 4 - FIXED ASSETS
Furniture, fixtures, equipment and leasehold improvements are recorded at cost,
and presented net of accumulated depreciation or amortization. Furniture,
fixtures and equipment are depreciated using straight-line and accelerated
methods over lives ranging from three to seven years. Leasehold improvements
are amortized on a straight-line basis over the shorter of the assets' lives or
lease terms.
F-9
<PAGE>
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 asssets $ 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.
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.
F-10
<PAGE>
Net periodic pension cost consists of the following components:
Year Ended June 30
--------------------------------------
1999 1998 1997
---- ---- ----
Service cost $ 22,976 $ 18,340 $ 16,962
Interest cost 23,909 22,302 19,651
Expected return on plan assets (37,437) (31,910) (26,828)
Amortization of transition
obligation 201 201 199
Amortization of net
unrecognized gains (5,979) (6,316) (4,740)
Amortization of prior service
cost 1,841 1,794 1,352
--------- --------- ---------
Net periodic pension cost 5,511 4,411 6,596
Settlement loss - - 708
--------- --------- ---------
Net periodic pension cost
including settlements $ 5,511 $ 4,411 $ 7,304
========= ========= =========
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.
The following tables set forth the changes in the projected pension benefit
obligation and fair value of the pension plan assets:
June 30
--------------------
1999 1998
---- ----
Benefit obligation at beginning of year $ 353,658 $ 295,245
Service cost 22,976 18,340
Interest cost 23,909 22,302
Participant contributions 54 -
Actuarial losses/gains (8,503) 34,610
Benefit payments (14,593) (16,042)
Plan amendments - 647
Foreign currency adjustment (94) (1,444)
----------- -----------
Benefit obligation at end of year $ 377,407 $ 353,658
=========== ===========
June 30
--------------------
1999 1998
---- ----
Fair value of plan assets at beginning of year $ 381,398 $ 322,533
Actual return on plan assets 36,473 67,275
Company contributions 7,889 9,311
Participant contributions 54 -
Benefit payments (14,593) (16,042)
Foreign currency adjustment (119) (1,679)
----------- ----------
Fair value of plan assets at end of year $ 411,102 $ 381,398
=========== ==========
F-11
<PAGE>
The following table sets forth selected information for plans with accumulated
benefit obligations in excess of plan assets:
June 30
--------------------
1999 1998
---- ----
Projected benefit obligation $ 86,703 $ 78,519
Accumulated benefit obligation 42,740 38,474
Fair value of plan assets - -
The accrued pension benefit cost recognized in the Company's consolidated
balance sheets is computed as follows:
June 30
--------------------
1999 1998
---- ----
Funded status at end of year $ 33,695 $ 27,740
Unrecognized prior service cost 9,255 11,101
Unrecognized net gain (75,579) (74,030)
Unrecognized transition obligation 793 993
----------- -----------
Net accrued pension liability $ (31,836) $ (34,196)
=========== ===========
Prepaid pension benefit cost $ 26,691 $ 13,778
Accrued pension benefit liability (58,527) (47,974)
Intangible assets - -
Accumulated other comprehensive income - -
----------- -----------
Net accrued pension liability $ (31,836) $ (34,196)
=========== ===========
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%
F-12
<PAGE>
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.
Net periodic postretirement benefit cost consists of the following components:
Year Ended June 30
---------------------------------------
1999 1998 1997
---- ---- ----
Service cost $ 1,898 $ 1,848 $ 1,891
Interest cost 2,178 2,133 1,987
Amortization of transition
obligation 46 46 50
Amortization of net unrecognized
gains (488) (584) (559)
Amortization of prior service
cost (127) (127) (126)
--------- --------- ----------
Net periodic postretirement
benefit cost $ 3,507 $ 3,316 $ 3,243
========= ========= ==========
F-13
<PAGE>
The following tables set forth the changes in the accumulated postretirement
benefit obligation, company contributions and benefit payments:
June 30
--------------------
1999 1998
---- ----
Benefit obligation at beginning of year $ 32,326 $ 30,031
Service cost 1,898 1,848
Interest cost 2,178 2,133
Participant contributions 175 189
Actuarial losses/(gains) (563) (883)
Acquisitions/(divestitures) 245 -
Benefit payments (1,267) (849)
Foreign currency adjustment (11) (143)
--------- ---------
Benefit obligation at end of year $ 34,981 $ 32,326
========= ==========
June 30
--------------------
1999 1998
---- ----
Fair value of plan assets at beginning of year $ - $ -
Company contributions 1,092 660
Participant contributions 175 189
Benefit payments (1,267) (849)
--------- ----------
Fair value of plan assets at end of year $ - $ -
========= ==========
The accrued other postretirement benefit cost recognized in the Company's
consolidated balance sheets is computed as follows:
June 30
--------------------
1999 1998
---- ----
Funded status at end of year $ (34,981) $ (32,326)
Unrecognized prior service cost (1,325) (1,451)
Unrecognized net gain (8,763) (8,664)
Unrecognized transition obligation 650 698
------------ ------------
Net accrued postretirement liability $ (44,419) $ (41,743)
============ ============
Prepaid pension benefit cost $ - $ -
Accrued postretirement benefit liability (44,419) (41,743)
Intangible assets - -
Accumulated other comprehensive income - -
------------ ------------
Net accrued postretirement liability $ (44,419) $ (41,743)
============ ============
F-14
<PAGE>
Assumptions used in the valuation for the U.S. plan, which comprises the
majority of the principal postretirement plans, include:
June 30
--------------------------------------
1999 1998 1997
---- ---- ----
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%
A one percentage point change in the assumed health care cost trend rates would
have the following effect:
1% Increase 1% Decrease
----------- -----------
Effect on net periodic postretirement benefit
cost in fiscal year 1999 $ 233 $ (283)
Effect on accumulated postretirement benefit
obligation as of June 30, 1999 1,925 (2,189)
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.
