Filed Pursuant to Rule 424(b)(1)
Registration No. 333-72450
P R O S P E C T U S
[LOGO]
17,500,000 SHARES
WILLIS GROUP HOLDINGS LIMITED
COMMON STOCK
$24.25 PER SHARE
---------
The selling shareholders named in this prospectus are selling 17,500,000
shares of our common stock. The selling shareholders have granted the
underwriters an option to purchase up to 2,625,000 additional shares of common
stock to cover over-allotments. We will not receive any proceeds from the sale
of shares in this offering.
Our common stock is listed on the New York Stock Exchange under the symbol
"WSH". On November 8, 2001, the last reported sale price of our common stock was
$24.63 per share.
--------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 12.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------------
PER SHARE TOTAL
--------- ------------
Public Offering Price $24.25 $424,375,000
Underwriting Discount $ 0.97 $ 16,975,000
Proceeds to the Selling Shareholders $23.28 $407,400,000
The underwriters expect to deliver the shares to purchasers on or about
November 15, 2001.
--------------
SALOMON SMITH BARNEY
---------
JPMORGAN MORGAN STANLEY
---------
BANC OF AMERICA SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
UBS WARBURG
November 8, 2001
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. NEITHER WE
NOR THE SELLING SHAREHOLDERS ARE MAKING AN OFFER TO SELL THESE SECURITIES IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT COVER OF THIS PROSPECTUS.
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TABLE OF CONTENTS
PAGE
--------
Prospectus Summary.......................................... 1
Risk Factors................................................ 12
Forward Looking Statements.................................. 23
Use of Proceeds............................................. 24
Price Range of Common Stock and Dividend Policy............. 24
Capitalization.............................................. 25
Selected Historical Consolidated Financial Data............. 26
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
Supplemental Constant Currency Financial Data............... 47
Business.................................................... 50
Management.................................................. 69
Principal and Selling Shareholders.......................... 80
Certain Relationships and Related Transactions.............. 84
Description of Material Indebtedness........................ 86
Description of Capital Stock................................ 91
Certain Income Tax Consequences............................. 96
Shares Eligible for Future Sale............................. 99
Underwriting................................................ 101
Validity of Common Stock.................................... 104
Experts..................................................... 104
Where You Can Find More Information......................... 104
Index to Consolidated Financial Statements.................. F-1
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i
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS KEY INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. IT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU.
YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND THE
FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS INCLUDED IN THIS PROSPECTUS,
BEFORE MAKING AN INVESTMENT DECISION.
THE WILLIS GROUP
We are the third largest insurance broker in the world. We provide a broad
range of value-added risk management consulting and employee benefits and
insurance brokering services to approximately 50,000 clients worldwide and place
insurance with approximately 4,000 carriers. We trace our history to 1828, and
we have significant market positions in the United States, the United Kingdom
and, directly and through our associates, many other countries. We are one of
three recognized leaders in providing specialized risk management advisory and
other services on a global basis to clients in various industries, and have
particular expertise in the construction, aerospace, marine and energy
industries.
We and our associates serve a diverse base of clients located in more than
160 countries. Those clients include major multinational and middle-market
companies in a variety of industries, as well as public institutions. We serve
over 30% of the U.K. FTSE 100 companies and over 10% of the Fortune 1000
companies, with an average relationship of more than 10 years. With
approximately 13,000 employees around the world and a network of over 300
offices in 74 countries, in each case including our associates, we believe we
are one of only three insurance brokers in the world possessing the global
operating presence, broad product expertise and extensive distribution network
necessary to meet effectively the global risk management needs of many of our
clients. We do not underwrite insurance risks for our own account. For the year
ended December 31, 2000, our revenues were approximately $1.3 billion.
Insurance brokers, such as ourselves, provide essential services to users of
insurance and reinsurance products. Those users include corporations, public
institutions and insurance carriers. Brokers distribute insurance products and
provide highly specialized, and often highly technical, value-added risk
management consulting services. Through knowledge of the insurance market and
risk management techniques, the broker provides value to its clients by
assisting in the analysis of risks, helping formulate appropriate strategies to
manage those risks, negotiating insurance policy terms and conditions, placing
risks to be insured with insurance carriers through the broker's distribution
network and providing specialized consulting to companies seeking to retain a
portion of their own risk, known as self-insurance consulting, and other risk
management consulting services. Additionally, the broker provides value to
insurance carriers by assessing a potential insurance user's risk management
needs and structuring appropriate insurance programs to meet those needs, acting
as a principal distribution channel for insurance products, and providing access
to insurance buyers that most insurance companies are not equipped to reach on
their own.
According to BUSINESS INSURANCE, the 187 largest commercial insurance
brokers globally reported brokerage revenues totaling $21.6 billion in 2000. The
insurance brokerage industry, having recently gone through a period of rapid
consolidation, is led by its three global participants: Marsh & McLennan
Companies, Inc., with approximately 32% of the worldwide market referred to
above; Aon Corporation, with approximately 24% of the worldwide market; and us,
with approximately 6% of the worldwide market. The industry is highly fragmented
beyond these three largest brokers with the next largest broker having
approximately 3% of the worldwide market.
We have experienced and incentivized management, with our top 13 executives
averaging 18 years of experience in the insurance brokerage and insurance
industries and 12 years of experience with us. To date, approximately 4,500 of
our employees have invested or acquired interests in our equity either directly
or through our employee share incentive programs. We also benefit from strong
sponsorship through Kohlberg Kravis Roberts & Co. L.P., or KKR.
1
RECENT MANAGEMENT INITIATIVES
In late 1998, Trinity Acquisition Limited, an entity formed by affiliates of
KKR for purposes of effecting the acquisition, acquired our predecessor, Willis
Corroon Group plc, in a going private transaction. Since then, we have made
several significant changes to our management and operations. Most notably, we
have:
- - completed an initial public offering of approximately 16% of our common stock
in June 2001, the proceeds from which were used to redeem in full the
preference shares of one of our subsidiaries;
- - named Joseph J. Plumeri, formerly of Citigroup Inc., as Executive Chairman and
Chief Executive Officer in October 2000, who is reinvigorating our culture and
approach to sales and marketing;
- - added over 150 new managers and producers;
- - implemented a comprehensive restructuring in our North American operations,
resulting in an increase in the time brokers have for needs analysis and
product design with clients and a reduction of 277 employees;
- - implemented a comprehensive program designed to reduce duplication in finance,
information technology and human resources management;
- - designed and implemented new business monitoring tools to more rigorously
monitor our global operations on a pro-active basis; and
- - continued to invest in our International operations, particularly in Europe
and Latin America, to fill the few strategic gaps remaining in our global
network.
These efforts have contributed to an improvement in our revenue growth and
profitability. From 1998 to 2000, our total revenues on a constant currency
basis grew at a 7.4% compound annual growth rate despite an environment of
declining primary insurance and reinsurance premium rates. The growth rate of
our total revenues on a constant currency basis accelerated to 8.1% for 2000 and
11.4% for the nine months ended September 30, 2001. See "Supplemental Constant
Currency Financial Data". In addition, our Adjusted EBITDA margin increased from
17% in 1998 to 20% in 2000. For the nine months ended September 30, 2001, our
Adjusted EBITDA margin was 24% compared to 18% for the nine months ended
September 30, 2000. For an explanation of Adjusted EBITDA, see footnote
(f) under "Prospectus Summary--Summary Consolidated Financial Information". We
believe that there are further benefits to come from our efforts in 1999 and
2000, including further improvement in revenue growth and margins.
BUSINESS STRATEGY
Our strategic objectives are to continue to grow revenues, cash flow and
earnings and to enhance our position as the third largest global provider of
risk management services. The key elements of this strategy are to:
- - CAPITALIZE ON OUR STRONG GLOBAL FRANCHISE--We intend to expand services to
existing clients and target new clients in need of our global reach and
specialized expertise.
- - EMPHASIZE VALUE-ADDED SERVICES--We emphasize value-added, fee-based risk
management services designed to complement our brokerage business and increase
the quality and scope of our services.
- - FOCUS ON EXPANDING AND CROSS-SELLING OUR EMPLOYEE BENEFITS CAPABILITIES--We
intend to expand our sales of employee benefits services to our brokerage
clients and develop payroll, asset management and other services.
- - INCREASE OPERATING EFFICIENCIES--We are implementing cost reduction measures
designed to further streamline work processes to increase efficiency and
margins while improving client service.
2
- - CREATE A SINGLE COMPANY CULTURE--We are creating a single company culture
through a group-wide approach to training, risk analysis, product design and
selling and increased employee ownership.
- - PURSUE STRATEGIC ACQUISITIONS AND INVESTMENTS--We intend to strengthen our
global franchise through selective acquisitions and investments that
complement our existing business.
For a complete discussion of our business strategy, see "Business--Business
Strategy".
RISKS RELATING TO OUR BUSINESS
As part of your evaluation of our company, you should take into account the
risks we face in our business and not solely our competitive strengths and
business strategies. For example, we have substantial debt and debt service
requirements which may place us at a competitive disadvantage in our industry.
Further, our approximate 6% worldwide market share is significantly smaller than
the approximate 32% share held by Marsh & McLennan and the approximate 24% share
held by Aon, which may make it difficult for us to compete successfully against
these larger competitors. You should also be aware that there are various other
risks involved in investing in our common stock, including risks relating to,
among other things, our ability to borrow more debt, our reliance on commission
income, our exposure to potential liability resulting from errors and omissions,
other legal matters in which we are involved or could become involved, our
relationship with our controlling shareholders and the future price of our
common stock. For more information about these and other risks, see "Risk
Factors". You should carefully consider these risk factors together with all of
the other information included in this prospectus.
OUR CORPORATE INFORMATION
Willis Group Holdings Limited was incorporated in Bermuda in February 2001
and remains a Bermuda resident company. Prior to redomiciling in Bermuda in June
2001, we were a U.K. company operating under the name of TA I Limited.
Historical financial information presented herein has been retroactively
restated to reflect the redomiciliation. See Note 1 to the audited consolidated
financial statements of Willis Group Holdings Limited included elsewhere in this
prospectus. For administrative convenience, we utilize the offices of a
subsidiary company as our principal executive offices. The address is Ten
Trinity Square, London EC3P 3AX, England and the telephone number is
(011) 44-20-7488-8111.
3
THE OFFERING
Shares offered by the selling 17,500,000 shares of common stock
shareholders(1)............................
Shares to be outstanding after this 147,112,631 shares of common stock
offering(2)................................
Use of proceeds.............................. We will not receive any proceeds from this
offering.
Dividend policy.............................. We do not intend to pay dividends on our
shares of common stock in the foreseeable
future. Some of the debt instruments of our
subsidiaries significantly restrict their
ability to pay dividends directly or
indirectly to us, which effectively limits
our ability to pay dividends on our shares of
common stock.
New York Stock Exchange symbol............... WSH
- ------------------------
(1) Does not include 2,625,000 shares that the underwriters may purchase from
the selling shareholders to cover overallotments of shares, if any.
(2) Does not include:
- - 30,218,916 shares issuable upon the exercise of stock options outstanding as
of September 30, 2001, 2,745,873 of which are subject to currently exercisable
options at an average exercise price of L2.00 ($2.94, based on the exchange
rate as of September 30, 2001 of $1.47=L1.00) per share; and
- - 40,491,622 shares (which includes the 30,218,916 shares issuable upon the
exercise of stock options outstanding as of September 30, 2001) authorized and
reserved for issuance under our various stock plans as of September 30, 2001.
4
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial data presented below should be read in
conjunction with the audited consolidated financial statements of Willis Group
Holdings Limited and the notes to those statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus. The financial information as of September 30, 2001
and for each of the nine-month periods ended September 30, 2000 and 2001 and for
each of the two years ended December 31, 2000 and for the period from
September 2, 1998 to December 31, 1998 reflects the financial position and
results of operations of Willis Group Holdings Limited. The financial
information for the period from January 1, 1998 to September 1, 1998 and for
each of the two years ended December 31, 1997 reflects the financial position
and results of operations of our predecessor.
The summary historical financial data presented below as of September 30,
2001 and for the nine-month periods ended September 30, 2000 and 2001 have been
derived from the unaudited condensed consolidated financial statements of Willis
Group Holdings Limited included elsewhere in this prospectus, which financial
statements have been prepared in accordance with generally accepted accounting
principles in the United States, or U.S. GAAP. Because we earn revenue in an
uneven fashion during the year, the results for the nine months ended September
30, 2001 are not necessarily indicative of the results to be expected for the
year ended December 31, 2001. See "Management Discussion and Analysis of
Financial Condition and Results of Operations".
The summary consolidated financial data presented below for each of the two
years ended December 31, 2000 have been derived from the audited consolidated
financial statements of Willis Group Holdings Limited included elsewhere in this
prospectus, which financial statements have been prepared in accordance with
U.S. GAAP. The summary consolidated financial data presented below for the
period from September 2, 1998 to December 31, 1998 have been derived from the
audited consolidated financial statements of Willis Group Holdings Limited,
which are not included in this prospectus. Those financial statements were
presented in U.S. dollars and were prepared in accordance with generally
accepted accounting principles in the United Kingdom, or U.K. GAAP.
The summary consolidated financial data presented below for the period from
January 1, 1998 to September 1, 1998 and for each of the two years ended
December 31, 1997 have been derived from the audited consolidated financial
statements of our predecessor which are not included in this prospectus. The
term "our predecessor" refers to Willis Group Limited (formerly Willis Corroon
Group plc) before its acquisition by Trinity Acquisition Limited, one of Willis
Group Holdings Limited's wholly owned subsidiaries and an entity formed by
affiliates of KKR for purposes of effecting the acquisition. For financial
reporting purposes, that acquisition was deemed to have occurred on
September 2, 1998. Those financial statements were presented in pounds sterling
and were prepared in accordance with U.K. GAAP with a reconciliation of net
income and stockholders' equity from U.K. GAAP to U.S. GAAP.
The derived financial data presented below is stated in accordance with U.S.
GAAP. In this prospectus, unless otherwise specified or unless the context
otherwise requires, all references to "dollars" or "$" are to United States
dollars.
5
PREDECESSOR WILLIS GROUP HOLDINGS LIMITED
------------------------------------ -------------------------------------
YEAR ENDED JANUARY 1 TO SEPTEMBER 2 TO YEAR ENDED
DECEMBER 31, SEPTEMBER 1, DECEMBER 31, DECEMBER 31,
------------------- -------------- -------------- --------------------
1996(A) 1997(A) 1998(A) 1998(B) 1999 2000
-------- -------- -------------- -------------- -------- --------
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Total revenues............. $1,133 $1,134 $ 772 $ 413 $ 1,244 $ 1,305
General and administrative
expenses................. (959) (968) (655) (374) (1,136) (1,062)
Unusual items (c).......... -- -- (59) -- (47) (18)
Depreciation expense....... (38) (37) (26) (14) (41) (37)
Amortization of goodwill... (28) (29) (20) (11) (35) (35)
Gain (loss) on disposal of
operations............... 7 7 4 (2) 7 1
------ ------ ----- ------- ------- -------
Operating income (loss).... 115 107 16 12 (8) 154
Interest expense........... (3) (1) (3) (27) (89) (89)
Other expenses............. -- -- -- (8) (7) --
Loss on closure of
operations............... -- -- (34) -- -- --
------ ------ ----- ------- ------- -------
Income (loss) before income
taxes, equity in net
earnings of associates
and minority interest.... 112 106 (21) (23) (104) 65
Income tax expense......... (57) (49) (22) (7) (7) (33)
Equity in net earnings
(losses) of associates... 5 3 13 (4) 7 2
Minority interest.......... (1) (1) (1) (10) (28) (25)
------ ------ ----- ------- ------- -------
Net income (loss) available
for common
stockholders............. $ 59 $ 59 $ (31) $ (44) $ (132) $ 9
====== ====== ===== ======= ======= =======
Net earnings (loss) per
share--basic............. $ (0.50) $ (1.11) $ 0.07
======= ======= =======
Net earnings (loss) per
share--diluted........... $ (0.50) $ (1.11) $ 0.07
======= ======= =======
Weighted average number of
common shares
outstanding--basic....... 88 119 121
======= ======= =======
Weighted average number of
common shares
outstanding--diluted..... 88 119 121
======= ======= =======
WILLIS GROUP HOLDINGS LIMITED
------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 2001
--------- ---------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Total revenues............. $ 956 $1,037
General and administrative
expenses................. (784) (784)
Unusual items (c).......... (11) (145)
Depreciation expense....... (28) (25)
Amortization of goodwill... (26) (26)
Gain (loss) on disposal of
operations............... 1 22
------ ------
Operating income (loss).... 108 79
Interest expense........... (67) (63)
Other expenses............. -- --
Loss on closure of
operations............... -- --
------ ------
Income (loss) before income
taxes, equity in net
earnings of associates
and minority interest.... 41 16
Income tax expense......... (28) (36)
Equity in net earnings
(losses) of associates... 7 9
Minority interest.......... (16) (14)
------ ------
Net income (loss) available
for common
stockholders............. $ 4 $ (25)
====== ======
Net earnings (loss) per
share--basic............. $ 0.03 $(0.19)
====== ======
Net earnings (loss) per
share--diluted........... $ 0.03 $(0.19)
====== ======
Weighted average number of
common shares
outstanding--basic....... 121 133
====== ======
Weighted average number of
common shares
outstanding--diluted..... 121 133
====== ======
6
PREDECESSOR
------------------------------------
YEAR ENDED JANUARY 1 TO
DECEMBER 31, SEPTEMBER 1,
------------------- --------------
1996(A) 1997(A) 1998(A)
-------- -------- --------------
($ IN MILLIONS)
BALANCE SHEET DATA
(AS OF PERIOD END):
Total assets (d)...............
Net assets.....................
Total long-term debt...........
Common shares and additional
paid-in capital..............
Total stockholders' equity.....
OTHER FINANCIAL DATA:
EBITDA (e)..................... $ 181 $ 191 $ 132
Adjusted EBITDA (f)............ 185 204 140
Adjusted EBITDA margin (g)..... 16% 18% 16%
Operating income before
goodwill amortization and
unusual
items and gain (loss) on
disposal of operations (h)... $ 136 $ 129 $ 91
Operating income before
goodwill amortization and
unusual items and gain (loss)
on disposal of operations
margin (h)................... 12% 11% 12%
Net income (loss) before
goodwill amortization and
unusual items and gain (loss)
on disposal of operations
(h).......................... $ 87 $ 81 $ 65
Net cash flow provided by
operations (i)............... 77 128 (51)
Net cash flow (used in)
provided by investing
activities (i)............... (38) (225) (50)
Net cash flow (used in)
provided by financing
activities (i)............... (110) (19) 21
Capital expenditures........... 45 43 33
WILLIS GROUP HOLDINGS LIMITED
-----------------------------------------------------------------
SEPTEMBER 2 TO YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
-------------- -------------------- ------------------------
1998(B) 1999 2000 2000 2001
-------------- -------- -------- --------- ---------
($ IN MILLIONS) (UNAUDITED)
BALANCE SHEET DATA
(AS OF PERIOD END):
Total assets (d)............... $8,378
Net assets..................... 663
Total long-term debt........... 836
Common shares and additional
paid-in capital.............. 838
Total stockholders' equity..... 649
OTHER FINANCIAL DATA:
EBITDA (e)..................... $ 45 $ 142 $243 $172 $ 257
Adjusted EBITDA (f)............ 61 204 274 189 265
Adjusted EBITDA margin (g)..... 15% 15% 20% 18% 24%
Operating income before
goodwill amortization and
unusual
items and gain (loss) on
disposal of operations (h)... $ 25 $ 67 $206 $144 $ 228
Operating income before
goodwill amortization and
unusual items and gain (loss)
on disposal of operations
margin (h)................... 6% 5% 16% 15% 22%
Net income (loss) before
goodwill amortization and
unusual items and gain (loss)
on disposal of operations
(h).......................... $ (26) $ (67) $ 54 $ 36 $ 98
Net cash flow provided by
operations (i)............... 70 19 79 23 138
Net cash flow (used in)
provided by investing
activities (i)............... (1,458) (26) (41) (22) 6
Net cash flow (used in)
provided by financing
activities (i)............... 1,521 (25) (23) (12) (109)
Capital expenditures........... 16 41 30 19 20
- ------------------------------
NOTES TO SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(a) The summary consolidated financial data for each of the two years ended
December 31, 1997 and for the period from January 1, 1998 to September 1,
1998 have been derived from the audited consolidated financial statements of
our predecessor. Those financial statements were presented in pounds
sterling and were prepared in accordance with U.K. GAAP with a
reconciliation of net income and stockholders' equity from U.K. GAAP to U.S.
GAAP. Upon conversion of the financial information for purposes of
disclosure in this prospectus, the U.K. GAAP financial statement line items
were adjusted for U.S. GAAP differences. Certain reclassifications have been
made to conform prior years' data to the current U.S. GAAP presentation.
Consolidated results of operations were translated into U.S. dollars at the
average exchange rates of $1.64 and $1.56, in each case for the years ended
December 31, 1997 and 1996, respectively. For the period ended September 1,
1998, consolidated results of operations were translated into U.S. dollars
at the average exchange rate of $1.65.
(b) The summary consolidated financial data for the period from September 2,
1998 to December 31, 1998 have been derived from the audited consolidated
financial statements of Willis Group Holdings Limited. Those financial
statements were presented in U.S. dollars and were prepared in accordance
with U.K. GAAP. Upon conversion of the financial information for purposes of
disclosure in this prospectus, the U.K. GAAP financial statement line items
were adjusted for U.S. GAAP differences. Certain reclassifications have been
made to conform prior years' data to the current U.S. GAAP presentation.
7
(c) Unusual items consist of the following:
- a non-cash compensation charge of $145 million recognized in the nine
months ended September 30, 2001 related to the probable satisfaction of
the conditions of the performance-based stock options. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview";
- restructuring charges relating to implementation of changes to our North
American business processes, which were $11 million for the nine months
ended September 30, 2000 and also for the year ended December 31, 2000,
representing excess operating lease obligations, and $7 million for the
year ended December 31, 1999, representing employee termination benefits;
- restructuring charges relating to the exit from some U.S. business lines
for the year ended December 31, 2000 of $7 million. These consisted of
$4 million of employee termination benefits, $1 million relating to excess
operating lease obligations and $2 million relating to other costs;
- charges relating to claims and costs associated with the government
initiated review of personal pensions plans sold in the United Kingdom
between 1988 and 1994 of $40 million for the year ended December 31, 1999
and $41 million for the period from January 1 to September 1, 1998. See
Note 11 to the audited consolidated financial statements of Willis Group
Holdings Limited included elsewhere in this prospectus; and
- costs incurred in connection with the acquisition of our predecessor of
$18 million for the period from January 1 to September 1, 1998.
(d) As an intermediary, we hold funds in a fiduciary capacity for the account of
third parties, typically as the result of premiums received from clients
that are in transit to insurance carriers and claims due to clients that are
in transit from insurance carriers. We report premiums, which are held on
account of, or due from policyholders, as assets with a corresponding
liability due to the insurance carriers. Claims held by, or due to, us which
are due to clients are also shown as both assets and liabilities of ours.
All those balances due or payable are included in insurance and reinsurance
balances receivable and payable on the balance sheet. We earn interest on
those funds during the time between the receipt of the cash and the time the
cash is paid out. Fiduciary cash must be kept in certain regulated bank
accounts subject to guidelines, which generally emphasize capital
preservation and liquidity and is not generally available to service our
debt or for other corporate purposes.
(e) EBITDA is defined as operating income before unusual items, gain (loss) on
disposal of operations, the non-cash charges described below which were
required as a result of the conversion of Willis Group Holdings Limited's
accounts from U.K. GAAP to U.S. GAAP, depreciation and amortization, plus
our equity in pre-tax earnings of associates. Our equity in pre-tax earnings
of associates is shown in the table in note (f) below. EBITDA is presented
because we believe that it is a useful indicator of a company's ability to
incur and service debt. EBITDA should not be considered by investors as an
alternative to operating income or net income as an indicator of our
performance, nor as an alternative to cash flows from operating activities,
investing activities or financing activities as a measure of liquidity.
Because all companies do not calculate EBITDA identically, this presentation
of EBITDA may not be comparable to other similarly entitled measures of
other companies. The non-cash charges excluded from EBITDA consist of the
following:
- non-cash adjustments for pension expense of $(19) million and $(13)
million for the years ended December 31, 1996 and 1997, $(2) million and
$(2) million for the periods January 1 to September 1, 1998 and
September 2 to December 31, 1998, $(19) million and $11 million for the
8
years ended December 31, 1999 and 2000 and $21 million and $10 million for
the nine-month periods ended September 30, 2000 and 2001; and
- non-cash adjustments for revaluation of forward exchange contracts and,
for periods ending after January 1, 2001, interest rate swaps of
$17 million and $(9) million for the years ended December 31, 1996 and
1997, $0 million and $(6) million for the periods January 1 to
September 1, 1998 and September 2 to December 31, 1998, $(3) million and
$(3) million for the years ended December 31, 1999 and 2000 and
$(6) million and $2 million for the nine-month periods ended
September 30, 2000 and 2001.
(f) As set forth in the following table, Adjusted EBITDA represents EBITDA,
adjusted to give effect to the following items:
- the elimination of the results of all operations disposed of from
January 1, 1996 to September 30, 2001, as if those dispositions had taken
place on January 1, 1996;
- severance costs incurred in connection with management's improvement
initiatives described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations";
- consulting fees relating to management's improvement initiative described
in "Management's Discussion and Analysis of Financial Condition and
Results of Operations";
- additional provisions for a combination of doubtful debts ($6 million) and
errors and omissions claims ($4 million) in 1999; and
- other expenses including those relating to acquisitions of broker teams,
costs in connection with our investment in the World Insurance Network and
other unusual and non-recurring costs which, in 1999, included
approximately $10 million of costs relating to investigating and
rectifying unauthorized billing and settlement practices in one of our
business subunits.
PREDECESSOR WILLIS GROUP HOLDINGS LIMITED
---------------------------------- ----------------------------------------------------------
YEAR ENDED NINE MONTHS
YEAR ENDED JANUARY 1 TO SEPTEMBER 2 TO DECEMBER ENDED
DECEMBER 31, SEPTEMBER 1, DECEMBER 31, 31, SEPTEMBER 30,
------------------- ------------ -------------- ------------------- -------------------
1996 1997 1998 1998 1999 2000 2000 2001
-------- -------- ------------ -------------- -------- -------- -------- --------
Operating income (loss)........ $115 $107 $ 16 $12 $ (8) $154 $108 $ 79
Unusual items.................. -- -- 59 -- 47 18 11 145
Gain (loss) on disposal of
operations................... (7) (7) (4) 2 (7) (1) (1) (22)
Non-cash adjustments excluded
from EBITDA.................. 2 22 2 8 22 (8) (15) (12)
Equity in earnings of
associates (before tax and
amortization)................ 5 3 13 (2) 12 8 15 16
Depreciation and
amortization................. 66 66 46 25 76 72 54 51
---- ---- ---- --- ---- ---- ---- ----
EBITDA......................... 181 191 132 45 142 243 172 257
Adjustments for dispositions... (25) (13) (6) (2) 2 (2) (2) (2)
Other adjustments:
Severance...................... 18 6 8 8 19 19 10 7
Consultancy.................... 10 14 3 1 17 8 6 --
Provisions..................... -- -- -- -- 10 -- -- --
Other expenses................. 1 6 3 9 14 6 3 3
---- ---- ---- --- ---- ---- ---- ----
Adjusted EBITDA................ $185 $204 $140 $61 $204 $274 $189 $265
==== ==== ==== === ==== ==== ==== ====
Adjusted EBITDA is presented because we believe that it is a useful
indicator to investors of our ability to incur and service debt based on our
present expense structure and ongoing operations. Adjusted EBITDA should not
be considered by investors as an alternative to operating income or net
income as an indicator of our performance, nor as an alternative to cash
flows from operating activities, investing activities or financing
activities as a measure of liquidity. Because all companies
9
do not calculate EBITDA identically, this presentation of Adjusted EBITDA
may not be comparable to EBITDA, Adjusted EBITDA or other similarly entitled
measures of other companies. Investors should not conclude from the
presentation of Adjusted EBITDA that additional costs arising from the same
or similar items will not be incurred in the future.
We believe that we are adequately reserved regarding our pension review
costs and therefore do not anticipate further pension review expense.
However, we are unable to assure you that we will not incur additional
costs. See "Business--Legal Matters". Also, with ongoing operating
improvement initiatives handled by our management, we anticipate expenses
relating to external consultancy and other non-recurring expenses to
decrease significantly in the short-term. As we continue to implement our
improvement initiatives, however, we do expect to continue to incur
severance expenses, although at amounts smaller than those incurred in
recent years.
(g) Adjusted EBITDA margin represents Adjusted EBITDA, less share of pre-tax
profits of associates, as a percentage of operating revenues. Adjusted
EBITDA margin is presented because we believe that it is a useful indicator
to investors of our profitability.
(h) Operating income before goodwill amortization, unusual items and gain (loss)
on disposal of operations, operating income before goodwill amortization,
unusual items and gain (loss) on disposal of operations margin and net
income (loss) before goodwill authorization, unusual items and gain (loss)
on disposal of operations are presented because we believe that they are a
useful indicator to investors of our historical operating income on a basis
likely to be relevant to how we report future performance. These disclosures
should not be considered by investors as an alternative to operating income
or net income, as an indicator of our performance, nor as an alternative to
other U.S. GAAP measures. However, given the magnitude of our goodwill
amortization charge and the recently announced change in accounting for
goodwill (which becomes effective as of January 1, 2002), we believe these
disclosures may more properly reflect our performance on a basis consistent
with future accounting practice and allow investors to more readily compare
our operating results with those of our competitors. We have included the
information under the caption "Other Financial Data" to distinguish the
amounts from those required under U.S. GAAP results. Because all companies
do not calculate operating income before goodwill amortization, unusual
items and gain (loss) on disposal of operations, operating income before
goodwill amortization, unusual items and gain (loss) on disposal of
operations margin and net income (loss) before goodwill amortization,
unusual items and gain (loss) on disposal of operations identically, this
presentation of these disclosures may not be comparable to other similarly
entitled measures of other companies.
These items have been derived as follows:
- Operating income before goodwill amortization, unusual items and gain
(loss) on disposal of operations adjusts the disclosed operating income
amount for the unusual items described in footnote (c), goodwill
amortization and gain (loss) on disposal of operations;
- Operating income before goodwill amortization, unusual items and gain
(loss) on disposal of operations margin represents operating income
before goodwill amortization, unusual items and gain (loss) on disposal
of operations as a percentage of operating revenues; and
- Net income (loss) before goodwill amortization, unusual items and gain
(loss) on disposal of operations adjusts for the unusual items
described in footnote (c), and gain (loss) on disposal of operations
after tax effects of $7 million in the year ended December 31, 1996,
$13 million in the period January 1, 1998 to September 1, 1998,
$14 million and $7 million in the years ended December 31, 1999 and
2000 and $4 million and $26 million (including a non-recurring tax
credit of $8 million) in the nine months ended September 30, 2000 and
2001. In addition, further adjustments are made for other expenses
written off of $8 million and $7 million (or $5 million and $4 million
net of taxes) in the period September 2, 1998 to December 31, 1998 and
the year ended December 31, 1999 and for the non-cash charge of
$34 million on the closure of Professional Liability Underwriting
Management in the period January 1 to September 1, 1998.
10
(i) The summary cash flow data presented for each of the nine months ended
September 30, 2000 and 2001 were derived from the unaudited condensed
consolidated financial statements of Willis Group Holdings Limited included
elsewhere in this prospectus. Those financial statements were prepared in
accordance with U.S. GAAP. The summary cash flow data presented for each of
the two years ended December 31, 2000 have been derived from the audited
consolidated financial statements of Willis Group Holdings Limited included
elsewhere in this prospectus. Those financial statements were prepared in
accordance with U.S. GAAP.
The summary cash flow data presented for the period from September 2, 1998
to December 31, 1998 have been derived from the audited consolidated
financial statements of Willis Group Holdings Limited. Those financial
statements were presented in U.S. dollars and were prepared in accordance
with U.K. GAAP. The cash flow data have been restated in summarized form
using the categories of cash flow activity under U.S. GAAP. The cash flows
in the period September 2, 1998 to December 31, 1998 included the cost of
the 1998 acquisition of our predecessor by Trinity Acquisition Limited, one
of our wholly owned subsidiaries, and the proceeds from the financing
agreements for the acquisition.
The summary cash flow data presented for the period from January 1, 1998 to
September 1, 1998 and for each of the two years ended December 31, 1997 have
been derived from the audited consolidated financial statements of our
predecessor. Those financial statements were presented in pounds sterling
and were prepared in accordance with U.K. GAAP and disclosed, in summarized
form, the categories of cash flow activity under U.S. GAAP.
11
RISK FACTORS
BEFORE INVESTING IN OUR COMMON STOCK, YOU SHOULD CAREFULLY CONSIDER THE
RISKS DESCRIBED BELOW AND THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS.
RISK FACTORS RELATING TO OUR BUSINESS
SUBSTANTIAL DEBT--WE AND OUR SUBSIDIARIES HAVE SIGNIFICANT INDEBTEDNESS WHICH
MAY RESTRICT OUR GROWTH, PLACE US AT A COMPETITIVE DISADVANTAGE AND ADVERSELY
AFFECT OUR ABILITY TO CONDUCT OUR BUSINESS.
As of September 30, 2001, we had a total of $836 million of long-term debt,
our stockholders' equity was $649 million and our debt to equity ratio was 1.3
to 1. Our interest expense for the year 2000 was $89 million. During 2000,
$30 million of debt was repaid, and a further $22.5 million was repaid through
September 30, 2001. Our repayment obligations for these periods were
$3.25 million for 2000 and $8.25 million for 2001. We also repurchased in the
open market and retired $99 million principal amount of our 9% senior
subordinated notes during the second and third quarters of 2001. Our significant
debt and debt service requirements could adversely affect our ability to operate
our business and may limit our ability to take advantage of potential business
opportunities. For example, our high level of debt presents the following risks
to you:
- we may have difficulty borrowing money in the future for working capital,
capital expenditures, acquisitions or other purposes;
- covenants in our subsidiaries' debt instruments limit their ability to pay
dividends to us or make other restricted payments and investments;
- our subsidiaries will need to use a large portion of the money earned by
them to pay principal and interest on their indebtedness, which will
reduce the amount of money available to them for their operations and
other business activities;
- we may have a much higher level of debt than our competitors, which may
put us at a competitive disadvantage;
- our debt level makes us more vulnerable to economic downturns and adverse
developments in our business;
- we are subject to the risk of interest rate increases on our indebtedness
with variable interest rates;
- our debt level reduces our flexibility in responding to changing business
and economic conditions, including increased competition in the insurance
brokerage industry; and
- our debt level limits our ability to pursue other business opportunities,
borrow more money for operations or capital in the future and implement
our business strategies.
ADDITIONAL BORROWINGS AVAILABLE--DESPITE CURRENT INDEBTEDNESS LEVELS, WE AND OUR
SUBSIDIARIES MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT. THIS COULD
INCREASE THE IMPACT OF THE RISKS DESCRIBED ABOVE.
Subject to restrictions in the instruments governing our outstanding
indebtedness, we and our subsidiaries may borrow more money for working capital,
capital expenditures, acquisitions or other purposes. We currently have
availability under our revolving credit facility of $150 million. Our expansion
strategy, including the pursuit of strategic acquisitions and investments, may
involve the incurrence of indebtedness in addition to our revolving credit
facility. If new debt is added to our current debt levels, the related risks
that we now face could intensify.
12
ABILITY TO SERVICE DEBT--WE AND OUR SUBSIDIARIES MAY NOT BE ABLE TO GENERATE
SUFFICIENT CASH FLOW TO REPAY OR PAY INTEREST ON OUR AND OUR SUBSIDIARIES'
OUTSTANDING INDEBTEDNESS.
Our business may not generate cash flow in an amount sufficient to enable us
to pay the principal of, or interest on, our and our subsidiaries' indebtedness
or to fund our other liquidity needs. Our ability to make payments on or to
refinance that indebtedness, to fund planned capital expenditures and to pursue
our expansion strategy will depend on our future performance, which, to a
certain extent, is subject to general economic, financial, competitive,
regulatory and other factors that are beyond our control.
For the year ended December 31, 2000, the ratio of earnings to fixed charges
was 1.2 to 1. For these purposes, earnings of $176 million consist of income
before income taxes, interest expense and interest within rental expenses, plus
dividends from associates, less pre-tax minority interests. Fixed charges of
$142 million consist of interest expense (including amortization of debt
issuance costs), pre-tax preferred dividends and the interest element of
operating lease rentals.
NEED FOR ADDITIONAL FINANCING FOR ACQUISITIONS--IF WE FAIL TO OBTAIN ADDITIONAL
FINANCING FOR ACQUISITIONS, WE MAY NOT BE ABLE TO EXPAND OUR BUSINESS.
We have engaged, and expect to continue to engage, in acquisitions to
maintain or increase our market share and expand our business. Our acquisition
strategy may require us to seek additional financing. If we are unable to obtain
sufficient financing on satisfactory terms and conditions, we may not be able to
maintain or increase our market share or expand our business. Our ability to
obtain additional financing will depend upon a number of factors, many of which
are beyond our control. For example, we may not be able to obtain additional
financing because we already have substantial debt and because we may not have
sufficient cash flow to service or repay our existing or additional debt. In
addition, any additional equity financing may be dilutive to you.
PREMIUMS AND COMMISSIONS--WE DO NOT CONTROL THE PREMIUMS ON WHICH OUR
COMMISSIONS ARE BASED, AND VOLATILITY OR DECLINES IN PREMIUMS MAY SERIOUSLY
UNDERMINE OUR PROFITABILITY.
We derive most of our revenues from commissions and fees for brokering and
consulting services. We do not determine insurance premiums on which commissions
are generally based. Historically, although commercial property and casualty
pricing has been improving over the last year, premiums have been cyclical in
nature and have varied widely based on market conditions. From the late 1980s
through late 2000, insurance premium rates have generally been declining as a
result of a number of factors, including:
- the expanded underwriting capacity of insurance carriers;
- consolidation of both insurance intermediaries and insurance carriers; and
- increased competition among insurance carriers.
In addition, as traditional risk-bearing insurance carriers continue to
outsource the production of premium revenue to non-affiliated agents or brokers
such as ourselves, those insurance carriers may seek to reduce further their
expenses by reducing the commission rates payable to those insurance agents or
brokers. The reduction of these commission rates, along with general volatility
and/or declines in premiums, may significantly undermine our profitability.
LEGAL MATTERS--OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL CONDITION OR
LIQUIDITY MAY BE MATERIALLY ADVERSELY AFFECTED BY ERRORS AND OMISSIONS AND THE
OUTCOME OF CERTAIN PENDING LEGAL MATTERS.
ERRORS AND OMISSIONS. We have extensive operations and are subject to
claims and litigation in the ordinary course of business resulting from alleged
errors and omissions. Because we often assist our clients with matters,
including the placement of insurance coverage and the handling of related
claims,
13
involving substantial amounts of money and errors and omissions claims against
us may in turn allege our potential liability for all or part of the amounts in
question, claimants can seek large damage awards and these claims can involve
potentially significant defense costs. Errors and omissions could include, for
example, our employees or sub-agents failing, whether negligently or
intentionally, to place coverage or notify claims on behalf of clients, to
provide insurance carriers with complete and accurate information relating to
the risks being insured or to appropriately apply funds that we hold for our
clients on a fiduciary basis. It is not always possible to prevent and detect
errors and omissions and the precautions we take may not be effective in all
cases. As of September 30, 2001, we had unutilized provisions of $55 million
related to liabilities that may arise from asserted and unasserted claims for
errors and omissions in connection with our businesses. This amount excludes
provisions established in connection with the pension review discussed below.
While most of the errors and omissions claims made against us have, subject
to our self-insured deductibles, been covered by our professional indemnity
insurance, our results of operations, financial condition or liquidity may be
adversely affected if in the future our insurance coverage proves to be
inadequate or unavailable or there is an increase in liabilities for which we
self-insure. In addition, errors and omissions claims may harm our reputation or
divert management resources away from operating our business.
SOVEREIGN/WFUM. Willis Faber (Underwriting Management) Limited, or WFUM, a
wholly owned subsidiary of ours, provided underwriting agency and other services
to Sovereign Marine & General Insurance Company Limited, which is one of our
other subsidiaries, and to third party insurance companies, some of which are
long-standing clients of ours, which we refer to as the stamp companies.
In July 1997, Sovereign received an adverse arbitration decision in respect
of a dispute between Sovereign and one of its reinsurers regarding the
enforceability of certain reinsurance arranged by WFUM. The directors of
Sovereign were unable to secure the support of Willis Group Limited for
unlimited financial backing and, as a consequence, placed Sovereign into
provisional liquidation. Sovereign is currently insolvent and subject to a
court-approved arrangement between a company and its creditors, referred to as a
scheme of arrangement. Following publication of the arbitration decision
referred to in this paragraph, Sovereign and some of the stamp companies
expressed concern about the enforceability of other reinsurance put in place by
WFUM on behalf of Sovereign and the stamp companies. Sovereign and the stamp
companies may make claims against WFUM, Willis Group Limited and our insurance
brokering subsidiaries in respect of alleged acts or omissions of our
subsidiaries or in respect of the costs of the run-off of the stamp companies'
liabilities. We cannot assure you that such claims will not be successful or, if
successful, would not have a material adverse effect on our results of
operations, financial condition or liquidity. For a more detailed discussion of
this matter, see "Business--Legal Matters".
PENSION REVIEW. As is the case for many companies involved in selling
personal pension plans to individuals in the United Kingdom from 1988 to 1994,
we face liabilities as a result of the pension transfers and opt-outs review
initiated by the United Kingdom government. Sellers of personal pension plans
have been subject to liabilities based on claims that they allegedly mis-sold
pension products or gave improper advice. In particular, the regulators of the
companies that engaged in this business, such as our independent financial
advisory business, Willis Corroon Financial Planning Limited, required these
companies to compensate individuals who withdrew from their previous or existing
company pension plans or who were otherwise advised to set up personal plans, to
the extent that following withdrawal, and the consequent loss of the employer
contribution, that individual's personal pension plan did not produce returns
equal to those that would have been achievable with an employer's
company-sponsored plan. Whether compensation is due to a particular individual,
and the amount of any compensation, is dependent on the subsequent performance
of the pension plan sold and the relative cost to reinstate that individual into
his or her prior company pension plan. These amounts could be significant and,
in that case, materially adversely affect our results of operations or financial
14
condition. Although we believe that the provisions established for the pension
review, totaling $103 million (approximately $68 million of which has been paid
as of September 30, 2001) are prudent, there remains a possibility that the
provisions made will be insufficient. For a more detailed discussion of this
matter, see "Business--Legal Matters".
WORLD TRADE CENTER--CLAIMS MAY BE MADE AGAINST US IN RELATION TO THE DESTRUCTION
OF THE WORLD TRADE CENTER WITH RESPECT TO OUR ROLE AS INSURANCE BROKER FOR THE
PLACEMENT OF INSURANCE FOR CERTAIN ENTITIES IMPACTED BY THE ATTACK.
We acted as the insurance broker, but not as an underwriter, for the
placement of both property and casualty insurance for a number of entities which
were directly impacted by the destruction of the World Trade Center complex,
including Silverstein Properties LLC, which acquired a 99-year leasehold
interest in the twin towers and related facilities from the Port Authority of
New York and New Jersey in July 2001. The insurance procured on the twin towers
and related facilities also covers the retail premises that had been leased by
Westfield Properties. We also placed insurance for the Port Authority itself,
which owns those buildings, and the Metropolitan Transit Authority, which owns
the transit facilities beneath the World Trade Center complex. Although the
World Trade Center complex insurance was bound at or before the July 2001
closing of the leasehold acquisition, consistent with standard industry
practice, the final policy wording for the placements was still in the process
of being finalized when the twin towers and other buildings in the complex were
destroyed on September 11.
Although the resolution of both property and casualty claims is in a very
preliminary stage, there is a disagreement between the insured parties and the
insurers concerning whether the September 11 events constituted one or more
occurrences for purposes of the relevant property insurance policies, the
outcome of which will significantly impact the amount the insurers ultimately
pay on the property policies. On October 22, 2001, one of the insurers commenced
an action in the U.S. Federal District Court for the Southern District of New
York against various parties including Silverstein, Westfield and two
institutions which provided acquisition financing for the lease on the twin
towers. The action, to which we are not a party, seeks, among other things, a
declaratory judgment as to whether the September 11 events constituted one or
more occurrences. On November 7, 2001, Silverstein countersued the insurer,
seeking prompt payment by the insurer of its portion of the coverage that would
be payable if the events of September 11 constituted one occurrence.
Other disputes may also arise in respect of the World Trade Center insurance
placed by us, including claims by one or more of the insureds that we made
errors or omissions of the nature described above under "Errors and Omissions"
in connection with our brokerage activities. However, we do not believe that our
role as broker will lead to liabilities which in the aggregate would have a
material adverse effect on our results of operations, financial condition or
liquidity.
EFFECTS OF INSURANCE MARKET DISPUTE--CLAIMS MAY BE MADE AGAINST WILLIS LIMITED
IN RELATION TO THE PERSONAL ACCIDENT EXCESS OF LOSS REINSURANCE MARKET, AND IF
THOSE CLAIMS ARE MATERIAL AND SUCCESSFUL, OUR BUSINESS, RESULTS OF OPERATIONS,
FINANCIAL CONDITION OR LIQUIDITY MAY BE MATERIALLY ADVERSELY AFFECTED.
Various legal proceedings are pending, have been concluded or may commence
between reinsurers, reinsureds and in some cases their intermediaries, including
reinsurance brokers, relating to personal accident excess of loss reinsurance
for the years 1993 to 1998. The proceedings principally concern allegations by
reinsurers that they have sustained substantial losses due to an alleged
abnormal "spiral" in the market in which the reinsurance contracts were placed,
the existence and nature of which, as well as other information, was not
disclosed to them by the reinsureds or their reinsurance broker. A "spiral" is a
market term for a situation in which reinsureds and reinsurers reinsure each
other with the effect that the same loss or portion of that loss moves through
the market multiple times.
15
The reinsurers concerned are taking the position that, despite their
decisions to underwrite risks or a group of risks, they are no longer bound by
their reinsurance contracts. As a result, they have stopped settling claims and
are seeking to recover claims already paid. We also understand that there have
been two arbitration awards in relation to a spiral, among other things, in
which the reinsurer successfully argued that it was no longer bound by parts of
its reinsurance program. Willis Limited, our principal insurance broking
subsidiary in the U.K., acted as the reinsurance broker or otherwise as
intermediary, but not as an underwriter, for numerous personal accident
reinsurance contracts, including for two contracts that were involved in one of
the arbitrations. Due to the small number of reinsurance brokers generally,
Willis Limited was one of a small number of brokers active in the market for
this reinsurance during the relevant period. We also utilized other brokers
active in this market as sub-agents, including brokers who are parties to the
legal proceedings described above, for certain contracts and may be responsible
for any errors and omissions they may have made. One proceeding brought by one
of the reinsurers concerned is scheduled to commence in January 2002 in the
English High Court against certain parties, including a sub-broker that Willis
Limited used to place two of the contracts involved in this trial. This trial
will be the first major public proceeding relating to the alleged spiral.
Although neither we nor any of our subsidiaries are a party to this or any other
proceeding or arbitration, Willis Limited has entered into standstill agreements
with certain of the reinsureds for which it has acted as reinsurance broker or
otherwise as intermediary, with the primary purpose of tolling the statute of
limitations pending the outcome of proceedings between the reinsureds and
reinsurers so that those reinsureds would not feel compelled to commence
proceedings against Willis Limited in order to avoid the lapse of any claims
they may have.
As a result of the significant amount of underwriting losses that the
underwriters for personal accident reinsurance have incurred, settlements
between reinsureds and reinsurers have largely stopped. It is possible that
reinsureds or reinsurers or other intermediaries may bring claims against Willis
Limited or may ask Willis Limited to contribute to any settlements that may be
reached. We understand that industry groups have been or are being formed with a
view to seeking a market-wide settlement of claims arising in various years, and
Willis Limited has been approached to join groups for certain years. Although at
this time no claims are pending against Willis Limited and we have not joined
any settlement effort, claims may be made against Willis Limited if reinsurers
do not pay claims on policies issued by them. It is too early to know what
amount of underwriting losses will be alleged to be attributable to an abnormal
spiral or the other issues that may be raised, or what amount, if any,
reinsureds or reinsurers or other intermediaries may seek to recover from Willis
Limited. We also do not know whether, if any claims are successful, the amounts
paid in respect of such claims will be material. We have not reserved any
amounts for potential claims other than in respect of legal costs relating to
investigating these issues.
REGULATION--WE ARE SUBJECT TO INSURANCE INDUSTRY REGULATION WORLDWIDE. IF WE
FAIL TO COMPLY WITH REGULATORY REQUIREMENTS, WE MAY NOT BE ABLE TO CONDUCT OUR
BUSINESS.
The manner in which we conduct our business is subject to legal requirements
and governmental and quasi-governmental regulatory supervision in the various
countries in which we operate. These requirements are generally designed to
protect our clients by establishing minimum standards of conduct and practice,
particularly regarding the provision of advice and product information as well
as financial criteria.
In the United Kingdom, our business activities are regulated by the General
Insurance Standards Council, as well as by the Financial Services Authority,
which also conducts monitoring visits to assess our compliance with their
requirements. Further, our clients have the right to file complaints with our
regulators about our services, and the regulators may conduct an investigation
or require us to conduct an investigation into these complaints. Our failure, or
that of our employees, to satisfy the regulators that we are in compliance with
their requirements or the legal requirements governing our activities, can
result in disciplinary action, fines, reputational damage and financial harm.
Lloyd's, whose
16
regulatory responsibilities for our insurance broking activities in the United
Kingdom were transferred to the General Insurance Standards Council on July 3,
2000, other than for complaints that arise prior to that date, has disciplined
and fined a number of Lloyd's brokers and their employees for misconduct. This
misconduct covered failures to maintain procedures and records and to act in the
clients' best interests, particularly in the taking of commissions without
appropriate disclosure.
Our activities in the United States are subject to regulation and
supervision by state authorities. Although the scope of regulation and form of
supervision by state authorities in adopting regulation and form of supervision
may vary from jurisdiction to jurisdiction, insurance laws in the United States
are often complex and generally grant broad discretion to supervisory
authorities in adopting regulations and supervising regulated activities. This
supervision generally includes the licensing of insurance brokers and agents and
third party administrators and the regulation of the handling and investment of
client funds held in a fiduciary capacity. Our continuing ability to provide
insurance brokering and third party administration in the jurisdictions in which
we currently operate depends on our compliance with the rules and regulations
promulgated from time to time by the regulatory authorities in each of these
jurisdictions.
We have in the past failed to comply with some of these regulations and
future failures by us or our employees may occur. While past failures have
resulted in insignificant fines, any failures reported in the future could lead
to other disciplinary action, including requiring clients to be compensated for
loss, the imposition of fines or the revocation of our authorization to operate
as well as reputational damage. In addition, changes in legislation or
regulations and actions by regulators, including changes in administration and
enforcement policies, could from time to time require operational improvements
or modifications at various locations which could result in higher costs or
hinder our ability to operate our business. See "Business--Regulation".
PUT AND CALL ARRANGEMENTS--WE HAVE ENTERED INTO SIGNIFICANT PUT AND CALL
ARRANGEMENTS WHICH MAY REQUIRE US TO PAY SUBSTANTIAL AMOUNTS TO PURCHASE SHARES
IN ONE OF OUR ASSOCIATES. THOSE PAYMENTS WOULD REDUCE OUR CASH FLOW AND THE
FUNDS AVAILABLE TO GROW OUR BUSINESS.
In connection with many of our investments in our associates, we retain
rights to increase our ownership percentages of these associates over time and,
in some cases, the existing owners also have a right to put their shares to us.
The put arrangement in place for shares of our associate, Gras Savoye, may
require us to pay substantial amounts to purchase those shares, which may cause
a significant decrease in our liquidity and the funds available to grow our
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources".
The rights under the put arrangement may be exercised between 2001 and 2011,
and if fully exercised, we would be required to buy shares of Gras Savoye, other
than those held by its management, possibly increasing our ownership interest by
57% from 33% to 90%. Management shareholders of Gras Savoye, representing
approximately 10% of the outstanding shares, do not have general put rights
between 2001 and 2011, but have certain put rights on their death, disability or
retirement. We expect that payments in connection with management put rights
will not exceed $22 million if those rights are fully exercised.
From 2001 to 2005, the incremental 57% of Gras Savoye may be put to us at a
price equal to the greater of approximately 800 million French francs
($111 million at September 30, 2001 exchange rates) for the full 57% or a price
determined by a contractual formula based on earnings and revenue. After 2005,
the put price is determined solely by the formula. The shareholders may put
their shares individually at any time during the put period. The amounts we may
have to pay in connection with the put arrangement may significantly exceed
these estimates.
We may need to obtain additional financings to satisfy our obligations under
the put arrangements described in this risk factor. See "--Substantial Debt" and
"--Ability to Service Debt".
17
COMPETITION--COMPETITION IN OUR INDUSTRY IS INTENSE, AND IF WE ARE UNABLE TO
COMPETE EFFECTIVELY, WE MAY LOSE MARKET SHARE AND OUR BUSINESS MAY BE MATERIALLY
ADVERSELY AFFECTED.
We face competition in all fields in which we operate, based on global
capability, product breadth, innovation, quality of service and price. We
compete with Marsh & McLennan and Aon, the two other providers of global risk
management services, as well as with numerous specialist, regional and local
firms. If we are unable to compete effectively against these competitors, we
will suffer lower revenue, reduced operating margins and loss of market share.
Competition for business is intense in all our business lines and in every
insurance market, and the other two providers of global risk management services
have substantially greater market share than we do. Competition on premium rates
has also exacerbated the pressures caused by a continuing reduction in demand in
some classes of business. For example, insureds have been retaining a greater
proportion of their risk portfolios than previously. Industrial and commercial
companies have been increasingly relying upon their own subsidiary insurance
companies, known as captive insurance companies, self-insurance pools, risk
retention groups, mutual insurance companies and other mechanisms for funding
their risks, rather than buying insurance. Additional competitive pressures
arise from the entry of new market participants, such as banks, accounting firms
and insurance carriers themselves, offering risk management or transfer
services. See "Business--Competition".
DEPENDENCE ON KEY PERSONNEL--THE LOSS OF ANY MEMBER OF OUR SENIOR MANAGEMENT,
PARTICULARLY OUR EXECUTIVE CHAIRMAN, OR A SIGNIFICANT NUMBER OF OUR BROKERS
COULD NEGATIVELY AFFECT OUR FINANCIAL PLANS, MARKETING AND OTHER OBJECTIVES.
The loss of or failure to attract key personnel could significantly impede
our financial plans, growth, marketing and other objectives. Our success depends
to a substantial extent not only on the ability and experience of our senior
management, particularly our Executive Chairman, Joseph Plumeri, but also on the
individual brokers and teams that service our clients and maintain client
relationships. The insurance brokerage industry has in the past experienced
intense competition for the services of leading individual brokers and brokerage
teams, and we have lost key individuals and teams to competitors in the past. We
believe that our future success will depend in large part on our ability to
attract and retain additional highly skilled and qualified personnel and to
expand, train and manage our employee base. We may not be successful in doing
so, because the competition for qualified personnel in our industry is intense.
Although we have employment agreements with our key employees, we do not
generally purchase key man life insurance on our employees.
INTERNATIONAL OPERATIONS--OUR SIGNIFICANT GLOBAL OPERATIONS EXPOSE US TO VARIOUS
RISKS THAT COULD IMPACT OUR BUSINESS
A significant portion of our operations is conducted outside the United
States and the United Kingdom. Accordingly, we are subject to legal, economic
and market risks associated with operating in foreign countries, including:
- devaluations and fluctuations in currency exchange rates;
- imposition of limitations on conversion of foreign currencies into pounds
sterling or dollars or remittance of dividends and other payments by
foreign subsidiaries;
- imposition or increase of withholding and other taxes on remittances and
other payments by subsidiaries;
- hyperinflation in certain foreign countries;
- imposition or increase of investment and other restrictions by foreign
governments;
- longer payment cycles;
- greater difficulties in accounts receivable collection; and
18
- the requirement of complying with a wide variety of foreign laws.
FOREIGN EXCHANGE RISK--OUR SIGNIFICANT NON-U.S. OPERATIONS, PARTICULARLY THOSE
IN THE UNITED KINGDOM, EXPOSE US TO EXCHANGE RATE FLUCTUATIONS, AND OUR NET
INCOME MAY SUFFER DUE TO CURRENCY TRANSLATIONS.
We report our operating results and financial condition in United States
dollars. Our United States operations earn revenue and incur expenses primarily
in dollars. In the United Kingdom, however, we earn revenue in a number of
different currencies, but expenses are almost entirely incurred in pounds
sterling. Outside the United States and the United Kingdom, we predominately
generate revenue and expenses in the local currency. The table below details the
breakdown of revenues and expenses by currency in 2000.
POUNDS STERLING U.S. DOLLARS OTHER CURRENCIES
--------------- ------------ ----------------
Percentage of Revenues............................... 20% 60% 20%
Percentage of Expenses............................... 40% 45% 15%
Because of devaluations and fluctuations in currency exchange rates or the
imposition of limitations on conversion of foreign currencies into dollars, we
are subject to currency translation exposure on the profits of our operations,
in addition to economic exposure. Furthermore, the mismatch between sterling
revenues and expenses creates an exchange exposure. As the pound sterling
strengthens, the dollars required to be translated into pounds sterling to cover
the net sterling expenses increase, which then causes our results to be
negatively impacted.
Our policy is to convert into pounds sterling all revenues arising in
currencies other than U.S. dollars together with sufficient U.S. dollar revenues
to fund the remaining pounds sterling expenses. Outside the United Kingdom, only
those cash flows necessary to fund mismatches between revenues and expenses are
converted into local currency; amounts remitted to the United Kingdom are
generally converted into pounds sterling. These transactional currency exposures
are generally managed by entering into forward exchange contracts. It is our
policy to hedge at least 25% of the next 12 months' exposure in significant
currencies. We generally do not hedge exposures beyond three years.
Given these facts, the strength of the pound sterling in recent years has
had a material negative impact on our reported results. This risk could have a
material adverse effect on our business, financial condition, cash flow and
results of operations in the future.
IMPLEMENTATION OF EXPANSION STRATEGY--IF WE ARE UNABLE TO IMPLEMENT SUCCESSFULLY
OUR ACQUISITION AND INVESTMENT STRATEGY, WE MAY NOT BE ABLE TO EXPAND OUR
BUSINESS AND REMAIN COMPETITIVE.
If we fail to implement our expansion strategy successfully, we may not be
able to grow or remain competitive. Any growth through acquisitions and
investments will be dependent upon identifying suitable acquisition or
investment candidates and successfully consummating those transactions and
integrating the acquired business at reasonable costs, on a timely basis and
without disruption to our existing business. See "--Competition" and
"Business--Business Strategy".
RISK FACTORS RELATING TO OUR COMMON STOCK
VOLATILITY OF COMMON STOCK PRICES--THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE
SUBSTANTIALLY, WHICH COULD NEGATIVELY AFFECT THE HOLDERS OF OUR COMMON STOCK.
The price of our common stock may fluctuate substantially due to the
relatively small percentage of our common stock available publicly, fluctuations
in the price of the stock of the small number of public companies in the
insurance brokerage business, announcements of acquisitions as part of our
expansion strategy, additions or departures of key personnel, announcements of
legal proceedings or
19
regulatory matters, as well as the general volatility in the stock market. The
market price of our common stock could also fluctuate substantially if we are
unable to sustain our recent significantly improved operating results or fail to
meet or exceed securities analysts' expectations of our financial results or if
there is a change in financial estimates or securities analysts'
recommendations. After this offering, approximately 28% of our market
capitalization will be traded publicly, which can result in a high degree of
volatility in our stock price. In addition, the stock market has experienced
volatility that has affected the market prices of equity securities of many
companies, and that has often been unrelated to the operating performance of
these companies. A number of other factors, many of which are beyond our
control, could also cause the market price of our common stock to fluctuate
substantially. You may not be able to sell your shares at or above the offering
price, or at all.
In the past, companies that have experienced volatility in the market price
of their stock have been the objects of securities class action litigation. If
we were to be the object of securities class action litigation, it could result
in substantial costs and diversion of management's attention and resources,
which could materially harm our results of operations, financial condition or
liquidity.
FUTURE SALES--FUTURE SALES OR THE POSSIBILITY OF FUTURE SALES OF A SUBSTANTIAL
AMOUNT OF OUR COMMON STOCK MAY DEPRESS THE PRICE OF YOUR COMMON STOCK.
Future sales of substantial amounts of shares of our common stock in the
public market could adversely affect prevailing market prices and the price of
your common stock and could impair our ability to raise capital through future
sales of our equity securities. Upon completion of this offering, we will have
147,112,631 shares issued and outstanding. All of the shares which the selling
shareholders are selling in this offering, plus any shares sold pursuant to the
exercise of the underwriters' option to purchase additional common stock from
the selling shareholders, will be freely tradeable without restriction under the
Securities Act, unless purchased by our affiliates.
Upon completion of this offering, and assuming the underwriters'
over-allotment option is not exercised, 106,509,576 shares are restricted
securities within the meaning of Rule 144. The rules affecting the sale of these
securities are summarized under "Shares Eligible for Future Sale". We have
granted registration rights to certain holders of restricted securities. See
"Shareholders--Shareholder Rights Agreement and Registration Rights Agreement".
Sales of restricted securities in the public market, or the availability of
these shares for sale, could adversely affect the market price of our common
stock.
At the time of our initial public offering, we, Profit Sharing (Overseas),
Limited Partnership, the consortium members listed in "Principal and Selling
Shareholders--Beneficial Ownership" and Fisher Capital Corp. L.L.C. agreed not
to offer, sell or agree to sell, directly or indirectly, any common stock
without the permission of Salomon Smith Barney Inc. for a period of 180 days
from the date of our initial public offering. Except in the case of certain of
our shares held by the trust that is party to our employee stock purchase
agreements, all of our other existing shareholders, including our directors and
executive officers, were, and continue to be, subject to existing transfer
restrictions on their shares in excess of 180 days pursuant to shareholder and
subscription agreements with us. Also, at the time of our initial public
offering, we agreed not to amend, waive or fail to enforce those transfer
restrictions for a period of 180 days from the date of our initial public
offering and have agreed not to amend, waive or fail to enforce those transfer
restrictions for a period of 135 days after the date of this prospectus, in each
case without the prior written consent of Salomon Smith Barney Inc. In addition,
those purchasers who purchased shares in our initial public offering through our
directed share program are also subject to lock-up agreements with the
underwriters in our initial public offering that generally prohibit resale of
those shares for 180 days after the date of our initial public offering.
In connection with this offering, Salomon Smith Barney Inc. has waived the
lock-up arrangement which it had entered into with each of the selling
shareholders in order for them to sell these shares in this offering. However,
we and each of the selling shareholders have agreed, subject to certain
20
exceptions, not to dispose of or hedge any shares of our common stock or any
securities convertible into or exchangeable for our common stock without the
prior written consent of Salomon Smith Barney Inc. for a period of 135 days from
the date of this prospectus.
Salomon Smith Barney Inc. may in its sole discretion, however, consent to
earlier sales, and when these periods expire we and our locked-up shareholders
will be able to sell our common stock in the public market. Our shareholders who
are subject to the lock-up agreements or similar restrictions on transfer will
own 108,881,756 shares of our common stock after giving effect to this offering,
assuming the underwriters' overallotment option is not exercised. Sales of a
substantial number of shares of our common stock following the expiration of
these lock-up periods could cause our stock price to fall.
In February 2001, we agreed to issue shares of our common stock in
connection with an acquisition and may issue shares of our common stock from
time to time as consideration for future acquisitions and investments. In the
event any such acquisition or investment is significant, the number of shares
that we may issue may in turn be significant. In addition, we may also grant
registration rights covering those shares in connection with any such
acquisitions and investments.
CONTROLLING SHAREHOLDER--BECAUSE WE ARE CONTROLLED BY KKR 1996 OVERSEAS,
LIMITED, OTHER SHAREHOLDERS HAVE A REDUCED ABILITY TO INFLUENCE OUR BUSINESS.
Following this offering, KKR 1996 Overseas, Limited, an entity controlled by
KKR, will own approximately 52.9% of our outstanding common stock, or 44.0% on a
fully diluted basis, in each case, assuming the underwriters' overallotment
option is not exercised, and will continue to control us. Accordingly,
affiliates of KKR will be able to:
- elect our entire board of directors;
- control our management and policies; and
- determine, without the consent of our other shareholders, the outcome of
any corporate transaction or other matter submitted to our shareholders
for approval, including mergers, consolidations and the sale of all or
substantially all our assets.
Affiliates of KKR will have sufficient voting power to prevent or cause a
change in control of our company and amend our organizational documents. The
interests of KKR may also conflict with the interests of the other holders of
our common stock. See "Shareholders".
ANTI-TAKEOVER EFFECT--SOME PROVISIONS IN OUR SHAREHOLDER RIGHTS AGREEMENT MAY
HAVE THE EFFECT OF DISCOURAGING CHANGE OF CONTROL EVENTS IN WHICH YOU MAY HAVE
HAD THE OPPORTUNITY TO SELL YOUR SHARES AT A PREMIUM OVER PREVAILING MARKET
PRICES.
We and our principal shareholders have entered into a shareholder rights
agreement that sets forth various rights and obligations regarding their
ownership of our common stock. The shareholder rights agreement, which we
describe under "Shareholders--Shareholder Rights Agreement and Registration
Rights Agreements", includes some provisions that could have an anti-takeover
effect and deprive you of the opportunity to sell your shares at a premium over
prevailing market prices. For example, the shareholder rights agreement grants
consortium members the right under specified circumstances to match certain
offers for the sale of our business.
UNENFORCEABILITY OF CERTAIN UNITED STATES JUDGMENTS--WE ARE INCORPORATED IN
BERMUDA, AND, AS A RESULT, IT MAY NOT BE POSSIBLE FOR SHAREHOLDERS TO ENFORCE
CIVIL LIABILITY PROVISIONS OF THE SECURITIES LAWS OF THE UNITED STATES.
We are organized under the laws of Bermuda. A substantial portion of our
assets are or may be located outside the United States. As a result, it may not
be possible for the holders of our common stock to effect service of process
within the United States upon us or to enforce against us in United
21
States courts judgments based on the civil liability provisions of the
securities laws of the United States. In addition, there is significant doubt as
to whether the courts of Bermuda would recognize or enforce judgments of United
States courts obtained against us or our directors or officers based on the
civil liability provisions of the securities laws of the United States or any
state or hear actions brought in Bermuda against us or those persons based on
those laws. We have been advised by our legal advisor in Bermuda, Appleby
Spurling & Kempe, that the United States and Bermuda do not currently have a
treaty providing for the reciprocal recognition and enforcement of judgments in
civil and commercial matters. Therefore, a final judgment for the payment of
money rendered by any federal or state court in the United States based on civil
liability, whether or not based on United States federal or state securities
laws, would not be automatically enforceable in Bermuda.
DIFFERENCE IN LAWS--THE LAWS OF BERMUDA DIFFER FROM THE LAWS IN EFFECT IN THE
UNITED STATES AND MAY AFFORD LESS PROTECTION TO HOLDERS OF OUR COMMON STOCK.
Holders of our common stock may have more difficulty in protecting their
interests than would shareholders of a corporation incorporated in a
jurisdiction of the United States. We are a Bermuda company and, accordingly,
are governed by the Companies Act 1981 of Bermuda, as amended. The Companies Act
differs in certain material respects from laws generally applicable to United
States corporations and shareholders, including:
- INTERESTED DIRECTOR TRANSACTIONS: Our bye-laws generally allow us to enter
into any transaction or arrangement in which any of our directors have an
interest. Directors may also participate in a board vote approving a
transaction or arrangement in which they have an interest, so long as they
have disclosed that interest. United States companies are generally
required to obtain the approval of a majority of disinterested directors
or the approval of shareholders before entering into any transaction or
arrangement in which any of their directors have an interest, unless the
transaction or arrangement is fair to the company at the time it is
authorized by the company's board or shareholders.
- BUSINESS COMBINATIONS WITH INTERESTED SHAREHOLDERS: United States
companies in general may not enter into business combinations with
interested shareholders, namely certain large shareholders and affiliates,
unless the business combination had been approved by the board in advance
or by a supermajority of shareholders or the business combination meets
specified conditions. There is no similar law in Bermuda.
- SHAREHOLDER SUITS: The circumstances in which a shareholder may bring a
derivative action in Bermuda are significantly more limited than in the
United States. In general, under Bermuda law, derivative actions are
permitted only when the act complained of is alleged to be beyond the
corporate power of the company, is illegal or would result in the
violation of the company's memorandum of association or bye-laws. In
addition, Bermuda courts would consider permitting a derivative action for
acts that are alleged to constitute a fraud against the minority
shareholders or, for instance, acts that require the approval of a greater
percentage of the company's shareholders than those who actually approved
them.
- LIMITATIONS ON DIRECTORS' LIABILITY: Our bye-laws provide that each
shareholder agrees to waive any claim or right of action he or she may
have, whether individually or in the right of the company, against any
director, except with respect to claims or rights of action arising out of
the fraud or dishonesty of a director. In general, United States companies
may limit the personal liability of their directors as long as they acted
in good faith and without knowing violation of law.
22
FORWARD LOOKING STATEMENTS
We have included in this prospectus forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that state our
intentions, beliefs, expectations or predictions for the future. All statements
other than statements of historical facts included in this prospectus, including
statements regarding our future financial position, strategy, projected costs
and plans and objectives of management for future operations, may be deemed to
be forward looking statements. Although we believe that the expectations
reflected in those forward looking statements are reasonable, we can give no
assurance that those expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from our
expectations are disclosed under "Risk Factors" and elsewhere in this
prospectus, including in conjunction with the forward looking statements
included in this prospectus. All forward looking statements contained in this
prospectus are qualified by reference to this cautionary statement.
23
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of common stock in
this offering.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has been traded on the New York Stock Exchange under the
symbol "WSH" since June 11, 2001. The high and low closing prices of our common
stock, as reported by the New York Stock Exchange, are set forth below for the
periods indicated.
PRICE RANGE OF
COMMON STOCK
-------------------
HIGH LOW
-------- --------
2001:
June (from June 11, 2001)................................. $18.50 $16.00
July...................................................... $17.77 $16.25
August.................................................... $19.95 $16.75
September................................................. $23.95 $17.60
October................................................... $25.02 $22.45
November (through November 8, 2001)....................... $25.01 $23.30
On November 8, 2001, the last reported sale price of our common stock as
reported by the New York Stock Exchange was $24.63 per share. As of
September 30, 2001, there were approximately 400 shareholders of record of our
common stock.
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. We currently intend to retain our future earnings to finance
the expansion of our business. In addition, our ability to pay dividends is
effectively limited by the terms of some of the debt instruments of our
subsidiaries, which significantly restrict their ability to pay dividends
directly or indirectly to us. See "Description of Material Indebtedness". Future
dividends on our common stock, if any, will be at the discretion of our board of
directors and will depend on, among other things, our results of operations,
cash requirements and surplus, financial condition, contractual restrictions and
other factors that our board of directors may deem relevant. We would pay cash
dividends, if any, on our common stock in United States dollars.
24
CAPITALIZATION
The following table presents our consolidated capitalization as of
September 30, 2001. You should read this table in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and the accompanying notes included in
this prospectus beginning on page F-1:
AS OF
SEPTEMBER 30,
2001
-------------
($ IN
MILLIONS)
DEBT:
Revolving credit facility (1)............................. $ --
Term loans................................................ 385
9% senior subordinated notes.............................. 451
------
Total debt................................................ 836
------
STOCKHOLDERS' EQUITY:
Preferred shares, par value $0.000115 per share;
1,000 million shares authorized and no shares issued and
outstanding............................................... --
Common shares, par value $0.000115 per share; 4,000 million
shares authorized, 147,112,631 shares issued and
outstanding (2)........................................... --
Additional paid-in capital.................................. 838
Accumulated deficit......................................... (192)
Accumulated other comprehensive income...................... 5
Treasury stock, at cost, 738,552 shares..................... (2)
------
Total stockholders' equity................................ 649
------
TOTAL CAPITALIZATION...................................... $1,485
======
The above information does not give effect to 30,218,916 shares issuable
upon the exercise of stock options outstanding as of September 30, 2001; or
40,491,622 shares (which includes the 30,218,916 shares issuable upon the
exercise of outstanding stock options) authorized and reserved for issuance
under our various stock plans as of September 30, 2001.
- ------------------------
(1) $150 million was available under our revolving credit facility as of
September 30, 2001. As of November 7, 2001, no amounts available under this
facility had been drawn.
(2) The actual aggregate par value of common shares is $16,918. This amount
rounds to zero in millions of dollars.
25
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with the audited consolidated financial statements of Willis Group
Holdings Limited and its related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operation" included elsewhere in this
prospectus. The financial information as of September 30, 2000 and 2001 and
December 31, 1998, 1999 and 2000 and for each of the nine-month periods ended
September 30, 2000 and 2001 and for each of the two years ended December 31,
2000 and for the period from September 2, 1998 to December 31, 1998 reflects the
financial position and results of operations of Willis Group Holdings Limited.
The financial information for the period from January 1, 1998 to September 1,
1998 and as of and for each of the two years ended December 31, 1997 reflects
the financial position and results of operations of our predecessor.
The selected historical financial data presented below as of September 30,
2001 and for the nine-month periods ended September 30, 2000 and 2001 have been
derived from the unaudited condensed consolidated financial statements of Willis
Group Holdings Limited included elsewhere in this prospectus, which financial
statements have been prepared in accordance with U.S. GAAP. Because we earn
revenue in an uneven fashion during the year, the results of the nine months
ended September 30, 2001 are not necessarily indicative of the results to be
expected for the year ended December 31, 2001. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
There has been no significant change in our financial condition since
September 30, 2001.
The selected consolidated financial data presented below as of and for each
of the two years ended December 31, 2000 have been derived from the audited
consolidated financial statements of Willis Group Holdings Limited included
elsewhere in this prospectus, which financial statements have been prepared in
accordance with U.S. GAAP. The selected consolidated financial data presented
below for the period from September 2, 1998 to December 31, 1998 and as of
December 31, 1998 have been derived from the audited consolidated financial
statements of Willis Group Holdings Limited which are not included in this
prospectus. Those financial statements were presented in U.S. dollars and were
prepared in accordance with U.K. GAAP. This information was reconciled from U.K.
GAAP to U.S. GAAP for purposes of the presentation below.
The selected consolidated financial data presented below for the period from
January 1, 1998 to September 1, 1998 and as of and for each of the two years
ended December 31, 1997 have been derived from the audited consolidated
financial statements of our predecessor which are not included in this
prospectus. Those financial statements were presented in pounds sterling and
were prepared in accordance with U.K. GAAP with a reconciliation of net income
and stockholders' equity from U.K. GAAP to U.S. GAAP.
26
The derived financial data presented below are stated in accordance with
U.S. GAAP.
PREDECESSOR WILLIS GROUP HOLDINGS LIMITED
---------------------------------- ------------------------------------------------------------
YEAR ENDED JANUARY 1 TO SEPTEMBER 2 TO YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 1, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------------- ------------ -------------- ------------------- ---------------------
1996(A) 1997(A) 1998(A) 1998(B) 1999 2000 2000 2001
-------- -------- ------------ -------------- -------- -------- --------- ---------
($ IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Total revenues............ $1,133 $1,134 $ 772 $ 413 $ 1,244 $ 1,305 $ 956 $1,037
General and administrative
expenses................ (959) (968) (655) (374) (1,136) (1,062) (784) (784)
Unusual items (c)......... -- -- (59) -- (47) (18) (11) (145)
Depreciation expense...... (38) (37) (26) (14) (41) (37) (28) (25)
Amortization of
goodwill................ (28) (29) (20) (11) (35) (35) (26) (26)
Gain (loss) on disposal of
operations.............. 7 7 4 (2) 7 1 1 22
------ ------ ----- ------- ------- ------- ------ ------
Operating income (loss)... 115 107 16 12 (8) 154 108 79
Interest expense.......... (3) (1) (3) (27) (89) (89) (67) (63)
Other expenses............ -- -- -- (8) (7) -- -- --
Loss on closure of
operations.............. -- -- (34) -- -- -- -- --
------ ------ ----- ------- ------- ------- ------ ------
Income (loss) before
income taxes, equity in
net earnings of
associates and minority
interest................ 112 106 (21) (23) (104) 65 41 16
Income tax expense........ (57) (49) (22) (7) (7) (33) (28) (36)
Equity in net earnings of
associates.............. 5 3 13 (4) 7 2 7 9
Minority interest......... (1) (1) (1) (10) (28) (25) (16) (14)
------ ------ ----- ------- ------- ------- ------ ------
Net income (loss)......... $ 59 $ 59 $ (31) $ (44) $ (132) $ 9 $ 4 $ (25)
====== ====== ===== ======= ======= ======= ====== ======
Net earnings (loss) per
share--basic............ $ (0.50) $ (1.11) $ 0.07 $ 0.03 $(0.19)
======= ======= ======= ====== ======
Net earnings (loss) per
share--diluted.......... $ (0.50) $ (1.11) $ 0.07 $ 0.03 $(0.19)
======= ======= ======= ====== ======
Weighted average number of
common shares
outstanding--basic...... 88 119 121 121 133
======= ======= ======= ====== ======
Weighted average number of
common shares
outstanding--diluted.... 88 119 121 121 133
======= ======= ======= ====== ======
BALANCE SHEET DATA (AS OF
PERIOD END):
Total assets (d).......... $6,760 $6,210 $ 6,904 $ 6,969 $ 7,590 $8,378
Net assets................ 961 972 601 513 529 663
Total long-term debt...... 31 56 1,040 988 958 836
Preference shares......... -- -- 267 269 272 --
Common shares and
additional paid-in
capital................. 121 123 365 401 410 838
Total stockholders'
equity.................. 958 963 321 226 238 649
OTHER FINANCIAL DATA:
Capital expenditures...... $ 45 $ 43 $ 33 $ 16 $ 41 $ 30 $ 19 $ 20
- ------------------------
(a) The selected consolidated financial data as of and for each of the two years
ended December 31, 1997 and for the period from January 1, 1998 to
September 1, 1998 have been derived from the audited consolidated financial
statements of our predecessor. Those financial statements were presented in
pounds sterling and were prepared in accordance with U.K. GAAP with a
reconciliation of net income and stockholders' equity from U.K. GAAP to U.S.
GAAP. Upon conversion of the financial information, for purposes of
disclosure in this prospectus, the U.K.
27
GAAP financial statement line items were adjusted for U.S. GAAP differences.
Certain reclassifications have been made to conform prior years' data to the
current U.S. GAAP presentation. Consolidated results of operations were
translated into U.S. dollars at the average exchange rates of $1.64 and
$1.56, and assets and liabilities were translated at the year-end exchange
rates of $1.65 and $1.71, for the years ended December 31, 1997 and 1996,
respectively. For the period ended September 1, 1998, consolidated results
of operations were translated into U.S. dollars at the average exchange rate
of $1.65.
(b) The selected consolidated financial data for the period from September 2,
1998 to December 31, 1998 and as of December 31, 1998 have been derived from
the audited consolidated financial statements of Willis Group Holdings
Limited. Those financial statements were presented in U.S. dollars and were
prepared in accordance with U.K. GAAP. Upon conversion of the financial
information, for purposes of disclosure in this prospectus, the U.K. GAAP
financial statement line items were adjusted for U.S. GAAP differences.
Certain reclassifications have been made to conform prior years' data to the
current U.S. GAAP presentation.
(c) Unusual items consist of the following:
- a non-cash compensation charge of $145 million recognized in the nine
months ended September 30, 2001 related to the probable satisfaction of
the conditions of the performance-based stock options. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview";
- restructuring charges relating to implementation of changes to our North
American business processes, which were $11 million for the nine months
ended September 30, 2000 and also for the year ended December 31, 2000,
representing excess operating lease obligations, and $7 million for the
year ended December 31, 1999, representing employee termination benefits;
- restructuring charges relating to the exit from certain U.S. business
lines for the year ended December 31, 2000 of $7 million. These consisted
of $4 million of employee termination benefits, $1 million relating to
excess operating lease obligations and $2 million relating to other costs;
- charges relating to claims and costs associated with the government
initiated review of personal pensions plans sold between 1988 and 1994 of
$40 million for the year ended December 31, 1999 and $41 million for the
period from January 1 to September 1, 1998. See Note 11 to the audited
consolidated financial statements of Willis Group Holdings Limited
included elsewhere in this prospectus; and
- costs incurred in connection with the acquisition of our predecessor of
$18 million for the period from January 1 to September 1, 1998.
(d) As an intermediary, we hold funds in a fiduciary capacity for the account of
third parties, typically as the result of premiums received from clients
that are in transit to insurance carriers and claims due to clients that are
in transit from insurance carriers. We report premiums, which are held on
account of, or due from policyholders, as assets with a corresponding
liability due to the insurance carriers. Claims held by, or due to, us which
are due to clients are also shown as both assets and liabilities of ours.
All those balances due or payable are included in insurance and reinsurance
balances receivable and payable on the balance sheet. We earn interest on
those funds during the time between the receipt of the cash and the time the
cash is paid out. Fiduciary cash must be kept in certain regulated bank
accounts subject to guidelines, which generally emphasize capital
preservation and liquidity and is not generally available to service our
debt or for other corporate purposes.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION GENERALLY RELATES TO WILLIS GROUP HOLDINGS LIMITED
AND OUR PREDECESSOR'S HISTORICAL CONSOLIDATED RESULTS OF OPERATIONS AND
FINANCIAL CONDITION AND SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS INCLUDED IN THIS PROSPECTUS BEGINNING ON PAGE F-1. THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000
AND FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 2001 HAVE BEEN
PREPARED IN ACCORDANCE WITH U.S. GAAP. FOR PURPOSES OF COMPARING THE OPERATING
RESULTS OF 1999 WITH 1998, OUR PREDECESSOR'S RESULTS FOR THE PERIOD FROM
JANUARY 1, 1998 TO SEPTEMBER 1, 1998 HAVE BEEN PRESENTED IN ACCORDANCE WITH U.S.
GAAP. THOSE RESULTS HAVE BEEN DERIVED FROM THEIR CONSOLIDATED FINANCIAL
STATEMENTS FOR 1998, WHICH WERE PRESENTED IN POUNDS STERLING AND PREPARED IN
ACCORDANCE WITH U.K. GAAP, WITH A RECONCILIATION TO U.S. GAAP.
OVERVIEW
We generate revenue from:
- commissions and fees on insurance placements and fees from consulting and
other services; and
- interest earned on premiums held before remission to the insurer and on
claims held before payment to the insured.
The majority of our revenues is commission-based and varies based upon the
premiums on the policies we placed on behalf of our clients. As such, when
premium rates in the insurance market decline, as they have in certain markets
in recent years, although there are many conflicting factors including changes
in buying and selling behavior, we experience pressure on our revenues and
earnings, and when pricing increases, we tend to benefit. Beginning in late
2000, market pricing generally began to move upward for the first time in recent
years. Although commissions and interest have traditionally been the greatest
sources of revenues, fee income, from both insurance placements and consulting
and other services, has been increasing as a percentage of total revenues in
recent years, while commission income has been declining largely because of
increased demand by clients for fee-generating risk management consulting
services and pressure on insurance premium rates, and therefore brokerage
commissions, due to competitive factors impacting the insurance industry. We
expect this trend toward increasing fee income to continue.
The events of September 11 have had a significant impact on the market for
insurance and reinsurance. Many insurers have been reducing the amount of
insurance they write, particularly in the airline, energy and large complex
property areas, and net industry capacity may be reduced. These insurers are
also increasing premium rates and restricting coverage terms, a process that had
commenced before September 11 but has accelerated since that time. We believe
this is due to concerns about the ability to arrange for reinsurance, as well as
to a change to a more conservative view on risk, particularly in the areas
mentioned above, in the wake of the events of September 11. As a result of these
changes, the number of insurers required to cover certain risks has generally
increased relative to the number of insurers that would typically have been
needed to cover the same risk prior to September 11, thus making it more
difficult to place certain risks in the market. Less complex risks are generally
being handled as normal, albeit with significant price increases. Given the
unprecedented nature and scope of the events of September 11 as well as the
possibility of U.S. and other governmental participation in the market for
insurance for terrorist acts, there remains uncertainty in the insurance market
today and we are unable to predict at this time when or if the insurance market
will return to pre-September 11 conditions.
Our results for the quarter ended September 30, 2001 were relatively
unaffected by the events of September 11, as September is typically a relatively
unexceptional month, with most insurance renewals in the quarter having been
completed before September 11. However, we believe that some insurance that we
would otherwise place in the fourth quarter of this year may be pushed into the
first quarter of 2002 or thereafter as a result of insurance being extended on a
month to month basis instead of being renewed for a more customary 12-month
period in the fourth quarter. We also expect that for the
29
fourth quarter of 2001, any loss of revenue due to business being pushed into
2002 will be offset to some extent, and perhaps even more than offset, by higher
commissions resulting from increased premium rates and higher fees on the
insurance placed during the quarter. However, there can be no assurance this
will be the case.
Insurance is a global business, and its participants are affected by global
trends in capacity and pricing. We are a global business. We compete all over
the world through the quality of our people, their specialist knowledge and our
ability to leverage our global capabilities and our relationships with insurance
carriers for the benefit of our clients. Our strategies include building on our
global franchise and implementing global best practices. We organize our
business into three main areas:
- North American Operations;
- Global Business; and
- International.
See "Business" for a description of our operations.
During 2000, 42% of our total revenues were derived from North American
operations, 47% were from Global Business operations and 11% were from
International operations. In 2000, Global Business produced a higher percentage
of our operating income than our revenues, and North American operations
produced a lesser percentage.
The period starting in 1995 has been one of significant change for us. We:
- carried out a series of divestitures of non-core businesses and assets;
- acquired businesses to expand our international presence;
- implemented a series of improvement initiatives to enhance revenues,
improve efficiency and add more value-added services to our traditional
insurance brokering services; and
- invested substantial amounts of money in non-recurring items such as
severance and external consultancy costs in support of these improvement
initiatives.
The scale of the changes was such that the growth rates of the businesses we
currently operate are not apparent from our reported numbers. In the period from
1995 through the end of 1998, reported operating revenues from continuing
operations grew at an annual growth rate of 0.5%. However, if the operating
revenues from businesses sold or closed from 1995 through 1998 are excluded,
adjusted operating revenues increased at a compound annual growth rate of 3.9%.
Operating income before unusual items was $96 million in 1995 and was
$87 million in 1998. EBITDA from 1995 through the end of 1998 grew at a compound
annual growth rate of 0.8%. Excluding the effects of the non-recurring and
unusual items referred to above and businesses sold or closed from 1995 through
1998, Adjusted EBITDA increased at a compound annual growth rate of 9.3%. See
notes (e) and (f) under "Prospectus Summary--Summary Consolidated Financial
Information" for a description of how EBITDA and Adjusted EBITDA are calculated
and their relevance for investors.
These changes continued in the period from 1998 through September 30, 2001.
During this period, we incurred a number of non-recurring and unusual expenses,
a portion of which related to our improvement initiatives. These expenses
included the following:
- PENSION REVIEW EXPENSES--the provisions made for claims and costs
associated with the government initiated review of personal pension plans
sold between 1988 and 1994 in the United Kingdom. Our predecessor company
recorded a provision of $41 million for these claims and costs in the
period from January 1 to September 1, 1998. In 1999, the provision was
increased by $64 million, of which $24 million was recorded as a purchase
price adjustment and $40 million was recorded as a charge to operations.
See "Business--Legal Matters".
- SEVERANCE EXPENSES--the provisions recorded for severance costs incurred
as part of our improvement initiatives. We incurred $16 million,
$19 million and $19 million of severance costs
30
in 1998, 1999 and 2000 and $10 million and $7 million in each of the
nine-month periods ended September 30, 2000 and 2001.
- CONSULTING EXPENSES--consulting expenses primarily incurred in connection
with our improvement initiatives. We incurred $4 million, $17 million and
$8 million of consulting expenses in 1998, 1999 and 2000 and $6 million in
the nine-month period ended September 30, 2001.
- PERFORMANCE-BASED STOCK OPTIONS--we recorded a $145 million non-cash
charge for performance-based stock options for the nine-month period ended
September 30, 2001 as described below.
- OTHER EXPENSES--including those relating to the acquisition of broker
teams, our investment in the World Insurance Network, and business
compliance errors. We incurred $12 million, $24 million and $6 million of
those expenses in 1998, 1999 and 2000 and $1 million in each of the
nine-month periods ended September 30, 2000 and 2001. Expenses for 1998
also included, as an unusual item, $18 million in expenses arising out of
our acquisition of our predecessor. Expenses for 1999 included
$10 million of costs relating to investigating and rectifying unauthorized
billing and settlement practices principally within two of our offices in
the United Kingdom and $10 million relating to additional provisions for
doubtful debts ($6 million) and errors and omissions claims ($4 million).
These non-recurring and unusual expenses affected our actual reported
results, offsetting the underlying benefits in both margin and EBITDA
improvement.
In addition to these non-recurring expenses, in recent years we have
completed a number of dispositions and acquisitions as part of our efforts to
focus our operations out of non-core or non-profitable businesses and to expand
our global capabilities. The following identifies the operations sold, closed or
acquired from 1998 through September 30, 2001:
- PROFESSIONAL LIABILITY UNDERWRITING MANAGEMENT--part of North American
operations that was closed in the second quarter of 1998. We reported a
loss on closure of $34 million, of which $33 million related to goodwill.
- KSA--an underwriting agency based in the Netherlands that was sold in
April 1999 for $6 million.
- E J WELTON LIMITED--a small, U.K.-based wholesale broker business that was
sold in March 2000 for $1 million.
- WILLIS NATIONAL--an independent financial advisor, in which we sold our
51% interest in July 2001 for $28 million.
We also expanded our International presence by making several investments
including the following at a total cost of $97 million:
- GROUP ITAL BROKERS--we acquired a 50% interest in an Italian subsidiary in
July 1998.
- ASSURANDRGRUPPEN--we acquired a 30% interest in a Danish associate in
September 1998.
- S&C WILLIS--we increased our investment in our Spanish associate from 48%
to 60% and reorganized our existing Spanish and Portuguese operations in
July 1998. Subsequently, our Spanish operation was merged with that of our
associate, Gras Savoye, and we retained an effective 46% holding in the
merged subsidiary.
- JASPERS WUPPESAHL--we increased our holding in our German associate to 45%
in January 1999.
- HERZFELD LEVY--we acquired a 20% interest in an associate in Argentina in
March 1999; this holding was subsequently increased to 40%.
- PRIMA/RONTARCA--we acquired a 51% interest in a Venezuelan subsidiary in
October 1999.
- BMZ--we acquired a 51% interest in a Mexican subsidiary in December 1999.
- SOUTH AFRICA--we acquired a 70% stake in a South African subsidiary in
May 2000.
31
- SEV DAHL--we acquired a 50.1% interest in a Norwegian subsidiary in
August 2000.
- SUMA--we acquired a 51% interest in a Colombian subsidiary in
December 2000.
In 1998, significant management attention was absorbed in the transaction
which ended with the acquisition of our predecessor and subsequent financing. At
the end of 1998, we successfully established a program to retain, attract and
incentivize key staff, under which at the time of our initial public offering on
June 11, 2001, 366 employees had invested in our common equity. Since our
initial public offering, approximately 4,200 additional employees have now
invested or acquired interests in shares of our common stock either directly or
through our employee share incentive programs.
1999 was a year of transition in which we, as a private company:
- accelerated the pace of our improvement initiatives, spending $36 million
on severance and external consultancy. In particular, we planned and
started to implement our Business Process Redesign program in our North
American operations, a comprehensive restructuring to categorize our
accounts, eliminate unprofitable accounts and activities, consolidate
several sales process functions, and streamline and centralize client
service functions, resulting in an increase in the time brokers have for
needs analysis and product design with clients;
- incurred $7 million in connection with our Business Process Redesign
program in North America;
- grew revenues by 3% on a comparable basis (by comparable basis we mean
revenues expressed in terms of constant currency, adjusted for the effect
of acquisitions and dispositions and adjusted for non-recurring and
unusual items);
- incurred approximately $30 million of expenses that we consider
investments for the future, including information technology spent in
support of the improvement initiatives, training initiatives, internal
implementation teams and the launch of our "Willis" brand; partly as a
consequence of these items our expenses increased by 6% on a comparable
basis.
- recruited over 60 key managers and producers;
- commenced our review of Shared Services, a program designed to reduce
duplication globally in finance, information technology and human resource
management;
- combined our United Kingdom and Global Specialty businesses under one
management;
- continued to expand our International network through acquisitions in
Mexico and Venezuela, and merged our Spanish operations with those of Gras
Savoye; and
- repaid $12 million of term loans under our senior credit facilities.
Although the financial results in 1999 were disappointing, the improvement
initiatives and expense reductions discussed above laid the base for improved
performance in 2000.
In 2000, we continued the aggressive implementation of our improvement
initiatives as a private company and began to see improvement in our financial
results. We:
- grew revenues by over 7% on a comparable basis;
- constrained expense growth to only 1% on a comparable basis;
- made substantial progress with our North American Business Process
Redesign program, eliminating 275 positions and establishing centers of
excellence for marketing, claims and the issuance of certificates of
insurance;
- invested in businesses in Norway, South Africa, Colombia and Chile;
- repaid a further $30 million of term loans under our senior credit
facility. We are ahead of our repayment schedule, with the next mandatory
payment due in 2004;
32
- spent $19 million on severance and reduced spending on external
consultants to $8 million. In the nine months ended September 30, 2001, we
spent $7 million on severance and $0 million on external consultants;
- recruited an additional 90 key managers and producers, including naming
Joseph Plumeri, formerly of Citigroup, as Executive Chairman and Chief
Executive Officer, which is reinvigorating our culture and approach to
sales and marketing;
- improved operating income by $162 million. 1999 included certain unusual
or non-recurring charges and, adjusting for these, we delivered an
improvement in Adjusted EBITDA of $73 million on a comparable basis, and
improved our Adjusted EBITDA margins from 15% in 1999 to 20% in 2000; and
- delivered an improvement in net cash flows from operating activities of
$60 million from $19 million in 1999 to $79 million in 2000.
Given the recent implementation of several of our improvement initiatives
and the arrival of Mr. Plumeri as Chairman and Chief Executive in October 2000,
we believe that there are further benefits to come from our efforts in 1999 and
2000, including further improvement in revenue growth and margins.
In February 2001, we acquired 100% of Bradstock G.I.S. Pty Limited in
Australia which we merged with our existing Australian operation to provide
greater scale and depth of management. The consideration for the acquisition was
A$8.4 million with A$4.4 million paid in cash and the balance satisfied by the
issue of preferred shares in our existing Australian operation. The preferred
shares will be exchanged for shares of our common stock on the third anniversary
of the acquisition, calculated using a series of specified formulae based on the
initial offering price and the trading price of our common stock at the second
and third anniversaries of the acquisition. Using the initial public offering
price of $13.50 per share of common stock and assuming that the formulae for the
second and third anniversaries of the acquisition is based on a price of $23.39
per share of common stock (the last sale price of our common stock on the New
York Stock Exchange on September 28, 2001), we would issue approximately 126,000
new shares of our common stock in exchange for the preferred shares on the third
anniversary of the acquisition.
We continue to review possible acquisitions and investments from time to
time. We may seek to pay for acquisitions or investments by issuing, in whole or
in part, shares of our common stock. In addition, we continue to review from
time to time possible dispositions of certain of our wholly or partly owned
subsidiaries, as well as interests in certain of our associates.
Like many insurance brokers, we earn revenue in an uneven fashion during the
year, primarily due to the timing of insurance policy renewals. As many
insurance and reinsurance policies incept and renew as of December 31 or
January 1, we generate the majority of our revenues in the first and fourth
calendar quarters. In 2000, for example, we generated 26.2% of our revenues in
the first quarter and 28.4% of our revenues in the fourth quarter. The second
and third quarters are less substantial revenue quarters, accounting for 23.3%
and 22.1% respectively, of 2000 revenues. Expenses, however, are incurred on a
relatively even basis throughout the year. As a result, we have historically
earned the majority of our operating income in the first and fourth quarters,
with the second and third quarters accounting for a lower percentage of full
year operating income. In 2000, for example, we recorded operating income of
$63 million (41%), $28 million (18%), $18 million (12%) and $45 million (29%)
for the first, second, third and fourth quarters and our associates' after tax
contribution was $9 million, $(1) million, $(1) million and $(5) million for
those quarters and our net income was $17 million, $(5) million, $(8) million
and $5 million.
In recent years, operating revenues have not been significantly influenced
by inflation. However, with our staff and related costs generally accounting for
approximately 68% of our total operating expenses, general inflationary
pressures in each of the countries in which we operate affect us.
33
We conduct our business in over 100 currencies. Accordingly, movements in
foreign currency exchange rates can affect our results. For example, the
strength of the pound sterling in recent years has had a material negative
impact on our reported results. We use constant exchange rates for internal
budgeting and reporting purposes and we believe this allows for a comparison
that provides investors with supplemental data with which to assess our
operating results. For a full description of our methodology for preparing our
results at constant exchange rates, see "Supplemental Constant Currency
Financial Data".
We currently have outstanding performance-based options entitling employees
to purchase shares of our common stock. These options vest and become
exercisable to the extent, if at all, that the performance-based goals under our
plans are achieved. No options will vest if actual results are below minimum
stated performance targets; options will vest proportionately as actual
performance falls within a stated range above the minimum targets. The
performance goals generally relate to cumulative consolidated cash flow and
annual EBITDA, as defined, of our subsidiary Willis Group Limited for periods
ending 2001 and 2002. These options are accounted for under the variable plan
method, which requires us to start recording non-cash compensation charges when
it becomes probable that the conditions to these performance-based options will
be satisfied. In the third quarter of 2001, management determined that it was
probable that the conditions for the outstanding performance-based stock options
would be satisfied. As a result, for the period ended September 30, 2001, we
recorded an initial charge of $145 million based on the difference between the
price of our common stock at the time the satisfaction of the conditions became
probable and the exercise price, which is generally L2 per share under our
existing plans. In the event the price of our common stock increases or
decreases through the end of 2002 when the performance period ends, the
associated charge will increase or decrease as well. The charges will generally
be expensed on an accelerated basis over the vesting periods of the associated
options, generally three to six years under our plans. Under this accelerated
method, however, approximately 62% of the overall vesting period was deemed to
have elapsed by the end of the third quarter 2001. A further 6% will elapse by
the end of the fourth quarter 2001 and a further 16% during 2002 with the
remainder thereafter. As of the date hereof, there were outstanding
performance-based options to purchase approximately 11.4 million shares.
Assuming that all such options vest and become exercisable, under variable plan
accounting every $1 increase in the price of our common stock above the exercise
price would result in $11.4 million of expense before tax charged over the
vesting period. Based on the September 28, 2001 stock price of $23.39, the total
charge would be $233 million. For every $1 increase or decrease in our stock
price, the total charge would increase or decrease by $11.4 million and the
income tax credit by approximately $2.0 million. Assuming a stock price of
$23.39, the total cost would be allocated over the applicable performance period
as follows:
NON-CASH
COMPENSATION INCOME TAX IMPACT ON
CHARGE CREDIT NET INCOME
------------ ---------- ----------
($ IN MILLIONS)
Nine months ended September 30, 2001....................... $145 $24 $121
Three months ending December 31, 2001...................... 14 3 11
---- --- ----
Year ending December 31, 2001.............................. 159 27 132
Year ending December 31, 2002.............................. 38 6 32
Year ending December 31, 2003.............................. 23 4 19
Year ending December 31, 2004.............................. 13 1 12
---- --- ----
$233 $38 $195
==== === ====
34
OPERATING RESULTS
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2001 COMPARED WITH NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 2000
SUMMARY
For the nine months ended September 30, 2001, total revenues increased by
$81 million (8%) to $1,037 million from $956 million for the corresponding
period of 2000. Excluding the effects of foreign currency exchange rate
movements and the effects of acquisitions and disposals, total revenues were 12%
higher in the nine months ended September 30, 2001 than in the corresponding
period of 2000. The increase in revenues was primarily due to increased business
from existing clients and generally higher premium rates and volumes.