F-15
<PAGE>
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 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 30, 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.
F-16
<PAGE>
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 are equal to the formula book value as of the prior year end, adjusted to
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.
The following schedule computes the formula book value per share at June 30:
1999 1998
---- ----
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
========== ==========
[1] After adjusting for currency translation as specified in the
Company's bylaws of $3,602 in 1999 and $3,956 in 1998.
F-17
<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 amount presented as redeemable common stock
outside the permanent shareholders' equity section is stated as the amount at
which the Company would be required to repurchase the shares, or the most
recent fiscal year end formula book value per share. In the permanent
shareholders' equity section, the "adjustment for redemption value less
(greater) than amounts paid/deemed paid in by shareholders" represents the
amount that the redeemable value is less than (exceeds) the cost of the stock.
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
========== ==============
F-18
<PAGE>
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.
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-19
<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-20
<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:
Year Ended June 30
--------------------------------------
1999 1998 1997
---- ---- ----
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
========== ========== ==========
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-21
<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.
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.
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>
F-22
<PAGE>
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>
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-23
<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-24
<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 of this report) 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-25
<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-26
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
SCHEDULE II
Valuation and Qualifying Accounts and Reserves
(Thousands of Dollars)
Balance at
Balance at Beginning Additions Charged Additions Charged End of
Description of Year Against Fees to 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-27
WATSON WYATT & COMPANY
SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF Name(s) under which
SUBSIDIARY NAME 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)
Ltd. China
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)
Limited Mauritius
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 A.B. 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)
Limited U.K.
Watson Wyatt Limited U.K.
Wyatt Financial Services Limited U.K.
Wyatt Pension Plan Trustee Limited U.K.
Watson Wyatt Investment
Consulting, Inc. U.S. Delaware
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.
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, except as to the information presented in Notes 5 and 6, for
which the date is December 9, 1999, relating to the financial statements and
financial statement schedule, which appears in this Form 10-K/A.
/S/PRICEWATERHOUSECOOPERS LLP
- --------------------------
PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
May 12, 2000
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/A of Watson Wyatt and Company for the year ended June 30,
1999.
Ernst & Young LLP
- -----------------
Ernst & Young LLP
Jacksonville, Florida
May 12, 2000
<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
ended
Year ended June June 30,
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>
SEE ACCOMPANYING NOTES.
-5-
<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:
Years ending June 30 Lease Commitments
-------------------- -----------------
1998 $ 7,659,054
1999 8,845,669
2000 9,296,342
2001 9,071,949
2002 6,823,480
Thereafter 30,002,877
=================
$ 71,699,371
=================
7. RELATED PARTIES
The Company's Board of Managers is comprised of officers and management of both
Wyatt and State Street as well as the Company's Chief Executive Officer who
serves as its Chairman. Due to the spin-off of Wyatt's previous division, WPC,
the Company was reliant on various Wyatt financial reporting processes through
the end of fiscal year 1997. The Company was charged approximately $78,000 for
these services during fiscal year 1997.
Capital contributed by Wyatt and State Street at June 30, 1997 and 1996 were
$73,500,000 and $39,462,000, respectively. Of the $39,462,000 of capital
contributed at June 30, 1996, $12,060,117 was receivable from State Street
which is included in receivable from affiliates in the balance sheet. As of
June 30, 1997, all of the capital contributed had been funded.
Under an agreement between the Company and Wyatt, the Company provides services
to certain clients whose contracts were retained by Wyatt. The client service
agreement provides (in part) that the Company may bill Wyatt for 100% of the
costs associated with providing services to the retained clients. As of June
30, 1997, Wyatt owed the Company $11,009,153 for retained client services.
Client fees and cost billed to Wyatt amounted to $40,313,000 and $10,829,000,
respectively, in 1997 and 1996.
-12-
<PAGE>
8. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is currently negotiating settlement of a long standing dispute over
the pricing of certain services from one of its major service providers. As of
June 30, 1997, the Company has recognized its liability to the service provider
to the extent of the Company's position in the negotiations. Should the dispute
be settled in favor of the service provider, the Company could be exposed to as
much as $2,200,000 in additional liability to the service provider. Of the
$2,200,000, approximately $1,900,000 would be recoverable from Wyatt under the
client services agreement.
-13-