Operating income for the nine months ended September 30, 2001 decreased by
$29 million (27%) to $79 million from $108 million for the corresponding period
of 2000. Excluding the non-cash compensation charge in 2001 for
performance-based stock options of $145 million, gains on disposal of operations
and restructuring costs, operating income for the nine months ended
September 30, 2001 increased by $84 million (71%) compared to the corresponding
period of 2000.
Operating cash earnings (defined as net loss of $25 million excluding
goodwill amortization of $26 million, the non-cash charge for performance-based
stock options of $121 million after tax, the gain on disposal of operations of
$16 million after tax and a non-recurring tax credit of $8 million) were
$98 million for the nine months ended September 30, 2001 compared with
$36 million (representing net income of $4 million excluding goodwill
amortization of $26 million, the gain on disposal of operations of $1 million
after tax and restructuring costs of $7 million after tax) in the third quarter
of 2000, an increase of $62 million (172%).
Primarily as a consequence of the performance-based options charge, we
recorded a net loss for the nine months ended September 30, 2001 of $25 million
($0.19 per share) compared with net income of $4 million ($0.03 per share) in
the corresponding period of 2000.
REVENUES
Revenues consist of commissions and fees, which increased by $80 million
(9%) to $987 million in the nine months ended September 30, 2001 from
$907 million in the corresponding period of 2000, and interest income, which
increased by $1 million (2%) to $50 million in the nine months ended
September 30, 2001 from $49 million in the corresponding period of 2000.
NORTH AMERICAN OPERATIONS: Revenues generated by our North American
operations increased by $8 million (2%) to $362 million in the nine months ended
September 30, 2001 from $354 million in the corresponding period of 2000.
Adjusting for the effect of the disposal of the Penco programs division in
January 2001, revenues increased by 5% in constant currency terms, primarily
attributable to increased premium rates.
GLOBAL BUSINESS: Revenues generated by our Global Business operations
increased by $50 million (10%) to $558 million in the nine months ended
September 30, 2001 from $508 million in the corresponding period of 2000. In
constant currency terms, revenues increased by 13%. Adjusting for the effect of
the Willis National disposal in July 2001, revenues increased by 15%, with
strong new business performance being supplemented by rising premium rates.
INTERNATIONAL: Revenues generated by our International operations increased
by $23 million (24%) to $117 million in the nine months ended September 30, 2001
from $94 million in the corresponding period of 2000. In constant currency
terms, revenues increased by 32%, mainly as a result of our acquisitions in
Norway, Colombia and South Africa. Excluding the effect on revenue of these
acquisitions, International revenues increased by 14% in constant currency
terms. During the first nine
35
months of 2001, most international insurance markets began firming in line with
those in the United States.
EXPENSES
Total expenses increased by $110 million (13%) to $958 million in the nine
months ended September 30, 2001 from $848 million in the corresponding period of
2000 almost wholly as a consequence of recognizing a non-cash compensation
charge of $145 million for performance-based stock options, which was partially
offset by a gain of $22 million on the disposal of Willis National.
General and administrative expenses (excluding non-cash compensation for
performance-based stock options) were $784 million for the nine months ended
September 30, 2001, unchanged from the corresponding period of 2000. Excluding
acquisitions and disposals, general and administrative expenses were 4% higher
in constant currency terms than in the corresponding period of 2000. Much of
this increase related to higher incentive payments arising from improved
revenues and operating profits. Controllable expenses, defined as general and
administrative expenses excluding incentives and other expenses linked to
revenue growth, increased 1% on a constant currency basis in the nine months
ended September 30, 2001.
INTEREST EXPENSE
Interest expense of $63 million in the nine months ended September 30, 2001
was $4 million, (6%) lower than in the corresponding period of 2000, reflecting
the early repayment and open-market repurchases of debt. Interest expense
represents interest payable on long-term debt consisting of the senior credit
facilities and the 9% senior subordinated notes due 2009.
INCOME TAXES
Income tax expense for the nine months ended September 2001 amounted to
$36 million. Tax deductions are not available for approximately 60% of the
performance-based options charge and 100% of the goodwill amortization charge.
Also, during the nine months ended September 30, 2001 there was a tax credit of
$8 million arising from the restructuring of certain subsidiary companies.
Excluding these items and the $6 million tax charge arising from disposal of
Willis National, the underlying tax rate for the nine months was 38%.
ASSOCIATES
Equity in net income of our associates was $9 million for the nine months
ended September 30, 2001 compared with $7 million in the corresponding period of
2000.
FISCAL 2000 COMPARED WITH FISCAL 1999
SUMMARY
Total revenues increased by $61 million (5%) from $1,244 million in 1999 to
$1,305 million in 2000. In constant currency terms, total revenues increased by
8%. Excluding the effects of foreign currency exchange rate movements, the loss
of revenues from businesses sold, and the revenues gained from acquisitions,
total revenues were 7% higher in 2000 than in 1999 due to improved new business
and firming premium rates.
Operating income increased by $162 million from a loss of $8 million in 1999
to income of $154 million in 2000. 2000 operating income was impacted by
$18 million in unusual items, consisting of restructuring charges in our North
American operations of $11 million related to excess operating lease obligations
following implementation of the Business Process Redesign program and
$7 million related to the exit from certain U.S. business lines. Excluding
unusual items and the impact of
36
exchange rate movements, 2000 operating income was $180 million. 1999 operating
income was impacted by $47 million in unusual items, consisting of $40 million
related to the review of personal pensions and $7 million related to employee
termination benefits in connection with the Business Process Redesign program.
In constant currency terms, excluding the impact of unusual items and exchange
rate movements, operating income increased by $131 million in 2000 versus 1999,
reflecting our improved revenues as well as the benefits of effective expense
controls and operations improvement initiatives.
Operating income before goodwill amortization increased by $162 million from
$27 million in 1999 to $189 million in 2000. Excluding the unusual items
described above and the impact of exchange rate movements, 2000 operating income
before goodwill amortization was $215 million and the margin was 16%. In
constant currency terms, excluding the impact of the unusual items described
above and exchange rate movements, operating income before goodwill amortization
increased by $131 million in 2000 versus 1999 and the margin increased from 7%
to 16%, reflecting our improved revenues as well as the benefits of effective
expense controls and operations improvement initiatives.
Net income increased by $141 million from a net loss of $132 million in 1999
to net income of $9 million in 2000. Excluding the impact of unusual items, net
income increased by $119 million in 2000 versus 1999.
REVENUES
Revenues consist of commissions and fees, which increased by $57 million
(5%) from $1,180 million in 1999 to $1,237 million in 2000, and interest income
which increased by $4 million (6%) from $64 million to $68 million.
NORTH AMERICAN OPERATIONS: Revenues generated by our North American
operations increased by $22 million (4%) from $520 million in 1999 to
$542 million in 2000. In constant currency terms, revenues increased by 5%,
reflecting firming premium rates in most areas.
GLOBAL BUSINESS: Revenues generated by our Global Business increased by
$35 million (6%) from $581 million in 1999 to $616 million in 2000. In constant
currency terms, revenues increased by 8%, mainly from improved rates and
increased orders.
INTERNATIONAL: Revenues generated by our International unit increased by
$4 million (3%) from $143 million in 1999 to $147 million in 2000. In constant
currency terms, revenues increased by 15%, mainly as a result of acquisitions in
Norway and Latin America. Excluding these acquisitions, International revenues
increased by 9% in constant currency terms.
EXPENSES
Total expenses decreased by $101 million (8%) from $1,252 million in 1999 to
$1,151 million in 2000, reflecting the benefits from the improvement initiatives
initiated in 1998 and the continuing tight control over expenditures. Total
expenses in 2000 included the following unusual item:
- Restructuring charges of $18 million in our North American operations
related to excess lease obligations and employee termination benefits,
and total expenses in 1999 included the following unusual items:
- a further provision of $40 million in connection with the government
initiated pension review in the United Kingdom (see "Business--Legal
Matters"), and
- employee termination costs of $7 million related to the Business Process
Redesign program.
37
Excluding these unusual items, total expenses in 2000 were 6% lower than in
1999 but were unchanged in constant currency terms. General and administrative
expenses declined by 7% in 2000 over 1999 partly as a result of consulting
expenses declining by $9 million and non-recurring expenses being $18 million
lower. Non-recurring expenses were lower in 2000 primarily due to the absence in
2000 of $10 million of costs in 1999 relating to investigating and rectifying
unauthorized billing and settlement practices in one of our business subunits
and $10 million of additional provisions made in 1999 for a combination of
errors and omissions claims and doubtful debts.
GAIN ON DISPOSAL OF OPERATIONS
The gain on disposal of operations in 2000 of $1 million arose from the
disposal of E J Welton Limited, a small United Kingdom based wholesale broker
that was sold in March 2000. The gain on disposal of operations in 1999 of
$7 million arose from the disposal of KSA, an underwriting agency based in the
Netherlands that was sold in April 1999.
INTEREST EXPENSE
Interest expense of $89 million in 2000 was unchanged from 1999 and
represented interest payable on long-term debt consisting of the senior credit
facilities and the 9% senior subordinated notes due 2009 issued in connection
with the acquisition of our predecessor.
INCOME TAXES
Income taxes for 2000 amounted to $33 million, giving an effective tax rate
of 51%. Excluding goodwill amortization charges, for which no tax deductions are
available, and the need to establish valuation allowances against certain
deferred tax asset balances which may not be recoverable, the underlying tax
rate for 2000 was 34%, the same as for 1999.
ASSOCIATES
Equity in net earnings of our associates was $2 million in 2000 compared
with $7 million in 1999. Lower profits from Germany (accounting for $3 million
of the decline), adverse foreign exchange (accounting for $1 million of the
decline) and higher effective tax rates (accounting for $1 million of the
decline) were the main contributory factors.
38
FISCAL 1999 COMPARED WITH FISCAL 1998
Our consolidated statement of operations for 1998 has been presented
separately for the period from January 1, 1998 to September 1, 1998, the
effective date of the acquisition of our predecessor, and for the period from
September 2, 1998 to December 31, 1998 in accordance with U.S. GAAP. The
following table summarizes the results for the year ended December 31, 1999
compared with the two separate periods for 1998.
PREDECESSOR WILLIS GROUP HOLDINGS LIMITED
------------- ------------------------------
JANUARY 1 TO SEPTEMBER 2 TO YEAR ENDED
SEPTEMBER 1, DECEMBER 31, DECEMBER 31,
1998 1998 1999
------------- -------------- -------------
($ IN MILLIONS)
Revenues
Commissions and fees............................... $ 728 $ 390 $ 1,180
Interest income.................................... 44 23 64
----- ----- -------
Total revenues....................................... 772 413 1,244
----- ----- -------
Expenses
General and administrative expenses................ (655) (374) (1,136)
Unusual items...................................... (59) -- (47)
Depreciation expense............................... (26) (14) (41)
Amortization of goodwill........................... (20) (11) (35)
Gain (loss) on disposal............................ 4 (2) 7
----- ----- -------
Total expenses....................................... (756) (401) (1,252)
----- ----- -------
Operating income (loss).............................. 16 12 (8)
Income (loss) on closure of operations............... (34) -- --
Interest expense..................................... (3) (27) (89)
Other expenses....................................... -- (8) (7)
----- ----- -------
Loss before income taxes, equity in associates and
minority interest.................................. (21) (23) (104)
Income tax expense................................... (22) (7) (7)
----- ----- -------
Loss before equity in net earnings of associates and
minority interest.................................. (43) (30) (111)
Equity in net earnings (loss) of unconsolidated
associates......................................... 13 (4) 7
Minority interest.................................... (1) (10) (28)
----- ----- -------
Net income (loss) available for common
stockholders....................................... $ (31) $ (44) $ (132)
===== ===== =======
SUMMARY
Total revenues increased by $59 million (5%) from $1,185 million in 1998
(being $772 million in the period January 1, 1998 to September 1, 1998, plus
$413 million in the period September 2, 1998 to December 31, 1998) to
$1,244 million in 1999. In constant currency terms, operating revenues increased
by 7%. Excluding the effects of foreign currency exchange rate movements, the
loss of operating revenue from businesses sold and the operating revenues gained
from acquisitions, operating revenues were 3% higher in 1999 than in 1998.
The 1999 operating loss of $8 million represented a decrease as compared to
operating income of $16 million for the period January 1, 1998 to September 1,
1998 and $12 million for the period from September 2, 1998 to December 31, 1998.
1999 operating income was impacted by $47 million in unusual items, consisting
of $40 million related to the review of personal pensions and $7 million related
to employee termination benefits in connection with the Business Process
Redesign program. Excluding unusual items and the impact of exchange rate
movements, 1999 operating income was $49 million. Operating income for the
period January 1, 1998 to September 1, 1998 was impacted by
39
$59 million in unusual items, consisting of charges of $41 million related to
the pensions review and costs of $18 million incurred in connection with the
acquisition of our predecessor. Excluding the impact of unusual items and
exchange rate movements, operating income decreased in 1999, primarily as a
consequence of higher expenditures for severance, consulting and the expenses
incurred in connection with our improvement initiatives. Excluding these
adjustments, operating income in 1999 was $109 million as compared to
$91 million for the period from January 1, 1998 to September 1, 1998 and
$30 million for the period September 2, 1998 to December 31, 1998.
Operating income before goodwill amortization decreased to $27 million in
1999 compared to $36 million for the period January 1, 1998 to September 1,
1998, and $23 million in the period September 2, 1998 to December 31, 1998.
Excluding the unusual items described above and the impact of exchange rate
movements, 1999 operating income before goodwill amortization was $84 million
and the margin was 7%. In constant currency terms, excluding the impact of
exchange rate movements and unusual items and other adjustments referred to
above, operating income before goodwill amortization was $144 million in 1999 as
compared to $111 million for the period January 1, 1998 to September 1, 1998,
and $41 million in the period September 2, 1998 to December 31, 1998.
REVENUES
Revenues comprise commissions and fees which increased by $62 million (6%)
from $1,118 million in 1998 (being $728 million for the period January 1, 1998
to September 1, 1998, plus $390 million for the period September 2, 1998 to
December 31, 1998) to $1,180 million in 1999, and interest income, which
decreased by $3 million (5%) from $67 million (being $44 million for the period
January 1, 1998 to September 1, 1998, plus $23 million for the period
September 2, 1998 to December 31, 1998) to $64 million.
NORTH AMERICAN OPERATIONS: Revenues generated by our North American
operations increased by $20 million (4%) from $500 million in 1998 to
$520 million in 1999. In constant currency terms, revenues increased by 2%,
mainly due to premium increases in the employee benefits sector and strong new
business production offset in part by lost business and shrinkage in the
property and casualty sector.
GLOBAL BUSINESS: Revenues generated by our Global Business declined by
$8 million (1%) from $589 million in 1998 to $581 million in 1999. In constant
currency terms, revenues increased by 2%. Revenue shortfalls in the United
Kingdom were offset by strong performances by our Aerospace and Global
Financial & Executive Risks sub-units. United States units had a more difficult
time than United Kingdom and other units in generally unsettled reinsurance
markets.
INTERNATIONAL: Revenues generated by our International unit increased by
$47 million (49%) from $96 million in 1998 to $143 million in 1999. Excluding
the effect of the acquisition of Gruppo Ital Brokers, which was acquired in
July 1998, and other acquisitions in 1999, principally in Latin America,
revenues increased by 8% in constant currency terms. Strong performances were
delivered by operations in Spain, Sweden and Venezuela.
EXPENSES
General and administrative expenses increased by $107 million (10%) from
$1,029 million in 1998 (being $655 million for the period January 1, 1998 to
September 1, 1998, plus $374 million for the period September 2, 1998 to
December 31, 1998) to $1,136 million in 1999. Non-recurring and unusual costs of
$60 million, including employee termination costs of $19 million and consulting
fees of $17 million incurred as part of the improvement initiatives, additional
provisions of $10 million relating to errors and omissions claims and doubtful
debts, and $14 million of other expenses including $10 million relating to
investigating and rectifying unauthorized billing and settlement practices
principally within two of our offices in the United Kingdom, were incurred in
1999. Excluding these non-recurring costs, the effect of foreign currency
40
exchange rate movements and the effect of acquisitions and disposals, general
and administrative expenses increased by 6% over 1998. In addition, total
expenses in 1999 included the following unusual items:
- a further provision of $40 million was established in the fourth quarter
of 1999 in connection with the United Kingdom Pensions Review (see
"Business--Legal Matters"); and
- employee termination costs of $7 million were provided in connection with
implementing changes to business processes in our North American
operations during 2000.
During the period January 1, 1998 to September 1, 1998, total expenses
included two unusual items: $41 million was added to the provision for pension
review costs and costs totaling $18 million were written off by our predecessor
in connection with the acquisition.
INTEREST EXPENSE
Interest expense of $89 million in 1999 increased significantly over that
payable in the period January 1, 1998 to December 31, 1998 as a consequence of
interest payable on the senior credit facility and the 9% senior subordinated
notes due 2009 incurred in connection with the acquisition of our predecessor.
INCOME TAXES
The income tax charge for 1999 amounted to $7 million. Excluding unusual
items, loss on disposal and amortization charges for which no tax deductions are
available, the underlying rate of tax was 34% compared with an underlying rate
of 36% in 1998.
ASSOCIATES
Equity in net earnings of our associates was $7 million in 1999 compared
with $13 million in the period January 1, 1998 to September 1, 1998 and
$(4) million in the period September 2, 1998 to December 31, 1998. Our
associates typically earn a higher proportion of their full-year revenues in the
first quarter than in subsequent quarters.
LIQUIDITY AND CAPITAL RESOURCES
As an intermediary, we hold funds in a fiduciary capacity for the account of
third parties, typically as the result of premiums received from clients that
are in transit to insurance carriers and claims due to clients that are in
transit from insurance carriers. We report premiums, which are held on account
of, or due from, policyholders as assets with a corresponding liability due to
the insurance carriers. Claims held by, or due to, us which are due to clients
are also shown as both assets and liabilities of ours. All those balances due or
payable are included in accounts receivable and accounts payable on the balance
sheet. We earn interest on those funds during the time between the receipt of
the cash and the time the cash is paid out. Fiduciary cash must be kept in
certain regulated bank accounts subject to guidelines, which generally emphasize
capital preservation and liquidity and is not generally available to service our
debt or for other corporate purposes.
Net cash provided by operations increased by $115 million to $138 million in
the nine months ended September 30, 2001 from $23 million in the corresponding
period of 2000. This increase was due mainly to the improved operating cash
earnings.
Net cash provided by operations improved by $60 million to $79 million in
2000 from $19 million in 1999. This increase was largely due to the improved
operating performance of the company.
For the nine months ended September 30, 2001, net cash provided from the
disposal of operations, which included Penco and Willis National, less
acquisitions amounted to $19 million compared with a net cash outflow for
acquisitions less disposals of $7 million in the corresponding period of 2000.
During 2000, the net cash outflow for acquisitions less proceeds from disposals
amounted to $14 million. During 1999, the net cash outflow for acquisitions less
proceeds from disposals amounted to $22 million which included a payment of
$16 million for a further 15% interest in Jaspers Wuppesahl, increasing our
ownership to 45%. We have additional call rights whereby we may increase our
ownership in Jaspers Wuppesahl to over 50% in 2012.
41
In connection with many of our investments in associates, we retain rights
to increase our ownership percentage of those associates over time, typically to
a majority or 100% ownership position. In addition, in certain instances, the
other owners of the associates have a right, typically at a price calculated
pursuant to a formula based on revenues or earnings, to put some or all of their
shares in the associates to us.
As part of our acquisition of 33% of Gras Savoye, we entered into a put
arrangement, whereby the other shareholders in Gras Savoye (primarily two
families, two insurance companies and Gras Savoye's executive management team)
could put their shares to us. From 2001 to 2011, we will be obligated to buy the
shares of those shareholders to the extent that those shareholders put their
shares, potentially increasing our ownership from 33% to 90% if all shareholders
put their shares, at a price determined by a contractual formula based on
earnings and revenue. Management shareholders of Gras Savoye (representing
approximately 10% of shares) do not have general put rights between 2001 and
2011, but have certain put rights on their death, disability or retirement from
which payments are not expected to exceed $22 million. From 2001 to 2005, the
incremental 57% of Gras Savoye may be put to us at a price equal to the greater
of approximately 800 million French francs ($111 million at September 30, 2001
exchange rates), for the full 57%, or a price based on the formula. After 2005,
the put price is determined solely by the formula. The shareholders may put
their shares individually at any time during the put period.
While neither we nor the management of Gras Savoye expect significant
exercises of the puts, on a separate or aggregate basis, in the near to medium
term, we nevertheless believe that, should the aggregate amount of shares be put
to us, sufficient funds would be available to satisfy this obligation. In
addition, we have a call option to move to majority ownership under certain
circumstances and in any event by 2009. Upon exercising this call option, the
remaining Gras Savoye shareholders have a put.
Although we discontinued our United Kingdom underwriting operations in 1991,
we are still required to handle the administration of claims arising from
insurance business previously written by Willis Faber (Underwriting Management)
on behalf of Sovereign and third party insurance carriers. Sovereign was placed
into provisional liquidation on July 11, 1997. See "Business--Legal Matters".
Cash payments in connection with the renegotiated arrangements for administering
the WFUM run-off amounted to $6 million during 2000. No significant cash
payments were made in 1999, as such amounts had been pre-funded in 1998. Annual
payments of about $4 million are expected to be payable in 2001.
Cash payments in connection with the government initiated review of pension
plans amounted to $21 million in each of 1999 and 2000 and $14 million in the
nine-month period ended September 30, 2001. We expect the remaining provision of
$35 million at September 30, 2001 to be paid out over the next two years.
Capital expenditures for 2000 and 1999, less the proceeds from disposals of
fixed assets, were $23 million and $30 million. We expect that capital
expenditures for 2001 will continue at approximately the same level. We have
funded our requirements for capital expenditures by cash generated internally
from operations and from external financing and expect to continue to do so in
the future.
Our wholly owned subsidiary, Willis North America, entered into a credit
agreement on July 22, 1998 with The Chase Manhattan Bank. The credit agreement,
as amended, is comprised of a term loan facility of $450 million under which
portions of the loan mature on four different dates between 2005 and 2008 and a
revolving credit facility of $150 million. Willis North America borrowed the
term loan portions of the credit agreement in full in November 1998 to refinance
certain of our existing indebtedness incurred in connection with the tender
offer for our predecessor. During 1999 and 2000, repayments totaling
$12 million and $30 million, respectively, were made and, during the first
quarter of 2001, we made additional repayments totaling $22.5 million. As a
consequence, we are ahead of our repayment schedule. As of October 29, 2001, the
outstanding balance on the term loans was $385 million. The next mandatory
repayment under the facility is not due until 2005. The revolving
42
credit portion is available for working capital requirements and general
corporate purposes, subject to certain limitations. As of October 29, 2001, the
revolving credit facility remained undrawn.
On February 2, 1999, Willis North America issued $550 million of 9% senior
subordinated notes, the proceeds from which were used to repay short-term
facilities. The notes mature on February 1, 2009 and interest is payable on the
notes semi-annually on February 1 and August 1 of each year. Willis North
America repurchased in the open market and retired $99 million principal amount
of the 9% senior subordinated notes during the second and third quarters of
2001. We used cash from operations to repurchase the notes. There was no
material gain or loss from the repurchase. Total long-term debt outstanding as
of September 30, 2001 was $836 million, down from $958 million as of
December 31, 2000.
The net proceeds from our June 2001 initial public offering amounted to
$282 million. Substantially all of the proceeds were used to redeem, on
June 30, 2001, all of the outstanding $273 million of preference shares in a
subsidiary company, resulting in approximately $23 million per year in dividend
cost savings.
Willis North America entered into an interest rate swap agreement on
December 4, 1998 with The Chase Manhattan Bank under which its LIBOR-based
floating rate interest payment obligations on the full amount of the term loans
have been swapped for fixed rate interest payment obligations, resulting in an
effective base rate of 5.099% per annum, plus the applicable margin, until the
final maturity of those term loans. The swap agreement provides for a reduction
of the notional amount of the swap obligation on a semi-annual basis and, to the
extent the actual amount outstanding under the term loans exceeds the notional
amount at any time, Willis North America would be exposed to the risk of
increased interest rates on that excess.
As of September 30, 2001, we had cash and cash equivalents of $120 million,
an increase of $32 million from December 31, 2000. We expect that internally
generated funds will be sufficient to meet our foreseeable operating cash
requirements, capital expenditures and scheduled debt repayments, the next of
which is not due until 2005. In addition, we have an undrawn $150 million
revolving credit facility.
FINANCIAL RISK MANAGEMENT
We are exposed to market risk from changes in interest rates and foreign
currency exchange rates. In order to manage the risk arising from these
exposures, we enter into a variety of interest rate and foreign currency
derivatives. We do not hold derivative or financial instruments for trading
purposes.
A discussion of our accounting policies for financial and derivative
instruments is included in Note 2 to the consolidated financial statements and
further disclosure is provided in Notes 12 and 15 to the consolidated financial
statements, included elsewhere in this prospectus.
FOREIGN EXCHANGE RISK MANAGEMENT
We report our operating results and financial condition in U.S. dollars. Our
U.S. operations earn revenue and incur expenses primarily in dollars. In the
United Kingdom, however, we earn revenue in a number of different currencies,
but expenses are almost entirely incurred in pounds sterling. Outside the United
States and the United Kingdom, we predominately generate revenue and expenses in
the local currency. The table below details the breakdown of revenues and
expenses by currency in 2000.
POUNDS STERLING U.S. DOLLARS OTHER CURRENCIES
--------------- ------------ ----------------
Percentage of Revenues............... 20% 60% 20%
Percentage of Expenses............... 40% 45% 15%
43
Our operations are exposed to foreign exchange risk arising from cash flows
and financial instruments that are denominated in currencies other than the U.S.
dollar. Our primary foreign exchange risk arises from changes in the exchange
rates between U.S. dollars and pounds sterling. Our objective is to maximize our
cash flow in U.S. dollars. Our policy is to convert into pounds sterling all
revenues arising in currencies other than U.S. dollars together with sufficient
U.S. dollar revenues to fund the remaining pound sterling expenses. Outside the
United Kingdom, only those cash flows necessary to fund mismatches between
revenues and expenses are converted into local currency; amounts remitted to the
United Kingdom are generally converted into pound sterling. These transactional
currency exposures are generally managed by entering into forward exchange
contracts. It is our policy to hedge at least 25% of the next 12 months'
exposure in significant currencies. We do not generally hedge exposures beyond
three years.
The table below provides information about our foreign currency forward
exchange contracts, which are sensitive to exchange rate risk. The table
summarizes the United States dollar equivalent amounts of each currency bought
and sold forward and the weighted average contractual exchange rates. All
forward exchange contracts mature within three years.
SETTLEMENT DATE BEFORE DECEMBER 31,
----------------------------------------------------
2001 2002
------------------------------------- ------------
AVERAGE
CONTRACT CONTRACTUAL CONTRACT
AMOUNT EXCHANGE RATE AMOUNT
------------ ---------------------- ------------
($ MILLIONS) ($ MILLIONS)
DECEMBER 31, 2000
FORWARD CURRENCY CONTRACTS
U.S. Dollars sold for sterling...... 73 $1.56 = L1 55
Japanese Yen sold for sterling...... 11 Yen 160.81 = L1 6
Euro sold for sterling.............. 22 Euro 1.58 = L1 8
--- --
Total............................... 105 69
--- --
Fair Value (1)...................... (2) --
SETTLEMENT DATE BEFORE DECEMBER 31,
---------------------------------------------------------
2002 2003
---------------------- --------------------------------
AVERAGE
AVERAGE CONTRACTUAL
CONTRACTUAL CONTRACT EXCHANGE
EXCHANGE RATE AMOUNT RATE
---------------------- ------------ -----------------
($ MILLIONS)
DECEMBER 31, 2000
FORWARD CURRENCY CONTRACTS
U.S. Dollars sold for sterling...... $1.50 = L1 25 $1.46 = L1
Japanese Yen sold for sterling...... Yen 144.21 = L1
Euro sold for sterling.............. Euro 1.60 = L1
--
Total............................... 25
--
Fair Value (1)...................... 1
SETTLEMENT DATE BEFORE DECEMBER 31,
-------------------------------------------------------------------------------
2000 2001
---------------------------------------- ------------------------------------
AVERAGE AVERAGE
CONTRACTUAL CONTRACT CONTRACTUAL
CONTRACT AMOUNT EXCHANGE RATE AMOUNT EXCHANGE RATE
--------------- ---------------------- ------------ ---------------------
($ MILLIONS) ($ MILLIONS)
DECEMBER 31, 1999
FORWARD CURRENCY CONTRACTS
U.S. Dollars sold for sterling.................. 54 $1.59 = L1 20 $1.59 =L1
Japanese Yen sold for sterling.................. 11 Yen 182.13 = L1 8 Yen 165.99 =L1
Euro sold for sterling.......................... 11 Euro 1.43 = L1 6 Euro 1.47 =L1
-- --
Total........................................... 76 34
-- --
Fair Value (1).................................. 1 --
- ------------------------------
(1) Represents the difference between the contract amount and the cash flow in
pounds sterling which would have been receivable had the foreign currency
forward exchange contracts been entered into on December 31, 2000 and 1999,
as appropriate, at the forward exchange rates prevailing at that date.
INTEREST RATE RISK MANAGEMENT
We are subject to market risk from exposure to changes in interest rates
based on our financing and investing activities. Our primary interest rate risk
arises from changes in short-term interest rates in both U.S. dollars and pounds
sterling.
Our operations are financed principally by variable rate bank borrowings and
the 9% senior subordinated notes due 2009 issued by a subsidiary. Interest rate
swaps are used to generate the desired interest rate profile and to manage our
exposure to interest rate fluctuations. Our policy is to
44
minimize our exposure to increases in interest rates on our borrowings.
Accordingly, the majority of our variable rate borrowings is currently hedged
through the use of interest rate swaps to convert the borrowings to reflect a
fixed rate of interest.
As a consequence of our insurance broking activities, there is a delay
between the time we receive cash for premiums and claims and the time the cash
needs to be paid. We earn interest on this float, which is included in our
financial statements as interest income. This float is regulated in terms of
access and the instruments in which it may be invested, most of which are
short-term in maturity. We manage the interest rate risk arising from this
exposure primarily through the use of interest rate swaps. It is our policy
that, for currencies with significant balances, a minimum of 25% of forecast
income arising is hedged for each of the next three years.
The table below provides information about our derivative instruments and
other financial instruments that are sensitive to changes in interest. For
interest rate swaps, the table presents notional principal amounts and average
interest rates analyzed by expected maturity dates. Notional principal amounts
are used to calculate the contractual payments to be exchanged under the
contracts. The duration of interest rate swaps varies between one and five
years, with an average re-fixing period of three months. Average variable rates
are based on interest rates set at December 31, 2000 or 1999, as appropriate,
or, in the case of interest rate swaps not yet started, at the rates prevailing
at December 31, 2000 or 1999, as appropriate.
EXPECTED TO MATURE BEFORE DECEMBER 31,
---------------------------------------------------------------
THERE- FAIR
2001 2002 2003 2004 2005 AFTER TOTAL VALUE(1)
-------- -------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN $ MILLION, EXCEPT PERCENTAGES)
DECEMBER 31, 2000
SHORT-TERM INVESTMENTS
Principal ($)............................. 11 7 4 22 22
Fixed rate receivable..................... 6.07% 6.21% 5.62% 6.03%
Principal (L)............................. 2 6 9 17 18
Fixed rate receivable..................... 6.30% 6.35% 6.75% 6.55%
FIDUCIARY INVESTMENTS
Principal ($)............................. 260 260 260
Fixed rate receivable..................... 6.86% 6.86%
Principal (L)............................. 38 38 38
Fixed rate receivable..................... 6.51% 6.51%
Principal (Euro).......................... 42 6 48 48
Fixed rate receivable..................... 4.53% 4.50% 4.53%
REDEEMABLE PREFERENCE SHARES
Principal ($)............................. 272 272 260
Fixed rate receivable..................... 8.50% 8.50%
LONG-TERM DEBT
Principal ($)............................. 550 550 492
Fixed rate payable........................ 9.0% 9.0%
Principal ($)............................. 11 94 302 407 407
Variable rate payable..................... 8.20% 8.28% 8.30% 8.29%
45
EXPECTED TO MATURE BEFORE DECEMBER 31,
---------------------------------------------------------------
THERE- FAIR
2001 2002 2003 2004 2005 AFTER TOTAL VALUE(1)
-------- -------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN $ MILLION, EXCEPT PERCENTAGES)
DECEMBER 31, 2000
INTEREST RATE SWAPS
Principal ($)............................. 262 336 158 60 816 3
Fixed rate receivable..................... 5.96% 6.02% 7.07% 6.83% 6.26%
Variable rate payable..................... 5.81% 5.66% 6.06% 6.12% 5.82%
Principal ($)............................. 385 385 8
Fixed rate payable........................ 5.10% 5.10%
Variable rate receivable.................. 6.22% 6.22%
Principal (L)............................. 105 95 56 42 298 3
Fixed rate receivable..................... 6.20% 6.59% 7.11% 6.63% 6.55%
Variable rate payable..................... 5.67% 5.66% 6.01% 6.07% 5.79%
Principal (Euro).......................... 12 24 7 17 60 --
Fixed rate receivable..................... 3.96% 4.05% 5.27% 5.27% 4.52%
Variable rate payable..................... 4.64% 4.55% 4.97% 5.25% 4.82%
Principal (Japanese Yen).................. 7 7 --
Fixed rate receivable..................... 1.70% 1.70%
Variable rate payable..................... 0.47% 0.47%
DECEMBER 31, 1999
SHORT-TERM INVESTMENTS
Principal ($)............................. 1 11 6 18 18
Fixed rate receivable..................... 7.16% 5.93% 6.58% 6.22%
Principal (L)............................. 9 7 16 16
Fixed rate receivable..................... 7.21% 6.52% 6.92%
FIDUCIARY INVESTMENTS
Principal ($)............................. 251 251 251
Fixed rate receivable..................... 5.33% 5.33%
Principal (L)............................. 73 73 73
Fixed rate receivable..................... 5.44% 5.44%
Principal (Euro).......................... 20 20 20
Fixed rate receivable..................... 2.85% 2.85%
REDEEMABLE PREFERENCE SHARES
Principal ($)............................. 269 269 239
Fixed Rate Receivable..................... 8.5% 8.5%
LONG-TERM DEBT
Principal ($)............................. 550 550 458
Fixed rate payable........................ 9.0% 9.0%
Principal ($)............................. 2 10 13 15 399 439 439
Variable rate payable..................... 8.10% 8.25% 8.22% 8.20% 8.47% 8.43%
INTEREST RATE SWAPS
Principal ($)............................. 160 202 307 44 713 (8)
Fixed rate receivable..................... 6.46% 5.44% 5.98% 6.62% 5.97%
Variable rate payable..................... 6.51% 6.81% 6.92% 6.98% 6.80%
Principal ($)............................. 425 425 26
Fixed rate payable........................ 5.10% 5.10%
Variable rate receivable.................. 7.12% 7.12%
Principal (L)............................. 73 113 102 23 311 (1)
Fixed rate receivable..................... 7.19% 6.30% 6.52% 7.21% 6.65%
Variable rate payable..................... 6.71% 6.94% 7.03% 6.97% 6.92%
Principal (Euro).......................... 10 13 26 49 --
Fixed rate receivable..................... 4.65% 4.38% 3.97% 4.22%
Variable rate payable..................... 3.93% 4.46% 4.77% 4.52%
Principal (Euro).......................... 5 5 --
Fixed rate payable........................ 4.61% 4.61%
Variable rate receivable.................. 3.85% 3.85%
Principal (Japanese Yen).................. 7 7 --
Fixed rate receivable..................... 1.70% 1.70%
Variable rate payable..................... 0.47% 0.47%
- ------------------------------
(1) Represents the net present value of the expected cash flows discounted at
current market rates of interest.
46
SUPPLEMENTAL CONSTANT CURRENCY FINANCIAL DATA
THIS PRESENTATION AND ANALYSIS IS INTENDED TO DEMONSTRATE THE IMPACT OF
EXCHANGE RATES ON DESIGNATED FINANCIAL LINE ITEMS ON A HISTORICAL BASIS TO
PROVIDE INVESTORS WITH SUPPLEMENTAL DATA WITH WHICH TO ASSESS MANAGEMENT'S
PERFORMANCE. THIS PRESENTATION AND ANALYSIS IS INTENDED TO SUPPLEMENT THE
PRESENTATION AND ANALYSIS OF OUR ACTUAL HISTORICAL RESULTS SET FORTH ELSEWHERE
IN THIS PROSPECTUS. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS". OUR BUSINESS AND OUR ABILITY TO GENERATE
CASH FLOW SUFFICIENT TO MEET OUR FIXED CHARGE OBLIGATIONS WILL CONTINUE TO BE
AFFECTED BY MOVEMENTS IN EXCHANGE RATES WHICH HAVE BEEN ELIMINATED IN THE
PRESENTATION AND ANALYSIS OF TOTAL REVENUES AND OPERATING INCOME ON A CONSTANT
CURRENCY BASIS.
We and our associates transact business with approximately 50,000 clients in
more than 160 countries and in over 100 currencies. We report our operating
results in United States dollars. The following table details the breakdown of
revenues and expenses by currency in 2000.
POUNDS STERLING U.S. DOLLARS OTHER CURRENCIES
--------------- ------------ ----------------
Percentage of Revenues............... 20% 60% 20%
Percentage of Expenses............... 40% 45% 15%
40% of the Willis Group's expenses are in pounds sterling while only 20% of
its revenues are in pounds sterling. This is due to a large part of the business
based in London being transacted in dollars. Therefore, as the pound sterling
strengthens, the dollars required to be translated into pounds sterling to cover
net sterling expenses increase, and our results are negatively impacted. Because
the largest proportion of our revenues and cash flow is in United States
dollars, Willis North America's senior credit facilities and 9% senior
subordinated notes are both denominated in dollars.
We transact business in over 100 currencies. Our results, including
operating revenues and operating income, are reported in dollars. There are two
methods of translating the results into dollars:
- AVERAGE RATE METHOD: The profit and loss account of the subsidiary or
associate is translated into dollars using the average rates of exchange
for the relevant period. This method is used where the company is a
subsidiary or associate preparing its accounts in currency other than
dollars.
- ACHIEVED RATE METHOD: A subsidiary or associate which prepares accounts in
dollars and trades in a currency other than dollars will translate foreign
currency transactions at the achieved rate. For example, if a business
generates revenue in a currency other than dollars the achieved rate used
is either the rate the funds where sold into dollars after being received
or if still in foreign currency at the period end then the closing rate.
The achieved rate for the period is the weighted average of rates used to
translate funds and the period closing rate weighted by the value of the
transactions.
The average rates of exchange and the achieved rates of exchange for five of
the major currencies for 1996 to September 30, 2001 are shown in note (a) to the
table below. We use constant exchange rates for internal budgeting and reporting
purposes. These are also shown in note (a).
To prepare the results at constant exchange rates rather than actual
exchange rates the same methodology is used in all material respects for
deriving the reported results, except that the constant exchange rates are used.
The profit and loss accounts of the subsidiaries that prepare accounts in
currencies other than dollars are translated into dollars using the constant
average rates. Foreign currency transactions by companies reporting in dollars
are translated at the constant achieved rate of exchange.
Although we cannot assure you that, if the exchange rates used in this
analysis had actually prevailed over all the periods presented, the results
would have been comparable to those presented, we believe that the trends
indicated would have been comparable. We believe that the constant
47
currency analysis by itself allows for a comparison that excludes the impact of
exchange rates over all the periods presented and provides investors
supplemental data with which to assess our operating results since 1996 on a
more comparable basis.
YEAR ENDED JANUARY 1- SEPTEMBER 2- YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 1, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
------------------- ------------ ------------ ---------------------- ---------------------
1996 1997 1998 1998 1999 2000 2000 2001
-------- -------- ------------ ------------ -------- -------- --------- ---------
($ IN MILLIONS)
Reported total revenues... $1,133 $1,134 $772 $413 $1,244 $1,305 $ 956 $1,037
Adjustments to constant
exchange rates (a)...... 13 3 11 6 39 82 50 84
------ ------ ---- ---- ------ ------ ------ ------
Total revenues--constant
currency (a)............ $1,146 $1,137 $783 $419 $1,283 $1,387 $1,006 $1,121
Reported operating income
(loss).................. 115 107 16 12 (8) 154 108 79
Reported operating income
(loss) margin (b)....... 10.1% 9.4% 2.1% 2.9% (0.6)% 11.8% 11.3% 7.6%
Adjustments to constant
exchange rates (a)...... $ (9) $ (2) $ 1 $ -- $ 9 $ 8 $ 2 $ 10
Operating income (loss)--
constant currency (a)... $ 106 $ 105 $ 17 $ 12 $ 1 $ 162 $ 110 $ 89
Operating income (loss)
margin--constant
currency (a)(c)......... 9.2% 9.2% 2.2% 2.9% 0.1% 11.7% 10.9% 7.9%
- ------------------------
(a) The average rates of exchange and achieved rates of exchange for the five
major currencies are shown in the following table. The constant exchange
rates used in the constant currency analysis are also shown below:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- ----------------------
1996 1997 1998 1999 2000 2000 2001 CONSTANT RATES
-------- -------- -------- -------- -------- -------- -------- --------------
(DENOMINATED PER US DOLLAR)
AVERAGE RATES:
Deutschemark......... 1.51 1.73 1.75 1.83 2.11 2.07 2.18 1.70
French Franc......... 5.12 5.83 5.89 6.14 7.08 6.96 7.32 5.69
Italian Lire......... 1,544.00 1,700.66 1,732.36 1,813.56 2,090.39 2,054.78 2,160.65 1,689.05
Japanese Yen......... 108.99 120.96 130.45 113.51 107.76 107.10 120.71 118.29
Pounds Sterling...... 0.64 0.61 0.60 0.62 0.66 0.65 0.69 0.60
ACHIEVED RATES:
Deutschemark......... 1.58 1.43 1.64 1.92 2.05 2.16 2.16 1.66
French Franc......... 5.19 5.27 5.61 6.45 6.86 7.25 7.23 5.53
Italian Lire......... 1,606.62 1,713.82 1,742.90 1,903.95 2,027.74 2,137.92 2,135.08 1,724.49
Japanese Yen......... 106.38 106.69 119.82 112.30 113.83 113.89 113.94 115.31
Pounds Sterling...... 0.65 0.63 0.63 0.61 0.66 0.66 0.68 0.63
With effect from January 1, 1999, the exchange rate between the euro and the
legacy currencies of the countries participating in the first wave of the
European Monetary Union, including the Deutschemark, French Franc and
Italian Lire, became irrevocably fixed. Exchange rates for periods after
1998 are based upon the rates of exchange for the euro and these fixed
rates.
(b) Reported operating income (loss) margin is defined as reported operating
income (loss) divided by reported total revenues.
(c) Operating income (loss) margin--constant currency is defined as operating
income (loss)--constant currency divided by total revenues--constant
currency.
48
As detailed above, total revenues--constant currency have grown from
$1,146 million in 1996 to $1,387 million in 2000, a 4.9% annual growth rate
since 1996, in an environment of declining primary insurance and reinsurance
premium rates, which compares to a 3.6% annual growth rate for total revenues
from continuing operations on a reported basis. Operating income
(loss)--constant currency has grown from $106 million in 1996 to $162 million in
2000, a 11.2% annual growth rate, which compares to a 7.6% annual growth rate
for operating income (loss) on a reported basis. We have improved our operating
income (loss) margin--constant currency by 250 basis points from 9.2% in 1996 to
11.7% in 2000, which compares to 170 basis points, from 10.1% in 1996 to 11.8%
in 2000, for operating income (loss) margin on a reported basis.
Total revenues--constant currency have grown to $1,121 million in the nine
months ended September 30, 2001, an 11% increase over the nine months ended
September 30, 2000, which compares to an 8% increase in total revenues on a
reported basis. Operating income--constant currency was $89 million in the nine
months ended September 30, 2001 compared to $110 million in the nine months
ended September 30, 2000. On a reported basis, after adjusting for the non-cash
compensation charge of $145 million and the gain on disposal of Willis National
of $22 million in the nine months ended September 30, 2001 and the restructuring
charge of $11 million and the gain on disposal of $1 million in the nine months
ended September 30, 2000, operating income increased by 71% to $202 million.
After making the same adjustments, operating income--constant currency increased
by 73% to $208 million. Operating income margin--constant currency was 7.9% in
the nine months ended September 30, 2001 compared to 10.9% in the nine months
ended September 30, 2000. After making the same adjustments as above, the
operating income margin--constant currency was 18.6% in the nine months ended
September 30, 2001 compared to 11.9% in the nine months ended September 30,
2000.
49
BUSINESS
IN THIS PROSPECTUS, "WE", "US" OR "OUR" REFERS TO WILLIS GROUP HOLDINGS
LIMITED AND ITS CONSOLIDATED SUBSIDIARIES, EXCLUDING ITS ASSOCIATES. ASSOCIATES
ARE ENTITIES IN WHICH WE MAINTAIN AN OWNERSHIP INTEREST OF AT LEAST 20% BUT NO
MORE THAN 50%, AND HAVE THE ABILITY TO EXERCISE SIGNIFICANT INFLUENCE.
UNLESS OTHERWISE SPECIFICALLY INDICATED, ALL MARKET INFORMATION OR OTHER
STATEMENTS PRESENTED IN THIS PROSPECTUS REGARDING OUR POSITION RELATIVE TO OUR
COMPETITION ARE BASED UPON STATISTICAL DATA OR INFORMATION, INCLUDING BROKERAGE
REVENUES, PUBLISHED IN BUSINESS INSURANCE (JULY 16, 2001). FOR PURPOSES OF THE
BUSINESS INSURANCE RANKINGS, BROKERAGE REVENUES ARE DEFINED AS GROSS REVENUES
GENERATED BY INSURANCE BROKERAGE, CONSULTING AND RELATED SERVICES.
GENERAL
We are the third largest insurance broker in the world. We provide a broad
range of value-added risk management consulting and employee benefits and
insurance brokering services to approximately 50,000 clients worldwide. We trace
our history to 1828, and we have significant market positions in the United
States, the United Kingdom and, directly and through our associates, many other
countries. We are one of three recognized leaders in providing specialized risk
management advisory and other services on a global basis to clients in various
industries, with particular expertise in the construction, aerospace, marine and
energy industries. In our capacity as an advisor and insurance broker, we act as
an intermediary between our clients and insurance carriers by:
- advising our clients on their risk management requirements, many of which
are highly complex;
- helping clients determine the best means of managing their risks; and
- negotiating and placing insurance risks with insurance carriers through
our global distribution network.
We assist clients in the assessment of their risks, advise on the best ways
of transferring suitable risk to the global insurance and reinsurance markets,
and then execute the transactions at the most appropriate available price for
our client. Our global distribution network enables us to place the risk in the
most appropriate insurance or reinsurance market worldwide. We also offer
clients a broad range of services to help them to identify and control their
risks. These services range from strategic risk consulting (including providing
actuarial analyses) to a variety of due diligence services to the provision of
practical on-site risk control services (such as health and safety or property
loss control consulting). We also assist clients in planning how to manage
incidents or crises when they occur. These services include contingency
planning, security audits and product tampering plans. We do not underwrite
insurance risks for our own account.
We and our associates serve a diverse base of clients located in more than
160 countries. Those clients include major multinational and middle-market
companies in a variety of industries, as well as public institutions. Many of
our client relationships span decades. With approximately 13,000 employees
around the world and a network of over 300 offices in 74 countries, in each case
including our associates, we believe we are one of only three insurance brokers
in the world possessing the global operating presence, broad product expertise
and extensive distribution network necessary to meet effectively the global risk
management needs of many of our clients. For the twelve months ended
December 31, 2000, our revenues were $1.3 billion.
50
THE 1998 ACQUISITION
Through a series of transactions in late 1998, Trinity Acquisition Limited,
an entity formed by KKR for purposes of effecting the acquisition, acquired our
predecessor in a going private transaction. Trinity Acquisition financed the
acquisition with common and preferred equity investments, senior subordinated
debt financing and borrowings under a senior credit agreement. In addition to
common equity invested by the KKR 1996 Fund (Overseas), Limited Partnership,
equity financing for the acquisition came from six major insurance companies,
Axa Insurance, Royal & Sun Alliance Insurance Group, The Chubb Corporation, The
Hartford Financial Services Group, Inc., Travelers Property Casualty Corp. and
The Tokio Marine and Fire Insurance Co., Ltd., which invested in the preferred
equity of one of our subsidiaries and, to a lesser extent, in our common equity.
We operated as a private company until our initial public offering in June 2001.
DEVELOPMENTS SINCE THE 1998 ACQUISITION
Since completion of the acquisition of our predecessor in late 1998, we have
made several changes to our management and operations. We have:
- completed an initial public offering of approximately 16% of our common
stock in June 2001 the proceeds from which were used to redeem in full the
preference shares of one of our subsidiaries;
- named Joseph Plumeri, formerly of Citigroup, serving most recently as
Chairman of Citibank North America's retail operations and Chairman and
Chief Executive of Citigroup's Primerica Financial Services, as Executive
Chairman and Chief Executive Officer of Willis Group in October 2000.
Since arriving, Mr. Plumeri has reinvigorated our culture and our approach
to sales and marketing;
- reorganized management responsibilities and reporting structures in our
operations globally; Richard Bucknall, Chief Operating Officer, now has
responsibility for our United Kingdom-based operations and International
to promote close interaction of these units in servicing their clients;
- significantly added to the management and senior production talent within
the organization by adding over 150 new managers and producers world-wide;
- implemented Business Process Re-Design in our North American operations, a
comprehensive restructuring program to segment our accounts, eliminate
unprofitable accounts and activities, consolidate several sales process
functions, and streamline and centralize client service functions, such as
claims handling, policy issuance and the issuance of insurance
certificates. This has resulted in an increase in the time brokers have
for needs analysis and product design with clients and a reduction of 277
employees;
- implemented Shared Services Transformation, a comprehensive program
designed to reduce duplication globally in finance, information technology
and human resource management, resulting in a reduction in headcount, a
streamlining of internal processes, and a movement of several back-office
operations offshore;
- expanded our service company in Mumbai, India, which provides high quality
cost-efficient support to our operations in the United Kingdom and the
United States. There are now approximately 490 positions in Mumbai;
51
- stressed the development and selling of employee benefits solutions and
risk management consulting capabilities to new and existing clients and
more aggressively targeted clients with global risk management needs;
- designed and implemented new business monitoring tools to more rigorously
monitor our global operations on a pro-active basis;
- increased interaction between our retail network and our Global Specialty
businesses;
- shut down, sold or begun the process of selling numerous non-core
operations such as small commercial books of business; and
- continued to invest in our International operations, particularly in
Europe and Latin America, to fill the few strategic gaps remaining in our
global network.
In addition, we have developed initiatives focused on maximizing the talent
and expertise of our brokers and consultants. Accordingly, we:
- developed improved techniques for recruitment and assessment;
- instituted a new incentive structure for brokers in the United States;
- implemented a new and more frequent appraisal process, including peer
review;
- invested in technology to enhance communication among employees; and
- formed practice groups to share knowledge and provide electronic access to
risk analysis tools for certain specific industry or product areas.
Each of our business units has developed action plans setting out the
implementation of the above initiatives. Senior management and our board of
directors continually review the performance against these action plans.
Over the past several months, we have implemented a series of actions
intended to permit us to more effectively function as one global operation,
including creating new roles for the global management of sales and marketing
and expenses and procurement. Since joining us in October 2000, Mr. Plumeri has
recruited Mario Vitale and appointed him as Global Head of Sales and Marketing.
This is a new position in our company and we believe that there is significant
scope for improving our practices in prospecting, selling and cross-selling. We
will develop strategies by business unit and geographical area to ensure that
all parts of the group work together effectively. Mr. Vitale will also be
responsible for improving training in critical areas such as presentation skills
and fee negotiation and for overseeing our e-business initiatives.
Mr. Plumeri also appointed Janet Coolick to the position of Chief
Administration Officer of the Willis Group in July 2001. Mrs. Coolick is
responsible for global procurement and administration policies. She is also
responsible for eliminating duplication and improving efficiency across the
group. We believe that we can bring significant improvement and lower expense in
many areas by the application of consistent high quality practices globally.
In July 2001, Mr. Plumeri appointed Frederick Arnold to the newly created
position of Group Executive Vice President, Strategic Development. Mr. Arnold is
responsible for implementing the Group's acquisition strategy and real estate
policies. Mr. Arnold had previously been Chief Administrative Officer of the
Willis Group.
In August 2001, Mr. Plumeri recruited William Bowden as the General Counsel
of the Willis Group. This is a new position for the Willis Group. We believe
that this will improve the value the
52
Willis Group obtains from its internal and external legal services while
improving standards in many areas of the Willis Group.
INDUSTRY OVERVIEW
Insurance brokers, such as ourselves, provide essential services to users of
insurance and reinsurance products. Those users include corporations, public
institutions and insurance carriers. Brokers distribute insurance products and
provide highly specialized, and often highly technical, value-added risk
management consulting services. Through its knowledge of the insurance market
and risk management techniques, the broker provides value to its clients and the
insurance carriers with whom the broker deals by:
VALUE TO CLIENTS
- assisting clients in their analysis of risk;
- helping clients formulate appropriate strategies to manage those risks;
- negotiating insurance policy terms and conditions;
- placing risks to be insured with insurance carriers through the broker's
distribution network obtaining better coverage and terms than the client
could achieve on its own through the use of market knowledge and
creativity; and
- providing specialized self-insurance consulting and other risk management
consulting services.
VALUE TO INSURANCE CARRIERS
- assessing a potential insurance user's risk management needs, structuring
an appropriate insurance program to meet those needs and placing risks to
be insured with an insurance carrier;
- acting as a principal distribution channel for insurance products; and
- providing access to insurance buyers that most insurance carriers are not
equipped to reach on their own.
There are three main subsectors of the brokerage industry although there are
many interdependencies amongst them:
- retail brokering, which involves business and services transacted between
brokers and commercial or individual customers;
- wholesale brokering, which involves business and services transacted
between two brokers, or agents, when one broker uses the services or
products of another broker; and
- reinsurance brokering, which involves placing reinsurance coverage for
primary insurance and reinsurance carriers.
According to BUSINESS INSURANCE, the 187 largest commercial insurance
brokers globally reported brokerage revenues totaling $21.6 billion in 2000. The
insurance brokerage industry, having recently gone through a period of rapid
consolidation, is led by its three global participants: Marsh & McLennan
Companies, Inc., with approximately 32% of the worldwide market referred to
above; Aon Corporation, with approximately 24% of the worldwide market; and us,
with approximately 6% of the worldwide market. The industry is highly fragmented
beyond these three brokers with the next largest broker having approximately 3%
of the worldwide market.
In addition to consolidation, another trend in the industry is the
increasing diversification of products and services offered by major insurance
brokerage companies. In recent years, the largest
53
brokers have added a variety of new products and services in order to meet the
increasingly complex risk management needs of their clients. This
diversification is in response to:
- clients' increasing focus on the complex risks faced in the operation of
their increasingly global businesses; and
- clients' desire to retain more of the risks themselves.
As a result, the complexity of the risks managed has increased, while the
proportion insured by traditional underwriters has decreased. This has led to an
increased need for, and the development by brokerage firms of the capability to
provide services, in addition to their traditional roles as intermediaries, that
deliver expert solutions to clients with complex risk problems. As a response to
this trend, we have in some cases augmented our offerings with limited
recruitment and specialized training and, where appropriate, formed new teams by
bringing together existing expertise from various parts of the Willis Group.
COMPETITIVE STRENGTHS
We benefit from and intend to capitalize on:
STRONG FRANCHISE WITH SIGNIFICANT MARKET POSITIONS. We are the third
largest insurance broker in the world and have significant market positions in
the United States, the United Kingdom and, directly and through our associates,
in many other countries. We are one of three recognized leaders in providing
specialized risk management advisory and other services on a global basis to
clients in a variety of industries. For example, we have particular expertise in
providing risk management services to the aerospace and marine industries. We
are also the largest marine and aviation reinsurance broker serving Japan. We
are also a prominent insurance broker to the construction industry. Our strong
global franchise and significant market positions:
- provide an extensive platform for selling new and existing products and
services to our existing clients;
- allow us to meet better the risk management needs of our existing clients
and help attract new clients;
- create economies of scale and other efficiencies; and
- attract talented professionals.
STRONG GLOBAL PRESENCE. We have the skills and insurance brokering
distribution capabilities necessary to effectively meet the global risk
management needs of large multinational and middle-market clients. We have
approximately 13,000 employees around the world and a network of over 300
offices in 74 countries, in each case including associates. This strong global
franchise enables us and our associates to serve over 50,000 clients located in
more than 160 countries worldwide. We estimate that, together with our
associates, we enjoy significant market positions in the United Kingdom, the
United States, France, Germany, Italy, Spain, Norway, Denmark and certain Latin
American countries, including Colombia, Chile and Venezuela. In 2000, we placed
insurance with approximately 4,000 insurance carriers, none of which
individually accounted for more than 8% of the total premiums placed by us on
behalf of our clients. Our worldwide franchise enables us to provide high
quality services on a local basis with the resources of a global firm. We
believe we are one of only three insurance brokers in the world with the global
operating presence necessary to meet the risk management needs of global
clients.
54
EXTENSIVE AND DIVERSE CLIENT BASE. Our clients operate in many businesses
and industries throughout the world and generally range in size from major
multinational corporations to middle market companies. Many of our client
relationships span decades, such as our relationship with The Tokio Marine and
Fire Insurance Co., Ltd., the largest non-life insurance company in Japan, which
dates back over 100 years. In the United States, we serve approximately 10% of
the Fortune 1000 companies, with an average relationship of more than 10 years.
In the United Kingdom, we serve over 30% of the U.K. FTSE 100 companies. Our
largest client accounted for less than 2% of our total revenues in 2000, and our
80 largest clients accounted for less than 12% of those revenues. This
diversified client base provides a relatively stable source of revenue and also
offers significant additional revenue opportunities to provide these clients
with additional products and services and cross-sell existing products and
services across our many areas of expertise.
BROAD ARRAY OF CLIENT-ORIENTED SERVICES AND PRODUCTS. In order to serve our
extensive client base, we offer a broad range of services and products designed
to address our clients' specific risk management needs. With our specialized
product and industry teams around the world, we help our clients assess the
risks they encounter in their operations worldwide, from employee benefits and
healthcare to the specialized risks of the aerospace industry. If the client
desires to insure against these risks, we negotiate policy terms and place the
appropriate insurance coverage with insurance underwriters using our significant
placing power. We also advise clients on appropriate levels of self insurance
and help establish and manage captive insurance companies. As a result of our
ability to meet our clients' risk management needs, management believes that we
enjoy a reputation for exceptional client service throughout our product
offerings. In independent surveys for 1998 and 1999 covering United States
insurance brokers, our North American operations received higher customer
satisfaction and performance ratings than our two main global competitors,
Marsh & McLennan and Aon.
EXPERIENCED AND INCENTIVIZED MANAGEMENT AND EMPLOYEES. Our Executive
Chairman and Chief Executive Officer, Joseph Plumeri, joined Willis Group in
October 2000. Mr. Plumeri has 32 years of experience with Citigroup and its
predecessor companies, most recently serving as Chairman of Citibank North
America's retail operations and Chairman and Chief Executive Officer of
Citigroup's Primerica Financial Services. In his tenure at Willis, Mr. Plumeri
has already instituted significant strategic and operating changes, positioning
us for future growth. Mr. Plumeri joins a highly experienced team. Our top 13
executives average 18 years of experience in the insurance brokerage and
insurance industries and an average of 12 years of experience with us. To date,
approximately 4,500 employees have invested or acquired interests in our equity
either directly or through our employee share incentive programs. The investment
by these employees, together with the options granted to certain of them at the
time of investment, currently represents approximately 24% of our share capital
on a fully diluted basis. This broad distribution of equity throughout the
organization should help us to retain and attract high quality managers,
brokers, and consultants.
STRONG SPONSORSHIP. Kohlberg Kravis Roberts & Co. L.P. is a leading
investment firm with significant investment experience in the insurance
industry. Over the past 25 years, KKR has invested more than $15.8 billion of
equity in nearly 90 transactions with a total value in excess of $100 billion.
We expect to continue to benefit from KKR's industry expertise, relationships
and investment experience.
55
BUSINESS STRATEGY
Our strategic objectives are to continue to grow revenues, cash flow, and
earnings and to enhance our position as the third largest global provider of
risk management services. We will build on our areas of strength and eliminate
areas in which we do not see the opportunities for strong profitable growth. The
key elements of this strategy are to:
CAPITALIZE ON STRONG GLOBAL FRANCHISE. As one of only three insurance
brokers providing risk management services on a global basis, we believe we are
well positioned to take advantage of the increased demand for global risk
management expertise. We intend to capitalize on our strong global franchise by:
- cross-selling both existing and new products and services to our existing
clients;
- targeting new clients in need of our global reach and specialized
expertise and knowledge and building in particular areas of strength such
as aerospace, marine, construction, reinsurance, financial risks and
employee benefits; and
- continuing to make strategic acquisitions and investments to further
strengthen our global platform.
We also seek to work more closely with selected insurance carriers to
develop new products and services for our clients. While these initiatives
continue to be developed and implemented, we have begun to see improvements.
EMPHASIZE VALUE-ADDED SERVICES. We seek to offer value-added, fee-based
risk management services, such as risk management consulting advice, including
captive insurance company management, loss control techniques and self-insurance
consulting, employee benefits consulting, claims administration and alternative
risk transfer methods to complement our existing insurance brokerage business.
These fee-based services have increased as a percentage of our total revenues
and, unlike typical insurance brokerage commissions, are not directly tied to
insurance premium rates. For fiscal 2000, we estimate that the percentage of our
total revenues from fees, including from insurance placements and consulting and
other services, had risen to approximately 30%. We believe that by emphasizing
these value-added risk management consulting services we can:
- increase the quality and scope of services we offer to our clients
worldwide;
- reduce our exposure to declines in insurance premium rates; and
- continue to enhance revenue growth and operating profit margins despite
historical trends toward decreasing insurance premiums and brokerage
commissions.
FOCUS ON EXPANDING AND CROSS-SELLING OUR EMPLOYEE BENEFITS CAPABILITIES. We
intend to grow our employee benefits capabilities and revenues. Together with
our associates, we currently have a global annual employee benefits revenue in
excess of $150 million of which approximately two-thirds is in North America
where we are a prominent provider of solutions for middle market clients. More
than 5.6 million of our clients' employees are covered by plans we have sold. We
have established a strong presence in North America and selected European
countries and an emerging position in Latin America.
56
The market for employee benefits is rapidly growing for a number of reasons.
First, the increasing proportion of older people in most mature economies is
leading governments to turn from state benefits to the private sector for
benefits and pensions. Second, the companies for similar reasons are seeking to
shift the burden of their employees' benefits from their own balance sheets to
external providers. Third, the cost of welfare is increasing in most countries.
We intend to significantly grow our employee benefits capabilities in this
favorable environment. We are establishing a coordinated global strategy for
employee benefits to:
- cross-sell employee benefits offerings to our existing insurance brokerage
clients; and
- develop other products and services, such as payroll, asset management and
other employee related services and sell these to our existing, extensive
client base.
INCREASE OPERATING EFFICIENCIES. In addition to our revenue growth and
improved client service initiatives, we are implementing a number of cost
reduction measures designed to streamline work processes to increase efficiency
while improving client service. Thus far, these initiatives have reduced our
workforce by over 1,400 employees since 1995, or more than 13%. We have changed
the reporting structure of the organization since the transaction in 1998 and
reorganized all our major operations. Other on-going initiatives include:
- intensifying efforts to develop existing and new accounts;
- increasing cross-selling of both existing and new products and services to
our existing clients;
- increasing the proportion of insurance transactions handled
electronically;
- reducing real estate, travel, entertainment and other operating expenses;
- further streamlining back-office functions and consolidating offices; and
- reducing purchasing costs by implementing vendor programs.
Additionally, we are increasingly selective in the number of insurance
carriers with which we do business in order to create direct economic benefits
for clients, carriers and us. We are streamlining administrative processes and
working closely with certain insurance carriers to generate new product and
service ideas. We believe that there are further benefits to come from our cost
reduction and efficiency measures and that there is scope for further
improvement in margins.
IMPLEMENT GLOBAL BEST PRACTICES AND CREATE A SINGLE COMPANY CULTURE. Our
management team, led by Mr. Plumeri, believes we can be better positioned for
continued profitable expansion through the implementation of global best
practices and the creation of a single company culture. The key elements of this
strategy will be:
- a group wide approach to training, risk analysis, product design, selling,
information technology management, procurement and real estate, which will
improve delivery quality while reducing duplication and cost;
- increased employee stock ownership, thus further aligning the goals of
staff and shareholders;
- improved communications from top management to staff at all levels; and
- investment in key areas will generally be funded by the elimination of
unnecessary expenditure.
PURSUE STRATEGIC ACQUISITIONS AND INVESTMENTS. We intend to strengthen our
global franchise through selective acquisitions and strategic investments. We
believe that the consolidation in the brokerage and risk management consulting
industry, coupled with the importance of a global presence, will provide us with
opportunities to acquire smaller brokers, consultants and related businesses
that have a strong regional or local market position or possess specialized
product expertise which complements our existing products. In addition to
acquiring controlling interests, we have also expanded internationally through
strategic minority investments in, and developing a close working relationship
with, other brokers. In connection with these investments, we assume an active
role in management and generally retain the right to obtain ownership
57
interests in excess of 50% over time. These and future strategic investments
should significantly enhance our global presence and enable us to better
leverage our global operations. We believe that we can improve the profitability
of acquired companies and strategic investments through economies of scale. We
believe that our initial public offering has positioned us to more effectively
capitalize on strategic acquisitions and investment opportunities.
OUR BUSINESS
Insurance is a global business, and its participants are affected by global
trends in capacity and pricing. Accordingly, we operate as a single global
business. We organize our business into three main areas:
- North American operations;
- Global Business; and
- International.
NORTH AMERICAN OPERATIONS
Our North American operations provide risk management, insurance brokerage
and related services to a wide variety of clients in the United States and
Canada. Headquartered in Nashville, Tennessee, our North American operations
operate through a network of more than 100 offices located in 37 states in the
United States and six offices in Canada. Certain parts of our Global Business
also have operations in the United States.
Our North American operations' clients include principally middle-market
and, to a lesser extent, major multinational companies to which we provide a
full range of property and casualty products and services. In addition, we
supply specialist consulting and brokerage services, including:
- construction;
- employee benefits;
- healthcare; and
- advanced risk management services.
The construction division specializes in providing risk management,
insurance and surety bonding services to the construction industry. This
division provides services to approximately 20% of the Engineering New Record
Top 400 contractors (a listing of the largest 400 North American contractors
based on revenue). The employee benefits division helps clients with the design
and implementation of benefits and compensation plans. Healthcare provides
insurance and consulting services to local healthcare professionals. Our North
American advanced risk management services division provides actuarial
consulting, captive management services and a wide range of other risk
consulting activities to large clients.
In addition to these divisions, we provide specialist expertise to clients
and insurance underwriters through other practices operating through expert
staff located throughout the North American network. These practices include
environmental risk, financial and executive risk and marine risk. During 2000,
centers of excellence in claims and certification of insurance were opened in
Nashville, Tennessee and in Phoenix, Arizona. These centers provide fast,
focused and tailored services to Willis clients.
We also have a small wholesale unit that provides specialist advice and
market expertise in property, casualty, professional and excess and surplus
lines insurance placements in a variety of industries, including manufacturing,
hospitality, real estate/habitational, transportation, construction, technology,
entertainment and social services. The public entity and municipal program
business of Public Entities National Company (Penco), which provides access to
specialized coverage for governmental entities, schools and other municipality
and public entities, was sold in January 2001. We will continue to focus on
Penco's pooling and association program business.
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GLOBAL BUSINESS
Our Global Business provides specialist brokerage and consulting services to
clients throughout the world for the risks of specific industrial and commercial
activities. In these operations, we have extensive specialized experience
handling diverse lines of coverage, including complex insurance programs, and
acting as an intermediary between retail brokers and insurers. We increasingly
provide consulting services on risk management with the objective of assisting
clients to reduce the overall cost of risk. Our Global Business serves clients
in more than 160 countries, primarily from United Kingdom offices, although we
also serve clients from offices in the United States and Asia.
Our Global Business is diversified from a geographical perspective. The
unit's 2000 revenues were generated in the following geographical regions: 27%
in the United Kingdom; 22% in North America and the Caribbean; 23% in
continental Europe; 14% in Japan and the Far East; 6% in South America; 5% in
the Middle East; and 3% in the rest of the world. In addition, this unit is
diversified from a client perspective, with no client accounting for more than
2% of its revenues in 2000.
We have strong global positions in the following areas:
- aerospace;
- marine;
- construction;
- niche products; and
- reinsurance.
We have particular expertise in the provision of insurance brokerage and
risk management services to clients in the aerospace industry, including
aircraft manufacturers, air cargo handlers and shippers, airport managers and
other general aviation companies. Advisory services provided by Aerospace
include claims recovery and collections, contract and leasing risk management,
safety services and markets information. Aerospace is prominent in supplying the
space industry through providing insurance and risk management services to over
60 companies. Aerospace is also a prominent reinsurance broker of aerospace
risks. Aerospace's clients are spread throughout the world and include 250
airlines and more than 35% of the world's leading non-American airports by
passenger movement. Other clients include those introduced from other
intermediaries as well as insurers seeking reinsurance.
We provide marine insurance brokerage services, including hull, cargo and
general marine liabilities. Marine's clients include direct buyers, other
insurance intermediaries and insurance and reinsurance companies. Marine
insurance brokerage is our oldest line of business. Other services of Marine
include claims collection and recoveries.
The Construction practice provides risk management advice and places
insurance coverage for a wide range of United Kingdom and international
construction activities. These range from house building to major projects such
as the construction of bridges, dams, airports and the deactivation of the
Chernobyl nuclear power plant.
We have four niche products areas:
- Fine Art, Jewelry, and Specie;
- Special Contingency Risks;
- Hughes Gibb; and
- Commercial Risks.
The Fine Art, Jewelry, and Specie unit provides specialist risk management
and insurance services to fine art, diamond and jewelry businesses and operators
of armored cars. Coverage is also obtained for vault and bullion risks. The
Special Contingency Risks unit specializes in producing packages to
59
protect corporations, groups and individuals against special contingencies such
as kidnap and ransom, extortion, detention, political repatriation and product
contamination. The Hughes Gibb unit principally services the insurance needs of
the horse racing and horse breeding industry and also arranges the reinsurance
of horse racing and horse breeding related business for insurance companies
worldwide.
We also provide traditional insurance brokerage services primarily to
smaller companies, which we call commercial risks. The principal types of risk
covered are property damage, employee liability, directors and officers
liability, product liability, professional liability and fiduciary liability.
From 1998, we have entered into franchise partnerships with local United Kingdom
insurance brokers to handle the insurance requirements of small companies and
individuals, utilizing specialized electronic systems linking the franchised
brokers directly to the commercial panel of insurance carriers. These small
companies and individuals represent a very large market in the United Kingdom.
Companies with revenues of under $20 million account for 55-70% of premiums paid
by companies and over 85% of the number of corporate clients in the United
Kingdom. Accordingly, we believe that the franchise program provides an
opportunity for growth, and had 43 franchise agreements in place at
December 31, 2000 compared with 23 as of December 31, 1999.
We are one of the world's largest intermediaries for reinsurance and have a
significant market share in many of the major markets. We are the largest marine
and aviation reinsurance broker servicing the Japanese insurance sector. In the
reinsurance area, we provide clients, both insurance and reinsurance companies,
with a complete range of transactional capabilities as well as analytical and
advisory services such as hazard modeling, insurance and reinsurance, financial
and balance sheet analysis and reinsurance optimization studies. We have
recently concentrated on recruiting top class industry professionals,
particularly in Europe and the U.S., where we currently have relatively low
market shares, and since 1998 we have recruited 33 senior reinsurance
professionals. Additionally, we have established a consulting unit, which
markets its capabilities in actuarial and hazard modeling, as well as knowledge
of the financial implications of catastrophe losses.
We also provide risk management and insurance brokerage services to
industrial and individual clients through 26 offices located in the United
Kingdom and Ireland. These operations arrange for their home-based clients
similar risk management and insurance brokerage services provided outside the
United Kingdom and Ireland through our North American operations, overseas
subsidiaries and associates.
We also design and obtain innovative property coverage solutions for large
or unusual exposures in a variety of industries, including mining and metals,
chemicals and pharmaceuticals, telecommunications, offshore energy, refining,
power stations and other utilities, transport authorities and motor
manufacturers and also handle the design, implementation and servicing of
reinsurance protections for captive insurance companies. A further offering is
comprehensive liability programs for coverage against environmental liability,
libel and slander.
Further product lines include directors and officers insurance, as well as
professional indemnity insurance for corporations, other insurance brokers and
other professional firms. Other product lines include designing and obtaining
insurance coverage for crime, computer fraud and unauthorized trading risks for
financial institutions on a worldwide basis, and placing specialty directors and
officers coverage and related products to the high-technology industry.
Services are tailored to individual client needs and range from strategic
risk assessment to transactional risk transfer and alternative risk financing
solutions. Services provided may include the development and management of
captive insurance companies, specialist insurance services, due diligence on
mergers and acquisitions and evaluating risks associated with new business
ventures. We have numerous long-standing relationships with both middle-sized
and larger companies throughout the United Kingdom and the United States. We
serve over 30% of the U.K. FTSE 100 companies and over 10% of the Fortune 1000.
60
INTERNATIONAL
Our International unit consists of a network of subsidiaries and associates
other than those in North America, the United Kingdom and Ireland. This
operation is located in 70 countries worldwide, including 22 countries in
Europe, 13 in the Asia/Pacific region and 35 elsewhere in the world. The
services provided are focused according to the characteristics of each market
and are not identical in every office, but generally include direct risk
management and insurance brokerage, specialist and reinsurance brokerage and
employee benefits consulting.
We believe the combined total revenues of our International subsidiaries and
associates provide an indication of the spread and capability of our
International network. In 2000, combined total revenues of our International
subsidiaries and our associates were $433 million compared to $393 million in
1998. Our consolidated total revenues for 2000 only include the revenues of our
international subsidiaries of $147 million and do not include the revenues of
our associates of $286 million.
As part of our on-going strategy, we have significantly strengthened
International's market share and operations through a number of acquisitions and
strategic investments in recent years. The most significant of these was the
acquisition, in 1997, of a 33% interest in Gras Savoye, France's leading
insurance broker and the tenth largest broker in the world. In addition, in
January 1998, our associate in Germany, C. Wuppesahl & Co. Assekuranzmakler,
merged with Jaspers Industries Assekuranz GmbH & Co. KG to create Jaspers
Wuppesahl, the third largest insurance broker in Germany, in which we now have
an interest of approximately 45%.
In July 1998, we acquired 50% of Gruppo Ital Brokers, which merged with UTA
Willis Corroon SpA, in which we have a 50% interest, to form Willis Italia. This
has since grown to be the second largest broker in Italy. We also acquired a 30%
interest in Assurandrgruppen the leading broker in Denmark, which was renamed
Willis A/S. In addition, in 1997 and 1998, we entered into a joint venture in
Indonesia and increased our existing interests in Brazil, Sweden, Spain,
Australia and Holland. We were the first non-Japanese broker to be awarded a
domestic license in Japan. During 1999 and 2000, we acquired a 40% interest in
Herzfeld & Levy SA, an independent insurance broker in Argentina, and also
established with Herzfeld & Levy a joint reinsurance brokering venture under the
name Willis SA. Also in 1999, we acquired a 51% interest in an independent
Mexican insurance broker, Bourchier, Marquard, Zepeda, Agente de Seguros y de
Fianzas, S.A. de C.V. In 1999 we acquired a 51% interest in four Venezuelan
companies, which included Ronto-Aralca y Asociados, C.A. Rontarca, the largest
insurance broker in that country, and C.A. Prima Corretaje de Seguros, the
fourth largest insurance broker in Venezuela. In August 2000, we acquired a
majority holding in Sev. Dahl's Assurancekontor AS, the third largest insurance
broker in Norway. In addition we have strengthened our management and production
capabilities in Singapore and Korea, re-entered the South African market and
acquired 51% of Suma, the second largest broker in Colombia. Those investments
have improved our market position and the market positions of our associates
worldwide. In February 2001, we acquired 100% of Bradstock G.I.S. Pty Limited in
Australia which we merged with an existing Australian operation to provide
greater scale and depth of management.
The following is a list of the major International associate investments
currently held by us and our interest as of September 30, 2001:
COMPANY COUNTRY % OWNERSHIP
- ------- ------------------- -----------
EUROPE
Gras Savoye & Cie France 33%
Gras Savoye Belgium S.A. Belgium 33%
Jaspers Wuppesahl Industrie Assekuranz GmbH & Co., K.G. Germany 45%
Willis A/S Denmark 30%
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COMPANY COUNTRY % OWNERSHIP
- ------- ------------------- -----------
ASIA/PACIFIC
Multi-Risk Consultants (Thailand) Limited Thailand 25%
Willis (Malaysia) Sdn. Bhd. Malaysia 30%
Willis Faber Insurance Brokers (B) Sdn. Bhd. Brunei 38%
REST OF THE WORLD
Al-Futtaim Willis Faber (Private) Limited Dubai 49%
Herzfeld & Levy S.A. Argentina 40%
In connection with many of our investments, we retain rights to increase our
ownership percentage over time, typically to a majority or 100% ownership
position. In addition, in certain instances our co-shareholders have a right,
typically based on some price formula of revenues or earnings, to put some or
all of their shares to us. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources".
In addition to our strategic investments in associates, we have acquired a
controlling interest in a broad geographic spread of other brokers. The
following is a list of the significant international subsidiaries in which we
have a controlling interest and our interest as of September 30, 2001:
COMPANY COUNTRY % OWNERSHIP
- ------- ------------------- -----------
EUROPE
Mansfeld, Willis GmbH & Co. K.G. Germany 100%
Willis A/B Sweden 78%
Willis OY A/B Finland 100%
Willis Italia Holding S.p.A.(1) Italy 50%
Willis Iberia Correduria de Seguros y Reaseguros S.A. Spain 60%
Willis Sev. Dahl A.S.(2) Norway 50%
Willis Corretores de Seguros Limitada Portugal 60%
Willis B.V. Netherlands 100%
Willis CIS L.L.C. Russia 100%
Willis Polska S.A. Poland 70%
Willis s.r.o Czech Republic 100%
Willis Kft. Hungary 80%
Willis Faber A.G. Switzerland 100%
ASIA/PACIFIC
Willis China (Hong Kong) Ltd. Hong Kong 100%
Willis India Private Limited India 100%
PT Willis Corroon BancBali(3) Indonesia 50%
Willis Korea Limited Korea 100%
Willis (Singapore) Pte Ltd. Singapore 100%
Willis (Taiwan) Limited Taiwan 100%
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COMPANY COUNTRY % OWNERSHIP
- ------- ------------------- -----------
REST OF THE WORLD
Willis Faber & Dumas (Mexico) Intermediario de Reaseguro
S.A. de C.V. Mexico 100%
Willis Faber Corretaje de Reaseguros S.A. Venezuela 100%
Willis Faber do Brasil Consultoria e Participacoes S.A. Brazil 100%
York Willis Corroon Corretores de Seguros S.A. Brazil 100%
Willis Faber Chile Limitada Chile 100%
Willis Australia Limited Australia 100%
Willis New Zealand Limited New Zealand 99%
Willis S.A. Argentina 60%
Willis Correa Insurance Services Limitada Chile 80%
BMZ-Willis Agente de Seguros y de Fianzas, S.A. de C.V. Mexico 51%
Willis South Africa (Pty) Limited South Africa 70%
Rontarca-Prima Y Asociados, C.A. Venezuela 51%
Suma Corredores de Seguros S.A. Colombia 51%
- ------------------------
(1) We have a majority equity interest in the company.
(2) We have a 50.1% interest in the company.
(3) We have a 50.3% interest in the company.
CUSTOMERS
Our customers operate on a global and local scale in a multitude of
businesses and industries throughout the world and generally range in size from
major multinational corporations to middle market companies. Further, many of
our client relationships span decades, for instance our relationship with The
Tokio Marine and Fire Insurance Co., Ltd. dates back over 100 years. In the
United States, we serve approximately 10% of the Fortune 1000 companies, with an
average relationship of more than 10 years, and we also serve over 30% of the
U.K. FTSE 100 companies. No one client accounted for more than 2% of revenues
for fiscal year 2000, and our 80 largest clients accounted for less than 12% of
2000 revenues. Additionally, we place insurance with over 4,000 insurance
carriers, none of which individually accounted for more than 8% of the total
premiums we placed on behalf of our clients in 2000.
EMPLOYEES
At December 31, 2000, we had approximately 10,470 employees, including
approximately 3,890 in the United Kingdom, 3,870 in the United States and 2,710
in the rest of the world, and our associates had approximately 2,550 employees.
At December 31, 1999, we had approximately 9,721 employees, including 3,916 in
the United Kingdom, 4,518 in the United States and 1,287 in the rest of the
world, and our associates had approximately 2,556 employees. At December 31,
1998, we had approximately 9,400 employees, including approximately 3,900 in the
United Kingdom, 4,400 in the United States and 1,100 in the rest of the world,
and our associates had approximately 2,600 employees. We are not involved in any
material dispute with employees and management believes that relations with
employees are good.
COMPETITION
We face competition in all fields in which we operate. The insurance
brokerage industry, having recently gone through a period of rapid
consolidation, is led by its three global participants: Marsh &
63
McLennan Companies, Inc., with approximately 32% of the worldwide market
referred to above; Aon Corporation, with approximately 24% of the worldwide
market; and us, with approximately 6% of the worldwide market. The industry is
highly fragmented beyond these three brokers with the next largest broker having
approximately 3% of the worldwide market.
Competition in the insurance brokering and risk management businesses in
general is based on global capability, product breadth, innovation, quality of
service and price. Our global capability and product breadth is similar to those
of the two other global brokers, and thus we compete with them primarily based
on innovation, quality of service and price. In addition, we compete with
numerous specialist, regional and local firms. Insurance companies also compete
with our brokers by directly soliciting insureds without the assistance of an
independent broker or agent. Competition for premiums is intense in all our
business lines and in every insurance market. Competition on premium rates has
also exacerbated the pressures caused by a continuing reduction in demand in
some classes of business. For example, insurers have been retaining a greater
proportion of their risk portfolios than previously. Industrial and commercial
companies have been increasingly relying upon captive insurance companies,
self-insurance pools, risk retention groups, mutual insurance companies and
other mechanisms for funding their risks, rather than buying insurance. We
provide management and similar services for those alternative risk transfer
programs. Additional competitive pressures arise from the entry of new market
participants, such as banks, accounting firms and insurance carriers themselves,
offering risk management or transfer services. Our market share has been stable
in recent years. We believe that our strategies of building on our strong global
franchise, expanding on our employee benefit capabilities, increasing our
operating efficiencies and creating a single company culture will allow us to
retain and gain clients in the competitive marketplace. We also believe that our
market position will provide us with opportunities to acquire smaller companies
with strong regional presence or specialized expertise.
REGULATION
Many of our activities are subject to regulatory supervision in the various
countries and jurisdictions in which they are based or undertaken. We have in
the past failed to comply with some of these regulations and future failures to
comply may occur. While past failures have resulted in insignificant fines, any
failures reported in the future could lead to disciplinary action, including
requiring clients to be compensated for loss, the imposition of fines and the
possible revocation of our authorization to operate as well as reputational
damage.
In the United Kingdom, a number of our legal entities are subject to
regulatory or self-regulatory supervision. For example, our insurance brokering
subsidiaries are subject to the rules of the General Insurance Standards Council
of which they are members and our subsidiary, Willis Structured Financial
Solutions Limited, is regulated by the Securities and Futures Authority (a
self-regulatory organization established under the provisions of the Financial
Services Act 1986). The Securities and Futures Authority has delegated its
regulatory supervisory functions to the Financial Services Authority.
The General Insurance Standards Council and the Financial Services Authority
generally conduct their regulatory supervisory functions through the
establishment of required levels of net worth and other financial criteria. The
General Insurance Standards Council and Financial Services Authority
requirements also prescribe the methods by which insurance brokers and those who
conduct investment business respectively will conduct business. The General
Insurance Standards Council rules in particular require that we maintain amounts
of fiduciary cash in bank accounts segregated from our own funds.
HM Treasury, whose regulatory functions have been delegated to the Financial
Services Authority, will continue to regulate Sovereign as an insurance company.
Our activities in connection with insurance brokering services and third
party administration within the United States are subject to regulation and
supervision by state authorities. Although the scope of regulation and form of
supervision may vary from jurisdiction to jurisdiction, insurance laws in the
64
United States are often complex and generally grant broad discretion to
supervisory authorities in adopting regulations and supervising regulated
activities. That supervision generally includes the licensing of insurance
brokers and agents and third party administrators and the regulation of the
handling and investment of client funds held in a fiduciary capacity. Our
continuing ability to provide insurance brokering and third party administration
in the jurisdictions in which we currently operate is dependent upon our
compliance with the rules and regulations promulgated from time to time by the
regulatory authorities in each of these jurisdictions.
All companies carrying on similar activities in a given jurisdiction are
subject to that regulation, and we do not consider that these controls adversely
affect our competitive position.
PROPERTIES
We own and lease a number of properties for use as offices throughout the
world and believe that our properties are generally suitable and adequate for
the purposes for which they are used. The principal properties are located in
the United Kingdom and the United States. Our headquarters at Ten Trinity Square
in London is a landmark building which we own. Our aim is to bring our London
employees together into one building to improve our efficiency and further the
development of our sales and marketing efforts. Accordingly, we are considering
our options with property in London which may include the disposal of Ten
Trinity Square.
LEGAL MATTERS
GENERAL. We have extensive operations and are subject to claims and
litigation in the ordinary course of business. Most of these result principally
from alleged errors and omissions in connection with our businesses. Like other
large corporations, however, we are also subject to a variety of other claims,
including those relating to our employment practices. Most of the errors and
omissions claims and other claims arising in the ordinary course of business are
covered by professional indemnity or other appropriate insurance. In respect of
self-insured deductibles applicable to those claims, we have established
provisions which we believe to be adequate in the light of current information
and legal advice. These provisions may be adjusted from time to time according
to developments. We do not expect the outcome of those claims, either
individually or in the aggregate, to have a material effect on our results of
operations, financial condition or liquidity. In addition, we are involved in
the legal matters discussed below.
SOVEREIGN/WFUM. Sovereign, a wholly owned subsidiary of ours, operated as
an insurance company in the U.K. and from 1972 Sovereign's underwriting
activities were managed by another wholly owned subsidiary of ours, Willis Faber
(Underwriting Management) Limited, or WFUM. WFUM also provided underwriting
agency and other services to third-party insurance companies, which we refer to
as the stamp companies, some of which are long-standing clients of ours. As an
underwriting agent, WFUM did not issue any contracts of insurance or reinsurance
in its own name or retain any underwriting risks for its own account. As part of
its services as agent, WFUM arranged insurance and reinsurance business on
behalf of Sovereign and the stamp companies in the following main classes of
insurance: marine, non-marine, casualty and aviation. WFUM also arranged
reinsurance on behalf of Sovereign and the stamp companies through third-party
brokers, as well as through brokers within our group of companies.
In 1991, Sovereign ceased underwriting new business and WFUM ceased
arranging new business on behalf of Sovereign and the stamp companies. From that
time until August 1998, WFUM administered the business it arranged on behalf of
Sovereign and the stamp companies, referred to as handling the "run-off" of the
business. From 1998, the run-off services were transferred to a new subsidiary
of ours which services have in turn been sub-contracted to a third party with
experience in running off pools with an insolvent member. In the case of
Sovereign, those services are provided
65
directly by that third party. One of our subsidiaries has agreed with certain of
the stamp companies to fund certain costs of the run-off, subject to certain
agreed guidelines as to timing and amount. The amounts to be funded under the
run-off arrangements are currently within the aggregate of the unused provisions
we have made. However, we cannot assure you that the provisions will be adequate
to cover the actual run-off costs over time. Although we expect the run-off of
the business to be conducted in an orderly manner, it may ultimately prove to be
a lengthy and expensive process.
In July 1997, Sovereign received an adverse arbitration decision in respect
of a dispute between Sovereign and one of its reinsurers regarding the
enforceability of certain reinsurance which WFUM had arranged. The award is
confidential and non-binding as to third parties. As a result of the decision,
the directors of Sovereign determined that Sovereign could not continue to trade
unless Willis Group provided unlimited financial support. Willis Group's
directors decided that, in the interests of our shareholders, this support for
Sovereign could not be justified. Accordingly, Sovereign's directors placed
Sovereign into provisional liquidation on July 11, 1997. On January 5, 2000, a
scheme of arrangement proposed by Sovereign to its creditors became effective.
The stated purpose of the scheme of arrangement is to resolve Sovereign's
liabilities and provide that Sovereign's business is run off in as orderly a
manner as possible. Sovereign's provisional liquidators have been discharged
from office and have been appointed as scheme administrators. On January 16,
2001, the scheme administrators announced an initial payment percentage of 30%
payable out of Sovereign's assets. Those creditors with established scheme
liabilities received payment by May 2001. Sovereign's assets are separate and
distinct from ours, and any payment from Sovereign will have no effect on our
results of operations, financial condition or liquidity.
Following the adverse arbitration decision, Sovereign and certain of the
stamp companies expressed concern about the enforceability of other reinsurance
put in place by WFUM on behalf of Sovereign and the stamp companies. We
understand Sovereign has recently prevailed in an arbitration to ensure that a
reinsurer honors its obligations to Sovereign on similar facts to the previous
adverse arbitration decision. The reinsurer failed to obtain permission to
appeal to the English courts. We also understand that Sovereign and possibly
some of the stamp companies have commenced arbitration proceedings with a number
of other reinsurers that are at a preliminary stage. Accordingly, we cannot
assure you that there will be no further arbitration decisions, court decisions
or discounted settlements arising in the future that result in shortfalls in
reinsurance recoveries for Sovereign or the stamp companies. Other reinsurers
which underwrite Sovereign's or the stamp companies' reinsurance contracts may
seek to challenge the enforceability of such contracts. The failure of Sovereign
or the stamp companies to collect reinsurance following any adverse arbitration
awards would increase the likelihood of them pursuing claims against WFUM.
Sovereign and the stamp companies have reserved their rights generally in
respect of such potential claims, and WFUM, Willis Group and certain of our
brokering subsidiaries have entered into standstill agreements which preserve
the rights of potential claimants with respect to their potential claims. The
scheme administrators and/or the stamp companies may seek to bring claims
directly against Willis Group and hold it responsible for the liabilities of its
subsidiaries. Although claims that Willis Group is liable merely because it is
the subsidiary's parent are difficult to pursue successfully under English law,
we cannot assure you that claims will not be made or, if made, that such claims
could not succeed. The scheme administrators or the stamp companies may also
seek to bring claims in respect of alleged acts or omissions of other
subsidiaries or of Willis Group.
We and our subsidiaries have not made any financial provisions in respect of
possible future claims relating to alleged breach of duty by WFUM or otherwise,
although if and to the extent that these claims are pursued it may be necessary
for our affected subsidiaries to review the need for financial provisions. Those
companies in our group with insurance protection have notified their insurance
providers of certain potential claims. We do not know whether any of these
claims will be made; the validity and amount of such claims and the extent, if
any, to which they will be covered by insurance,
66
after giving effect to the applicable deductibles, exclusions and limits, can be
assessed only when and if these claims are made.
We plan to continue to deal with the foregoing matters in our best interests
and in a manner designed to assist an orderly run-off of the obligations of
Sovereign and of the stamp companies while limiting the costs of resolution. It
is possible that circumstances may lead the directors of WFUM to place WFUM in
liquidation. We do not believe the resolution of these matters, including any
possible liquidation of WFUM, will have a material adverse impact on our results
of operations, financial condition or liquidity, although we cannot be sure of
that.
PENSION REVIEW. As is the case for many companies involved in selling
personal pension plans to individuals in the United Kingdom from 1988 to 1994,
we face liabilities as a result of the pension transfers and opt-outs review
initiated by the United Kingdom government. Sellers of personal pension plans
have since been subject to liabilities based on claims that they allegedly
mis-sold pension products or gave improper advice. In particular, the regulators
of the companies that engaged in this business, such as our independent
financial advisory business, Willis Corroon Financial Planning Limited or WCFP,
require these companies to compensate individuals who withdrew from their
previous or existing company pension plans or who were otherwise advised to set
up personal plans, to the extent that following withdrawal, and the consequent
loss of the employer contribution, that individual's personal pension plan did
not produce returns equal to those that would have been achievable with an
employer's company-sponsored plan. Whether compensation is due to a particular
individual, and the amount thereof, is dependent on the subsequent performance
of the pension plan sold and the relative cost to reinstate that individual into
his or her prior company pension plans. These amounts could be significant and,
in that case, materially adversely affect our operations or financial condition.
The Financial Service Authority, or the FSA, currently requires all offers of
compensation to be made by June 30, 2002 and WCFP is on target to meet that
deadline, although we cannot be sure the FSA will not impose further
requirements which affect those deadlines and WCFP's ability to meet them.
Acceptance of offers and settlement can take many months to finalize.
Although we believe that the provisions established for the pension review,
currently totaling $103 million (approximately $68 million of which has been
paid as of September 30, 2001), are prudent, there remains a possibility that
the provisions made will be insufficient. We expect to pay out these established
provisions over the next three years; however, if the provisions are
insufficient, our results of operations and financial condition may be adversely
affected.
BACCALA & SHOOP. Prior to 1984, Baccala and Shoop Insurance Services, a
U.S. subsidiary of the Willis Group, acted as managing general agent for certain
insurance issuing companies, including three subsidiaries of The Hartford
Financial Services Group, Inc. Since Baccala and Shoop ceased active operations
in 1983, issuing companies (including Hartford) have notified Baccala and Shoop
of potential errors and omissions claims against Baccala and Shoop. In August
1987, Baccala and Shoop, Hartford and Willis North America, a subsidiary of
ours, entered into a Standstill Agreement, amended in 1994, pursuant to which
the statutes of limitations on Hartford's claims against Baccala and Shoop were
tolled indefinitely in exchange for Hartford's agreement to forbear filing
complaints against Baccala and Shoop based on these potential claims. Since
1983, Willis Group has paid approximately $7.9 million in settlement of errors
and omissions claims brought by certain other issuing companies, including
issuing companies that went into liquidation. There has been no notification of
additional potential claims from Hartford or other issuing companies since 1992.
Hartford has not stated what it believes to be its total aggregate losses
potentially attributable to Baccala and Shoop. For accounting purposes, Willis
Group has established provisions in connection with the Baccala and
Shoop-related claims, and believes such provisions to be adequate. However, we
cannot assure you that the provisions will be adequate to cover claims over
time.
67
OTHER MATTERS. See "Risk Factors--Effects of Insurance Market Dispute", for
a discussion of a reinsurance market dispute that may affect our business.
ENFORCEABILITY OF CIVIL LIABILITIES
We are organized under the laws of Bermuda. A substantial portion of our
assets are or may be located outside the United States. As a result, it may not
be possible for the holders of our common stock to effect service of process
within the United States upon us or to enforce against us in United States court
judgments based on the civil liability provisions of the securities laws of the
United States. In addition, there is significant doubt as to whether the courts
of Bermuda would recognize or enforce judgments of United States courts obtained
against us or our directors or officers based on the civil liability provisions
of the securities laws of the United States or any state or hear actions brought
in Bermuda against us or those persons based on those laws. We have been advised
by our legal advisor, Appleby Spurling & Kempe, that currently there is no
treaty in force between the United States and Bermuda providing for the
reciprocal recognition and enforcement of judgments in civil and commercial
matters. As a result, whether a United States judgment is or would be
enforceable in Bermuda against us or our officers and directors depends on
whether the United States court is recognized by the Bermuda court as having
jurisdiction over us or our officers and directors, as determined by reference
to Bermuda conflict of law rules. A judgment debt from a United States court
which is final and for a specified sum based on United States federal securities
law will not be enforceable in Bermuda, unless the judgment debtor had submitted
to the jurisdiction of the United States courts, and the issue of submission and
jurisdiction is a matter of Bermuda law not United States law. In addition and
regardless of the issue of jurisdiction, the Bermuda court will not enforce a
United States federal securities law which is either penal or of a public law
nature. Also, no claim can be brought in Bermuda against us or our officers or
directors in the first instance for violation of United States securities law as
United States securities law has no extraterritorial jurisdiction under Bermuda
law and does not have the force of law in Bermuda. A Bermuda court may, however,
impose civil liability on us or our officers and directors in a suit brought in
such a court against us or our officers or directors, if the facts alleged
constitute or give rise to a cause of action under Bermuda law. Certain remedies
available under the laws of United States jurisdictions, including certain
remedies under the United States federal securities laws, would not be available
under Bermuda law or enforceable in a Bermuda court as they would be contrary to
public policy.
68
MANAGEMENT
The following are our current directors and executive officers and their
ages as of September 30, 2001 and positions within the Willis Group. Their
business address is c/o Willis Group Holdings Limited, Ten Trinity Square,
London EC3P 3AX, England. Mr. Plumeri, Mr. Lucas and the Willis Group Limited
executive officers identified below are members of the Group Executive Committee
of the Board of Willis Group Limited as of September 30, 2001. The Group
Executive Committee manages the operational business and strategic direction of
our operating subsidiaries.
NAME AGE POSITION
- ---- -------- --------
Henry R. Kravis........................... 57 Director
George R. Roberts......................... 58 Director
Perry Golkin.............................. 48 Director
Todd A. Fisher............................ 36 Director
Scott C. Nuttall.......................... 28 Director
Joseph J. Plumeri......................... 58 Executive Chairman and Director; Executive
Chairman and Chief Executive Officer of
Willis Group Limited
James R. Fisher........................... 46 Director
Paul M. Hazen............................. 59 Director
Frederick Arnold.......................... 47 Group Executive Vice President, Strategic
Development of Willis Group Limited
William P. Bowden, Jr..................... 57 Group General Counsel of the Willis Group
Richard J. S. Bucknall.................... 53 Group Chief Operating Officer of Willis
Group Limited
Thomas Colraine........................... 43 Group Chief Financial Officer of Willis
Group Limited
Janet Coolick............................. 58 Group Chief Administration Officer of
Willis Group Limited
Brian D. Johnson.......................... 59 Chief Executive Officer of the North
American operations of Willis Group
Limited
Patrick Lucas............................. 62 Managing Partner of Gras Savoye
Stephen G. Maycock........................ 49 Group Human Resources Director of Willis
Group Limited
Joseph M. McSweeny........................ 52 Chairman and Chief Executive Officer of
Global Risk Solutions of Willis Group
Limited
John M. Pelly............................. 48 Chairman and Chief Executive Officer of
Global Reinsurance of Willis Group Limited
Sarah J. Turvill.......................... 47 Chief Executive Officer of International
operations (excluding United Kingdom and
North America) of Willis Group Limited
Mario Vitale.............................. 46 Executive Vice President -- Group Sales
and Marketing of Willis Group Limited
HENRY R. KRAVIS--Henry R. Kravis is our director and has been a director of
TA I Limited since the 1998 acquisition. Mr. Kravis is a founding partner of KKR
and, since January 1, 1996, has been a managing member of KKR & Co. L.L.C., the
limited liability company which is the general partner of
69
KKR & Co. L.P. Mr. Kravis is also a general partner of KKR Associates, L.P. and
a director of Accuride Corporation, Amphenol Corporation, Borden, Inc., The
Boyds Collection, Ltd., BRW Acquisition, Inc., Evenflo Company, Inc., IDEX
Corporation, KinderCare Learning Centers, Inc., KSL Recreation Corporation,
MedCath Incorporated, Owens-Illinois, Inc., PRIMEDIA, Inc., Regal
Cinemas, Inc., Sotheby's Holdings, Inc., Spalding Holdings Corporation, U.S.
Natural Resources, Inc., Accel-KKR Company, Alliance Imaging, Inc., Birch
Telecom Inc., United Fixtures Company and Worldcrest Group. Messrs. Kravis and
Roberts are first cousins.
GEORGE R. ROBERTS--George R. Roberts is our director and has been a director
of TA I Limited since the 1998 acquisition. Mr. Roberts is a founding partner of
KKR, and, since January 1, 1996, has been a managing member of KKR & Co. L.L.C.
Mr. Roberts is also a general partner of KKR Associates, L.P. and a director of
Accuride Corporation, Amphenol Corporation, Borden, Inc., The Boyds
Collection, Ltd., Evenflo Company, Inc., IDEX Corporation, KinderCare Learning
Centers, Inc., KSL Recreation Corporation, Owens-Illinois, Inc.,
PRIMEDIA, Inc., Safeway Inc., Spalding Holdings Corporation, U.S. Natural
Resources, Inc, Accel-KKR Company, Alliance Imaging, Inc., Birch Telecom Inc.,
United Fixtures Company and Worldcrest Group.
PERRY GOLKIN--Perry Golkin is our director and has been a director of TA I
Limited since the 1998 acquisition. Mr. Golkin has been a member of KKR & Co.
L.L.C. since January 1, 1996. Mr. Golkin was a general partner of KKR from 1995
to January 1996. Prior to 1995, he was an executive of KKR. He is a general
partner of KKR Associates, L.P. He is also a member of the board of directors of
BRW Acquisition, Inc., PRIMEDIA, Inc., Alea Group Holdings A.G., Rockwood
Specialties, Inc. and Walter Industries, Inc.
TODD A. FISHER--Todd A. Fisher is our director and has been a director of
TA I Limited since the 1998 acquisition. Mr. Fisher has been a member of KKR &
Co. L.L.C. since January 1, 2001. Mr. Fisher was an executive of KKR from
June 1993 to December 31, 2000. Mr. Fisher was an associate at Goldman Sachs &
Co. from July 1992 to June 1993. He is also a member of the board of directors
of Accuride Corporation, Layne Christensen Company, BRW Acquisition, Inc., Alea
Group Holdings A.G. and Rockwood Specialties, Inc.
SCOTT C. NUTTALL--Scott C. Nuttall is our director and has been a director
of TA I Limited since the 1998 acquisition. Mr. Nuttall has been an executive of
KKR since November 1996. Mr. Nuttall was an executive at The Blackstone Group
from January 1995 to November 1996. He is also a member of the board of
directors of Amphenol Corporation, BRW Acquisition, Inc., KinderCare Learning
Centers and Walter Industries, Inc.
JOSEPH J. PLUMERI--Joseph J. Plumeri is our Executive Chairman and director
and has been a director of TA I Limited since October 2000. He is also the
Executive Chairman, Chief Executive Officer and a director of Willis Group
Limited, positions held since October 15, 2000. Before joining us, Mr. Plumeri
spent 32 years as an executive with Citigroup Inc. and its predecessors. Of
note, Mr. Plumeri oversaw the 450 North American retail branches of Citigroup's
Citibank unit. Mr. Plumeri also served as Chairman and Chief Executive Officer
of Citigroup's Primerica Financial Services from 1995 to 1999. In 1994,
Mr. Plumeri was appointed Vice Chairman of Citigroup's predecessor, Travelers
Group Inc., and in 1993 Mr. Plumeri became the President of a predecessor of
Citigroup's Salomon Smith Barney unit after overseeing the merger of Smith
Barney and Shearson and serving as the President and Managing Partner of
Shearson since 1990. Mr. Plumeri also serves as a director of Velcero, Inc. He
is also a board member and advisor to many organizations, including The Board of
Visitors of the College of William & Mary, The United Negro College Fund, The
National Center on Addiction and Substance Abuse. He is also a commissioner of
the New Jersey Sports and Exposition Authority.
JAMES R. FISHER--James R. Fisher is our director and has been a director of
TA I Limited since the 1998 acquisition. Mr. Fisher is the Managing Member and
majority owner of Fisher Capital Corp.
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L.L.C. From 1986 through March 1997, Mr. Fisher was a senior executive at
American Re Corporation and served most recently as Senior Vice President and
Chief Financial Officer of American Reinsurance Company and American Re
Corporation, President of American Re Financial Products and President and Chief
Executive Officer of American Re Asset Management. Before joining American Re,
Mr. Fisher was a Senior Accountant at Peat, Marwick, Mitchell & Co., Chief
Financial Officer of The Lawrence Corporation and Senior Manager/Director of
Insurance Industry Services at Price Waterhouse. Mr. Fisher is also Chairman and
Interim Chief Executive Officer of BRW Acquisition, Inc. and a member of the
board of directors and Chairman of the audit committee of Alea Group Holdings,
A.G.
PAUL M. HAZEN--Paul M. Hazen is our director and has been a director of
TA I Limited since January 1, 2001. Mr. Hazen joined Wells Fargo in 1970 and was
named Chairman on November 2, 1998. Mr. Hazen served as Chairman and Chief
Executive Officer from January 1, 1995 to November 2, 1998, President and Chief
Operating Officer from 1984 to 1995 and Vice Chairman from 1981 to 1984.
Mr. Hazen is also a director of Safeway Inc., Phelps Dodge Corporation,
E.piphany Inc., Xstrata AG and is Chairman of Accel-KKR Company and Deputy
Chairman of Vodafone plc. and is President of Intermountain Center for Human
Development.
FREDERICK ARNOLD--Frederick Arnold became a member of the Group Executive
Committee in December 2000 and Group Executive Vice President, Strategic
Development in July 2001. Mr. Arnold joined the Willis Group in March 2000 as
Executive Vice President--Development, Finance and Administration of the North
American operations and was Group Chief Administrative Officer from December
2000 to June 2001. Prior to joining the Willis Group, Mr. Arnold worked for
20 years as an investment banker, primarily at Lehman Brothers, Smith Barney and
Arnhold and S. Bleichroeder, specializing in mergers and acquisitions and equity
capital markets.
WILLIAM P. BOWDEN, JR.--William P. Bowden, Jr. joined us on September 1,
2001 as our General Counsel and was appointed a member of the Group Executive
Committee. Prior to joining us, Mr. Bowden was General Counsel for the Americas
of Societe Generale for four years, General Counsel of CS First Boston, Inc. for
three years and Chief Counsel for the Office of the Comptroller of the Currency,
an independent agency of the U.S. Treasury Department, for four years.
RICHARD J.S. BUCKNALL--Richard J.S. Bucknall joined the board of directors
of Willis Group Limited on November 1, 1998 and has been a member of the Group
Executive Committee since April 1995. He was appointed Chief Operating Officer
on January 1, 2001. His current responsibilities include Global Specialties,
Global Risk Solutions, International Holdings, and U.K. and Republic of Ireland
Retail businesses. He also has responsibilities for the discontinued United
Kingdom underwriting operations. Mr. Bucknall has 34 years of experience in the
insurance brokerage industry, of which 15 years have been with us.
THOMAS COLRAINE--Thomas Colraine joined the board of directors of Willis
Group Limited and the Group Executive Committee on August 31, 1997 and has been
the Group Chief Financial Officer since September 1997. From January 1995 to
October 1996, he was Chief Financial Officer of our North American operations
and was Change Program Director from October 1996 to September 1997.
Mr. Colraine has 13 years of experience in the insurance brokerage industry, all
13 years of which have been with us.
JANET COOLICK--Janet Coolick joined the Board of Directors of Willis Group
Limited and the Group Executive Committee on July 1, 2001. Mrs. Coolick joined
the Willis Group on March 5, 2001 as Executive Vice President and Director,
Operational Efficiency and on July 1, 2001 she was appointed the Chief
Administration Officer. Before joining us, Mrs. Coolick spent 15 years with
Citigroup Inc. and its predecessors where she held various executive positions
including Chief of Staff and Director of Expense Management and Control.
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BRIAN D. JOHNSON--Brian D. Johnson joined the board of directors of Willis
Group Limited and the Group Executive Committee on January 1, 1993. He is an
actuary and has been the Chief Executive Officer of the Willis Group's North
American operations since October 1, 1999. From 1994 until 1997 he was Vice
Chairman and Chief Operating Officer of the North American retail business and
from 1997 he was Chief Executive of that area. Mr. Johnson has 37 years of
experience in the insurance brokerage industry, of which 35 years have been with
us.
PATRICK LUCAS--Patrick Lucas joined the board of directors of Willis Group
Limited on April 15, 1998 as a non-executive director and became a member of the
Group Executive Committee on January 1, 2001. He is the Managing Partner of Gras
Savoye and Chairman and Chief Executive Officer of Gras Savoye S.A. and Gras
Savoye Reassurance, positions held since 1991, 1979 and 1976 respectively.
Mr. Lucas has 35 years of experience in the insurance brokerage industry.
STEPHEN G. MAYCOCK--Stephen G. Maycock joined the Group Executive Committee
on July 1, 2001. He has been the Group Human Resources director of the Willis
Group since he joined in 1996. Prior to joining the Willis Group, he had a
global human resources role with S C Johnson & Son Inc., for 13 years.
Mr. Maycock has five years of experience in the insurance brokerage industry,
all of which have been with us.
JOSEPH M. MCSWEENY--Joseph M. McSweeny joined the board of directors of
Willis Group Limited on September 1, 2000 and has been a member of the Group
Executive Committee since October 1, 1999. He became Chairman and Chief
Executive Officer of the Willis Group's Global Risk Solutions business on
July 1, 2001. He joined the Willis Group in 1994 and held senior executive
positions in the North American retail business until 1998 when he was appointed
Chief Executive Officer of Willis Group's International business, a position he
held until June 2001. Mr. McSweeny has 25 years of experience in the insurance
industry, of which seven years have been with us.
JOHN M. PELLY--John M. Pelly joined the board of directors of Willis Group
Limited on November 1, 1998 and has been a member of the Group Executive
Committee since April 1995. He is Chairman and Chief Executive Officer of the
Willis Group's Global Reinsurance business, a position held since 1995.
Mr. Pelly has 29 years of experience in the insurance brokerage industry, all
29 years of which have been with us. Mr. Pelly is also a non-executive director
of Mitsui Marine International Limited.
SARAH J. TURVILL--Sarah J. Turvill became a member of the Group Executive
Committee on July 1, 2001. Ms. Turvill joined the Willis Group in May 1978 and
for over the last 10 years has had a senior management role in the growth of our
international activities, particularly in Europe where she was Managing Director
from 1995 to 2001. Since July 1, 2001 Ms. Turvill has been the Chief Executive
Officer of Willis Group's International business. She has 23 years of experience
in the insurance brokerage industry, all of which have been with us.
MARIO VITALE--Mario Vitale joined the Willis Group as a Group Executive Vice
President of Group Sales and Marketing on November 13, 2000 and became a member
of the Group Executive Committee in December 2000. Prior to joining the Willis
Group, Mr. Vitale was President of the Risk Management Division of Kemper
Insurance Company for one year and President of the Risk Management Division of
Reliance National with full global responsibilities for 13 years. He is also on
the board of directors of the College of Insurance in New York. Mr. Vitale has
25 years of experience in the insurance industry.
Directors are elected annually. Each of Willis Group Holdings Limited's
current directors was elected on February 8, 2001. Paul Hazen joined our board
as an independent director in January 2001. We expect over time that one or two
additional independent directors will join our board.
BOARD COMMITTEES
Our board of directors has standing audit and compensation committees.
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AUDIT COMMITTEE. The purpose of the audit committee is to:
- make recommendations concerning the engagement of independent public
accountants;
- review with our management and the independent public accountants the
plans for, and scope of, the audit procedures to be utilized and results
of audits;
- approve the professional services provided by the independent public
accountants;
- review the adequacy and effectiveness of our internal accounting controls;
- review major findings of internal investigations, management's response to
them and implementation of recommendations; and
- perform any other duties and functions in connection with the adequacy of
internal control and security systems throughout the Willis Group.
The members of the audit committee are James R. Fisher (Chairman), Perry
Golkin, Todd A. Fisher, Scott C. Nuttall and Paul M. Hazen.
COMPENSATION COMMITTEE. The purpose of the compensation committee is to
establish and submit to our board of directors recommendations with respect to:
- compensation of officers and senior key employees; and
- awards to be made under our stock incentive plans.
The members of the compensation committee are Perry Golkin, Todd A. Fisher,
Scott C. Nuttall and Paul M. Hazen.
We also intend to establish an executive committee, which will have
authority to take corporate actions between regular meetings of the board of
directors. The members of the executive committee are expected to be Joseph J.
Plumeri, Perry Golkin and Todd A. Fisher.
COMPENSATION OF DIRECTORS AND OFFICERS
Partners and executives of KKR who serve as our directors do not receive
additional compensation for service in those capacities, other than customary
directors' fees which for us is currently $40,000 per annum. These directors are
entitled to defer receipt of those fees under the directors' deferred
compensation plan described below. See "Certain Relationships and Related
Transactions".
The aggregate fees or compensation paid to all our directors and executive
officers during 2000 was $4,825,417, which included contributions made to the
pension plans in respect of our directors and executive officers of $684,493.
The figures do not include (1) compensation paid to Mr. Reeve, who resigned as
TA I Limited's Chairman and as Executive Chairman of Willis Group Limited on
October 15, 2000, (2) compensation paid to Messrs. Nixon and Pinkston who
resigned from the Group Executive Committee of Willis Group Limited as of
December 31, 2000 or (3) the $40,000 fee paid to Mr. Viault who resigned as one
of the TA I Limited directors on December 31, 2000. For the year ended
December 31, 2000, our highest paid director received $434,343, including
pension plan contributions of approximately $5,270.
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Mr. Lucas, who was a director of Willis Group Limited during 2000, receives
a meeting allowance of $2,274 for attending meetings of that company's board of
directors or its committees outside his country of residence. For the year ended
December 31, 2000, Mr. Lucas received $6,822. The compensation and pension
contributions for Mr. Lucas are paid by his employing company, our associate
Gras Savoye & Cie.
The following table provides summary information for each of our directors
and executive officers who held options to purchase shares of our common stock
as of September 30, 2001. All our existing directors and executive officers as a
group held options to purchase 8,376,587 shares as of September 30, 2001.
NO. OF
SHARES
UNDERLYING
OPTIONS EXERCISE
DATE OF GRANT GRANTED PRICE(1) OPTION EXPIRATION PERIOD
------------------ ---------- -------- ------------------------
Henry R. Kravis.................. -- -- --
George R. Roberts................ -- -- --
Perry Golkin..................... -- -- --
Todd A. Fisher................... -- -- --
Scott C. Nuttall................. -- -- --
Joseph J. Plumeri................ October 15, 2000 5,164,222 L2 October 15, 2010
James R. Fisher(2)............... -- -- -- --
Paul M. Hazen.................... June 11, 2001 111,111 $13.50 June 11, 2011
Frederick Arnold................. July 6, 2000 200,000 L2 December 18, 2010
William P. Bowden, Jr............ September 10, 2001 11,362 $17.60 September 10, 2011
Richard J.S. Bucknall............ December 18, 1998 400,000 L2 December 18, 2008
December 29, 2000 187,500 L2 December 29, 2010
June 11, 2001 393 L9.85 January 31, 2005
Thomas Colraine.................. December 18, 1998 406,656 L2 December 18, 2008
June 11, 2001 393 L9.85 January 31, 2005
Janet Coolick.................... June 11, 2001 5,554 $13.50 June 11, 2001
Brian D. Johnson................. December 18, 1998 400,000 L2 December 18, 2008
Stephen G. Maycock............... December 18, 1998 217,162 L2 December 18, 2008
June 11, 2001 393 L9.85 January 31, 2005
Joseph M. McSweeny............... December 18, 1998 209,411 L2 December 18, 2008
July 6, 2000 218,644 L2 July 6, 2010
John M. Pelly.................... December 18, 1998 360,000 L2 December 18, 2008
December 29,
2000.............. 125,000 L2 December 29, 2010
June 11, 2001 393 L9.85 January 31, 2005
Sarah J. Turvill................. December 18, 1998 108,000 L2 December 18, 2008
June 11, 2001 393 L9.85 January 31, 2005
Mario Vitale..................... December 29, 2000 250,000 L2 December 29, 2011
- ------------------------
(1) L2 equals $2.94, based on the exchange rate as of September 30, 2001 of
$1.47 = L1.00 and L9.85 equals $14.48, based on the same exchange rate.
L9.85 was the pound sterling equivalent of $13.50, our initial public
offering price, at the time of the offering.
(2) Fisher Capital Corp. L.L.C., of which James R. Fisher is the managing member
and majority owner, is the beneficial owner of options to purchase 422,501
shares of our common stock. Mr. Fisher may be deemed to share beneficial
ownership of options held by Fisher Capital Corp. L.L.C. and in the shares
of common stock should the options be exercised, but disclaims such
beneficial ownership.
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NON-EMPLOYEE DIRECTORS' DEFERRED COMPENSATION PLAN
We have adopted a directors' deferred compensation plan for our non-employee
members of the board of directors. Under this plan, non-employee directors may
elect to defer all or any portion of their fees to be earned in any given
calendar year into (1) a cash account, in which the deferred fees earn interest
at a rate equal to that which we do or could earn on an equal amount of money
deposited with our principal lender, or (2) a stock account, which we credit
with a number of shares equal to the amount of the fees deferred into the stock
account divided by the 10-day average sales price of our shares with respect to
the date the director defers his or her fees. A director shall only receive a
distribution of his or her cash account (in cash) and stock account (in shares
of our common stock), upon the earlier to occur of (1) a change of control of
our company, (2) the first business day of the calendar year following the date
the director retires, resigns or otherwise separates from service as a director
and (3) the termination of the plan by the board of directors. As of
September 30, 2001, there were 500,000 shares available for distribution into
stock accounts under this plan of which 2,241 shares have been credited in
aggregate to directors' stock accounts.
NON-EMPLOYEE DIRECTORS SHARE OPTION PLAN
Due to certain adverse tax consequences associated with certain non-employee
directors' participation in the Non-Employee Directors' Deferred Compensation
Plan, we have established a share option plan for certain non-employee members
of the board of directors who are subject to income taxation in the United
Kingdom. Under this share option plan, non-employee directors may receive an
immediately exercisable option to purchase shares of our common stock at nominal
value. The number of shares subject to the option will be limited, in each
calendar year, to that number of our shares having a market value, as of the
date of grant of the option, equal to the amount of fees which that non-employee
director waived in respect of that calendar year. We anticipate that under the
plan, a non-employee director may either exercise his or her option at any time
and receive shares of our common stock, or we may elect to repurchase the option
at any time, at a price equal to the excess of the fair market value of the
shares subject to the option at the time of the repurchase minus the nominal
exercise price, payable in shares of our common stock, net of all income taxes
required to be withheld by us under applicable tax laws. As of September 30,
2001, there were 100,000 shares available for grant under this plan.
EXECUTIVE CHAIRMAN'S EMPLOYMENT ARRANGEMENTS
On October 15, 2000, we entered into a five year employment agreement with
Mr. Plumeri, by which Mr. Plumeri receives an annual base salary equal to
$1,000,000, which is subject to an annual review, a guaranteed bonus equal to
his base salary for each year during the term of the employment agreement, and
the opportunity to earn additional annual or other bonus amounts in excess of
the guaranteed bonus if extraordinary performance targets, established by our
board of directors at the beginning of each fiscal year after consulting with
Mr. Plumeri regarding these targets, are achieved.
AMENDED AND RESTATED 1998 STOCK OPTION PLAN AND AMENDED AND RESTATED WILLIS
AWARD PLAN
Our Amended and Restated 1998 Share Purchase and Option Plan for Key
Employees and our Amended and Restated Willis Award Plan for Key Employees, each
provides for the grant of time-based vesting options, performance-based vesting
options and various other share-based grants to our employees and to employees
of our subsidiaries to purchase our shares of common stock. The 1998 Plan and
the Willis Award Plan are intended to:
- promote our and our subsidiaries' long-term financial interests and growth
by attracting and retaining management personnel with the training,
experience and ability to enable them to make a substantial contribution
to the success of our business;
75
- motivate management personnel by means of growth-related incentives to
achieve long range goals; and
- further the alignment of interests of participants with those of our
shareholders through opportunities for increased share ownership in us.
As of September 30, 2001, of the time- and performance-based options
granted, 28,312,176 remained unforfeited under the 1998 Plan and 150,000 vested
options had been granted and 140,000 remained unforfeited under the Willis Award
Plan. There are 30,000,000 shares available to be granted under the 1998 Plan,
of which 10,000,000 may be granted to any one employee in any given calendar
year, and 5,000,000 shares are available to be granted under the Willis Award
Plan. Under the 1998 Plan, unless otherwise provided by our board of directors,
time-based options generally become exercisable in five equal annual
installments beginning on the second anniversary of the date of grant and
performance-based options generally become exercisable to the extent, if any,
that performance goals generally based on Willis Group Limited's cumulative
consolidated cash flow and annual EBITDA, as defined, for periods ending 2001
and 2002 are achieved. 30% of the performance-based options are calculated based
upon Willis Group Limited's achievement of the cash flow targets, and the
remaining 70% of the performance-based options are calculated based upon Willis
Group Limited's achievement of the EBITDA targets. Upon the determination of
whether and to what extent the targets are achieved, the performance-based
options will vest and become exercisable in four equal annual installments,
generally beginning on the third anniversary of the date of grant. The
exercisability of the options may accelerate or terminate based on the
circumstances surrounding an optionee's termination of employment, and both
time-based and performance-based options may (in the discretion of our board of
directors), fully accelerate upon a change in control of our company. Under the
1998 Plan and Willis Award Plan, unless otherwise provided by our board of
directors, all exercisable options are exercisable from the date of grant until
the tenth anniversary of the date of grant.
Unless sooner terminated by our board of directors, the 1998 Plan and Willis
Award Plan will expire 10 years after their adoption. That termination will not
affect the validity of any grant outstanding on the date of the termination of
either of the 1998 Plan or the Willis Award Plan.
The compensation committee of our board of directors administers the 1998
Plan and Willis Award Plan, including, without limitation, the determination of
the employees to whom grants will be made, the number of shares subject to each
grant and the various terms of those grants. Our board of directors may from
time to time amend the terms of any grant, but, except for adjustments made upon
a change in our shares by reason of a stock split, spin-off, stock dividend,
stock combination or reclassification, recapitalization, reorganization,
consolidation, change of control or similar event, that action may not adversely
affect the rights of any participant under the 1998 Plan or Willis Award Plan,
as applicable, with respect to the options without at least a majority of the
participants approving such action. Our compensation committee of our board of
directors will retain the right to amend, suspend or terminate the 1998 Plan and
Willis Award Plan at any time. No further grants are to be made under the 1998
Plan.
2001 SHARE PURCHASE AND OPTION PLAN
Our 2001 Share Purchase and Option Plan provides for the grant of options,
including "incentive stock options", to purchase our shares of common stock and
various other share-based grants to our employees and employees of our
subsidiaries. The 2001 Share Purchase and Option Plan is intended to:
- promote our and our subsidiaries' long-term financial interests and growth
by attracting and retaining management personnel with the training,
experience and ability to enable them to make a substantial contribution
to the success of our business;
76
- motivate management personnel by means of growth-related incentives to
achieve long range goals; and
- further the alignment of interests of participants with those of our
shareholders through opportunities for increased share ownership in us.
As of September 30, 2001, options granted for 1,224,239 shares remained
unforfeited and 50,000 restricted shares remain unforfeited. There are
10,000,000 shares available to be granted under the 2001 Plan, of which
5,000,000 may be granted to any one employee in any given calendar year. Options
and restricted shares will vest and become either generally exercisable in equal
installments of 20% per year over a five-year period commencing on the second
anniversary of grant or on the eighth anniversary of grant. Also, certain option
grants may accelerate depending on the achievement of certain performance goals
and option grants may terminate based on the circumstances surrounding an
optionee's termination of employment. The vesting of options and other
share-based awards may also be accelerated, in the discretion of our board of
directors, upon a change in control of our company. In connection with certain
of our option grants, employees have agreed and may in the future agree to
restrict the transferability of the shares of our common stock that they own, as
of the date the option is granted, for a period of six years from the date of
the original option grant, which options may be forfeited without payment in the
event the employees breach the transfer restrictions imposed on their shares.
Under the 2001 Plan, unless otherwise provided by our board of directors, it is
anticipated that all exercisable options are exercisable from the date of grant
until the tenth anniversary of the date of grant.
Unless sooner terminated by our board of directors, the 2001 Plan will
expire 10 years after its adoption. That termination will not affect the
validity of any grant outstanding on the date of that plan's termination.
The compensation committee of our board of directors administers the 2001
Plan, including, without limitation, the determination of the employees to whom
grants will be made, the number of shares subject to each grant and the various
terms of those grants. Our board of directors may from time to time amend the
terms of any grant, and retains the right to amend, suspend or terminate the
2001 Plan at any time. In November 2001, we expect to grant options to purchase
shares of our common stock to up to 300 management employees. The number of
shares subject to each employee's option will be equal to two shares of our
common stock for every one share of our common stock that the employee owns as
of the date the option is granted, which the employee agrees to be subject to
restrictions on transferability. We expect that either we or our related trust
will issue shares of our common stock under our S-8 registration statement at
fair market value to those employees who want to acquire additional shares to be
credited to their account prior to the November option grant. These options will
have a per share exercise price equal to the fair market value of our shares of
common stock on the date the option is granted.
EMPLOYEE STOCK PURCHASE PLAN
We have established an employee stock purchase plan for employees of certain
of our subsidiaries, currently United States and Canadian subsidiaries, under
which the employees will have the opportunity to purchase up to a maximum amount
of shares of our common stock through the use of payroll deductions over certain
specified periods of time. The plan qualifies as an employee stock purchase plan
under section 423 of the Internal Revenue Code, which will provide the
participants in the plan with certain tax benefits upon their subsequent sale or
other disposition of the shares of our common stock that they will purchase
under the terms of the plan. We expect to offer the participants in the plan the
opportunity to elect to have up to a certain amount of their salaries deducted
from their paychecks over a period of six months, and to use that money to
purchase shares of our common stock. In no event may a participant purchase more
than $25,000 worth of our common stock in any
77
given calendar year. 103,055 shares of our common stock were issued in
accordance with the first offering under this plan. As of September 30, 2001,
there were 896,945 shares available for sale and purchase under this plan.
SHARESAVE PLAN
We have established a "save as you earn" plan, which we refer to as our
Sharesave Plan, which has been approved by the Inland Revenue of the United
Kingdom, under which all executive directors and employees of our company and
its subsidiaries who have completed a minimum service requirement not exceeding
five years and are subject to certain taxes in the United Kingdom will be
granted options to purchase shares of our common stock. As of the date of this
prospectus, we have granted under the Sharesave Plan options to purchase 595,669
shares of our common stock at L9.85, which was the pound sterling equivalent of
$13.50, the price of our common stock at the time of our initial public
offering. Otherwise, options may be granted with a sterling option price that is
not less than 80% of the market value of the shares on the date of grant and,
where the shares are to be subscribed, the nominal value if greater. The options
may vest in three, five or seven years' time, with each participant being able
to pay for his or her options by entering into a savings contract with a
building society under which he or she agrees to save a regular monthly amount,
not to exceed L250 per month. The first grant of options vests in three years
and the maximum monthly saving amount is L100. When the option vests, the
participant will receive his or her savings back plus a tax-free bonus, which
may be used, at the employee's discretion, to exercise the option. Options not
exercised within six months at the end of the contract will lapse. In addition,
in the event of a change of control of our company, options may be exercised
within six months of the change of control.
The board of directors may determine the maximum number of shares available
for any option grant. Options may be adjusted, subject to the prior approval of
the Inland Revenue, to reflect variations in the share capital of the company,
including the capitalization, rights issue and subdivision, consolidation or
reduction in the capital of our company. Also, the board of directors may at any
time amend the Sharesave Plan, which amendments must be approved by the Inland
Revenue prior to taking effect in order to ensure that the Sharesave Plan
retains its tax-qualified status. However, the board of directors may not make
any amendments that would adversely affect the rights of participants without
obtaining appropriate consents. No options may be granted under the Sharesave
Plan after the tenth anniversary of the adoption of the Sharesave Plan. The
Sharesave Plan is a sub-plan of the 2001 Share Purchase and Option Plan and the
904,331 shares available for grant under this plan are part of the 10,000,000
shares available for grant under the 2001 Share Purchase and Option Plan.
EMPLOYEE STOCK PURCHASE AGREEMENTS
As of the date of this prospectus, the shares of common stock purchased by
employees and former employees, the options granted to the employees and the
shares of common stock an employee may receive upon exercise of an option (all
as granted under either the 1998 Plan or the Willis Award Plan) generally are
subject to transfer restrictions until the sixth anniversary of the date the
employees originally purchased their stock. One exception to this transfer
restriction allows an employee to sell shares of his or her common stock under
an effective registration statement at the time Profit Sharing (Overseas), our
majority shareholder and an indirect wholly owned subsidiary of KKR, sells its
shares pursuant to such registration statement, in the same proportion as Profit
Sharing (Overseas) sells its shares. In lieu of the exercise by certain of our
employees or former employees of such registration rights, we or our related
trust will repurchase approximately 250,000 shares at a price per share equal to
the price received by the selling shareholders in this offering less the
underwriting discount. The shares of common stock and options are also subject
to certain risks of forfeiture, in whole or in part, prior to the sixth
anniversary of the date the employees originally purchased the stock, including,
without limitation, our right to repurchase the stock and to terminate options
at a stated repurchase or
78
termination price, which price ranges from the fair market value of the stock to
the book value per share of the stock (for stock purchased and options granted
prior to January 20, 2001), depending upon the circumstances of an employee's
termination of employment. In the event Profit Sharing (Overseas) is selling all
or a portion of its shares to an unaffiliated third party, the shares of common
stock purchased by the employees are also subject to Profit Sharing (Overseas)'s
right to cause the employees to sell all or a portion of their shares, and the
employees have a right to cause Profit Sharing (Overseas) to permit employees
and former employees to sell a portion of their shares.
EMPLOYEE STOCK OWNERSHIP PLANS AND TRUST
Willis Group maintains Employee Share Ownership Plans, which as of
September 30, 2001, held 809,000 shares of our common stock on behalf of Willis
Group directors, officers and other employees. These shares were acquired by the
Plans at the time of the 1998 acquisition of our predecessor in return for the
employees forfeiting cash awards held by the Plans for their benefit. As part of
the forfeiture arrangements, certain employees were granted under our Zero Cost
Share Option Scheme, options over shares (now shares of our common stock), the
value of which equaled on grant the cash amount of forfeited cash awards. The
Plans are obliged to deliver the shares held when the zero cost option is
exercised upon payment of L1 and relevant taxes. No option may be exercised more
than 10 years from the date of grant and no further options will be granted
under the Scheme.
Those employees who forfeited cash awards but did not receive a zero cost
option grant have their shares vested under the Plans at the same time they
would have received the cash awards.
The options and shares subject to the options, as well as the other shares
held in the Plans, will be subject, among other things, to our right to
repurchase them at varying purchase prices upon certain terminations of
employment, pursuant to the employee stock purchase agreements above. However,
in the event that the shares subject to the option are, as also described above,
required by Profit Sharing (Overseas) to be sold to a third party, the
participant will be entitled to receive a cash payment in respect of his or her
shares, if the participant would have received cash under his or her forfeited
award in that circumstance.
In addition, options may be adjusted to reflect variations in the share
capital of our company, including the capitalization, rights issue and
subdivision, consolidation or reduction in the capital of our company. The board
of directors may amend the provisions of the Zero Cost Share Option Scheme at
any time; however the board of directors may not make any amendments that would
disadvantage the participants without obtaining prior approval of the amendments
from a majority of the participants.
In connection with the employee stock purchase agreements described above, a
trust was established at the time of the 1998 acquisition, which through its
trustees, is a party to the Management and Employees Shareholders' Agreement,
which governs the shares purchased by our employees. Under this agreement, the
trust can be required to purchase shares of our common stock and options owned
by these employees whose employment with us is terminated. Also, the trust has
the power to repurchase the shares and options owned by such former employees.
As of September 30, 2001, the trust had an interest in 738,552 shares of our
common stock, which can be purchased by employees or used to satisfy options
grants made by us. As of September 30, 2001, 331,250 of the shares held by the
trust were reserved to satisfy option grants when exercised.
OTHER
Willis also maintains a deferred compensation plan for certain employees
that allows employees to defer a portion of their annual compensation and Willis
North America has a 401(k) plan covering all eligible employees of Willis North
America and its subsidiaries. Our shares of common stock are available as an
investment option to participants in Willis North America's 401(k) plan.
79
PRINCIPAL AND SELLING SHAREHOLDERS
BENEFICIAL OWNERSHIP
The following presents information with respect to the beneficial ownership
of our shares as of September 30, 2001, before and after giving effect to this
offering, by (1) each person who is known by us to beneficially own more than 5%
of the shares of our common stock, as well as each member of the consortium,
consisting of Axa Insurance UK plc and Axa General Insurance Limited, Royal &
Sun Alliance Insurance Group plc, The Chubb Corporation, The Hartford Financial
Services Group, Inc., Travelers Property Casualty Corp. and The Tokio Marine and
Fire Insurance Co., Ltd., (2) each of our directors and executive officers,
(3) all of our directors and executive officers as a group and (4) all selling
shareholders. The amounts shown in the table below assume no exercise of the
over-allotment option to purchase 2,625,000 shares of our common stock granted
to the underwriters by the selling shareholders. If the underwriters elect to
exercise their over-allotment option, each selling shareholder will become
obligated to sell to the underwriters a number of additional shares
approximately proportionate to the number of shares sold by such selling
shareholder in this offering.
Unless otherwise indicated, the address of each person named in the table
below is Ten Trinity Square, London EC3P 3AX, England. The amounts and
percentages of our shares beneficially owned are reported on the basis of
regulations of the Commission governing the determination of beneficial
ownership of securities. Under the rules of the Commission, a person is deemed
to be a beneficial owner of a security if that person has or shares voting
power, which includes the power to vote or to direct the voting of that
security, or investment power, which includes the power to dispose of or to
direct the disposition of that security. A person is also deemed to be a
beneficial owner of any securities of which that person has a right to acquire
beneficial ownership within 60 days. Under these rules, more than one person may
be deemed to be a beneficial owner of the same securities and a person may be
deemed to be a beneficial owner of securities as to which that person has no
economic interest. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of common stock
subject to options held by that person that are currently exercisable or
exercisable within 60 days of the date of this offering are deemed issued and
outstanding. These shares, however, are not deemed outstanding for purposes of
computing percentage beneficial ownership of any other person. The percentage of
our share capital before and after this offering is based on 147,112,631 shares
of common stock outstanding on October 29, 2001.
BEFORE THIS OFFERING AFTER THIS OFFERING
--------------------------- ---------------------------
NUMBER OF NUMBER OF
SHARES PERCENT NUMBER OF SHARES PERCENT
BENEFICIALLY BENEFICIALLY SHARES TO BE BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OWNED SOLD OWNED OWNED
- ------------------------------------- ------------ ------------ ------------ ------------ ------------
KKR 1996 Overseas, Limited(1)........ 92,002,916 62.5% 14,252,233 77,750,683 52.9%
Henry R. Kravis(1)................... 92,002,916 62.5% 14,252,233 77,750,683 52.9%
George R. Roberts(1)................. 92,002,916 62.5% 14,252,233 77,750,683 52.9%
Perry Golkin(1)...................... 92,036,916 62.6% 14,252,233 77,780,683 52.9%
Todd A. Fisher(1).................... 92,010,916 62.5% 14,252,233 77,758,683 52.9%
Scott C. Nuttall(1).................. 92,005,916 62.5% 14,252,233 77,753,683 52.9%
James R. Fisher(2)................... 632,072 0.4% 97,915 534,157 0.4%
Paul Hazen........................... 37,037 * -- 37,037 *
Axa Insurance UK plc(3).............. 2,500,000 1.7% 387,277 2,112,723 1.4%
Axa General Insurance Limited(3)..... 1,500,000 1.0% 232,366 1,267,634 0.9%
80
BEFORE THIS OFFERING AFTER THIS OFFERING
--------------------------- ---------------------------
NUMBER OF NUMBER OF
SHARES PERCENT NUMBER OF SHARES PERCENT
BENEFICIALLY BENEFICIALLY SHARES TO BE BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OWNED SOLD OWNED OWNED
- ------------------------------------- ------------ ------------ ------------ ------------ ------------
Royal & Sun Alliance Insurance Group
plc(4)............................. 4,000,000 2.7% 619,643 3,380,357 2.3%
The Chubb Corporation(5)............. 4,000,000 2.7% 619,643 3,380,357 2.3%
The Hartford Financial Services
Group, Inc.(6)..................... 3,333,333 2.3% 516,369 2,816,964 1.9%
Travelers Property Casualty
Corp.(7)........................... 4,000,000 2.7% 619,643 3,380,357 2.3%
The Tokio Marine and Fire Insurance
Co., Ltd.(8)....................... 1,000,000 0.7% 154,911 845,089 0.6%
Joseph J. Plumeri.................... 2,854,251 1.9% -- 2,854,251 1.9%
Frederick Arnold..................... 105,176 * -- 105,176 *
Richard J.S. Bucknall................ 310,000 * -- 310,000 *
William P. Bowden, Jr................ 19,886 * -- 19,886 *
Thomas Colraine...................... 182,444 * -- 182,444 *
Janet Coolick........................ 3,731 * -- 3,731 *
Brian D. Johnson..................... 250,000 * -- 250,000 *
Patrick Lucas........................ 50,000 * -- 50,000 *
Stephen G. Maycock................... 85,540 * -- 85,540 *
Joseph M. McSweeny................... 192,871 * -- 192,871 *
John M. Pelly........................ 305,000 * -- 305,000 *
Sarah J. Turvill..................... 77,000 * -- 77,000 *
Mario Vitale......................... 145,000 * -- 145,000 *
All our directors and executive
officers (20 persons)(9)........... 4,691,436 3.2% -- 4,691,436 3.2%
- ------------------------
* Less than 1%.
(1) Shares shown as beneficially owned by KKR 1996 Overseas, Limited are owned
of record by Profit Sharing (Overseas), Limited Partnership. KKR 1996
Overseas, Limited is the general partner of KKR Associates II (1996),
Limited Partnership, which is the general partner of KKR 1996 Fund
(Overseas), Limited Partnership, which is the general partner of Profit
Sharing (Overseas), Limited Partnership, which owns approximately 62.5% of
our issued and outstanding shares prior to this offering. Messrs. Henry R.
Kravis, George R. Roberts, Robert I. McDonnell, Paul E. Raether, Michael W.
Michelson, James H. Greene, Jr., Michael T. Tokarz, Edward A. Gilhuly, Perry
Golkin, Scott M. Stuart and Todd A. Fisher as members of KKR 1996 Overseas,
Limited, may be deemed to share beneficial ownership of any shares
beneficially owned by KKR 1996 Overseas, Limited but disclaim such
beneficial ownership. Scott C. Nuttall is a director and an executive of
Kohlberg Kravis Roberts & Co. L.P. Mr. Nuttall is also a limited partner of
KKR Associates II (1996), Limited Partnership. Mr. Nuttall disclaims
beneficial ownership of any of our shares beneficially owned by Kohlberg
Kravis Roberts & Co. L.P. and KKR Associates II (1996), Limited Partnership.
The amounts owned by Messrs. Golkin, Fisher and Nuttall include 34,000,
8,000 and 3,000 shares respectively. The address of KKR 1996 Overseas,
Limited is Ugland House, P.O. Box 309, George
81
Town, Grand Cayman, Cayman Islands, B.W.I., and the address of each
individual listed above is c/o Kohlberg Kravis Roberts & Co., L.P., 9 West
57th Street, New York, New York 10019.
(2) James R. Fisher owns 28,500 shares of our stock. Fisher Capital Corp.
L.L.C., is the beneficial owner of 603,572 of our shares, which include
currently exercisable options to purchase 422,501 shares. Fisher Capital
Corp. L.L.C. will sell 97,915 shares in this offering. Mr. Fisher, as the
managing member and majority owner of Fisher Capital Corp. L.L.C., may be
deemed to share ownership of any shares beneficially owned by Fisher Capital
Corp. L.L.C. but disclaims such beneficial ownership. James R. Fisher has an
interest in 75,654 of our shares as an investor through KKR Partners
(International) Limited Partnership. Mr. Fisher may be deemed to share
beneficial ownership of any shares beneficially owned by KKR Partners
(International) Limited Partnership but disclaims such beneficial ownership.
The address of Mr. Fisher and Fisher Capital Corp. L.L.C is 8 Clarke Drive,
Cranbury, New Jersey 08512.
(3) The address of Axa Insurance UK plc and Axa General Insurance Limited is 107
Cheapside, London EC2V 6DU, England. These shares were transferred in
October 2001 from their parent, Axa Insurance plc.
(4) The address of Royal & Sun Alliance Insurance Group plc is 30 Berkeley
Square, London, W1J 6EW, England.
(5) The address of The Chubb Corporation is 15 Mountain View Road, Warren, New
Jersey 07059.
(6) Our shares shown as beneficially owned by The Hartford Financial Services
Group, Inc. are owned of record by its affiliate Nutmeg Insurance Company,
and its address is 55 Farmington Avenue, 9th Floor, Hartford, Connecticut
06115.
(7) Our shares shown as beneficially owned by Travelers Property Casualty Corp.
are owned of record by its affiliate Travelers Casualty and Surety Company
and its address is One Tower Square, 10 CR Hartford, Connecticut 06183.
(8) The address of The Tokio Marine and Fire Insurance Co., Ltd. is 2-1
Marunouchi 1-Chome, Chiyoda-ku, Tokyo, 100, Japan.
(9) This includes 111,873 shares held in trust on behalf of our executive
officers subject to vesting. These shares were issued in connection with the
cancellation of unvested incentive awards owned by such employees prior to
the 1998 acquisition.
SHAREHOLDER RIGHTS AGREEMENT AND REGISTRATION RIGHTS AGREEMENTS
We have entered into a shareholder rights agreement with TA II Limited, an
indirect wholly owned subsidiary of ours, Profit Sharing (Overseas), Limited
Partnership and the members of the consortium referred to above. Under that
shareholder rights agreement, certain holders of shares of our common stock will
be subject to rights of, and restrictions on, transfer, as well as the other
provisions described below.
Under the shareholder rights agreement, each member of the consortium has
the right to require a proposed acquirer of any shares of our common stock held
by Profit Sharing (Overseas) or any of its affiliates to purchase a specified
percentage of that member's holding of shares of common stock in us on similar
terms. Additionally, if Profit Sharing (Overseas) or any of its affiliates
receives a bona fide offer from a third party to purchase a majority of our
shares of common stock then owned by them, they may require each member of the
consortium to sell a similar proportion of their shares in us to that third
party on similar terms.
The shareholder rights agreement provides that if before September 2, 2003
Profit Sharing (Overseas), any of its affiliates or we or any of our
subsidiaries receive a written, unsolicited offer from a third party to enter
into a transaction which would result in a sale of the business, then the
members of the consortium will have the right to match the unsolicited offer,
and that offer may not be accepted
82
if any member of the consortium makes an offer at the same price and on the same
terms in writing within 35 days of being notified of the unsolicited offer. In
addition, if during that period Profit Sharing (Overseas) or we or any of our
subsidiaries propose to enter into a transaction which would result in a sale of
the business other than in an unsolicited offer, that entity must first allow
the members of the consortium to make an offer to enter into a similar
transaction within 30 days, but if Profit Sharing (Overseas) or we decide to
refuse that offer, or if no member of the consortium makes this type of offer,
then Profit Sharing (Overseas) or we or any of our subsidiaries, as the case may
be, will be free to enter into a transaction resulting in a sale of the
business, provided that a definitive agreement is entered into within specified
time periods at the same or a higher price. These provisions will also apply to
the entering into of a transaction or series of related transactions, whether by
an unsolicited offer or a proposal by Profit Sharing (Overseas) or any of its
affiliates to enter into such a transaction, whereby Profit Sharing (Overseas)
and its affiliates would transfer at least 30% of our then issued shares of
common stock to a single person or a group of persons acting in concert.
We have entered into a registration rights agreement with the members of the
consortium. Under the registration rights agreement, the consortium members and
certain of their transferees, subject to a number of conditions and limitations,
may require us to file a registration statement under the Securities Act to
register the sale of shares of our common stock held by them. We may be required
to file up to four registration statements. The registration rights agreement
also provides, subject to a number of conditions and limitations, that the
consortium members and those transferees have piggy-back registration rights in
connection with registered offerings of our shares that we initiate, including
this offering. Under this agreement, we will be required to pay all registration
expenses. In addition, we are required to indemnify the persons whose shares we
register, and they in turn are required to indemnify us with respect to any
information they provide, against certain liabilities in respect of any
registration statement or offering covered by the registration rights agreement.
We have entered into a registration rights agreement with Profit Sharing
(Overseas). Like the registration rights agreement with the members of the
consortium discussed in the previous paragraph, this agreement gives Profit
Sharing (Overseas), Limited Partnership the right, subject to a number of
conditions and limitations, to demand the registration of the shares of our
common stock that it owns or to partake in a registration initiated by us. We
are responsible for expenses for the first 10 registrations of each class or
series of our securities held by it, including this registration. In addition,
we are required to indemnify Profit Sharing (Overseas), and it in turn is
required to indemnify us, with respect to any information they provide, against
certain liabilities in respect of any registration statement or offering covered
by the registration rights agreement.
83
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Following this offering, KKR Overseas Limited, an entity controlled by KKR,
will own approximately 52.9% of our outstanding common stock, or 44.0% on a
fully diluted basis, in each case assuming the underwriters' overallotment
option is not exercised, and will continue to control us. Accordingly,
affiliates of KKR will be able to:
- elect our entire board of directors;
- control our management and policies; and
- determine, without the consent of our other shareholders, the outcome of
any corporate transaction or other matter submitted to our shareholders
for approval, including mergers, consolidations and the sale of all or
substantially all our assets.
Affiliates of KKR will have sufficient voting power to prevent or cause a
change in control of our company and amend our organizational documents. See
"Principal and Selling Shareholders".
In connection with the acquisition of our predecessor, KKR received
aggregate fees of $7.5 million and Fisher Capital Corp. L.L.C. received
aggregate fees of $2.0 million. KKR and Fisher Capital Corp. L.L.C. render
management, consulting, and certain other services to us and our subsidiaries
for annual fees payable quarterly in arrears. In 1998, 1999 and 2000, we paid
$250,000, $1.0 million and $1.0 million to KKR and $87,500, $350,000 and
$350,000 to Fisher Capital Corp. L.L.C. for those services. We also reimburse
their incidental expenses in connection with those services. Partners and
employees of KKR and Fisher Capital Corp. L.L.C. who also serve as our directors
do not receive additional compensation for service in that capacity, other than
customary directors' fees, which for us is currently $40,000 per annum. See
"Management--Non-Employee Directors' Deferred Compensation Plan and Non-Employee
Directors Share Option Plan". In addition, on January 27, 1999, Fisher Capital
Corp. L.L.C. was granted 422,501 options to purchase an equivalent number of
shares. The options are currently exercisable and expire on January 27, 2014.
In 2000, our United States subsidiary, Willis North America, purchased an
interest of approximately 5% in OneShield Inc., a company it is partnering with
to bring major segments of its workflow process on United States business to the
Internet. Our subsidiary also has warrants in OneShield Inc., which on exercise
could increase its interest to approximately 7.1% on a fully diluted basis. The
partners and employees of KKR and Fisher Capital Corp. L.L.C., some of whom
serve as our directors, have current interests of 6.5% in aggregate and 0.3%
respectively in OneShield Inc. Fisher Capital Corp. L.L.C. also has an interest
of 0.3% in OneShield Inc.
Also in 2000, our United States and United Kingdom subsidiaries received
advice and consultancy services relating to their overall approach to e-business
strategy and specific opportunities from Dynamis Solutions Inc., who received
fees of approximately $319,000. The partners and employees of KKR, some of whom
serve as our directors, have current interests of 14.23% in aggregate in Dynamis
Solutions.
In the ordinary course of our business we have placed and will continue to
place premiums with the members of the consortium who beneficially owned
approximately 14% of our common stock as of September 30, 2001.
Richard J.S. Bucknall, a member of the Group Executive Committee of Willis
Group Limited, was an Underwriting Member of Lloyd's during 2000. Some of our
insurance brokering subsidiaries place risks with the syndicates in which
Mr. Bucknall participates in the normal course of their brokering activities on
the same basis as those subsidiaries do with other Lloyd's syndicates. Willis
Group Limited has given Mr. Reeve, the former Chairman of TA I Limited and
Willis Group Limited, a guarantee in respect of the performance obligations of
Willis Limited, his employing company, in respect of an unfunded pension scheme
established for him and Willis Group Limited has also guaranteed the
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performance obligations of Willis North America in respect of the pension
benefits for Brian D. Johnson and Mr. Pinkston, a director of Willis Group
Limited, under the Willis Corroon Executive Supplemental Plan, an unfunded
pension plan. We have given Joseph J. Plumeri a guarantee in respect of Willis
North America, Inc.'s performance obligations under its employment agreement
with Mr. Plumeri.
During 2000, our subsidiary, Willis North America, acquired from Joseph J.
Plumeri, our Executive Chairman and the Executive Chairman and Chief Executive
Officer of Willis Group Limited, a 12.5% undivided interest in a Citation V
Ultra aircraft for $693,719. The transaction was conducted on terms equivalent
to those that prevail in arms length transactions.
In connection with Paul M. Hazen becoming a non-employee member of our board
of directors, he purchased 37,037 shares of our common stock at the initial
public offering price of $13.50 per share and was granted on June 11, 2001,
under the Amended and Restated 1998 Share Purchase and Option Plan, an option to
purchase 111,111 shares at $13.50 per share. The options are exercisable from
June 2003 until June 2011.
We have entered into a shareholder rights agreement and a registration
rights agreement with the consortium members and Profit Sharing (Overseas),
which we describe under "Principal and Selling Shareholders--Shareholder Rights
Agreement and Registration Rights Agreements".
Our bye-laws permit directors to hold office with our company or act in a
professional capacity for us, other than as an auditor. In addition, our
bye-laws permit directors to be interested in any transaction or arrangement
with us or in which we are otherwise interested. Under our bye-laws, so long as
a director declares the nature of his or her interest as required by the
Companies Act 1981 of Bermuda, any transaction or arrangement in which he or she
is interested may not be voided on the basis of his or her interest. In
addition, under our bye-laws, a director that has disclosed his or her interest
in a transaction or arrangement with us may be counted in the quorum and vote at
any meeting at which the transaction or arrangement is considered by our board
of directors.
We believe that the transactions described in this section between us or our
subsidiaries and affiliates of ours are on terms no less favorable to us or our
subsidiaries than the terms that would be available to us or our subsidiaries in
transactions with a non-affiliated third party. We intend that future
transactions with our affiliates will be on a similar basis.
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DESCRIPTION OF MATERIAL INDEBTEDNESS
SENIOR CREDIT FACILITIES
Our wholly owned subsidiary, Trinity Acquisition, entered into a credit
agreement, dated as of July 22, 1998, among Trinity Acquisition, as guarantor,
Willis North America, as borrower, Willis Group, as guarantor, the lenders and
The Chase Manhattan Bank, as administrative agent and collateral agent,
providing up to $450 million in term loans and $150 million in revolving credit
facilities.
GENERAL
The credit agreement, as amended, was comprised of a term loan facility
under which portions, or tranches, of the loan mature on four different dates,
and a revolving credit facility in the amounts indicated below:
- a $125 million tranche A facility;
- a $125 million tranche B facility;
- a $100 million tranche C facility;
- a $100 million tranche D facility; and
- a $150 million revolving credit facility.
Borrowings under the term loan portions of the credit agreement were
borrowed in full on November 19, 1998:
- to refinance outstanding indebtedness;
- to make an intercompany loan to Trinity Acquisition; and
- to finance the payment of fees and expenses incurred in connection with
the tender offer.
However, as of October 29, 2001, voluntary prepayments totaling $65 million
had been made on the term loans. Accordingly at that date the amounts
outstanding were as follows:
- Tranche A $82.8 million
- Tranche B $116.3 million
- Tranche C $93.0 million
- Tranche D $93.0 million
The revolving credit facility is available for working capital requirements
and other general corporate purposes, subject to certain limitations. The
revolving credit facility is available for loans denominated in United States
dollars, pounds sterling and certain other currencies and for letters of credit,
including to support loan note guarantees.
AMORTIZATION; PREPAYMENTS
The final maturity of the loans under the tranche A facility will be the
seventh anniversary of November 19, 1998, which we refer to as the initial
funding date, with interim amortization commencing on the thirtieth month after
the initial funding date. The final maturity of the loans under the tranche B
facility will be the eighth anniversary of the initial funding date, with
nominal interim amortization. The final maturity of the loans under the tranche
C facility will be the ninth anniversary of the initial funding date, with
nominal interim amortization. The final maturity of the loans under the tranche
D facility collectively with the other term loans under the credit agreement
will be nine years
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and six months after the initial funding date, with nominal interim
amortization. The revolving credit facility will be available until the seventh
anniversary of the initial funding date, and extensions of credit outstanding
under that facility on that seventh anniversary will mature on that date.
Certain mandatory prepayments of term loans under the credit agreement will
be required with the proceeds of certain non-ordinary course asset sales and
other dispositions of property, to the extent not reinvested and subject to
other exceptions, and, for each fiscal year in which the ratio of consolidated
total debt to consolidated EBITDA, as defined in the credit agreement, is equal
to or greater than 3.0:1.0, 50% of excess cash flow, as defined in the credit
agreement, to the extent not reinvested and subject to other exceptions. In
addition, certain prepayments of the revolving credit facility will be required
in the event that the aggregate dollar equivalent of all loans and letter of
credit outstandings thereunder exceed 105% of the aggregate revolving credit
commitments.
INTEREST RATES; FEES
Loans under the credit agreement bear interest at a rate per annum equal to,
at the applicable borrower's election, either
- a base rate determined by reference to the highest of an announced prime
rate, the United States federal funds effective rate plus 0.50% or a rate
for certificates of deposit plus 1%; or
- the cost of funds for United States dollar deposits at LIBOR for one, two,
three or six months (or certain other periods to the extent available,
subject to certain conditions) as the applicable borrower may elect,
adjusted for certain additional costs,
plus, in each case, a margin which will be subject to adjustment depending on
the ratio of consolidated total debt to consolidated EBITDA from time to time.
The applicable margin for LIBOR loans under the permanent facility agreement
will range, based on those performance pricing adjustments, from 2.25% to
0.875%, in the case of revolving credit loans and tranche A loans, from 2.50% to
1.75%, in the case of tranche B loans, from 2.75% to 2.00%, in the case of
tranche C loans, and from 3.00% to 2.25%, in the case of tranche D loans, in
each with applicable margins for base rate loans being 1.25% lower than the
margins for LIBOR loans at the corresponding performance pricing levels.
A commitment fee calculated based on the available unused commitments under
the credit agreement is payable quarterly in arrears at a per annum rate of
0.50%, subject, in the case of commitments under the revolving credit facility,
to adjustment in a range from 0.50% to 0.25% depending on the ratio of
consolidated total debt to consolidated EBITDA from time to time.
Fees in respect of letters of credit or loan note guarantees are calculated
at a rate per annum equal to
- in the case of letters of credit, the applicable margin for LIBOR loans
then applicable to utilizations under the revolving credit facility, less
0.25%, and
- in the case of loan note guarantees, 2.25%,
based on the maximum amount of each letter of credit or loan note guarantee,
payable quarterly in arrears and upon the termination of the revolving credit
facility. In addition, a fronting fee calculated at a rate equal to 0.25% of the
maximum amount of each letter of credit or loan note guarantee is payable for
the account of the issuing bank in respect thereof, payable quarterly in arrears
and upon the termination of the revolving credit facility.
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GUARANTEE; SECURITY
All obligations of Willis North America under the credit agreement are
guaranteed by Trinity Acquisition and its United Kingdom and United States
subsidiaries, including Willis Group Limited, with certain exceptions.
Obligations under the credit agreement are secured by a pledge of capital
stock of certain subsidiaries of Trinity Acquisition, including capital stock of
Willis Group Limited, its direct subsidiaries (with certain exceptions), Willis
North America and its direct United States subsidiaries, the partnership
interests of Willis Partners, as well as, in some circumstances, certain
intercompany notes and certain non-cash proceeds of asset sales, in each case
subject to exceptions and conditions included in the credit agreement. The
obligations of Willis Group Limited are supported by a general lien, known as a
floating charge in the United Kingdom, filed in the United Kingdom against
Willis Group's assets.
CERTAIN COVENANTS
The credit agreement contains numerous operating and financial covenants,
including, without limitation, requirements in the case of the credit agreement
to maintain minimum ratios of adjusted EBITDA to interest and maximum levels of
indebtedness in relation to adjusted EBITDA. In addition, the credit agreement
includes covenants relating to the delivery of financial statements, reports and
notices, limitations on liens, limitations on sales and other disposals of
assets, limitations on indebtedness and other liabilities, limitations on
capital expenditures, limitations on investments, mergers, acquisitions, loans
and advances, limitations on dividends and other distributions, limitations on
prepayment, redemption or amendment of the notes, maintenance of property,
environmental matters, employee benefit matters, maintenance of insurance,
nature of business, compliance with applicable laws, corporate existence and
rights, payment of taxes and access to information and properties.
EVENTS OF DEFAULT
The credit agreement contains events of default after expiration of
applicable grace periods, including failure to make payments under the credit
agreement, breach of covenants, breach of representations and warranties,
certain events relating to employee benefit plans, invalidity of certain loan
documents, default under other agreements or conditions relating to
indebtedness, including the 9% senior subordinated notes due 2009, certain
events of liquidation, moratorium, insolvency, bankruptcy or similar events,
certain litigation or other proceedings, certain events relating to changes in
control and certain issuances by TA II of equity or debt securities.
Upon the occurrence of an event of default, the banks will be able to
terminate the commitments under the credit agreement, and declare all amounts,
including accrued interest, under the credit agreement to be due and payable and
take certain other actions, including enforcement of rights in respect of the
collateral securing the credit agreement.
9% SENIOR SUBORDINATED NOTES DUE 2009
In February 1999, our wholly owned subsidiary, Willis North America, issued
9% senior subordinated notes due 2009 in an aggregate principal amount of
$550 million in a private transaction not subject to the registration
requirements under the Securities Act. In September 1999, Willis North America
completed an exchange offer in which holders exchanged the notes for identical
freely tradeable notes registered under the Securities Act. The notes are
guaranteed by Willis Group and Willis Partners.
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Willis North America pays interest on the notes semi-annually on February 1
and August 1 of each year. The notes are redeemable at the option of Willis
North America in the following cases:
- On or before February 1, 2002, Willis North America may redeem up to 35%
of the aggregate principal amount of the notes at a redemption price equal
to 109% of the aggregate principal amount of those notes, plus accrued and
unpaid interest, using the net proceeds of certain equity offerings.
- From and after February 1, 2004, Willis North America may redeem the
notes, in whole or in part, at a redemption price equal to 104.5% of the
aggregate principal amount of the notes being redeemed in 2004, which
percentage declines each year to 100% in 2007, plus accrued and unpaid
interest.
As of September 30, 2001, Willis North America had repurchased in the open
market and retired notes in a principal amount of $99 million.
If Willis North America becomes subject to a change of control, holders of
its notes will have the right to require it to purchase all of their notes at a
price equal to 101% of the aggregate principal amount of the notes, plus accrued
and unpaid interest to the date of repurchase. In addition, under specified
circumstances, Willis North America will be required to offer to purchase the
notes at a price equal to 100% of the principal amount of the notes, plus
accrued and unpaid interest to the date of purchase, with the excess proceeds of
certain assets sales.
The indenture for the notes contains covenants that, among other things,
limit the ability of Willis North America, Willis Group, Willis Partners and
some of their subsidiaries to:
- incur additional indebtedness and issue preferred stock;
- pay dividends or make other distributions;
- repurchase capital stock or subordinated indebtedness;
- create liens;
- enter into some transactions with affiliates;
- sell assets and assets of subsidiaries;
- issue or sell capital stock of some subsidiaries; and
- enter into some mergers and acquisitions.
The indenture also provides for events of default which, if any of them
occurs, would permit or require the principal of, premium, if any, interest and
any other monetary obligations on the notes to become or to be declared to be
immediately due and payable. Holders of notes may under specified circumstances
be entitled to receive additional payments in respect of taxes and similar
charges.
PREFERENCE SHARES
In connection with the acquisition of our predecessor, six of the world's
leading insurance companies invested in the preference shares of TA II Limited,
a wholly owned subsidiary of ours. The preference shares were redeemed in full
for $273,428,900 on June 29, 2001 using the proceeds from our initial public
offering.
The following is a brief description of each of the members of the
consortium:
AXA INSURANCE UK PLC and AXA GENERAL INSURANCE LIMITED are UK members of the
Axa group of companies which are present in more than 60 countries with
approximately 140,000 employees and agents. The Axa group is one of the world's
leading insurers in life insurance and property casualty
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business and in asset management and financial services. In 2000, the Axa
group's total consolidated revenues, excluding mutuals, was FF523 billion
($75 billion).
ROYAL & SUN ALLIANCE INSURANCE GROUP PLC is the U.K.'s largest general
insurer, with 2000 net premium income of $17.7 billion in respect of its general
insurance and life business. Royal & Sun Alliance Insurance Group provides
general and life insurance products and services and asset management and
administrative services. In addition to the U.K., Royal & Sun Alliance Insurance
Group operates in the United States, Canada, Scandinavia and some 50 countries
worldwide with around 50,000 employees.
THE CHUBB CORPORATION is a global leader in providing business and personal
property and liability insurance. The company concentrates on specialty
commercial lines and insuring high value homes and their contents. Founded in
1882, Chubb is headquartered in Warren, New Jersey, and has more than 110
offices in 30 countries worldwide. In 2000, Chubb had net written premiums of
$6.3 billion.
THE HARTFORD FINANCIAL SERVICES GROUP, INC. is one of the nation's largest
insurance and financial services companies, with 2000 revenues of
$14.7 billion. As of September 30, 2001, The Hartford had assets of
$170.6 billion. The company is a leading provider of investment products, life
insurance and group benefits; automobile and homeowners products; business
property and casualty insurance; and reinsurance.
TRAVELERS PROPERTY CASUALTY CORP. is one of the oldest and largest insurance
groups in the United States. The company writes all forms of property casualty
insurance for businesses and individuals, primarily through independent agents.
Its 2000 net written premiums were approximately $8.8 billion. Travelers
Property Casualty Corp. is headquartered in Hartford, Connecticut and has
approximately 20,000 employees. Travelers Property Casualty Corp. is an
affiliate of Salomon Smith Barney Inc., which is an underwriter in this
offering.
THE TOKIO MARINE AND FIRE INSURANCE CO., LTD. is the oldest and largest
non-life company in Japan and is a leader in commercial and personal lines
underwriting. In 2000/2001, Tokio had net premiums written of Y1,311.0 billion
($10.6 billion). The company writes marine, fire, casualty, automobile and
allied lines of insurance, principally covering risks in Japan. The company is
headquartered in Tokyo, Japan and has approximately 13,600 employees.
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DESCRIPTION OF CAPITAL STOCK
The following summary is a description of the material terms of our capital
stock.
GENERAL
We were incorporated as an exempted company under the Companies Act 1981 of
Bermuda. Accordingly, the rights of our shareholders are governed by Bermuda law
and our memorandum of association and bye-laws.
Our authorized capital consists of 4,000 million shares of common stock and
1,000 million shares of preferred stock. As of the date of this prospectus, our
issued and outstanding share capital consists of 147,112,631 shares of common
stock. Under the consent of the Bermuda Monetary Authority which we received,
persons who are not residents of Bermuda may freely hold, vote and transfer the
shares that the selling shareholders are offering in this prospectus.
COMMON STOCK
Our current authorized but unissued shares are at the disposal of our board
of directors, who may issue, grant options over or otherwise dispose of those
shares to any persons and on any terms they deem appropriate, provided the
issuance does not violate Bermuda law or our bye-laws and we obtain Bermuda
Monetary Authority approval in applicable circumstances.
VOTING RIGHTS AND SHAREHOLDERS' MEETINGS
Holders of our common stock are entitled to one vote per share held of
record on all matters submitted to a vote of shareholders. Unless required by
Bermuda law or our bye-laws, voting at general meetings is decided by a simple
majority of the votes cast at a meeting at which a quorum is present. Under our
bye-laws, shareholders representing at least 50% of the issued and outstanding
shares of common stock present in person or by proxy and entitled to vote
constitute a quorum. Under our bye-laws, the vote of 75% of the outstanding
shares entitled to vote and the approval of a majority of the board is required
to amend bye-laws regarding appointment and removal of directors, remuneration,
powers and duties of the board, indemnification of directors and officers,
director's interests and the procedures for amending bye-laws. Any share
entitled to vote may be voted by written proxy and proxies may be valid for all
general meetings. There are no limitations under Bermuda law on the voting
rights of non-resident or foreign shareholders.
Under Bermuda law, a company is required to convene at least one general
shareholders' meeting per calendar year. Under Bermuda law and our bye-laws,
general meetings of shareholders may either be annual or special. Under Bermuda
law, special general meetings must be called upon the request of shareholders
holding not less than 10% of the paid up capital of the company carrying the
right to vote at general meetings. Directors may also convene special general
meetings as they deem necessary.
Bermuda law requires that shareholders be given at least five days' advance
notice of a general meeting, although the accidental omission of notice to any
person does not invalidate the proceedings at a meeting. Under our bye-laws,
notice of annual general meetings must be made in writing at least 21 days
before the meeting and notice of special general meetings must be made in
writing at least 7 days before the meeting.
ELECTION OR REMOVAL OF DIRECTORS
Under Bermuda law and our bye-laws, directors are elected at the annual
general meeting or to serve until their successors are elected or appointed,
unless they are earlier removed or resign.
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The election of our directors is determined by a simple majority of votes
cast, except as otherwise required by law. Our shareholders do not have
cumulative voting rights. Accordingly, holders of a majority of the shares of
common stock entitled to vote in any election of directors may elect all
directors.
Under Bermuda law and our bye-laws, a director may be removed at a special
general meeting of shareholders specifically called for that purpose, provided
that the director was served with at least 14 days' notice. The director has a
right to be heard at the meeting. Any vacancy created by the removal of a
director at a special general meeting may be filled at that meeting by the
election of another director in his or her place or, in the absence of any
election, by the board of directors.
DUTIES OF DIRECTORS AND OFFICERS
Under the Companies Act 1981 of Bermuda, the duties of directors and
officers are to act honestly and in good faith with a view to the best interests
of the company and to exercise the care, diligence and skill that a reasonably
prudent person would exercise in comparable circumstances. Every director and
officer of the company is also required to comply with the provisions of the
Companies Act 1981, all related regulations and the Company's bye-laws. In
addition, the directors are subject to common law fiduciary duties. These duties
include the duty to act bona fide in the best interests of the company, and not
for any collateral purpose.
Under Bermuda law, the directors' duties are owed to the company itself, not
to its shareholders or members, creditors, or any class of either shareholders,
members or creditors. In discharging his or her duties, a director is required
to exercise the care and skill which may be reasonably expected of a person with
the director's skills and experience.
Bermuda law renders void any provision in the bye-laws or in any contract
between a company and any director exempting him or her from or indemnifying him
or her against any liability in respect of any fraud or dishonesty of which he
or she may be guilty in relation to the company. In addition, the Companies Act
1981 provides that where a director, officer or auditor of a company is found
liable to any person for damages arising out of the performance of any function
of his or her duties, he will only be held jointly and severally liable if it is
proved that he or she knowingly engaged in fraud or dishonesty. In any other
case, the court will determine the percentage of responsibility of all parties
it determines has contributed to the loss or liability of the plaintiff, and the
liability of any one director, officer or auditor shall be equal to the total
loss suffered by the plaintiff multiplied by the director's, officer's or
auditor's percentage of responsibility as determined by the court.
DIVIDEND RIGHTS
Dividends are payable only when declared by the board of directors. Bermuda
law prohibits a company from declaring a dividend or making a distribution out
of contributed surplus if there are reasonable grounds for believing that the
company is, or would after payment, be unable to pay its liabilities as they
become due, or the realizable value of the company's assets would thereby be
less than the aggregate of its liabilities and its issued share capital and
share premium accounts. All dividends unclaimed for a period of six years after
having been declared will be forfeited and revert to us. Except as noted in this
paragraph, there are no limitations under Bermuda law on the rights of
non-resident or foreign shareholders to receive dividends.
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RIGHTS IN LIQUIDATION
In the event of our liquidation, after payment of all debts and liabilities,
we will distribute our remaining assets to our shareholders in proportion to
their ownership of outstanding shares, subject to the preferential rights
accorded to any series of preferred stock.
PRE-EMPTIVE RIGHTS
Generally, holders of our common stock have no pre-emptive rights. In
limited circumstances not involving a public offering, pursuant to our
shareholder rights agreement, members of the consortium are entitled to
pre-emptive rights.
CHANGES IN CAPITAL
We may from time to time by shareholder resolution passed by a simple
majority:
- increase our share capital to be divided into shares in the amount that
the resolution prescribes;
- divide our shares into several classes with different rights;
- consolidate and divide any or all of our share capital into shares of a
larger amount than our existing shares;
- sub-divide any of our shares into shares of a smaller amount than that
fixed by our memorandum of association, as long as the proportion between
the amount paid and the amount, if any, unpaid on each reduced share be
the same as on the share from which the reduced share is derived;
- cancel shares which, at the date of the passing of the resolution, have
not been taken or agreed to be taken by any person, and diminish the
amount of our share capital by the amount of the cancelled shares;
- change the currency denomination of our share capital; and
- authorize the reduction of issued share capital or any share premium.
TRANSFER OF SHARES
Transfer of shares must be in writing. The instruments of transfer of a
share may be in any form which our board of directors approves.
MODIFICATION OF RIGHTS
Our bye-laws provide that, subject to Bermuda law, the rights attached to
any class of shares of common stock may be modified by a resolution passed at a
separate general meeting of the holders representing at least a majority of the
votes cast of that class. For purposes of this meeting, one or more shareholders
present in person or by proxy representing at least a majority of the issued and
outstanding shares of that class and entitled to vote will be a quorum.
BORROWING POWER
Neither Bermuda law nor our bye-laws will restrict in any way our power to
borrow and raise funds. The decision to borrow funds is passed by or under
direction of our board of directors, no shareholders' resolution being required.
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PREFERRED STOCK
Authorized shares of our preferred stock may be issued at the discretion of
our board of directors without any further action by the shareholders, except as
required by applicable law or regulation. Our board of directors is authorized,
from time to time, to divide the preferred stock into classes or series, to
designate each class or series and to determine for each class or series its
respective rights and preferences, including, without limitation, any of the
following:
- the rate of dividends and whether dividends will be cumulative or have a
preference over the common stock in right of payment;
- the terms and conditions upon which shares may be redeemed and the
redemption price;
- sinking fund provisions for the redemption of shares;
- the amount payable in respect of each share upon a voluntary or
involuntary liquidation of us;
- the terms and conditions upon which shares may be converted into other
securities of ours, including common stock;
- limitations and restrictions on payment of dividends or other
distributions on, or redemptions of, other classes of our capital stock
junior that that series, including the common stock;
- conditions and restrictions on the incurrence of certain indebtedness or
issuance of other senior classes of capital stock;
- the terms on which shares may be redeemed, if any; and
- voting rights.
Any series or class of preferred stock could, as determined by our board of
directors at the time of issuance, rank senior to our common stock with respect
to dividends, voting rights, redemption and liquidation rights. The preferred
stock authorized is of the type commonly known as blank-check preferred stock.
OTHER MATTERS
ACCESS TO BOOKS AND RECORDS AND DISSEMINATION OF INFORMATION. Members of
the general public have the right to inspect the public documents of a company
available at the office of the Registrar of Companies in Bermuda. These
documents include the company's certificate of incorporation, its memorandum of
association, including its objects and powers, and any alteration to the
company's memorandum of association.
The shareholders have the additional right to inspect the bye-laws of the
company, minutes of general meetings and the company's audited financial
statements, which must be presented at the annual general meeting. The register
of shareholders of a company is also open to inspection by shareholders without
charge and to members of the general public on the payment of a fee. A company
is required to maintain its share register in Bermuda but may, subject to the
provisions of the Companies Act 1981, establish a branch register outside
Bermuda.
A company is required to keep at its registered office a register of its
directors and officers which is open for inspection for not less than two hours
in each day by members of the public without charge. Bermuda law does not,
however, provide a general right for shareholders to inspect or obtain copies of
any other corporate records.
AMENDMENT OF MEMORANDUM OF ASSOCIATION AND BYE-LAWS. Bermuda law provides
that the memorandum of association of a company may be amended by a resolution
passed at a general meeting of shareholders of which due notice has been given.
In certain circumstances, an amendment
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to the memorandum of association also requires the approval of the Bermuda
Minister of Finance, who may grant or withhold approval at his discretion.
However, such approval of the Bermuda Minister of Finance is not required for an
amendment which alters or reduces a company's share capital as provided in the
Companies Act 1981. Except as set forth therein, the bye-laws may be amended by
a resolution passed by a majority of votes cast at a general meeting.
Under Bermuda law, the holders of an aggregate of no less than 20% in par
value of a company's issued share capital have the right to apply to the Bermuda
Court for an annulment of any amendment of the memorandum of association adopted
by shareholders at any general meeting. This does not apply to an amendment
which alters or reduces a company's share capital as provided in the Companies
Act 1981. Where such an application is made, the amendment becomes effective
only to the extent that it is confirmed by the Bermuda Court. An application for
amendment of the memorandum of association must be made within 21 days after the
date on which the resolution altering the company's memorandum is passed. Such
application may be made on behalf of the persons entitled to make the
application by one or more of their number as they may appoint in writing for
the purpose. No such application may be made by persons voting in favor of the
amendment.
APPRAISAL RIGHTS AND SHAREHOLDER SUITS. Under Bermuda law, in the event of
an amalgamation of two Bermuda companies, a shareholder who did not vote in
favor of the amalgamation and is not satisfied that fair value has been paid for
his shares may apply to the Bermuda Court to appraise the fair value of his
shares. The amalgamation of a company with another company requires the
amalgamation agreement to be approved by:
- a meeting of the holders of shares of the amalgamating company;
- a meeting of the holders of each class of such shares; and
- in certain circumstances, the consent of the Bermuda Minister of Finance
(who may grant or withhold consent at his discretion).
Class actions and derivative actions are generally not available to
shareholders under Bermuda law. The Bermuda courts, however, would ordinarily be
expected to permit a shareholder to commence an action in the name of a company
to remedy a wrong done to the company where the act complained of:
- is alleged to be beyond the corporate power of the company;
- is illegal; or
- would result in the violation of the company's memorandum of association
or bye-laws.
Furthermore, consideration would be given by the Bermuda courts to acts that
are alleged to constitute a fraud against the minority shareholders or, for
instance, where an act requires the approval of a greater percentage of the
company's shareholders than those who actually approved it.
When the affairs of a company are being conducted in a manner oppressive or
prejudicial to the interests of some part of the shareholders, one or more
shareholders may apply to the Bermuda courts for an order regulating the
company's conduct of affairs in the future or ordering the purchase of the
shares of any shareholder by other shareholders or by the company.
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CERTAIN INCOME TAX CONSEQUENCES
BERMUDA TAXATION
The following summary of Bermuda tax matters is based upon the advice of
Appleby Spurling & Kempe, our Bermuda counsel, regarding current law and
practice in Bermuda. This summary does not purport to be a comprehensive
description of all the tax considerations which may be relevant to a decision to
purchase our shares. Investors should consult their professional advisers on the
possible tax consequences of their subscribing for, purchasing, holding, selling
or redeeming our shares under the laws of their countries of citizenship,
residence, ordinary residence or domicile.
On the date of this prospectus, there is no Bermuda income, corporation or
profits tax, withholding tax, capital gains tax, capital transfer tax, estate
duty or inheritance tax payable by us or our shareholders, other than
shareholders ordinarily resident in Bermuda.
Tax Protection Act 1966, as amended, an undertaking that, in the event of
there being enacted in Bermuda any legislation imposing withholding or other tax
computed on profits or income, or computed on any capital assets, gain or
appreciation or any tax in the nature of estate duty or inheritance tax, such
tax shall not until March 28, 2016 be applicable to us or to any of our
operations, or to our shares, debentures or other obligations except and so far
as such tax applies to persons ordinarily resident in Bermuda and holding such
shares, debentures or other obligations or any land leased or let to us in
Bermuda.
As an exempted company, we are liable to pay to the Bermuda Government an
annual Government fee based upon our assessable capital. Based on our authorized
capital and share premium, our estimated assessable capital immediately after
this offering would be approximately $270.6 million, and the fee would be
approximately $16,695 per annum.
UNITED STATES TAXATION
The following summary describes the material United States federal income
tax consequences of ownership of shares of common stock as of the date of this
prospectus. The discussion included below is applicable to U.S. Holders (as
defined below).
As used in this prospectus, the term U.S. Holder means a beneficial holder
of a share of common stock that is:
- a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or any political subdivision of the United States;
- an estate the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust (1) which is subject to the primary supervision of a court within
the United States and the control of one or more United States persons as
described in section 7701(a)(30) of the Internal Revenue Code of 1986, as
amended, which we refer to as the Code, or (2) that has a valid election
in effect under applicable U.S. Treasury regulations to be treated as a
United States person.
Except where noted, this summary deals only with shares of common stock held
as capital assets and does not deal with special situations, such as those of
dealers in securities or currencies, traders in securities that elect to use a
mark-to-market method of accounting for their securities holdings, financial
institutions, tax-exempt entities, insurance companies, persons holding shares
of common stock as part of a hedging, integrated, conversion or constructive
sale transaction or a straddle, or persons whose functional currency is not the
United States dollar. In addition, this discussion does not address
96
the tax consequences that could apply to persons that own 10% or more of our
voting stock. Furthermore, the discussion below is based upon the provisions of
the Code, and regulations, rulings and judicial decisions promulgated under the
Code as of the date of this prospectus, and those authorities may be repealed,
revoked or modified so as to result in United States federal income tax
consequences different from those discussed below.
PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF SHARES SHOULD
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES
ARISING UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
If a partnership holds shares, the tax treatment of a partner will generally
depend upon the status of the partner and the activities of the partnership. If
a U.S. Holder is a partner of a partnership holding shares, that holder is urged
to consult its tax advisors.
TAXATION OF DIVIDENDS
The gross amount of dividends paid to U.S. Holders will be treated as
dividend income to these holders, to the extent paid out of current or
accumulated earnings and profits, as determined under United States federal
income tax principles. This income will be includable in the gross income of a
U.S. Holder as ordinary income on the day received by the U.S. Holder. These
dividends will not be eligible for the dividends received deduction allowed to
corporations under the Code.
To the extent that the amount of any distribution exceeds our current and
accumulated earnings and profits for a taxable year, the distribution will first
be treated as a tax-free return of capital, causing a reduction in the adjusted
basis of the shares of common stock. This will increase the amount of gain, or
decrease the amount of loss, to be recognized by the U.S. Holder on a subsequent
disposition of the shares of common stock, and the balance in excess of adjusted
basis will be taxed as capital gain recognized on a sale or exchange.
If, for United States federal income tax purposes, we are classified as a
United States owned foreign corporation, distributions made to a U.S. Holder
with respect to shares of common stock that are taxable as dividends generally
will be treated for United States foreign tax credit purposes as:
- foreign source passive income or, in the case of some holders, foreign
source financial services income, and
- United States source income,
in proportion to our earnings and profits in the year of such distribution
allocable to foreign and United States sources, respectively. For this purpose,
we will be treated as a United States-owned foreign corporation so long as stock
representing 50% or more of the voting power or value of our stock is owned,
directly or indirectly, by United States persons.
PASSIVE FOREIGN INVESTMENT COMPANY
We do not believe that we are, for United States federal tax purposes, a
passive foreign investment company, and we expect to continue our operations in
such a manner that we will not be a passive foreign investment company. If,
however, we are or become a passive foreign investment company, U.S. Holders
could be subject to additional federal income taxes on gain recognized with
respect to the shares of common stock and on certain distributions, plus an
interest charge on certain taxes treated as having been deferred by the U.S.
Holder under the passive foreign investment company rules.
FOREIGN PERSONAL HOLDING COMPANY
We do not believe that we are, or that any of our non-U.S. subsidiaries is,
a foreign personal holding company for United States federal income tax
purposes. If we or one of our non-U.S.
97
subsidiaries were so classified, a U.S. Holder would be required, regardless of
that holder's percentage ownership, to include in income, as a dividend, that
holder's pro rata share of our relevant non-U.S. subsidiary's undistributed
foreign personal holding company income--generally, taxable income with certain
adjustments--if the U.S. Holder held shares of common stock on the last day of
our taxable year or, if earlier, the last day on which we satisfied the
shareholder test described below. In addition, if we were classified as a
foreign personal holding company, and a U.S. Holder acquired shares of common
stock from a decedent, the U.S. Holder would not receive a "stepped-up" basis in
that stock. Instead, the U.S. Holder would have a tax basis equal to the lower
of the fair market value of those shares of common stock or the decedent's basis
in them.
A foreign corporation will be classified as a foreign personal holding
company if:
(1) at any time during the corporation's taxable year, five or fewer
individuals, who are United States citizens or residents, directly or
indirectly own more than 50% of the corporations' stock, by either voting
power or value; and
(2) the corporation receives at least 60% of its gross income, 50% after
the initial year of qualification, in each case as adjusted, for the taxable
year from certain passive sources.
TAXATION OF CAPITAL GAINS
For United States federal income tax purposes, a U.S. Holder will recognize
taxable gain or loss on any sale or exchange of a share of common stock in an
amount equal to the difference between the amount realized for the share of
common stock and the U.S. Holder's basis in the share of common stock. That gain
or loss will be capital gain or loss. Capital gains of individuals derived with
respect to capital assets held for more than one year are eligible for reduced
rates of taxation. The deductibility of capital losses is subject to
limitations. Any gain or loss recognized by a U.S. Holder will generally be
treated as United States source gain or loss.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to dividends in
respect of the shares of common stock or the proceeds received on the sale,
exchange or redemption of the shares of common stock paid within the United
States and in certain cases, outside of the United States, to U.S. Holders other
than certain exempt recipients, such as corporations, and backup withholding may
apply to those amounts if the U.S. Holder fails to provide an accurate taxpayer
identification number or to report interest and dividends required to be shown
on its federal income tax returns. The amount of any backup withholding from a
payment to a U.S. Holder will be allowed as a credit against the U.S. Holder's
United States federal income tax liability.
98
SHARES ELIGIBLE FOR FUTURE SALE
Our common stock has traded on the New York Stock Exchange under the symbol
"WSH" since June 11, 2001. Future sales of substantial amounts of our common
stock, including shares issued upon the exercise of outstanding options, in the
public market could adversely affect market prices prevailing from time to time
and could impair our ability to raise capital through sale of our equity
securities. Sales of our common stock in the public market after the
restrictions, described below, lapse, or the perception that such sales may
occur, could adversely effect the prevailing market price.
Upon completion of this offering, we will have outstanding
147,112,631 shares of common stock, without taking into account 30,218,916
shares that may be issued upon exercise of options outstanding as of the date of
this offering.
The 17,500,000 shares of common stock being sold in this offering and the
23,000,000 shares of common stock sold in our initial public offering will be
freely tradeable (other than by an affiliate of our company as that term is
defined in the Securities Act of 1933, or Securities Act) without restriction or
registration under the Securities Act, excluding those shares sold under our
directed share program in our initial public offering. All remaining shares were
issued and sold by us in private transactions and are eligible for public sale
if registered under the Securities Act or sold under Rule 144. All of our shares
held by our principal shareholders, directors and officers will be restricted
securities within the meaning of Rule 144 and may be sold in the public market
only if registered or sold under an exemption from registration under the
Securities Act, including the exemption provided by Rule 144. We entered into a
registration rights agreement with some of our principal shareholders with
respect to the shares of our common stock they hold. See
"Shareholders--Shareholders Rights Agreement and Registration Rights
Agreements".
Except in the case of certain of our shares held by the trust that is party
to our employee stock purchase agreements, all of our existing shareholders
prior to the completion of our initial public offering, who collectively held an
aggregate of approximately 123,651,774 shares of common stock, including our
directors and executive officers, have agreed, under lock-up agreements or
restrictions on transfer contained in shareholder and subscription agreements
with us, that they will not sell any common stock owned by them for a period of
at least 180 days from the date of our initial public offering. In the case of
lock-up agreements, sales may be made only with the prior written consent of
Salomon Smith Barney Inc.
In connection with this offering, Salomon Smith Barney Inc. has waived the
lock-up arrangement it had entered into with each of the selling shareholders in
order for them to sell their shares in this offering. However, we and each of
the selling shareholders have agreed, subject to certain exceptions, not to
dispose of or hedge any shares of our common stock or any securities convertible
into or exchangeable for our common stock without the prior written consent of
Salomon Smith Barney Inc. for a period of 135 days from the date of this
prospectus. Salomon Smith Barney Inc. in its sole discretion may release any of
the securities subject to these arrangements at any time without notice.
Also, at the time of our initial public offering, where these agreements
were not directly with the representatives of the underwriters in the initial
public offering, we have agreed with the representatives that these agreements
will not be waived, amended or failed to be enforced in that 180 day period and
in connection with this offering, we have agreed not to amend, waive, or fail to
enforce these transfer restrictions for a period of 135 days after the date of
this prospectus, in each case, without the prior written consent of Salomon
Smith Barney Inc. In addition, shares sold in our initial public offering
through our directed share program were, and continue to be, subject to lock-up
agreements that generally prohibit resales for 180 days from the date of our
initial public offering.
Following the expiration of the lock-up periods, and assuming the
underwriters' over-allotment option is not exercised, 106,509,576 shares of
common stock will be available for sale in the public
99
market subject to compliance with Rule 144, including approximately
17,200,000 shares eligible for sale under Rule 144(k). Approximately 2,400,000
additional shares will become available for sale in the public market following
the expiration of the lock-up period for the directed share program included as
part of our initial public offering.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of our initial public offering, a person, or persons whose shares are
aggregated, who has beneficially owned restricted shares for at least one year,
including a person who may be deemed an affiliate of ours, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the number of the shares then outstanding, which is approximately
147 million shares assuming no exercise of outstanding options; or
- the average weekly trading volume of the shares of our common stock on the
New York Stock Exchange during the four calendar weeks before the filing
of a Form 144 with respect to that sale.
Sales under Rule 144 are also subject to requirements relating to manner of
sale, notice and availability of current public information about us. Under
Rule 144(k), a person who is not deemed to have been an affiliate of ours at any
time during the three months preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any previous owner except an affiliate of ours, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
In addition, after our initial public offering we filed two registration
statements on Form S-8 under the Securities Act, which covered all shares of our
common stock reserved for issuance under our various stock incentive plans.
Shares registered under these registration statements are available for sale in
the open market unless these shares are subject to vesting restrictions.
We also may issue shares of our common stock from time to time as
consideration for future acquisitions and investments. In the event any such
acquisition or investment is significant, the number of shares that we may issue
may in turn be significant. In addition, we may also grant registration rights
covering those shares in connection with any such acquisitions and investments.
We have agreed to issue shares of our common stock in connection with our
acquisition of Bradstock G.I.S. Pty Limited in Australia upon the third
anniversary of such acquisition. Using the initial public offering price of
$13.50 per share of common stock and assuming that the formulae for the second
and third anniversary of the acquisition is based on a price of $23.39 (the last
sale price of our common stock on the New York Stock Exchange on September 28,
2001) we would issue approximately 126,000 new shares on the third anniversary.
100
UNDERWRITING
Salomon Smith Barney Inc. is acting as sole bookrunning lead manager of this
offering and J.P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated
are acting as co-lead managers and, together with Banc of America Securities
LLC, Credit Suisse First Boston Corporation, Merrill Lynch, Pierce, Fenner &
Smith Incorporated and UBS Warburg LLC, are acting as representatives of the
underwriters named below. Subject to the terms and conditions stated in the
underwriting agreement dated the date of this prospectus, each underwriter named
below has agreed to purchase, and the selling shareholders have agreed to sell
to that underwriter, the number of shares set forth opposite the underwriter's
name.
NUMBER
UNDERWRITER OF SHARES
- ----------- ----------
Salomon Smith Barney Inc.................................... 4,410,004
J.P. Morgan Securities Inc.................................. 2,520,000
Morgan Stanley & Co. Incorporated........................... 2,520,000
Banc of America Securities LLC.............................. 1,575,000
Credit Suisse First Boston Corporation...................... 1,575,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 1,575,000
UBS Warburg LLC............................................. 1,575,000
Cochran, Caronia Securities LLC............................. 145,833
Dowling & Partners Securities, LLC.......................... 145,833
A.G. Edwards & Sons, Inc.................................... 145,833
First Union Securities, Inc................................. 145,833
Fox-Pitt, Kelton Inc........................................ 145,833
Friedman, Billings, Ramsey.................................. 145,833
Janney Montgomery Scott LLC................................. 145,833
Keefe, Bruyette & Woods, Inc................................ 145,833
Legg Mason Wood Walker, Incorporated........................ 145,833
Neuberger & Berman.......................................... 145,833
Sandler O'Neill & Partners L.P.............................. 145,833
Shemano Group............................................... 145,833
----------
Total............................................... 17,500,000
==========
The underwriting agreement provides that the obligations of the underwriters
to purchase the shares included in this offering are subject to approval of
legal matters by counsel and to other conditions. The underwriters are obligated
to purchase all the shares (other than those covered by the over-allotment
option described below) if they purchase any of the shares.
The underwriters propose to offer some of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus and
some of the shares to dealers at the public offering price less a concession not
to exceed $0.582 per share. The underwriters may allow, and the dealers may
reallow, a concession not to exceed $0.10 per share on sales to other dealers.
If all the shares are not sold at the offering price, the representatives may
change the public offering price and the other selling terms.
The selling shareholders have granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase up to
2,625,000 additional shares of common stock at the public offering price less
the underwriting discount. The underwriters may exercise this option solely for
the purpose of covering over-allotments, if any, in connection with this
offering. To the extent the option is exercised, each underwriter must purchase
a number of additional shares approximately proportionate to that underwriter's
initial purchase commitment.
At the time of our initial public offering, we, Profit Sharing (Overseas),
Limited Partnership, the consortium members and Fisher Capital Corp. L.L.C.
agreed that, for a period of 180 days from the date of our initial public
offering, we and they will not, without the prior written consent of Salomon
101
Smith Barney Inc., dispose of or hedge any shares of our common stock or any
securities convertible into or exchangeable for our common stock, except that we
may issue and sell common stock and grant options pursuant to our employee
benefit plans, issue common stock upon the exercise of options and issue common
stock as consideration for acquisitions so long as the recipient of the common
stock in connection with the acquisition agrees not to sell the common stock for
the remainder of the 180 day period. Except in the case of certain of our shares
held by the trust that is party to our employee stock purchase agreements, all
of our other existing shareholders, including our directors and executive
officers, are subject to existing restrictions on sales of their shares in
excess of 180 days pursuant to shareholder and subscription agreements with us.
Also, at the time of our initial public offering, we agreed not to amend, waive
or fail to enforce those transfer restrictions for a period of 180 days from the
date of our initial public offering and in connection with this offering, we
have agreed not to amend, waive or fail to enforce these transfer restrictions
for a period of 135 days after the date of this prospectus, in each case,
without the prior written consent of Salomon Smith Barney Inc. In connection
with this offering, Salomon Smith Barney Inc. has waived the lock-up arrangement
it had entered into with each of the selling shareholders in order for them to
sell their shares in this offering. However, we and each of the selling
shareholders have agreed, subject to certain exceptions, not to dispose of or
hedge any shares of our common stock or any securities convertible into or
exchangeable for our common stock without the prior written consent of Salomon
Smith Barney Inc. for a period of 135 days from the date of this prospectus.
Salomon Smith Barney Inc. in its sole discretion may release any of the
securities subject to these arrangements at any time without notice.
Our common stock is listed on the New York Stock Exchange under the symbol
"WSH".
The following table shows the underwriting discounts and commissions that
the selling shareholders are to pay to the underwriters in connection with this
offering. These amounts are shown assuming both no exercise and full exercise of
the underwriters' option to purchase additional shares of common stock.
PAID BY THE SELLING
SHAREHOLDERS
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
Per share................................................... $ 0.97 $ 0.97
----------- -----------
Total....................................................... $16,975,000 $19,521,250
=========== ===========
In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of common stock in the open
market. These transactions may include short sales, syndicate covering
transactions and stabilizing transactions. Short sales involve syndicate sales
of common stock in excess of the number of shares to be purchased by the
underwriters in this offering, which creates a syndicate short position.
"Covered" short sales are sales of shares made in an amount up to the number of
shares represented by the underwriters' over-allotment option. In determining
the source of shares to close out the covered syndicate short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. Transactions to close out the
covered syndicate short involve either purchases of the common stock in the open
market after the distribution has been completed or the exercise of the
over-allotment option. The underwriters may also make "naked" short sales of
shares in excess of the over-allotment option. The underwriters must close out
any naked short position by purchasing shares of common stock in the open
market. A naked short position is more likely to be created if the underwriters
are concerned that there may be downward pressure on the price of the shares in
the open market after pricing that could adversely affect investors who purchase
in this offering. Stabilizing transactions consist of the bids for or purchases
of shares in the open market while this offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc. repurchases shares
102
originally sold by that syndicate member in order to cover syndicate short
positions or making stabilizing purchases.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the common stock. They may also cause the price
of the common stock to be higher than the price that otherwise would exist in
the open market in the absence of these transactions. The underwriters may
conduct these transactions on the New York Stock Exchange or in the
over-the-counter market, or otherwise. If the underwriters commence any of these
transactions, they may discontinue them at any time.
We estimate that our portion of the total expenses of this offering will be
approximately $1 million, which consist of approximately $150,000 for filing and
listing fees and approximately $850,000 for accounting and legal fees and
expenses.
Travelers Property Casualty Corp., an affiliate of Salomon Smith Barney
Inc., owns four million shares of our common stock. After giving effect to this
offering, Travelers Property Casual Corp. will own 3,380,357 shares of our
common stock. Salomon Smith Barney Inc. served as sole bookrunning lead manager
of our initial public offering.
Because more than ten percent of the proceeds of this offering, not
including underwriting compensation, may be received by entities who are
affiliated with members of the National Association of Securities Dealers, Inc.,
this offering is being conducted in compliance with NASD Conduct
Rule 2710(c)(8). Pursuant to that rule, the appointment of a qualified
independent underwriter is not necessary in connection with this offering, as a
bona fide independent market (as defined in the NASD Conduct Rules) exists in
our common stock.
The Chase Manhattan Bank, an affiliate of J.P. Morgan Securities Inc., is
the Administrative Agent and Collateral Agent, Morgan Stanley Senior Funding,
Inc., an affiliate of Morgan Stanley & Co. Incorporated, is the Syndicate Agent,
and Bank of America N.A., an affiliate of Banc of America Securities LLC, is the
Documentation Agent, and each are lenders under our senior credit facilities.
The underwriters and their affiliates may, from time to time, engage in
transactions with and perform services for us in the ordinary course of their
business.
Morgan Stanley Dean Witter Online Inc., an affiliate of Morgan Stanley & Co.
Incorporated, will be distributing shares of common stock over the Internet to
its respective eligible account holders. In addition, Merrill Lynch, Pierce,
Fenner & Smith Incorporated will be facilitating Internet distribution for this
offering to certain of its Internet subscription customers. Merrill Lynch,
Pierce, Fenner & Smith Incorporated intends to allocate a number of shares for
sale to its online brokerage customers. An electronic prospectus is available on
the Internet website maintained by Merrill Lynch, Pierce, Fenner & Smith
Incorporated. Other than the prospectus in electronic format, the information on
the Merrill Lynch, Pierce, Fenner & Smith Incorporated website is not a part of
this prospectus. Finally, while J.P. Morgan Securities Inc. may make the
prospectus available to customers via a password-protected website, J.P. Morgan
Securities Inc. will not rely on any means of electronic delivery to satisfy
legal prospectus requirements, but instead will deliver paper copies.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters. The representatives may agree to
allocate a number of shares to underwriters for sale to their online brokerage
account holders. The representatives will allocate shares to underwriters that
may make Internet distributions on the same basis as other allocations. In
addition, shares may be sold by the underwriters to securities dealers who
resell shares to online brokerage account holders.
We and the selling shareholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, or to contribute to payments the underwriters may be required to make
because of any of those liabilities.
103
VALIDITY OF COMMON STOCK
Appleby Spurling & Kempe, Bermuda, will pass upon the validity of the sale
of the shares of common stock offered by this prospectus. Certain legal matters
will be passed upon for us by Simpson Thacher & Bartlett, New York, New York
10017 as to matters of United States and New York law. Certain partners of
Simpson Thacher & Bartlett, members of their families, related persons and
others, have an indirect interest, through limited partnerships, who are
investors in KKR 1996 Fund (Overseas) Limited Partnership, in less than 1% of
the common stock. In addition, Simpson Thacher & Bartlett has in the past
provided, and may continue to provide, legal services to KKR and its affiliates,
including KKR 1996 Fund (Overseas) Limited Partnership. The underwriters are
being represented as to United States legal matters by Cravath, Swaine & Moore,
New York, New York 10019.
EXPERTS
The consolidated financial statements of Willis Group Holdings Limited as of
December 31, 2000 and 1999 and for the two years then ended included in this
prospectus have been audited by Deloitte & Touche, independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a registration statement on Form F-1 under
the Securities Act about the securities we offer under this prospectus. We are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, as applicable to foreign private issuers, and will file
periodic reports and other information relating to our business, financial
statements and other matters with the Commission. We are exempt from the rules
under the Securities Exchange Act prescribing the furnishing and content of
proxy statements to shareholders, and our officers, directors and principal
shareholders are exempt from the reporting and "short swing" profit recovery
provisions contained in Section 16 of the Act. You may read and copy these
reports and other information at the public reference facilities maintained by
the Commission located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington D.C. 20549 and at the regional public reference facility maintained
by the Securities and Exchange Commission located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of that material,
including copies of all or any portion of the registration statement, can be
obtained from the Public Reference Section of the Securities and Exchange
Commission at prescribed rates by calling the Commission at 1-800-SEC-0330. That
material may be accessed electronically by means of the Commission's home page
on the Internet (http://www.sec.gov). Information concerning us is also
available for inspection at the offices of the exchange, 20 Broad Street, New
York, New York 10005.
You may also request a copy of those materials, free of cost, by writing or
telephoning us at the following address and telephone number:
Willis Group Holdings Limited
Ten Trinity Square
London EC3P 3AX
England
Attention: Company Secretary
Telephone: +44-20-7488-8111
104
------------------------
We have received consent from the Bermuda Monetary Authority for the
transfer of the shares of common stock that the selling shareholders will sell
under this prospectus. Such approvals or permissions do not constitute a
guaranty by the Bermuda Monetary Authority as to our performance or our credit
worthiness. Accordingly, in giving those approvals or permissions, the Bermuda
Monetary Authority is not liable for our performance or default or for the
correctness of any opinions or statements expressed in this document.
We will file this document as a prospectus with the Registrar of Companies
in Bermuda. That filing will not constitute a guaranty by the Registrar as to
our performance or creditworthiness, nor does it suggest that the Registrar is
liable for our performance or default or the correctness of any opinions or
statements expressed in this document.
The Bermuda Monetary Authority has classified us as non-resident in Bermuda
for exchange control purposes. Accordingly, we may convert currency, other than
Bermuda currency, held for our account to any other currency without
restriction. Persons, firms or companies regarded as residents of Bermuda for
exchange control purposes require specific consent under the Exchange Control
Act, 1972 of Bermuda, and regulations promulgated under that Act, to purchase
any shares in our capital stock or any other securities that we may issue. Under
the terms of the consent that we expect the Bermuda Monetary Authority to give
to us, the issuance and transfer of the shares of common stock between persons,
firms or companies regarded as non-resident in Bermuda for exchange control
purposes may be effected without further permission from the Bermuda Monetary
Authority.
------------------------
105
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
WILLIS GROUP HOLDINGS LIMITED
INDEPENDENT AUDITORS' REPORT................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000
AND 1999 AND FOR THE YEARS THEN ENDED:
Consolidated Statements of Operations..................... F-3
Consolidated Balance Sheets............................... F-4
Consolidated Statements of Comprehensive Income (Loss).... F-6
Consolidated Statements of Cash Flows..................... F-7
Consolidated Statements of Stockholders' Equity........... F-9
Notes to Consolidated Financial Statements................ F-10
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 AND FOR EACH OF
THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND
SEPTEMBER 30, 2000:
Condensed Consolidated Statements of Operations........... F-41
Condensed Consolidated Balance Sheets..................... F-42
Condensed Consolidated Statements of Cash Flows........... F-43
Notes to the Condensed Consolidated Financial
Statements.............................................. F-44
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Willis Group Holdings Limited
We have audited the accompanying consolidated balance sheets of Willis Group
Holdings Limited and subsidiaries as of December 31, 2000 and 1999 and the
related consolidated statements of operations, comprehensive income (loss), cash
flows and stockholders' equity for the years 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the companies as of
December 31, 2000 and 1999 and the results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche
London, England
February 13, 2001, except for Note 1 and Note 21, as
to which the date is October 29, 2001.
F-2
WILLIS GROUP HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
2000 1999
----------- -----------
REVENUES:
Commissions and fees...................................... $ 1,237 $ 1,180
Interest income........................................... 68 64
----------- -----------
Total revenues.......................................... 1,305 1,244
----------- -----------
EXPENSES, NET:
General and administrative expenses....................... 1,062 1,136
Pension review expense (Note 11).......................... -- 40
Restructuring costs (Note 3).............................. 18 7
Depreciation expense...................................... 37 41
Amortization of goodwill.................................. 35 35
Gain on disposal of operations (Note 4)................... (1) (7)
----------- -----------
Total expenses.......................................... 1,151 1,252
----------- -----------
OPERATING INCOME (LOSS)..................................... 154 (8)
----------- -----------
OTHER EXPENSES:
Interest expense.......................................... 89 89
Other expenses............................................ -- 7
----------- -----------
Other expenses, net..................................... 89 96
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES, EQUITY IN NET EARNINGS OF
ASSOCIATES AND MINORITY INTEREST.......................... 65 (104)
INCOME TAX EXPENSE (Note 5)................................. 33 7
----------- -----------
INCOME (LOSS) BEFORE EQUITY IN NET EARNINGS OF ASSOCIATES
AND MINORITY INTEREST..................................... 32 (111)
EQUITY IN NET EARNINGS OF ASSOCIATES (Note 6)............... 2 7
MINORITY INTEREST (Including $23 and $23, respectively, of
preferred stock dividends on Company--Obligated
Mandatorily Redeemable Preferred Capital Securities of
Subsidiary) (Note 7)...................................... (25) (28)
----------- -----------
NET INCOME (LOSS)........................................... $ 9 $ (132)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE--Basic and Diluted (Note
8)........................................................ $ 0.07 $ (1.11)
=========== ===========
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING--Basic
and Diluted (Note 8)...................................... 121,311,497 119,005,203
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
WILLIS GROUP HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
2000 1999
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 88 $ 80
Fiduciary funds--restricted (Note 9)...................... 978 897
Short-term investments (Note 9)........................... 41 33
Accounts receivable, net of allowance for doubtful
accounts of $24 and $25, respectively................... 4,675 4,110
Deferred tax assets (Note 5).............................. 14 11
Other current assets...................................... 94 88
------ ------
Total current assets.................................... 5,890 5,219
------ ------
NONCURRENT ASSETS:
Fixed assets, net of accumulated depreciation of $79 and
$52, respectively (Note 10)............................. 192 220
Goodwill, net of accumulated amortization of $80 and $45,
respectively............................................ 1,225 1,259
Investments in associates (Note 6)........................ 134 137
Deferred tax assets (Note 5).............................. 45 36
Other noncurrent assets................................... 104 98
------ ------
Total noncurrent assets................................. 1,700 1,750
------ ------
TOTAL....................................................... $7,590 $6,969
====== ======
(Continued)
F-4
WILLIS GROUP HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
2000 1999
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $5,484 $4,837
Deferred revenue and accrued expenses..................... 130 108
Provisions (Note 11)...................................... 37 49
Income taxes payable...................................... 43 35
Other current liabilities................................. 189 182
------ ------
Total current liabilities............................... 5,883 5,211
------ ------
NONCURRENT LIABILITIES:
Long-term debt (Note 12).................................. 958 988
Provisions (Note 11)...................................... 121 143
Other noncurrent liabilities.............................. 99 114
------ ------
Total noncurrent liabilities............................ 1,178 1,245
------ ------
Total liabilities....................................... 7,061 6,456
------ ------
COMMITMENTS AND CONTINGENCIES (Note 18)
MINORITY INTEREST........................................... 19 18
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL
SECURITIES OF SUBSIDIARY (Note 7)......................... 272 269
STOCKHOLDERS' EQUITY:
Common shares, $0.000115 par value; Authorized:
4,000,000,000;
Issued and outstanding, 123,698,539 shares and
120,567,702 shares, respectively........................ -- --
Additional paid-in capital................................ 410 401
Accumulated deficit....................................... (167) (176)
Accumulated other comprehensive (loss) income
(Note 16)............................................... (5) 1
------ ------
Total stockholders' equity.............................. 238 226
------ ------
TOTAL....................................................... $7,590 $6,969
====== ======
(Concluded)
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
WILLIS GROUP HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS)
2000 1999
-------- --------
NET INCOME (LOSS) AVAILABLE FOR COMMON STOCKHOLDERS......... $ 9 $(132)
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustment................... (8) 3
Unrealized holding gains (losses) (net of tax of $1 and
($1))................................................... 2 (2)
--- -----
Other comprehensive (loss) income, net of tax............. (6) 1
--- -----
COMPREHENSIVE INCOME (LOSS)................................. $ 3 $(131)
=== =====
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
WILLIS GROUP HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS)
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) available for common stockholders....... $ 9 $(132)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss (gain) on sale of subsidiary, fixed assets and
short-term investments................................. 2 (4)
Depreciation............................................ 37 41
Amortization of goodwill................................ 35 35
Provision for doubtful accounts......................... 8 10
Minority interest....................................... 3 5
Provisions.............................................. (23) 23
Provision for deferred income taxes..................... (8) (18)
Other................................................... 3 4
Changes in operating assets and liabilities, net of
effects from purchase of subsidiaries:
Fiduciary funds -- restricted........................... (124) 66
Accounts receivable..................................... (742) (84)
Accounts payable........................................ 851 154
Other................................................... 28 51
---- -----
Net cash provided by operations....................... 79 19
---- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on disposal of fixed assets...................... 7 11
Additions to fixed assets................................. (30) (41)
Net cash proceeds from sale of subsidiaries............... 1 15
Acquisitions of subsidiaries, net of cash acquired........ (8) (19)
Investments in and advances to associates................. (1) (17)
Purchase of short-term investments........................ (32) (22)
Proceeds on sale of short-term investments................ 25 46
Other, net................................................ (3) 1
---- -----
Net cash used in investing activities................. (41) (26)
---- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of issuances of debt............................. -- 550
Repayments of debt........................................ (32) (598)
Debt issuance costs....................................... -- (13)
Proceeds from the issuances of common shares.............. 9 36
---- -----
Net cash used in financing activities................. (23) (25)
---- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 15 (32)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (7) (6)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 80 118
---- -----
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 88 $ 80
==== =====
(Continued)
F-7
WILLIS GROUP HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS)
2000 1999
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for income taxes............................ $27 $18
=== ===
Cash payments for interest................................ $85 $72
=== ===
SUPPLEMENTAL DISCLOSURES OF NONCASH FLOW INVESTING
AND FINANCING ACTIVITIES:
Investment in associated companies........................ $-- $ 1
Issuance of mandatorily redeemable subsidiary preferred
shares
in lieu of dividend..................................... 3 2
Purchase of fixed assets.................................. -- 2
Deferred payments on acquisitions of subsidiaries......... 4 6
Acquisitions:
Fair value of assets acquired........................... 38 39
Less: liabilities assumed............................... (25) (21)
Cash acquired........................................... (6) (2)
--- ---
Acquisitions, net of cash acquired........................ $ 7 $16
=== ===
(Concluded)
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
WILLIS GROUP HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS)
2000 1999
----------- -----------
COMMON SHARES
Balance, beginning of year.................................. 120,567,702 109,599,817
Common share issuances.................................... 3,069,462 10,967,885
Exercise of stock options................................. 61,375 --
----------- -----------
Balance, end of year........................................ 123,698,539 120,567,702
=========== ===========
MANAGEMENT COMMON STOCK
Balance, beginning of year.................................. 20 18
Proceeds from issuance of management common shares........ -- 2
----------- -----------
Balance, end of year........................................ 20 20
----------- -----------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year.................................. 381 347
Proceeds from issuances of common shares.................. 9 34
----------- -----------
Balance, end of year........................................ 390 381
----------- -----------
ACCUMULATED DEFICIT
Balance, beginning of year.................................. (176) (44)
Net income (loss) available for common stockholders....... 9 (132)
----------- -----------
Balance, end of year........................................ (167) (176)
----------- -----------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Balance, beginning of year.................................. 1 --
Foreign currency translation adjustment................... (8) 3
Unrealized holding gains (losses)......................... 2 (2)
----------- -----------
Balance, end of year........................................ (5) 1
----------- -----------
TOTAL STOCKHOLDERS' EQUITY.................................. $ 238 $ 226
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
1. THE COMPANY AND ITS OPERATIONS
ORGANIZATION--Willis Group Holdings Limited ("Willis Group Holdings") was
incorporated on February 8, 2001 as an exempted company under the Companies Act
1981 of Bermuda, for the sole purpose of redomiciling the ultimate parent
company of the Willis Group (comprised of TA I Limited and subsidiaries) from
the United Kingdom to Bermuda. On incorporation, Willis Group Holdings was
wholly owned by Profit Sharing (Overseas), Limited Partnership, an affiliate of
Kohlberg Kravis Roberts & Co., L.P. and one of the existing stockholders of
TA I Limited ("TA I").
Willis Group Holdings, effective from May 8, 2001, exchanged its common
shares for all the issued and outstanding ordinary shares of TA I. Further, on
April 10, 2001, Willis Group Holdings made an offer to exchange one of its
non-voting management common shares for each outstanding non-voting management
ordinary share of TA I. The offer expired on May 8, 2001 and at expiration
Willis Group Holdings had received acceptances in respect of, or otherwise had
rights to acquire, 99.8% of the outstanding non-voting management ordinary
shares of TA I. Subsequently Willis Group Holdings compulsorily acquired the
remaining 0.2%. The non-voting management shares issued by Willis Group Holdings
automatically converted into voting shares on consummation of the Willis Group
Holdings initial public offering. In addition, all management ordinary stock
options of TA I have been rolled over into identical stock options of Willis
Group Holdings. As a consequence of these transactions, Willis Group Holdings is
the beneficial owner of 100% of TA I's issued and outstanding share capital.
As a result of the exchange offers, the former stockholders of TA I have
acquired a majority voting interest in Willis Group Holdings. Under accounting
principles generally accepted in the United States ("US GAAP"), the company
whose stockholders retain the majority interest in a combined business must be
treated as the acquirer for accounting purposes. Accordingly, the transaction is
being accounted for as a "reverse acquisition" for financial reporting purposes
and TA I is deemed to have acquired 100% of the equity interest in Willis Group
Holdings. The relevant acquisition process utilizes the capital structure of
Willis Group Holdings and the assets and liabilities of TA I and subsidiaries
(collectively, the "Predecessor") are recorded at historical cost.
The Predecessor is the operating entity for financial reporting purposes,
and the financial statements prior to May 8, 2001 represent the Predecessor's
financial position and result of operations. The assets and liabilities and
results of operations of the Predecessor are included as of May 8, 2001.
Although TA I was deemed to be the acquiring corporation for financial
accounting and reporting purposes, the legal status of Willis Group Holdings as
the surviving corporation does not change.
BUSINESS--Willis Group Holdings and subsidiaries (collectively, the
"Company") provide a broad range of value-added risk management consulting and
insurance brokering services both directly, and indirectly through its
associates, to a diverse base of clients internationally. The Company provides
specialized risk management advisory and other services on a global basis to
clients in various industries, including the construction, aerospace, marine and
energy industries. In its capacity as an advisor and insurance broker, the
Company acts as an intermediary between clients and insurance carriers by
advising clients on risk management requirements, helping clients determine the
best means of managing risk, and negotiating and placing insurance risk with
insurance carriers through the Company's global distribution network. The
Company also provides other value-added services.
F-10
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company have been prepared on
the accrual basis of accounting. A summary of the major accounting policies
followed in the preparation of the accompanying consolidated financial
statements, which conform to accounting principles generally accepted in the
United States of America (the "US"), is presented below.
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of Willis Group Holdings and its subsidiaries,
all of which are controlled through the ownership of a majority voting interest.
Intercompany balances and transactions have been eliminated on consolidation.
FOREIGN CURRENCY TRANSLATION--Transactions in currencies other than the
functional currency of the entity are recorded at the rates of exchange
prevailing at the date of the transaction. Monetary assets and liabilities in
currencies other than the functional currency are translated at the rates of
exchange prevailing at the balance sheet date and the related transaction gains
and losses are reported in the statements of operations. Certain intercompany
loans are determined to be of a long-term investment nature. The Company records
transaction gains and losses from remeasuring such loans as a component of other
comprehensive income.
Upon consolidation, the results of operations of subsidiaries and associates
whose functional currency is other than the US dollar are translated into US
dollars at the average exchange rate and assets and liabilities are translated
at year-end exchange rates. Translation adjustments are presented as a separate
component of other comprehensive income in the financial statements and are
included in net earnings only upon sale or liquidation of the underlying foreign
subsidiary or associated company.
USE OF ESTIMATES--The preparation of financial statements in conformity with
accounting principles generally accepted in the US require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the dates
of the financial statements and the reported amounts of revenues and expenses
during the year. In the preparation of these consolidated financial statements,
estimates and assumptions have been made by management concerning the selection
of useful lives of fixed assets and goodwill, provisions necessary for trade
receivables and liabilities, the carrying value of investments, income tax
valuation allowances and other similar evaluations. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents primarily consist of
time deposits with original maturities of three months or less.
FIDUCIARY FUNDS--RESTRICTED--Fiduciary funds--restricted, represent
unremitted premiums received from insureds and unremitted claims received from
insurance underwriters. Fiduciary funds are generally required to be kept in
certain regulated bank accounts subject to guidelines which emphasize capital
preservation and liquidity; such funds are not available to service the
Company's debt or for other corporate purposes. Notwithstanding the legal
relationships with clients and insurers, the Company is entitled to retain
interest income earned on fiduciary funds in accordance with industry custom and
practice and, in some cases, as supported by agreements with insureds.
Included in fiduciary funds-restricted are cash and cash equivalents, time
deposits, certificates of deposit and debt securities. These securities are
carried at fair market value, with unrealized gains and losses reported in other
comprehensive income. Realized gains and losses on investments sold are
F-11
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
included in earnings and are derived using the specific identification method
for determining the cost of securities.
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE--In its capacity as an insurance
agent or broker, the Company collects premiums from insureds and, after
deducting its commissions, remits the premiums to the respective insurers; the
Company also collects claims or refunds from insurers on behalf of insureds.
Unremitted insurance premiums and claims are held in a fiduciary capacity. The
obligation to remit these funds is recorded as accounts payable on the Company's
consolidated balance sheets. The period for which the Company holds such funds
is dependent upon the date the insured remits the payment of the premium to the
Company and the date the Company is required to forward such payment to the
insurer. Balances arising from insurance brokering transactions are reported as
separate assets or liabilities unless such balances are due to or from the same
party and a right of offset exists, in which case the balances are recorded net.
Accounts receivable are stated at estimated net realizable values.
Allowances are recorded, when necessary, in an amount considered by management
to be sufficient to meet probable future losses related to uncollectible
accounts. The write-off of account receivables was $7 and $5 in the years ended
December 31, 2000 and 1999, respectively.
SHORT-TERM INVESTMENTS--The Company classifies all short-term investments as
available-for-sale in accordance with the provisions of SFAS No. 115, ACCOUNTING
FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. These securities are
carried at fair market value, with unrealized gains and losses reported in other
comprehensive income. Realized gains and losses on investments sold are included
in earnings and are derived using the specific identification method for
determining the cost of securities.
FIXED ASSETS--Fixed assets are stated at cost less accumulated depreciation.
Expenditures for improvements are capitalized; repairs and maintenance are
charged to expense as incurred. Depreciation is computed using the straight-line
method based on the estimated useful lives of assets.
Depreciation on buildings and long leaseholds is calculated over 50 years.
Depreciation on leasehold improvements is calculated over the lesser of the
useful life of the assets or the lease term. Depreciation on furniture and
equipment is calculated based on a range of 3 to 25 years and vehicles are
depreciated over a period up to 4 years.
RECOVERABILITY OF FIXED ASSETS--In accordance with SFAS No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF, long-lived assets and certain identifiable intangibles held and used by a
company are required to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, the Company estimates
the future cash flows expected to result from the use of the asset and its
eventual disposition. If the undiscounted future cash flow is less than the
carrying amount of the asset, the asset is deemed impaired. The amount of the
impairment is measured as the difference between the carrying value and the fair
value of the asset. Generally, long-lived assets and certainidentifiable
intangibles to be disposed of are reported at the lower of carrying amount or
fair value less cost to sell.
GOODWILL--Goodwill represents the excess of the cost of businesses acquired
over the fair market value of identifiable net assets at the dates of
acquisition. The Company reviews goodwill for
F-12
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
impairment whenever facts or circumstances indicate that the carrying amounts
may not be recoverable. If an evaluation is required, the estimated future
undiscounted cash flows associated with the underlying business operation are
compared to the carrying amount of goodwill to determine if a write-down is
required. If such an assessment indicates that the undiscounted future cash
flows will not be recovered, the carrying amount is reduced to the estimated
fair value.
Effective September 2, 1998, Trinity Acquisition Limited ("Trinity
Acquisition"), a wholly owned subsidiary of Willis Group Holdings, acquired
Willis Group Limited in a going private transaction. Trinity Acquisition was
incorporated in June 1998 by Kohlberg Kravis Roberts & Co. L.P. for the sole
purpose of effecting the acquisition of Willis Group Limited. Prior to the
acquisition, the activities of Trinity Acquisition and Willis Group Holdings
were de minimis. The acquisition of Willis Group Limited was accounted for under
the purchase method of accounting, included the purchase of outstanding shares
of common stock of Willis Group Limited at L2 per share which, plus acquisition
costs, resulted in a total purchase price of $1,468. A portion of the purchase
price was allocated to assets acquired and liabilities assumed based on
estimated fair market values at the date of acquisition while the balance of
$1,374 was recorded as goodwill and is being amortized over 40 years on a
straight line basis. Goodwill arising on subsequent acquisitions is amortized
over 20 years. The weighted average goodwill amortization period is 39 years.
INVESTMENTS IN ASSOCIATES--Investments in entities owned associates in which
the Company has the ability to exercise significant influence are accounted for
by the equity method of accounting whereby the investment is carried at cost of
acquisition, plus the Company's equity in undistributed earnings or losses since
acquisition, less dividends received.
Investments in less than 20% owned associates are accounted for by the cost
method. Such investments are not publicly traded.
The Company periodically reviews its investments in associates for which
fair value is less than cost to determine if the decline in value is other than
temporary. If the decline in value is judged to be other than temporary, the
cost basis of the investment is written down to fair value. The amount of any
write-down is included in the results of operations as a realized loss.
PUT AND CALL OPTIONS RELATING TO SUBSIDIARIES AND ASSOCIATES--For certain
subsidiaries and associates, the Company has the right to purchase shares (a
call option) from co-shareholders at various dates in the future. In addition,
the co-shareholders of certain of subsidiaries and associates have the right to
sell (a put option) their shares to the Company at various dates in the future.
Generally, the exercise price of such puts and calls is formula-based (using
revenues and earnings) and is designed to reflect fair value.
On inception of an option agreement, the Company records the puts and calls
at fair value. The put and call options are subsequently marked to market at
each reporting period with changes in value being recognized in the statement of
operations.
DERIVATIVE FINANCIAL INSTRUMENTS--The Company uses derivative financial
instruments for other than trading purposes to alter the risk profile of an
existing underlying exposure. Interest rate swaps are used to manage interest
risk exposures and amounts payable and receivable are recognized in interest
income or expense on an accrual basis based on the terms of the agreement and
the interest rates
F-13
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
prevailing at that time. Forward foreign currency exchange contracts are used to
manage currency exposures arising from future income. These contracts are
recorded at their fair value with unrealized gains and losses recognized
currently in the statement of operations.
INCOME TAXES--The Company accounts for income taxes under the provisions of
SFAS No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS 109"). SFAS 109 requires
recognition of deferred tax assets and liabilities for the estimated future tax
consequences of events attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted rates in effect for the
year in which the differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of changes in tax rates is
recognized in the statement of operations in the period in which the enactment
date changes. Deferred tax assets and liabilities are reduced through the
establishment of a valuation allowance at such time as, based on available
evidence, it is more likely than not that the deferred tax assets will not be
realized.
PENSIONS--The Company has two principal defined benefit pension plans, one
in the United Kingdom (the "UK") and the other in the US. The plans cover
substantially all eligible employees based on employees' service lives
calculated over a constant percentage of pensionable earnings. The pension cost
of both plans is accounted for in accordance with SFAS No. 87, EMPLOYERS'
ACCOUNTING FOR PENSIONS. Pension information is presented in accordance with
SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS.
STOCK-BASED COMPENSATION--The Company accounts for its stock option and
stock-based compensation plans using the intrinsic-value method prescribed in
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES ("APB 25"). Accordingly, the Company computes compensation costs for
each employee stock option granted as the amount by which the estimated fair
value of the Company's common shares on the date of the grant exceeds the amount
the employee must pay to acquire the shares. As required by SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS 123"), the Company has included,
in Note 14, the required SFAS 123 pro forma disclosures of net income (loss) and
earnings (loss) per share as if the fair value-based method of accounting had
been applied.
REVENUE RECOGNITION--Revenue includes insurance commissions, fees for
services rendered, certain commissions receivable from insurance carriers and
interest income.
The Company takes credit for commissions (or fees negotiated in lieu of
commission) in respect of insurance placements at the date when the insured is
billed or at the inception date of the policy, whichever is later. Commissions
on additional premiums and adjustments are recognized as and when advised. Fees
for consulting services are recorded as the services are provided or, for short
term projects, on completion of the project. Fees for other services, including
captive management and third party administration, are recognized over the
period for which the services are rendered. The Company establishes contract
cancellation reserves where appropriate. At December 31, 2000 and 1999, such
amounts were not material.
Commissions receivable from insurance carriers such as commissions
contingent on the performance of insurance policies placed are recognized at the
earlier of the date when cash is received, or when formal, written notification
of the actual amount due is received from the insurance
F-14
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
carrier. If some of the commissions received are potentially subject to full or
partial repayment to the carrier, then recognition is deferred until the
conditions for repayment have passed. Interest income is recognized as earned.
RECENT ACCOUNTING PRONOUNCEMENTS--SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133") as amended by SFAS No. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES--DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133, and SFAS No. 138, ACCOUNTING FOR
CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES, is effective for
the Company as of January 1, 2001. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. Gains or losses
resulting from changes in the value of derivatives are accounted for depending
on the intended use of the derivative and whether they qualify for hedge
accounting. The adoption of SFAS 133, effective January 1, 2001, will result in
an increase in other comprehensive income, net of tax, of $8 reported as the
cumulative effect of adopting an accounting principle.
In November 1999, the United States Securities and Exchange Commission (the
"SEC") issued Staff Accounting Bulletin No. 101, REVENUE RECOGNITION ("SAB
101"). This Bulletin sets forth the SEC Staff's position regarding the point at
which it is appropriate for a company to recognize revenue. The Staff believes
that revenue is realizable and earned when all of the following criteria are
met: (i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred or service has been rendered, (iii) the seller's price to the buyer is
fixed or determinable and (iv) collectibility is reasonably assured. The Company
has reviewed these criteria and believes its policy for revenue recognition to
be in accordance with SAB 101.
3. RESTRUCTURING COSTS
The Company recorded charges of $18 and $7 primarily for employee
termination benefits and excess operating lease obligations as a result of
restructuring plans during the years ended December 31, 2000 and 1999,
respectively. Such charges have been recorded as restructuring costs in the
consolidated statements of operations.
In the fourth quarter of 1999, the Company announced a comprehensive
restructuring plan to segment accounts, eliminate unprofitable accounts and
activities, consolidate several sales process functions and streamline and
centralize client service functions such as claims handling, policy issuance and
the issuance of insurance certificates in the North American operations.
Pursuant to this plan, the Company expects to eliminate 275 positions and
physically segregate and discontinue use of certain leased office space which,
where economically feasible, will be subleased. This restructuring plan resulted
in the Company recording a charge of $7 representing employee termination
benefits in 1999 and a charge of $11 representing excess operating lease
obligations (net of expected sublease income) in 2000. As of December 31, 2000,
266 employees had been terminated as a result of the restructuring plan.
In 2000, the Company developed a plan to exit certain business lines
including the sale of the municipality business of Public Entities National
Company ("PENCO"), part of the US wholesale operations, and the sale or closure
of certain other non-strategic businesses. As a result of these plans, it is
expected that approximately 250 employees will be terminated. The sale of the
municipality business of PENCO was completed in January 2001 while the proposed
sale or closure of certain other
F-15
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
3. RESTRUCTURING COSTS (CONTINUED)
non-strategic businesses is expected to be completed by July 2001. Restructuring
charges of $7 were recorded by the Company in the fourth quarter of 2000,
representing $4 of employee termination benefits, $1 of excess operating lease
obligations and $2 of other exit costs relating to these plans. As of
December 31, 2000, no employees had been terminated.
Selected information for restructuring charges follows:
EMPLOYEE EXCESS
TERMINATION OPERATING LEASE
BENEFITS OBLIGATIONS OTHER TOTAL
----------- --------------- -------- --------
January 1, 1999....................... $-- $-- $-- $ --
Restructuring charge.................. 7 -- -- 7
--- --- --- ----
December 31, 1999..................... 7 -- -- 7
Restructuring charge.................. 4 12 2 18
Used in year.......................... (6) (4) -- (10)
--- --- --- ----
December 31, 2000..................... $ 5 $ 8 $ 2 $ 15
=== === === ====
4. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS--During 2000 and 1999, the Company acquired a number of
businesses and also increased its ownership interest in certain associates. All
of these transactions were recorded using the purchase method of accounting.
Accordingly, the results of operations of the acquired businesses and the
Company's increased share of the undistributed earnings of associates have been
included in the Company's consolidated results from their respective acquisition
dates. The assets acquired and liabilities assumed were recorded at estimated
fair values.
The aggregate purchase price of all acquisitions approximated $12 and $32,
including amounts of $4 and $6 for deferred payments as of December 31, 2000 and
1999, respectively.
The preliminary purchase price allocations for the acquisitions are subject
to adjustment during the year following acquisition when finalized. In most of
the acquisitions, the preliminary allocation resulted in an excess of purchase
price over the fair value of net assets acquired being allocated to goodwill,
which is being amortized on a straight-line basis over 20 years.
If all of the Company's 2000 and 1999 acquisitions had occurred on
January 1, 2000 and January 1, 1999, respectively, pro forma revenues, pro forma
net income (loss), pro forma basic net income (loss) per common share and pro
forma diluted net income (loss) per common share for 2000 and 1999 would not
have been materially different from the amounts reported.
DISPOSITIONS--The Company disposed of a number of businesses during 2000 and
1999. Total proceeds relating to 2000 were not material. Total proceeds relating
to 1999 dispositions of subsidiaries and associates amounted to $7 with a gain
of $7 recorded in the consolidated statement of operations. Additional cash was
received in 1999 in the amount of $7 which related to deferred amounts on
acquisitions completed in prior years.
F-16
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
5. INCOME TAXES
The components of income (loss) before income taxes, equity in net earnings
of associates and minority interest for the years ended December 31, are as
follows:
2000 1999
-------- --------
UK........................................................ $23 $ (88)
US........................................................ 21 (57)
Other jurisdictions....................................... 21 41
--- -----
Income (loss) before income taxes, equity in net earnings
of associates and minority interest..................... $65 $(104)
=== =====
The provision for income taxes by location of the taxing jurisdiction for
the years ended December 31, consisted of the following:
2000 1999
-------- --------
Current income taxes:
UK corporation tax........................................ $ 4 $ 6
US federal tax............................................ 13 --
US state and local taxes.................................. 5 2
Other jurisdictions....................................... 14 16
--- ---
Total current taxes..................................... 36 24
--- ---
Deferred:
UK corporation tax........................................ 6 2
US federal tax............................................ (5) (16)
US state and local........................................ (1) (3)
Other jurisdictions....................................... (3) --
--- ---
Total deferred taxes.................................... (3) (17)
--- ---
Total income taxes.......................................... $33 $ 7
=== ===
F-17
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
5. INCOME TAXES (CONTINUED)
The following table reconciles, for the years ended December 31, the income
tax provision (benefit) at the UK corporation tax rate to that in these
financial statements.
2000 1999
-------- --------
Income (loss) before income taxes, equity in net earnings of
associates and minority interest.......................... $65 $(104)
--- -----
Corporation tax rate........................................ 30% 30%
Income tax provision (benefit) at corporation tax rate...... 19 (31)
--- -----
Adjustments to derive effective rate:
Nondeductible items:
Goodwill amortization................................... 11 13
Other................................................... 8 6
Other items:
Change in valuation allowance............................. (2) 29
Prior year adjustment..................................... (1) --
Tax differentials of foreign earnings:
US earnings............................................. 3 (3)
Other jurisdictions..................................... 4 2
Other..................................................... (9) (9)
--- -----
Provision for income taxes.................................. $33 $ 7
=== =====
F-18
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
5. INCOME TAXES (CONTINUED)
The significant components of deferred income tax assets and liabilities and
their balance sheet classifications, as of December 31, are as follows:
2000 1999
-------- --------
Deferred tax assets:
Accrued expenses not currently deductible................. $ 9 $ 10
UK net operating losses................................... 30 24
UK capital losses......................................... 71 77
Accrued retirement benefits............................... 19 24
Provisions................................................ 32 46
Allowance for doubtful accounts........................... 4 1
Deferred compensation..................................... 12 11
Other..................................................... 2 2
---- ----
Gross deferred tax assets............................... 179 195
Less: valuation allowance............................... (101) (125)
---- ----
Net deferred tax assets................................. 78 70
---- ----
Deferred tax liabilities:
Tax-leasing transactions.................................. 12 12
Unremitted foreign earnings............................... 2 3
Other..................................................... 5 8
---- ----
Deferred tax liabilities................................ 19 23
---- ----
Net deferred tax assets................................... $ 59 $ 47
==== ====
Balance sheet classifications:
Deferred tax assets -- current............................ $ 14 $ 11
Deferred tax assets -- noncurrent......................... 45 36
---- ----
$ 59 $ 47
==== ====
As of December 31, 2000, the Company had a valuation allowance of $101 to
reduce its deferred tax assets to estimated realizable value. The valuation
allowance primarily relates to the deferred tax assets arising from tax loss
operating carryforwards and capital loss carryforwards in the UK as well as
other temporary differences. In the UK, tax loss operating carryforwards and
capital loss carryforwards have no expiration date. The utilization of tax
operating carryforwards is, however, restricted to the taxable income of the
subsidiary generating the losses. In addition, capital loss carryforwards can
only be offset against capital gains. The reduction in the total valuation
allowance for the year ended December 31, 2000 arises principally from
confirmation received from the UK Inland Revenue regarding the future
utilization of certain temporary differences, an element of which was recorded
as a fair value adjustment. Offsetting this reduction was an increase in the
valuation allowance attributable to UK net operating losses. As of December 31,
2000, based upon the level of historical taxable income and projections for
future taxable income over the periods in which the temporary differences are
anticipated to reverse, and prudent and feasible tax-planning strategies,
management believes it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the
F-19
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
5. INCOME TAXES (CONTINUED)
valuation allowances, as of December 31, 2000. However, the amount of the
deferred tax asset considered realizable could be adjusted in the future if
estimates of taxable income are revised. In the event that the valuation
allowance of $101 as of December 31, 2000 is reduced in future years to
recognize deferred tax assets, $77 will be allocated to reduce goodwill.
The Company recognizes a deferred tax liability related to the undistributed
earnings of subsidiaries when the Company expects that it will recover those
undistributed earnings in a taxable manner, such as through receipt of dividends
or sale of the investments. The Company does not, however, provide for income
taxes on the unremitted earnings of certain other subsidiaries located outside
the UK because, in management's opinion, such earnings have been indefinitely
reinvested in these operations, will be remitted in a tax free liquidation, or
will be remitted as dividends with taxes substantially offset by foreign tax
credits. It is not practical to determine the amount of unrecognized deferred
tax liabilities for temporary differences related to investments in these non-UK
subsidiaries.
6. INVESTMENT IN ASSOCIATES
As of December 31, 2000 and 1999, the Company held a number of investments
which it accounts for using the equity method. The Company's interest in the
outstanding common stock of the more significant associates as of December 31,
2000, is as follows.
COUNTRY 2000 1999
------- -------- --------
Al-Futtaim Willis Faber (Private) Limited............. Dubai 49% 49%
Jaspers Wuppesahl Industrie Assekuranz GmbH & Co., KG
("Jaspers Wuppesahl")............................... Germany 45% 45%
Gras Savoye & Cie ("Gras Savoye")..................... France 33% 33%
Willis A/S............................................ Denmark 30% 30%
Herzfeld & Levy SA.................................... Argentina 40% 20%
Of those listed above, the Company's principal investments as of
December 31, 2000 and 1999 comprised of Gras Savoye, a French insurance broker,
and Jaspers Wuppesahl, an insurance broker in Germany. Included in the carrying
amount of the Gras Savoye investment is goodwill of $74 and $76 net of
accumulated goodwill amortization of $5 and $3 as of December 31, 2000 and 1999,
respectively. Included in the carrying amount of the Jaspers Wuppesahl
investment is goodwill of $35 and $37 net of accumulated goodwill amortization
of $3 and $1 as of December 31, 2000 and 1999, respectively. Goodwill related to
Gras Savoye and Jaspers Wuppesahl is being amortized on a straight-line basis
over a weighted-average period of 38 years. As of December 31, 2000 and 1999,
the Company's other investments in associates individually and in the aggregate
were not material to the Company's operations.
On July 23, 1997, the Company entered into an agreement with Gras Savoye
whereby, among other things, the co-shareholders of Gras Savoye (other than
management) have the right to sell (put option) their shares to the Company
possibly increasing the Company's ownership interest from 33% to 90%. The option
expires in 2011 and Gras Savoye's eligible co-shareholders may exercise their
rights from January 1, 2001. In addition, the Company has the right to purchase
(call option) at least 50.1% of Gras Savoye's shares from the co-shareholders.
The call option is exercisable from December 1,
F-20
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
6. INVESTMENT IN ASSOCIATES (CONTINUED)
2009. The exact amount payable by the Company under the put and call is based on
the greater of a price per Gras Savoye share defined contractually or a
formula-based price contingent on Gras Savoye's future results. The Company
recorded the put and call options related to Gras Savoye at fair value on
July 23, 1997, and have subsequently marked them to market at each reporting
period with changes in value being recognized in the statement of operations.
Unaudited condensed financial information for associates, in the aggregate,
as of and for the years ended December 31, 2000 and 1999 is presented below. For
convenience purposes: (i) balance sheet data has been translated to US dollars
at the relevant year-end exchange rate, and (ii) consolidated statement of
operations data has been translated to US dollars at the relevant average
exchange rate.
2000 1999
-------- --------
Condensed balance sheet data:
Current assets.......................................... $650 $808
Noncurrent assets....................................... 110 115
Current liabilities..................................... (638) (639)
Stockholders' equity.................................... 77 78
Condensed statement of operations data:
Net sales............................................... 286 296
Income before income taxes.............................. 33 35
Net income.............................................. 17 33
7. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES OF
SUBSIDIARY
In 1998, TA II Limited, a wholly owned subsidiary of Willis Group Holdings,
issued $10 par value company-obligated mandatorily redeemable preferred capital
securities (the "preference shares") at a premium of $15 per share. The proceeds
were used to assist in financing the acquisition of Willis Group Limited by
Trinity Acquisition.
The preference shares have no voting rights (except in the case of a winding
up resolution) and have an aggregate liquidation preference of approximately
$270. They carry the right to a cumulative dividend of 8.5% per annum, excluding
the amount of any associated tax credits, on a fixed amount of $25 per
preference share. TA II Limited has the option to satisfy 1% per annum of the
cumulative dividend by the issuance of additional preference shares. The
dividend is payable in US dollars semiannually on June 30 and December 31 of
each year. Holders of preference shares have a preferential right to receive out
of surplus assets, arrears and accruals of dividends and $25 per share, but do
not have any further right to participate in surplus assets.
The preference shares may be redeemed at any time by TA II Limited by
payment of a fixed amount of $25 per share plus any accrued and unpaid
dividends. The preference shares are required to be redeemed in full by payment
of a fixed amount of $25 per share plus any accrued and unpaid dividends on the
earlier of August 1, 2009 or the sale of all or substantially all of the
business of Willis Group Limited, a wholly owned subsidiary of Willis Group
Holdings, including whether in a single transaction or series of transactions
and whether by sale of shares, sale of assets or otherwise.
Dividend payments on the preference shares are classified on the
consolidated statements of operations within minority interest.
F-21
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
8. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is calculated by dividing net
income by the weighted-average number of common shares outstanding during each
year. The computation of diluted net income per share is similar to basic net
income per share, except that diluted net income per share reflects the
potential dilution that could occur if dilutive securities and other contracts
to issue common shares were exercised or converted into common shares or
resulted in the issuance of common shares that then shared in the net income of
the Company.
In 2000 and 1999, time-based options to purchase 17,865,957 and 11,426,610
common shares were outstanding. Given that the Company's common shares are not
publicly traded and the exercise price of these options was established based on
management's estimate of the fair value of same on the measurement date, such
options have no dilutive nor antidilutive effect on net income per share as of
December 2000 and 1999, respectively.
9. FIDUCIARY FUNDS--RESTRICTED AND SHORT-TERM INVESTMENTS
The Company's short-term investments and fiduciary funds-restricted are
comprised of cash, time deposits and certificates of deposit, and debt
securities. Accrued interest on investments is recorded as other current assets.
The debt securities are recorded at fair market value. Fair market value is
based upon the market price of the security plus accrued interest, if any.
Unrealized holding gains and losses are reported, net of tax, as a component of
other comprehensive income. As of December 31, 2000 and 1999, the amortized cost
of securities approximated fair value.
Realized gains and losses on debt securities are included in earnings.
During 2000 and 1999, sales of debt securities totaled $52 and $72,
respectively, on which realized gains and losses were not material to the
consolidated results of the Company.
F-22
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
9. FIDUCIARY FUNDS--RESTRICTED AND SHORT-TERM INVESTMENTS (CONTINUED)
As of December 31, fiduciary funds--restricted and short-term investments
consisted of the following:
2000 1999
-------- --------
Short-term investments(1):
US Government securities.................................. $ 8 $ 6
UK Government securities.................................. 5 10
Other foreign government securities....................... 20 7
Corporate debt securities................................. 8 10
---- ----
$ 41 $ 33
---- ----
Fiduciary funds-restricted:
Cash and cash equivalents(2).............................. $632 $553
Commercial paper(1)....................................... -- 15
Certificates of deposits.................................. 306 270
US Treasury bills(1)...................................... 7 11
Time deposits............................................. 33 48
---- ----
$978 $897
==== ====
- ------------------------
(1) Debt securities classified as available-for-sale.
(2) Cash and cash equivalents primarily consist of time deposits with original
maturities of three months or less.
10. FIXED ASSETS
The components of fixed assets as of December 31 are as follows:
2000 1999
-------- --------
Land and buildings.......................................... $102 $109
Leasehold improvements...................................... 27 27
Vehicles.................................................... 24 26
Furniture and equipment..................................... 118 110
---- ----
Total fixed assets, cost.................................... 271 272
Less accumulated depreciation............................... (79) (52)
---- ----
Total fixed assets, net..................................... $192 $220
==== ====
F-23
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
11. PROVISIONS
Provisions as of and for the years ended December 31, are as follows:
PENSIONS SURPLUS DISCONTINUED
CLAIMS REVIEW PROPERTIES OPERATIONS TOTAL
-------- -------- ---------- ------------ --------
January 1, 1999......................... $45 $34 $28 $39 $146
Charge to operations.................... 18 40 1 -- 59
Purchase price adjustment............... -- 24 -- -- 24
Used in the year........................ (7) (21) (7) (1) (36)
Foreign exchange and other
adjustments........................... -- -- -- (1) (1)
--- --- --- --- ----
December 31, 1999....................... 56 77 22 37 192
--- --- --- --- ----
Charge to operations.................... 15 -- 11 -- 26
Used in the year........................ (14) (21) (8) (6) (49)
Foreign exchange and other
adjustments........................... (4) (5) (2) -- (11)
--- --- --- --- ----
December 31, 2000....................... $53 $51 $23 $31 $158
=== === === === ====
The claims provision represents management's assessment of liabilities that
may arise from asserted and unasserted claims for errors and omissions that
arise in the course of the Company's business. Where some of the potential
liability is recoverable under the Company's external insurance arrangements,
the full assessment of the liability is included in the provision with the
associated insurance recovery shown separately as an asset. There were no
insurance recoveries recognized as of December 31, 2000 and 1999.
In common with many companies involved in selling personal pension plans in
the UK, the Company's financial advisory business, Willis Corroon Financial
Planning Limited ("WCFP"), is required by the Financial Services Authority and
the Personal Investment Authority ("the Regulator"), which regulates these
matters, to review certain categories of personal pension plans sold to
individuals between 1988 to 1994. WCFP is required to compensate those
individuals who transferred from, opted out or did not join, their
employer-sponsored pension plan if the expected benefits from their personal
pension plan did not equal the benefits that would have been available from
their employer-sponsored pension plan. Whether compensation is due to a
particular individual, and the amount thereof, is dependent upon the subsequent
performance of the personal pension plan sold and the net present value of the
benefits that would have been available from the employer-sponsored pension plan
calculated using financial and demographic assumptions prescribed by the
Regulator. The Regulator currently requires all offers of compensation to be
made by June 30, 2002.
In 1999, the pension review provision was increased by $64, $24 of which was
recorded as a purchase price adjustment and $40 of which was recorded as a
charge to operations. The purchase price adjustment was recognized in the second
quarter of 1999 to reflect the expected higher cost of compensation as a
consequence of falling UK interest rates. The charge to income of $40 in the
fourth quarter of 1999 was necessitated by adverse changes in the demographic
assumptions to be used and the Regulator's announcement of the discovery of
errors in their prescribed method of calculating compensation resulting in the
prospective reworking of previously settled claims. Although the Company
considers the established provisions to be prudent and expects to pay out these
provisions
F-24
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
11. PROVISIONS (CONTINUED)
over the next three years, there remains some uncertainty as to the ultimate
exposure relating to the review. This exposure is subject to a number of
variable factors including, among others, the effect of future changes in
prescribed UK interest rates and in financial and other assumptions which are
issued by the Regulator on a quarterly basis.
The surplus properties provision relates to future lease rentals of
leasehold properties which are surplus to the Company's operational
requirements. The provision amount represents the discounted contracted lease
payment less an allowance for future rental income.
The provision for discontinued operations includes estimates for future
costs of administering the run-off of the Company's former UK underwriting
operations. Willis Faber (Underwriting Management) Limited ("WFUM"), a wholly
owned subsidiary of the Company provided underwriting agency and other services
to certain insurance companies including Sovereign Marine & General Insurance
Company Limited ("Sovereign") (in Scheme of Arrangement) (collectively, the
"stamp companies") and in 1991 ceased arranging new business on behalf of the
stamp companies. Willis Faber Limited has agreed with certain of the stamp
companies to fund certain costs of the run-off, subject to agreed guidelines as
to timing and amount. Although the Company expects the run-off to be conducted
in an orderly manner, it may ultimately prove to be a lengthy and expensive
process. The amounts to be funded under the run-off arrangements are currently
within the aggregate of the provisions made.
12. LONG-TERM DEBT
Long-term debt as of December 31, consists of the following:
2000 1999
-------- --------
Senior Credit Facility term loan, variable rate due 2005 to
2008...................................................... $408 $438
9% Senior Subordinated Notes, due 2009...................... 550 550
---- ----
$958 $988
==== ====
SENIOR CREDIT FACILITY--During 1998, Willis Group Holdings' wholly owned
subsidiary, Trinity Acquisition, entered into a credit agreement among Trinity
Acquisition, as guarantor, Willis North America Inc. ("Willis North America"),
as borrower, Willis Group Limited, as guarantor, the lenders and The Chase
Manhattan Bank, as administrative agent and collateral agent, providing up to
$450 in term loans and $150 in revolving credit facilities. The credit
agreement, as amended, includes a term loan facility under which portions, or
tranches of the loan mature on four different dates between 2005 and 2008.
Pursuant to the credit agreement, the Company makes loan repayments based on
the amortization schedule specified in the credit agreement. In addition, during
2000 and 1999, the Company made non-mandatory early repayments totaling $30 and
$12, respectively. As a consequence, the Company's next scheduled repayment
under the facility is not due until 2004. In the years ended December 31, 2000
and 1999, the weighted-average interest rate relating to all loans under the
Senior Credit Facility ranged from 8.40% to 9.22% and 7.52% to 8.30%,
respectively; net of an interest rate swap, the ranges were 6.96% to 7.76% and
7.30% to 8.05%, for the years ended December 31, 2000 and 1999, respectively.
F-25
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
12. LONG-TERM DEBT (CONTINUED)
The revolving credit facility is available for working capital requirements
and general corporate purposes, subject to certain limitations, until 2005. The
revolving credit facility is available for loans denominated in US dollars,
pounds sterling and certain other currencies and for letters of credit,
including to support loan note guarantees.
The credit agreement contains numerous operating and financial covenants,
including, without limitation, requirements in the case of the credit agreement
to maintain minimum ratios of adjusted earnings before interest, tax,
depreciation and amortization ("EBITDA"), to interest and maximum levels of
indebtedness in relation to adjusted EBITDA. In addition, the credit agreement
includes covenants relating to limitation on liens, limitations on sales and
other disposals of assets, limitations on indebtedness and other liabilities,
limitations on capital expenditures, limitations on investments, mergers,
acquisitions, loans and advances, limitations on dividends and other
distributions, limitations on prepayment, redemption or amendment of the notes,
maintenance of property, environmental matters, employee benefit matters,
maintenance of insurance, nature of business, compliance with applicable laws,
corporate existence and rights, payment of taxes and access to information and
properties.
All obligations of Willis North America under the credit agreement are
guaranteed by Trinity Acquisition and its UK and US subsidiaries, including
Willis Group Limited, with certain exceptions. Obligations under the credit
agreement are secured by a pledge of capital stock of certain subsidiaries of
Trinity Acquisition, including capital stock of Willis Group Limited, its direct
subsidiaries (with certain exceptions), Willis North America and its direct US
subsidiaries, the partnership interests of Willis Partners, as well as, in some
circumstances, certain intercompany notes and certain non-cash proceeds of asset
sales, in each case subject to exceptions and conditions included in the credit
agreement. The pledge of stock owned by Willis Group Limited is supported by a
general lien filed in the UK against Willis Group Limited's assets.
9% SENIOR SUBORDINATED NOTES--In February 1999, Willis North America
refinanced a short-term loan by issuing 9% Senior Subordinated Notes due 2009
(the "Notes") in the aggregate principal amount of $550. The interest on the
Notes is payable semiannually on February 1 and August 1 of each year, beginning
August 1, 1999.
The Notes are redeemable at the option of Willis North America in the
following cases:
- On or before February 1, 2002, Willis North America may redeem up to 35%
of the aggregate principal amount of the Notes at a redemption price equal
to 109% of the aggregate principal amount of those Notes, plus accrued and
unpaid interest, using the net proceeds of certain equity offerings.
- From and after February 1, 2004, Willis North America may redeem the
Notes, in whole or in part, at a redemption price equal to 104.5% of the
aggregate principal amount of the Notes being redeemed in 2004, which
percentage declines by 1.5% per annum over the next years to 100% in 2007,
plus accrued and unpaid interest.
If Willis North America becomes subject to a change of control, holders of
its Notes will have the right to require the Company to purchase all of their
Notes at a price equal to 101% of the aggregate
F-26
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
12. LONG-TERM DEBT (CONTINUED)
principal amount of the Notes, plus accrued and unpaid interest to the date of
repurchase. In addition, under specified circumstances, Willis North America
will be required to offer to purchase the Notes at a price equal to 100% of the
principal amount of the Notes, plus accrued and unpaid interest to the date of
purchase, with the excess proceeds of certain assets sales.
The indenture for the Notes contains covenants that, among other things,
limit the ability of Willis North America, Willis Group Limited, Willis Partners
and some of their subsidiaries to incur additional indebtedness and issue
preferred stock; pay dividends or make other distributions; repurchase capital
stock or subordinated indebtedness; create liens; enter into some transactions
with associates; sell assets and assets of subsidiaries; issue or sell capital
stock of some subsidiaries; and enter into some mergers and acquisitions.
Two of Willis Group Holdings wholly owned subsidiaries, Willis Group Limited
and Willis Partners, have jointly and severally and fully and unconditionally
guaranteed the prompt and complete performance of Willis North America in
respect of the Notes.
SCHEDULED DEBT REPAYMENTS--Aggregate maturities of long-term debt for the
five years subsequent to December 31, 2000 are as follows:
2004........................................................ $ 11
2005........................................................ 94
Thereafter.................................................. 853
----
$958
====
LINES OF CREDIT--The Company also has available $17 in lines of credit, of
which $13 was drawn as of December 31, 2000 (excluding the $150 revolving credit
facility).
13. PENSION PLANS
Willis North America has a 401(k) plan covering all eligible employees of
Willis North America and its subsidiaries. The plan allows participants to make
pre-tax contributions and the Company provides a matching contribution of 3% of
employees' annual eligible compensation. All investment assets of the plan are
held in a trust account administered by independent trustees. The Company's
401(k) mandatory matching contributions for 2000 and 1999 were approximately $6
and $5, respectively.
The Company has two principal defined benefit pension plans funded
externally which cover all eligible employees. One plan exists in the UK and the
other in the US. It is the Company's policy to fund pension costs as required by
applicable laws and regulations.
F-27
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
13. PENSION PLANS (CONTINUED)
The following schedules provide information concerning the Company's UK and
US defined benefit pension plans as of and for the years ended December 31:
UK PENSION US PENSION
BENEFITS BENEFITS
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Change in benefit obligation:
Benefit obligation, beginning of year..................... $ 997 $1,080 $314 $327
Service cost.............................................. 27 34 13 16
Interest cost............................................. 56 58 22 21
Employee contribution..................................... 2 2 -- --
Actuarial (gain) loss..................................... (17) (100) 2 (60)
Benefits paid............................................. (44) (57) (14) (12)
Foreign currency changes.................................. (75) (20) -- --
Termination benefits...................................... -- -- -- 22
----- ------ ---- ----
Benefit obligations, end of year............................ 946 997 337 314
----- ------ ---- ----
Change in plan assets:
Fair value of plan assets, beginning of year.............. 1,363 1,174 366 318
Actual return on plan assets.............................. 12 248 5 58
Employee contributions.................................... 2 2 -- --
Employer contributions.................................... 14 17 1 2
Benefits paid............................................. (44) (57) (14) (12)
Foreign currency changes.................................. (101) (21) -- --
----- ------ ---- ----
Fair value of plan assets, end of year...................... 1,246 1,363 358 366
----- ------ ---- ----
Reconciliation of funded status:
Funded status............................................. 300 366 21 52
Unrecognized net actuarial gain........................... (277) (355) (75) (112)
----- ------ ---- ----
Net asset (liability) recognized............................ 23 11 (54) (60)
----- ------ ---- ----
Amounts recognized in balance sheet consist of:
Prepaid benefit cost...................................... 23 11 -- --
Accrued benefit liability................................. -- -- (54) (60)
----- ------ ---- ----
Net asset (liability) recognized............................ $ 23 $ 11 $(54) $(60)
===== ====== ==== ====
F-28
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
13. PENSION PLANS (CONTINUED)
The weighted average actuarial assumptions utilized in determining the above
amounts for the UK and US defined benefit plans for the years ended December 31
were as follows:
UK PENSION US PENSION
BENEFITS BENEFITS
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Weighted average assumptions:
Discount rate............................................ 6.0% 6.0% 7.3% 7.3%
Expected return on plan assets........................... 7.3% 7.5% 8.5% 8.5%
Rate of compensation increase............................ 3.8% 4.0% 5.0% 5.0%
The components of the net periodic benefit cost of the UK and US defined
benefit plans for the years ended December 31 are as follows:
UK PENSION US PENSION
BENEFITS BENEFITS
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Components of net periodic benefit cost:
Service cost............................................. $27 $34 $13 $16
Interest cost............................................ 56 58 22 21
Expected return on plan assets........................... (80) (77) (30) (28)
Termination benefits..................................... -- -- -- 22
Recognized actuarial gain................................ (2) -- (9) (2)
--- --- --- ---
$ 1 $15 $(4) $29
=== === === ===
14. STOCK BENEFIT PLANS
Willis Group Holdings has adopted the Amended and Restated 1998 Share
Purchase and Option Plan for Key Employees and the 2000 Willis Award Plan for
Key Employees providing for the grant of time-based vesting options and
performance-based vesting options and various other share-based grants to
employees. The objectives of these plans include attracting and retaining the
best personnel, motivating management personnel by means of growth-related
incentives to achieve long range goals and providing employees with the
opportunity to increase their share ownership in Willis Group Holdings.
AMENDED AND RESTATED 1998 SHARE PURCHASE AND OPTION PLAN--This plan, which
was established on December 18, 1998, provides for the granting of time-based
vesting and performance-based vesting options to employees of the Company. There
are 30,000,000 common shares available for grant under this plan provided,
however, that in no event the total number of common shares subject to options
and other equity for current and future participants exceed 25% of the equity of
the Company on a fully diluted basis. All options granted under this plan are
exercisable at L2 per share ($3 using the year-end exchange rate of L1 = $1.5)
and expire on December 18, 2008.
F-29
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
14. STOCK BENEFIT PLANS (CONTINUED)
Time-based options are earned upon the fulfillment of vesting requirements.
Options are generally exercisable in equal installments of 20% per year over a
five-year period commencing on or after December 18, 2000.
Performance-based options will generally become exercisable in the event and
to the extent that certain performance targets are met, which targets are based
on the achievement of cash flow targets and EBITDA targets of the Company, as
defined in the plan agreements. The number of common shares subject to
performance options which will become exercisable will be zero if threshold
performance targets are not met and will thereafter be dependent upon the extent
to which such minimum threshold levels are exceeded, up to specified maximum
performance targets. If the performance conditions are met, the options will
generally become exercisable in equal installments of 25% per year over a
four-year period commencing on or after December 18, 2001.
2000 WILLIS AWARD PLAN--This plan, which was established on July 13, 2000,
provides for the granting of time-based options to selected employees who have
been identified as superior performers. There are 5,000,000 common shares
available under this plan provided, however, that in no event the total number
of common shares subject to options and other equity for current and future
participants exceed 25% of the equity of Willis Group Holdings on a fully
diluted basis. All options granted under this plan are exercisable at L2 per
share ($3 using the year-end exchange rate of L1 = $1.5).
The options vest immediately on the grant date and are exercisable any time
up to July 13, 2010.
COMPENSATION COST--Willis Group Holdings applies the intrinsic value method
allowed by APB 25 in accounting for its stock option plans. Under APB 25,
compensation expense resulting from awards under fixed plans (the time-based
vesting options, options granted pursuant to the 2000 Willis Award Plan and
various other share-based grants to employees) are measured as the difference
between the best estimate of market price at the first date on which both the
number of shares that an individual is entitled to receive and the exercise
price, if any, are known. Compensation expense resulting from awards under
variable plans, however, is measured as the difference between the best estimate
of market price at the date when the number of shares of stock is known (the
date the performance conditions are satisfied) and the exercise price; the cost
is recognized over the period the employee performs related services. Since the
ultimate compensation is unknown until the performance conditions are satisfied,
estimates of compensation cost are recorded before the measurement date based on
the estimate of market price of the common shares at the intervening dates in
situations where it is probable that the performance conditions will be
attained. All fixed plan options were granted at an exercise price equal to
Willis Group Holdings management's best estimate of market price at the
measurement date. In addition, the criteria for recognition of compensation
expense related to performance-based options have not yet been met. Accordingly,
no compensation expense has been recognized in the consolidated statements of
operations pursuant to APB 25. Had compensation cost for such plans been
determined consistent with the fair value method prescribed by
F-30
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
14. STOCK BENEFIT PLANS (CONTINUED)
SFAS 123, the Company's net income (loss) and net income (loss) per share for
2000 and 1999 would have been reduced to the pro forma amounts indicated in the
table below.
2000 1999
-------- --------
NET INCOME (LOSS):
As reported............................................... $ 9 $(132)
Pro forma................................................. 4 (136)
NET INCOME (LOSS) PER SHARE:
Basic and diluted:
As reported............................................. 0.07 (1.11)
Pro forma............................................... 0.03 (1.14)
The fair value of each of Willis Group Holdings option grants included in
pro forma net income (loss) presented above is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2000 and 1999, respectively: dividend yield of 0%
in 2000 and 0% in 1999, expected volatility of 30% in 2000 and 1999, risk-free
interest rate of 5.26% in 2000 and 6.42% in 1999, and a weighted-average
expected life of three years in both 2000 and 1999. The compensation cost as
generated by the Black-Scholes model may not be indicative of the future
benefit, if any that may be received by the option holder. The weighted average
fair value of options granted during the years ended December 31, 2000 and 1999
was $0.82 and $0.95 per share, respectively.
The Black-Scholes model was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions. Because Willis Group Holdings employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
F-31
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
14. STOCK BENEFIT PLANS (CONTINUED)
Stock option transactions under the plans as of and for the years ended
December 31, are as follows:
2000 1999
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE(1) SHARES PRICE(1)
---------- -------- ---------- --------
Balance, beginning of period............... 22,008,216 $3.00 21,976,966 $3.24
Granted.................................. 8,534,222 796,250
Exercised................................ (61,375) --
Forfeited................................ (1,549,498) (765,000)
---------- ----- ---------- -----
Balance, end of period..................... 28,931,565 $3.00 22,008,216 $3.24
========== ===== ========== =====
Options exercisable as of year-end......... 2,438,622 --
========== ==========
- ------------------------
(1) All options are exercisable at L2 per share. Year-end exchange rates of
L1 = $1.5 and L1 = $1.62 have been used as of December 31, 2000 and 1999,
respectively.
As of December 31, 2000, Willis Group Holdings has 28,931,565 options
outstanding of which 2,438,622 are currently exercisable. All options are
exercisable at L2 per share ($3 using the year-end exchange rate of L1 = $1.5).
15. FINANCIAL INSTRUMENTS
The Company's principal financial instruments, other than derivatives,
comprise bank loans and overdrafts, the Senior Credit Facility and the Notes,
cash deposits and short-term investments. The Company also enters into
derivative transactions (principally interest rate swaps and forward foreign
currency contracts) in order to manage interest rate and currency risks arising
from the Company's operations and its sources of finance. The Company does not
hold financial instruments for trading purposes.
The main risks arising from the Company's financial instruments are interest
rate risk, liquidity risk, foreign currency risk and credit risk. The Company's
Board of Directors reviews and agrees policies for managing each of these risks
as summarized below. These policies have remained unchanged since the beginning
of 1999.
INTEREST RATE RISK--The Company's operations are financed principally
through the Senior Credit Facility, which has a variable interest rate and the
Notes, which have a 9% fixed interest rate. Interest rate swaps are used to
generate the desired interest rate profile and to manage the Company's exposure
to interest rate fluctuations.
F-32
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
15. FINANCIAL INSTRUMENTS (CONTINUED)
Willis North America has entered into an interest rate swap agreement under
which its LIBOR-based variable rate interest payment obligations on the full
amount of the term loans have been swapped for fixed rate interest payment
obligations until the final maturity of those term loans. The swap agreement
provides for a reduction of the notional amount of the swap obligation on a
semi-annual basis, and to the extent the actual amount outstanding under the
term loans exceeds the notional amount at any time, Willis North America would
be exposed to the risk of increased interest rates on that excess.
The differential to be paid or received is recognized as an adjustment to
interest expense as incurred. The swap agreement matures on or before the Senior
Credit Facility to which it is matched.
As a result of the Company's operating activities, the Company receives cash
for premiums and claims which it deposits in short-term investments denominated
in US dollars and other foreign currencies. The Company earns interest on these
funds, which is included in the Company's financial statements as interest
income. These funds are regulated in terms of access and the instruments in
which they may be invested, most of which are short-term in maturity. In order
to manage interest rate risk arising from these financial assets, the Company
enters into interest rate swaps to receive a fixed rate of interest and pay a
variable rate of interest fixed in the various currencies related to the
short-term investments. The use of interest rate contracts essentially converts
groups of short-term investments to fixed rates. It is Company policy that, for
currencies with significant balances, a minimum of 25% of forecast income
arising is hedged for each of the next three years.
A summary of the Company's interest rate swaps by major currency as of
December 31, is as follows:
WEIGHTED
AVERAGE
INTEREST RATES
NOTIONAL TERMINATION -------------------
AMOUNT(1) DATES RECEIVE PAY
--------- ----------- -------- --------
2000
US dollar............... Receive fixed -- pay variable $816 2001-2004 6.26% 5.82%
Receive variable -- pay fixed 385 2006 6.22 5.10
Pounds sterling......... Receive fixed -- pay variable 298 2001-2004 6.55 5.79
Euro.................... Receive fixed -- pay variable 60 2001-2004 4.52 4.82
Japanese yen............ Receive fixed -- pay variable 7 2001 1.70 0.47
1999
US dollar............... Receive fixed -- pay variable 713 2000-2003 5.97 6.80
Receive variable -- pay fixed 425 2006 7.12 5.10
Pounds sterling......... Receive fixed -- pay variable 311 2000-2003 6.65 6.92
Euro.................... Receive fixed -- pay variable 49 2000-2002 4.22 4.52
Receive variable -- pay fixed 5 2000 3.85 4.61
Japanese yen............ Receive fixed -- pay variable 7 2001 1.70 0.47
- ------------------------------
(1) Notional amounts represent US dollar equivalents translated at the spot
rate as of December 31.
LIQUIDITY RISK--The Company's objective is to ensure that it has the ability
to generate sufficient cash either from internal or external sources, in a
timely and cost-effective matter, to meet its
F-33
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
15. FINANCIAL INSTRUMENTS (CONTINUED)
commitments as they fall due. The Company's management of liquidity risk is
embedded within its overall risk management framework. Scenario analysis is
continually undertaken to ensure that its resources can meet liquidity
requirements. These resources are supplemented by a $150 revolving credit
facility which expires on November 19, 2005, of which no amount is currently
drawn.
FOREIGN CURRENCY RISK--The Company's objective is to maximize its cash flow
in US dollars. In all locations with the exception of the UK, the Company
predominately generates revenues and expenses in the local currency. In the UK,
however, the Company earns revenues in a number of different currencies but
expenses are almost entirely in pounds sterling. This mismatch creates a
currency exposure. In the year ended December 31, 2000, approximately 20% of the
Company's total revenues were earned in sterling, 60% in the US dollar and 20%
in other currencies. However, in 2000, approximately 40% of total expenses were
incurred in sterling, 45% in US dollars and 15% in other currencies.
The Company's policy within the UK is to convert into sterling all revenues
arising in currencies other than US dollars together with sufficient US dollar
revenues to fund the remaining sterling expenses. Outside the UK, only those
cash flows necessary to fund mismatches between revenues and expenses are
converted into local currency; amounts remitted to the UK are generally
converted into sterling. These transactional currency exposures are principally
managed by entering into forward foreign exchange contracts. It is Company
policy to hedge at least 25% of the next 12 months' exposures in significant
currencies.
The table below summarizes by major currency the contractual amounts of the
Company's forward contracts to exchange foreign currencies for pounds sterling.
Foreign currency notional amounts are reported in US dollars translated at spot
rates as of December 31.
SELL SELL
2000(1) 1999
-------- --------
US dollar................................................... $143 $74
Euro........................................................ 30 15
Japanese yen................................................ 15 19
- ------------------------
(1) Forward exchange contracts range in maturity from 2001 to 2003.
CREDIT RISK AND CONCENTRATIONS OF CREDIT RISK--Credit risk represents the
accounting loss that would be recognized at the reporting date if counterparties
failed to perform as contracted and from movements in interest rates and foreign
exchange rates. The Company does not anticipate nonperformance by
counterparties. The Company generally does not require collateral or other
security to support financial instruments with credit risk; however, it is the
Company's policy to enter into master netting arrangements with counterparties
as practical.
Concentrations of credit risk (whether on or off-balance sheet) that arise
from financial instruments exist for groups of customers or counterparties when
they have similar economic characteristics that would cause their ability to
meet contractual obligations to be similarly affected by changes in economic or
other conditions. Financial instruments on the balance sheet that potentially
F-34
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
15. FINANCIAL INSTRUMENTS (CONTINUED)
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents, accounts receivable, and derivatives which are recorded at
fair value. The Company maintains a policy providing for the diversification of
cash and cash equivalent investments and places such investments in an extensive
number of high quality financial institutions to limit the amount of credit risk
exposure. Concentrations of credit risk with respect to receivables are limited
due to the large number of clients and markets in which the Company does
business, as well as the dispersion across many geographic areas. Management
does not believe significant risk exists in connection with the Company's
concentrations of credit as of December 31, 2000.
FAIR VALUE--The estimated fair value of the Company's financial instruments
as of December 31, 2000 and 1999 is summarized below. Certain estimates and
judgments were required to develop the fair value amounts. The fair value
amounts shown below are not necessarily indicative of the amounts that the
Company would realize upon disposition nor do they indicate the Company's intent
or ability to dispose of the financial instrument.
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
2000 1999
--------------------- ---------------------
Primary financial instruments held or issued to
finance the Company's operations:
Cash and cash equivalents......................... $88 $88 $80 $80
Fiduciary funds -- restricted..................... 978 978 897 897
Short-term investments............................ 41 41 35 33
Long-term debt.................................... 958 900 988 895
Company-obligated mandatorily redeemable
preferred capital securities of subsidiary...... 272 260 269 239
Derivative financial instruments held to manage
interest rate and currency exposures:
Interest rate swaps -- assets..................... -- 16 -- 25
-- liabilities................... -- 2 -- 9
Forward foreign exchange contracts -- assets...... 3 3 3 3
-- liabilities..... 4 4 2 2
The following methods and assumptions were used by the Company in estimating
its fair value disclosure for financial instruments:
CASH AND CASH EQUIVALENTS--The estimated fair value of these financial
instruments approximates their carrying values due to their short maturities.
FIDUCIARY FUNDS--RESTRICTED AND SHORT-TERM INVESTMENTS--Fair values are
based on quoted market values.
LONG-TERM DEBT--The estimated fair values of the Company's long-term debt
are based on current interest rates available to the Company for debt
instruments with similar terms and remaining maturities.
F-35
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
15. FINANCIAL INSTRUMENTS (CONTINUED)
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL SECURITIES OF
SUBSIDIARY--The estimated fair values of the company-obligated mandatorily
redeemable preferred capital securities of a subsidiary are based on discounted
future cash flows using current interest rates available for securities with
similar terms and remaining maturities.
DERIVATIVE FINANCIAL INSTRUMENTS--Market values have been used to determine
the fair value of interest rate swaps and forward foreign exchange contracts
based on estimated amounts the Company would receive or have to pay to terminate
the agreements, taking into account the current interest rate environment or
current foreign currency forward rates.
16. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The components of accumulated other comprehensive (loss) income as of and
for the years ended December 31, are as follows:
FOREIGN
CURRENCY UNREALIZED
TRANSLATION HOLDING
ADJUSTMENTS GAINS (LOSSES) TOTAL
----------- -------------- ---------
January 1, 1999....................................... $ -- $ -- $ --
Current period change................................. 3 (2) 1
--------- --------- ---------
December 31, 1999..................................... 3 (2) 1
Current period change................................. (8) 2 (6)
--------- --------- ---------
December 31, 2000..................................... $ (5) $ -- $ (5)
========= ========= =========
17. STOCKHOLDERS' EQUITY
Common shares and management common shares rank PARI PASSU in all respects
except that management common shares do not confer on the holder the right to
receive notice of or to attend and vote at general meetings. Holders of common
shares are entitled to one vote per share. Management common shares are
automatically reclassified as common shares on listing of the latter.
Dividend distributions are limited to retained earnings of Willis Group
Holdings as determined in accordance with generally accepted accounting
principles in the UK. The Company has no distributable retained earnings as of
December 31, 2000.
18. CONTINGENCIES AND COMMITMENTS
OPERATING LEASES--The Company leases certain land, buildings and equipment
under various operating lease arrangements. Original non-cancelable lease terms
typically are between 10 and 20 years and may contain escalation clauses, along
with options that permit early withdrawal. The total amount of the minimum rent
is expensed on a straight-line basis over the term of the lease.
F-36
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
18. CONTINGENCIES AND COMMITMENTS (CONTINUED)
As of December 31, 2000, the aggregate future minimum rental commitments
under all non-cancelable operating lease agreements are as follows:
GROSS RENTAL RENTALS FROM NET RENTAL
COMMITMENTS SUBLEASES COMMITMENTS
------------ ------------ -----------
2001............................................ $ 56 $ 5 $ 51
2002............................................ 48 4 44
2003............................................ 40 2 38
2004............................................ 33 1 32
2005............................................ 29 2 27
Thereafter...................................... 143 9 134
---- --- ----
Total........................................... $349 $23 $326
==== === ====
Rent expense amounted to $66 and $64 for the years ended December 31, 2000
and 1999, respectively. The Company's rental income from subleases was $4 and $3
for the years ended December 31, 2000 and 1999, respectively.
GUARANTEES--Guarantees issued by certain of Willis Group Holdings'
subsidiaries with respect to the Senior Credit Facility and the Notes are
discussed elsewhere in these consolidated financial statements.
Certain of Willis Group Holdings' subsidiaries have given the landlords of
some leasehold properties occupied by the Company in the UK and the US
guarantees in respect of the performance of the lease obligations of the
subsidiary holding the lease. The operating lease obligations subject to such
guarantees amounted to $157 and $181 as of December 31, 2000 and 1999,
respectively.
In addition, the Company has given guarantees to bankers and other third
parties relating principally to letters of credit amounting to $8 and $7 as of
December 31, 2000 and 1999, respectively.
The Company has also given guarantees to bankers in respect of commitments
entered into by them to provide security for membership of Lloyd's of certain
Group employees who are not Directors of Willis Group Holdings amounting to
$52,500 (figure presented in dollars) and $500,000 (figure presented in
dollars), as of December 31, 2000 and 1999, respectively.
PUT AND CALL OPTIONS RELATING TO SUBSIDIARIES AND ASSOCIATES--For certain
subsidiaries and associates, the Company has the right to purchase shares (a
call option) from co-shareholders at various dates in the future. In addition,
the co-shareholders of certainsubsidiaries and associates have the right to sell
(a put option) their shares to the Company at various dates in the future.
Generally, the exercise price of such puts and calls is formula-based (using
revenues and earnings) and is designed to reflect fair value.
Based on current projections of profitability and exchange rates, the
potential amount payable in 2001 from these options is not expected to exceed
$121. Of this balance, $120 relates to Gras Savoye, as disclosed in Note 6.
CLAIMS--The Company has extensive operations and is subject to claims and
litigation in the ordinary course of business resulting principally from alleged
errors and omissions in connection with
F-37
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
18. CONTINGENCIES AND COMMITMENTS (CONTINUED)
its businesses. Most of the errors and omissions claims are covered by
professional indemnity insurance. In respect of self-insured deductibles
applicable to those claims, the Company has established provisions which are
believed to be adequate in the light of current information and legal advice.
These provisions may be adjusted from time to time according to developments.
The Company does not expect the outcome of those claims, either individually or
in the aggregate, to have a material effect on the Company's financial
condition, results of operations or liquidity.
19. SEGMENT INFORMATION
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION ("SFAS 131") establishes standards for reporting information about
operating segments and related disclosures products and services, geographic
areas, and major customers. Operating segments are components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision-maker in deciding how to allocate
resources and in assessing performance.
The Company conducts its worldwide insurance brokering activities through
three operating segments: US Operations, International and Global Business. Each
operating segment exhibits similar economic characteristics, provides similar
products and services and distributes same through common distribution channels
to a common type or class of customer. In addition, the regulatory environment
in each region is similar. Consequently, for financial reporting purposes the
Company has aggregated these three operating segments into one reportable
segment.
None of the Company's customers represented more than 10% of the Company's
consolidated commissions and fees for the years ended December 31, 2000 and
1999.
Information regarding the Company's geographic locations for the years ended
December 31, is as follows:
UK US OTHER(3) TOTAL
-------- -------- -------- --------
2000
Commissions and fees(1)................................ $479 $616 $142 $1,237
Long-lived assets(2)................................... 135 42 15 192
1999
Commissions and fees(1)................................ 454 585 141 1,180
Long-lived assets(2)................................... 155 50 15 220
- ------------------------
(1) Commissions and fees are attributed to countries based upon the location of
the subsidiary generating the revenue.
(2) Long-lived assets include identifiable fixed assets.
(3) Other than in the UK and the US, the Company does not conduct business in
any country in which its commissions and fees and/or long-lived assets
exceed 10% of consolidated commissions and fees and/or long-lived assets,
respectively.
F-38
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
19. SEGMENT INFORMATION (CONTINUED)
The Company has not reported revenues from external customers for each
product and service or each group of similar products and services as the
Company's internal systems do not allow for the generation of such information.
20. RELATED PARTY TRANSACTIONS (ALL FIGURES ARE PRESENTED IN DOLLARS)
The Company has an Employee Stock Ownership Plan (the "ESOP") which invests
in Willis Group Holdings common shares. The trustee of the ESOP transferred
527,495 and 34,687 common shares during the years ended December 31, 2000 and
1999, respectively. As of December 31, 2000 and 1999, the ESOP shares
outstanding were 1,253,411 and 1,780,906, respectively, representing
approximately 1.0% and 1.5% of total common shares as of December 31, 2000 and
1999, respectively. Shares held by the ESOP have been considered outstanding for
purposes of calculating the Company's basic and diluted net income per common
share. No dividends have been distributed on the common shares held by the ESOP.
KKR 1996 Fund (Overseas), Limited Partnership beneficially owns
approximately 74% of Willis Group Holdings share capital. The general partner of
KKR 1996 Fund (Overseas), Limited Partnership is KKR Associates II (1996),
Limited Partnership, a limited partnership of which the general partners is KKR
1996 Overseas, Limited, a company owned by Messrs. Kravis, Roberts, Golkin and
Fisher and other members of the limited liability company which is the general
partner of Kohlberg Kravis Roberts & Co. L.P. KKR 1996 Overseas has sole voting
and investment power with respect to the share capital owned by KKR 1996 Fund
(Overseas).
Kohlberg Kravis Roberts & Co. L.P. and Fisher Capital Corp. LLC, a company
for which Mr. J.R. Fisher, a Director of Willis Group Holdings is the managing
member and majority owner, render management, consulting and certain other
services to the Company for annual fees payable quarterly in arrears. In 2000,
the Company paid an amount of $1,000,000, in the case of Kohlberg Kravis
Roberts & Co. L.P. and $350,000, in the case of Fisher Capital Corp. LLC for
those services. Included in accrued expenses is $249,970 and $250,000 payable to
Kohlberg Kravis Roberts & Co. L.P. and $87,520 and $0 payable to Fisher Capital
Corp. LLC as of December 31, 2000 and 1999, respectively.
In addition, the Company and Fisher Capital Corp. LLC entered into a share
option agreement dated January 27, 1999, whereby the Company granted to Fisher
Capital Corp. LLC 422,501 options to purchase an equivalent number of common
shares. The options vest upon grant date and are exercisable any time up to
January 27, 2014. The fair value of the options, computed on grant date using
the Black-Scholes option-pricing model and assuming a dividend yield of 0%,
expected volatility of 30%, a risk-free interest rate of 6.42% and a
weighted-average expected life of three years, amounts to $334,905. This cost
may not be indicative of the future benefit to be received by Fisher Capital
Corp. LLC. Mr. J.R. Fisher, as the managing member and majority owner of Fisher
Capital Corp., may be deemed to share beneficial ownership of any options owned
by Fisher Capital Corp., L.L.C but disclaims such beneficial ownership.
During 2000, Willis North America acquired from Mr. J. Plumeri, the Chairman
and the Executive Chairman and Chief Executive Officer of Willis Group Limited,
a 12 1/2% undivided interest in a Citation V Ultra Aircraft for $693,719; as of
December 31, 2000, this balance was recorded as a
F-39
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
20. RELATED PARTY TRANSACTIONS (ALL FIGURES ARE PRESENTED IN DOLLARS)
(CONTINUED)
payable. This transaction was consummated on terms equivalent to those that
prevail in arms-length transactions.
21. SUBSEQUENT EVENTS
On June 11, 2001, Willis Group Holdings issued 23,000,000 common shares at
$13.50 per share in an initial public offering. The net proceeds amounted to
$282 after deducting underwriting discounts, commissions and other expenses of
the offering. The net proceeds were used to redeem all of the outstanding $273
preference shares of a subsidiary on June 29, 2001.
On July 31, 2001, the Company completed the sale of its 51% interest in
Willis National Holdings Limited. The gain on disposal amounted to $22.
F-40
WILLIS GROUP HOLDINGS LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
-------- --------
REVENUES:
Commissions and fees...................................... $ 987 $ 907
Interest income........................................... 50 49
------ ------
Total revenues.......................................... 1,037 956
------ ------
EXPENSES, NET:
General and administrative expenses (excluding non-cash
compensation)........................................... 784 784
Non-cash compensation--performance options--(Note 4)...... 145 --
Gain on disposal of operations--(Note 5).................. (22) (1)
Depreciation expense...................................... 25 28
Amortization of goodwill.................................. 26 26
Restructuring costs--(Note 6)............................. -- 11
------ ------
Total expenses.......................................... 958 848
------ ------
OPERATING INCOME............................................ 79 108
INTEREST EXPENSE............................................ 63 67
------ ------
INCOME BEFORE INCOME TAXES, EQUITY IN NET EARNINGS OF
ASSOCIATES AND MINORITY INTEREST.......................... 16 41
INCOME TAX EXPENSE.......................................... 36 28
------ ------
(LOSS) INCOME BEFORE EQUITY IN NET EARNINGS OF ASSOCIATES
AND MINORITY INTEREST..................................... (20) 13
EQUITY IN NET EARNINGS OF ASSOCIATES........................ 9 7
MINORITY INTEREST (Including $12 and $17, respectively, of
preferred stock dividends)................................ (14) (16)
------ ------
NET (LOSS) INCOME........................................... $ (25) $ 4
====== ======
NET (LOSS) INCOME PER COMMON SHARE--(Note 7)
--Basic................................................... $(0.19) $ 0.03
====== ======
--Diluted................................................. $(0.19) $ 0.03
====== ======
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING--(Note 7)
--Basic................................................... 133 121
====== ======
--Diluted................................................. 133 121
====== ======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-41
WILLIS GROUP HOLDINGS LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 120 $ 88
Fiduciary funds--restricted............................... 1,168 978
Short-term investments.................................... 43 41
Accounts receivable, net of allowance for doubtful
accounts of $27 and $24, respectively................... 5,256 4,675
Deferred tax assets....................................... 23 14
Other current assets...................................... 67 94
------ ------
Total current assets.................................... 6,677 5,890
------ ------
NONCURRENT ASSETS:
Fixed assets, net of accumulated depreciation of $93 and
$79, respectively....................................... 180 192
Goodwill, net of accumulated amortization of $106 and $80,
respectively............................................ 1,200 1,225
Investments in associates................................. 139 134
Deferred tax assets....................................... 53 45
Other noncurrent assets................................... 129 104
------ ------
Total noncurrent assets................................. 1,701 1,700
------ ------
TOTAL..................................................... $8,378 $7,590
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $6,242 $5,484
Deferred revenue and accrued expenses..................... 138 130
Provisions................................................ 36 37
Income taxes payable...................................... 77 43
Other current liabilities................................. 176 189
------ ------
Total current liabilities............................... 6,669 5,883
------ ------
NONCURRENT LIABILITIES:
Long-term debt............................................ 836 958
Provisions................................................ 101 121
Other noncurrent liabilities.............................. 109 99
------ ------
Total noncurrent liabilities............................ 1,046 1,178
------ ------
Total liabilities....................................... 7,715 7,061
------ ------
COMMITMENTS AND CONTINGENCIES--(Note 10)
MINORITY INTEREST........................................... 14 19
COMPANY--OBLIGATED MANDATORILY REDEEMABLE PREFERRED CAPITAL
SECURITIES OF SUBSIDIARY.................................. -- 272
STOCKHOLDERS' EQUITY:
Common shares, $0.000115 par value; Authorized:
4,000,000,000; issued and outstanding, 147,112,631
shares and 123,698,539 shares, respectively............. -- --
Additional paid-in capital................................ 838 410
Accumulated deficit....................................... (192) (167)
Accumulated other comprehensive income (loss)--(Note 8)... 5 (5)
Treasury stock, at cost, 738,552 shares at September 30,
2001.................................................... (2) --
------ ------
Total stockholders' equity.............................. 649 238
------ ------
TOTAL....................................................... $8,378 $7,590
====== ======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-42
WILLIS GROUP HOLDINGS LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $ (25) $ 4
Adjustments to reconcile net (loss) income to net cash
provided by
operating activities:
Depreciation............................................ 25 28
Amortization of goodwill................................ 26 26
Provision for doubtful accounts......................... 7 4
Minority interest....................................... 1 --
Provisions.............................................. (18) (18)
Provision for deferred income taxes..................... (20) (4)
Non-cash compensation expense attributable to
performance options................................... 145 --
Other................................................... (27) (2)
Changes in operating assets and liabilities, net of
effects from purchase of
subsidiaries:
Fiduciary funds -- restricted, net...................... (195) (224)
Accounts receivable..................................... (625) (883)
Accounts payable........................................ 817 1,123
Other................................................... 27 (31)
------- ------
Net cash provided by operations....................... 138 23
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on disposal of fixed assets...................... 4 4
Additions to fixed assets................................. (20) (19)
Acquisitions of subsidiaries, net of cash acquired........ (3) (8)
Tax refund relating to prior acquisition.................. 5 --
Purchase of short-term investments........................ (8) (17)
Proceeds on sale of short-term investments................ 6 18
Proceeds from sale of operations.......................... 22 1
Other, net................................................ -- (1)
------- ------
Net cash provided by (used in) investing activities... 6 (22)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt........................................ (122) (14)
Repayment of preference shares............................ (273) --
Proceeds from initial public offering, net of underwriting
discounts and offering expenses......................... 285 --
Proceeds from issuance of common shares................... 1 2
------- ------
Net cash used in financing activities................. (109) (12)
------- ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 35 (11)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (3) (7)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 88 80
------- ------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 120 $ 62
======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for income taxes............................ $ 24 $ 14
======= ======
Cash payments for interest................................ $ 74 $ 76
======= ======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-43
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
1. THE COMPANY AND ITS OPERATIONS
ORGANIZATION--Willis Group Holdings Limited ("Willis Group Holdings") was
incorporated on February 8, 2001 as an exempted company under The Companies Act
1981 of Bermuda, for the sole purpose of redomiciling the ultimate parent
company of the Willis Group (comprised of TA I Limited and subsidiaries) from
the United Kingdom to Bermuda. On incorporation, Willis Group Holdings was
wholly owned by Profit Sharing (Overseas), Limited Partnership, an affiliate of
Kohlberg Kravis Roberts & Co., L.P. and one of the existing stockholders of TA I
Limited ("TA I").
Willis Group Holdings, effective from May 8, 2001, exchanged its common
shares for all the issued and outstanding ordinary shares of TA I. Further, on
April 10, 2001, Willis Group Holdings made an offer to exchange one of its
non-voting management common shares for each outstanding non-voting management
ordinary share of TA I. The offer expired on May 8, 2001 and at expiration
Willis Group Holdings had received acceptances in respect of, or otherwise had
rights to acquire, 99.8% of the outstanding non-voting management ordinary
shares of TA I. Subsequently Willis Group Holdings compulsorily acquired the
remaining 0.2%. The non-voting management shares issued by Willis Group Holdings
automatically converted into voting shares on consummation of the Willis Group
Holdings initial public offering. In addition, all management ordinary stock
options of TA I have been rolled over into identical stock options of Willis
Group Holdings. As a consequence of these transactions, Willis Group Holdings is
the beneficial owner of 100% of TA I's issued and outstanding share capital.
As a result of the exchange offers, the former stockholders of TA I have
acquired a majority voting interest in Willis Group Holdings. Under accounting
principles generally accepted in the United States ("US GAAP"), the company
whose stockholders retain the majority interest in a combined business must be
treated as the acquirer for accounting purposes. Accordingly, the transaction is
being accounted for as a "reverse acquisition" for financial reporting purposes
and TA I is deemed to have acquired 100% of the equity interest in Willis Group
Holdings. The relevant acquisition process utilizes the capital structure of
Willis Group Holdings and the assets and liabilities of TA I and subsidiaries
(collectively, the "Predecessor") are recorded at historical cost.
The Predecessor is the operating entity for financial reporting purposes,
and the financial statements prior to May 8, 2001 represent the Predecessor's
financial position and results of operations. The assets and liabilities and
results of operations of the Predecessor are included as of May 8, 2001.
Although TA I was deemed to be the acquiring corporation for financial
accounting and reporting purposes, the legal status of Willis Group Holdings as
the surviving corporation does not change.
BUSINESS--Willis Group Holdings and subsidiaries (collectively, the
"Company") provide a broad range of value-added risk management consulting and
insurance brokering services both directly, and indirectly through its
associates, to a diverse base of clients internationally. The Company provides
specialized risk management advisory and other services on a global basis to
clients in various industries, including the construction, aerospace, marine and
energy industries. In its capacity as an advisor and insurance broker, the
Company acts as an intermediary between clients and insurance carriers by
advising clients on risk management requirements, helping clients determine the
best means of managing risk, and negotiating and placing insurance risk with
insurance carriers through the Company's global distribution network. The
Company also provides other value-added services.
F-44
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements (hereinafter
referred to as the "Interim Financial Statements") have been prepared in
accordance with US GAAP.
The Interim Financial Statements are unaudited but include all adjustments
(consisting of normal recurring adjustments) which the Company's management
considers necessary for a fair presentation of the financial position as of such
dates and the operating results and cash flows for those periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with US GAAP have been condensed or omitted. The results
of operations for the nine-month period ended September 30, 2001 may not
necessarily be indicative of the operating results that may be incurred for the
entire fiscal year.
The December 31, 2000 balance sheet was derived from audited financial
statements but does not include all disclosures required by US GAAP. However,
the Company believes that the disclosures are adequate to make the information
presented not misleading. These Interim Financial Statements should be read in
conjunction with the Company's consolidated balance sheets as of December 31,
2000 and 1999, and the related consolidated statements of operations,
comprehensive income, cash flows and changes in stockholders' equity for each of
the two years in the period ended December 31, 2000.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
BUSINESS COMBINATIONS ("SFAS 141"), and SFAS No.142, GOODWILL AND INTANGIBLE
ASSETS ("SFAS 142"). SFAS 141 requires the purchase method of accounting for
business combinations occurring after June 30, 2001 and eliminates the
pooling-of-interests method. SFAS 142, which becomes effective from January 1,
2002, requires that goodwill and other intangible assets that have an indefinite
useful life will no longer be amortized but rather will be tested at least
annually for impairment. The Company has yet to determine the full impact of
applying these standards.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS
144"). SFAS 144 addresses financial accounting and reporting for the impairment
of long-lived assets and for long-lived assets to be disposed of. SFAS 144
becomes effective for fiscal years beginning after December 15, 2001. The
Company does not expect the application of this standard to have a material
effect on the consolidated financial statements.
3. DERIVATIVE FINANCIAL INSTRUMENTS
The financial risks the Company manages through the use of derivative
financial instruments are interest rate risk and foreign currency risk. The
Company's Board of Directors reviews and agrees on policies for managing each of
these risks.
INTEREST RATE RISK--The Company's operations are financed principally
through the Senior Credit Facility term loan due 2005 to 2008, which has a
variable interest rate and the Senior Subordinated Notes due 2009, which have a
9% fixed interest rate. Interest rate swaps are used to generate the desired
interest rate profile and to manage the Company's exposure to interest rate
fluctuations.
F-45
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
3. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
Willis North America Inc., "Willis North America", has entered into an
interest rate swap agreement under which its LIBOR-based variable rate interest
payment obligations on the full amount of the term loans have been swapped for
fixed rate interest payment obligations until the final maturity of those term
loans. The swap agreement provides for a reduction of the notional amount of the
swap obligation on a semi-annual basis, and to the extent the actual amount
outstanding under the term loans exceeds the notional amount at any time, Willis
North America would be exposed to the risk of increased interest rates on that
excess. The Company has designated the interest rate swap agreement as a cash
flow hedge as defined by SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES ("SFAS 133") with the fair value recorded in payables on the
balance sheet. Changes in fair value are recorded as a component of Other
Comprehensive Income. The loss recorded for the nine-month period ended
September 30, 2001 was $17. Amounts are reclassified from Other Comprehensive
Income into earnings when the hedged exposure affects earnings.
As a result of the Company's operating activities, the Company receives cash
for premiums and claims which it deposits in short-term investments denominated
in US dollars and other foreign currencies. The Company earns interest on these
funds, which is included in the Company's financial statements as interest
income. These funds are regulated in terms of access and the instruments in
which they may be invested, most of which are short-term in maturity. In order
to manage interest rate risk arising from these financial assets, the Company
enters into interest rate swaps to receive a fixed rate of interest and pay a
variable rate of interest fixed in the various currencies related to the
short-term investments. The use of interest rate contracts essentially converts
the variable return of groups of short-term investments to fixed rates. The fair
value of these contracts is recorded on payables in the balance sheet, with
changes in fair value of effective hedges recorded in Other Comprehensive Income
and changes in fair value of ineffective hedges recorded in general and
administrative expenses. For the nine-month period ended September 30, 2001, the
Company has recorded a gain of $18 in Other Comprehensive Income relating to
changes in fair value on contracts which are effective hedges as defined in SFAS
133. For contracts which were not designated for hedge accounting as defined in
SFAS 133, the Company has recorded a gain of $8 in general and administrative
expenses, representing the change in fair value for the nine-month period ended
September 30, 2001.
FOREIGN CURRENCY RISK--The Company's objective is to maximize its cash flow
in US dollars. In all locations with the exception of the UK, the Company
predominately generates revenues and expenses in the local currency. In the UK,
however, the Company earns revenues in a number of different currencies but
expenses are almost entirely in pounds sterling. This mismatch creates a
currency exposure. In the year ended December 31, 2000, approximately 20% of the
Company's total revenues were earned in sterling, 60% in US dollars and 20% in
other currencies. However, in 2000, approximately 40% of total expenses were in
sterling, 45% in US dollars and 15% in other currencies.
The Company's policy within the UK is to convert into sterling all revenues
arising in currencies other than US dollars together with sufficient US dollar
revenues to fund the remaining sterling expenses. Outside the UK, only those
cash flows necessary to fund mismatches between revenues and expenses are
converted into local currency; amounts remitted to the UK are generally
converted into sterling. These transactional currency exposures are principally
managed by entering into forward foreign exchange contracts. It is Company
policy to hedge at least 25% of the next 12 months' exposures in significant
currencies.
F-46
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
3. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The fair value of these contracts is recorded in payables on the balance
sheet, with changes in the fair value of effective hedges recorded in Other
Comprehensive Income and changes in fair value of ineffective hedges recorded in
general and administrative expenses. For the nine-month period ended
September 30, 2001, the Company has recorded a gain of $7 in Other Comprehensive
Income relating to changes in the fair value on contracts which are effective
hedges as defined in SFAS 133. For contracts which were not designated for hedge
accounting as defined in SFAS No. 133, the Company has recorded a loss of $6 in
general and administrative expenses representing the changes in the fair value
for the nine-month period ended September 30, 2001.
4. NON-CASH COMPENSATION
Willis Group Holdings applies the intrinsic value method allowed by
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES ("APB 25") in accounting for its stock option plans. Under APB 25,
compensation expense resulting from awards under variable plans, is measured as
the difference between the best estimate of market price at the date when the
number of shares of stock is known (the date the performance conditions are
satisfied) and the exercise price; the cost is recognized over the period the
employee performs related services. Since the ultimate compensation is unknown
until the performance conditions are satisfied, estimates of compensation cost
are recorded before the measurement date based on the market price of the common
shares at the intervening dates in situations where it is probable that the
performance conditions will be attained.
In the third quarter of 2001, management of Willis Group Holdings determined
that it was probable that the maximum performance condition would be attained.
Accordingly, compensation expense of $145 has been recognized in the nine-month
period ended September 30, 2001 based on the 11.4 million unforfeited
performance options outstanding at that date, a quarter-end market price of
$23.39 and an average elapsed performance period of 62%.
5. GAIN ON DISPOSAL OF OPERATIONS
On July 31, 2001, the Company completed the sale of its 51% interest in
Willis National Holdings Limited. The gain on disposal amounted to $22.
6. RESTRUCTURING COSTS
In the fourth quarter of 1999, the Company announced a comprehensive
restructuring plan to consolidate several sales process functions and streamline
and centralize client service functions such as claims, policy insurance and
coverage in the North American retail operations. Pursuant to this plan, the
Company expected to eliminate 275 positions and physically segregate and
discontinue use of certain leased office space which, where economically
feasible, will be subleased. As of September 30, 2001, 277 employees
(September 30, 2000--240) had been terminated as a result of this restructuring
plan.
In the fourth quarter of 2000, the Company developed a plan to exit certain
business lines including the sale of the municipality business of Public
Entities National Company ("PENCO"), part of the US wholesale operations, and
the sale or closure of certain other non-strategic businesses. As a result of
these plans, it is expected that approximately 250 employees will be terminated.
The sale of the municipality business of PENCO was completed in January 2001
while the proposed sale or closure
F-47
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
6. RESTRUCTURING COSTS (CONTINUED)
of certain other non-strategic businesses is expected to be completed by
December 2001. As of September 30, 2001, an aggregate of 69 employees had been
terminated pursuant to these plans.
7. NET (LOSS) INCOME PER SHARE
Basic net (loss) income per share, is calculated by dividing net (loss)
income by the weighted-average number of common shares outstanding during each
period. The computation of diluted net (loss) income per share is similar to
basic net (loss) income per share, except that diluted net (loss) income per
share reflects the potential dilution that could occur if dilutive securities
and other contracts to issue common shares were exercised or converted into
common shares or resulted in the issuance of common shares that then shared in
the net (loss) income of the Company.
The computation of net (loss) income per share has been retroactively
restated to reflect the number of shares of Willis Group Holdings, after
consummation of the exchange offers.
For the nine-month period ended September 30, 2000, time-based options to
purchase 11,262,046 common shares were outstanding. The exercise price of these
options was established based on management's estimate of the fair value of
these options on the measurement dates. In addition, the Predecessor's shares
were not publicly traded during this period and, in the opinion of management,
the average market value was not in excess of the exercise price. Such options
had no dilutive nor antidilutive effect on net (loss) income per share for the
nine-month period ended September 30, 2000.
For the nine-month period ended September 30, 2001, time-based options to
purchase 18,071,839 common shares were outstanding. The basic and diluted
weighted-average number of shares outstanding was 133,762,133, giving basic and
diluted net loss per common share of $0.19. The weighted-average number of
shares issuable upon the exercise of stock options for the nine-month period
ended September 30, 2001, which were not included in the calculation because
they were antidilutive, was 9,379,948.
F-48
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
8. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive loss for the nine-month periods ended
September 30, 2001 and 2000, are as follows:
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------------
2001 2000
-------- --------
Net (loss) income........................................... $(25) $ 4
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment................... (6) (10)
Cumulative effect of accounting change (net of tax of $5
and $0)................................................. 8 --
Unrealized holding gains (net of tax of $1 and $0)........ 1 --
Net gain on derivative instruments (net of tax of $1 and
$0)....................................................... 7 1
---- ---
Other comprehensive income (loss), net of tax............... 10 (9)
---- ---
Comprehensive loss income................................... $(15) $(5)
==== ===
The components of accumulated other comprehensive income (loss), net of
related tax, at September 30, 2001 and December 31, 2000, are as follows:
2001 2000
-------- --------
Net foreign currency translation adjustment................. $(11) $(5)
Net cumulative effect of accounting change.................. 8 --
Net unrealized holding gains................................ 1 --
Net gain on derivative instruments.......................... 7 --
---- ---
Accumulated other comprehensive income (loss)............... $ 5 $(5)
==== ===
9. STOCKHOLDERS' EQUITY
On June 11, 2001, Willis Group Holdings issued 23,000,000 common shares at
$13.50 per share in an initial public offering. The net proceeds amounted to
$282 after deducting underwriting discounts, commissions and other expenses of
the offering. The net proceeds were used to redeem all the outstanding $273
preference shares of a subsidiary on June 29, 2001.
10. COMMITMENTS AND CONTINGENCIES
In common with many companies involved in selling personal pension plans in
the UK, the Company's financial advisory business, Willis Corroon Financial
Planning Limited ("WCFP"), is required by the Financial Services Authority and
the Personal Investment Authority ("the Regulator"), which regulates these
matters, to review certain categories of personal pension plans sold to
individuals between 1988 and 1994. WCFP is required to compensate those
individuals who transferred from, opted out or did not join, their
employer-sponsored pension plan if the expected benefits from their personal
pension plan did not equal the benefits that would have been available from
their employer-sponsored pension plan. Whether compensation is due to a
particular individual, and the amount
F-49
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
thereof, is dependent upon the subsequent performance of the personal pension
plan sold and the net present value of the benefits that would have been
available from the employer-sponsored pension plan calculated using financial
and demographic assumptions prescribed by the Regulator. The Regulator currently
requires all offers of compensation to be made by June 30, 2002.
At December 31, 2000, the Company had a provision of $51, which forms part
of the Provisions amount on the condensed consolidated balance sheet, relating
to this issue. During the nine months ended September 30, 2001, the Company used
$14 of this provision in settling claims and other related costs and, allowing
for foreign exchange adjustments, the remaining balance at September 30, 2001
was $35. Although the Company considers the established provisions to be prudent
and expects to pay out these provisions over the next two years, there remains
some uncertainty as to the ultimate exposure relating to the review. This
exposure is subject to a number of variable factors including, among others, the
effect of future changes in prescribed UK interest rates and in financial and
other assumptions which are issued by the Regulator on a quarterly basis.
At December 31, 2000, the Company had a provision of $31, which forms part
of the Provisions amount on the condensed consolidated balance sheet, for
discontinued operations that includes estimates for future costs of
administering the run-off of the Company's former UK underwriting operations.
Willis Faber (Underwriting Management) Limited ("WFUM"), a wholly owned
subsidiary of the Company, provided underwriting agency and other services to
certain insurance companies including Sovereign Marine & General Insurance
Company Limited ("Sovereign") (in Scheme of Arrangement) (collectively, the
"stamp companies") and in 1991 ceased arranging new business on behalf of the
stamp companies. Willis Faber Limited has agreed with certain of the stamp
companies to fund certain costs of the run-off, subject to agreed guidelines as
to timing and amount. Although the Company expects the run-off to be conducted
in an orderly manner, it may ultimately prove to be a lengthy and expensive
process. The amounts to be funded under the run-off arrangements are currently
within the aggregate of the provisions made. The Company used $3 to fund certain
costs of the run-off in the nine-month period ended September 30, 2001.
The Company has extensive operations and is subject to claims and litigation
in the ordinary course of business resulting principally from alleged errors and
omissions in connection with its businesses. At December 31, 2000, the Company
had a provision of $53, also forming part of the Provisions amount on the
condensed consolidated balance sheet, representing management's assessment of
liabilities that may arise from asserted and unasserted claims for errors and
omissions. During the nine-month period ended September 30, 2001, the Company
charged $11 to operations and used $9 in settling claims and, allowing for
foreign exchange adjustments, the balance remaining at September 30, 2001 was
$55. Most of the errors and omissions claims are covered by professional
indemnity insurance. In respect of self-insured deductibles applicable to those
claims, the Company has established provisions which are believed to be adequate
in the light of current information and legal advice. These provisions may be
adjusted from time to time according to developments. The Company does not
expect the outcome of those claims, either individually or in the aggregate, to
have a material effect on the Company's financial condition, results of
operations or liquidity.
F-50
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND OTHER DATA, UNLESS OTHERWISE STATED)
11. SEGMENT INFORMATION
The Company conducts its worldwide insurance brokering activities through
three operating segments: North American Operations, International and Global
Businesses. Each operating segment exhibits similar economic characteristics,
provides similar products and services and distributes same through common
distribution channels to a common type or class of customer. In addition, the
regulatory environment in each region is similar. Consequently, for financial
reporting purposes the Company has aggregated these three operating segments
into one reportable segment.
* * * * * *
F-51
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17,500,000 SHARES
WILLIS GROUP HOLDINGS LIMITED
COMMON STOCK
[LOGO]
------
P R O S P E C T U S
NOVEMBER 8, 2001
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SALOMON SMITH BARNEY
JPMORGAN
MORGAN STANLEY
BANC OF AMERICA SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
UBS WARBURG
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