AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 2002
REGISTRATION NO. 333-87662
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------
AMENDMENT NO. 2
TO
FORM F-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
WILLIS GROUP HOLDINGS LIMITED
(Exact Name of Registrant as Specified in its Charter)
BERMUDA 6411 NONE
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
------------------------------
CEDAR HOUSE
41 CEDAR AVENUE
HAMILTON HM 12, BERMUDA
(441) 295-2244
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
WILLIAM P. BOWDEN, JR.
WILLIS GROUP HOLDINGS LIMITED
7 HANOVER SQUARE
NEW YORK, NEW YORK 10004
(212) 344-8888
(Name, Address, Including Zip Code and Telephone Number,
Including Area Code, of Agent For Service)
------------------------------
WITH COPIES TO:
------------------------------
EDWARD P. TOLLEY III, ESQ. D. COLLIER KIRKHAM, ESQ.
SIMPSON THACHER & BARTLETT CRAVATH, SWAINE & MOORE
425 LEXINGTON AVENUE 825 EIGHTH AVENUE
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10019
(212) 455-2000 (212) 474-1000
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earliest effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE FEE(3)
Common Stock, par value $0.000115 per 18,400,000
share...................................... Shares(2) $29.08 $535,072,000 $49,226.62
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
as amended, based on the average of the high and low prices for the common
stock as reported on the New York Stock Exchange on May 14, 2002.
(2) Includes the 2,400,000 shares which the underwriters have the option to
purchase from certain of the selling shareholders solely to cover
over-allotments.
(3) The Registrant previously paid a fee of $47,610. The Registrant currently
has a credit of $32,265.32 in its account for use towards SEC filings and a
portion of such credit will be applied towards the registration fee for this
filing.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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- --------------------------------------------------------------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE AND
THE SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 15, 2002
P R O S P E C T U S
[LOGO]
16,000,000 SHARES
WILLIS GROUP HOLDINGS LIMITED
COMMON STOCK
$ PER SHARE
---------
The selling shareholders named in this prospectus are selling 16,000,000
shares of our common stock. The selling shareholders have granted the
underwriters an option to purchase up to 2,400,000 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 May 14, 2002, the last reported sale price of our common stock was
$29.38 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 $ $
Underwriting Discount $ $
Proceeds to the Selling Shareholders $ $
The underwriters expect to deliver the shares to purchasers on or about
, 2002.
--------------
SALOMON SMITH BARNEY JPMORGAN
---------
BANC OF AMERICA SECURITIES LLC CREDIT SUISSE FIRST BOSTON
---------
MERRILL LYNCH & CO. MORGAN STANLEY UBS WARBURG
, 2002
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.
------------------------
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary.......................................... 1
Risk Factors................................................ 12
Forward Looking Statements.................................. 19
Use of Proceeds............................................. 20
Price Range of Common Stock and Dividend Policy............. 20
Capitalization.............................................. 21
Selected Historical Consolidated Financial Data............. 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Supplemental Constant Currency Financial Data............... 43
Business.................................................... 46
Management.................................................. 65
Principal and Selling Shareholders.......................... 77
Certain Relationships and Related Transactions.............. 81
Description of Material Indebtedness........................ 83
Description of Capital Stock................................ 87
Certain Income Tax Consequences............................. 92
Shares Eligible for Future Sale............................. 95
Underwriting................................................ 97
Validity of Common Stock.................................... 100
Experts..................................................... 100
Where You Can Find More Information......................... 100
Index to Consolidated Financial Statements.................. F-1
------------------------
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 one of the largest insurance brokers 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
approximately 180 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 over 75 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, 2001, our revenues were approximately $1.4 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 15 executives
averaging 17 years of experience in the insurance brokerage and insurance
industries and 10 years of experience with us. To date, approximately 4,750 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 DEVELOPMENTS
We appointed Joseph Plumeri as our Chairman and Chief Executive Officer in
October 2000 and, since then, we have made several significant changes to our
management and operations. In particular, 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;
- expanded opportunities for employees to own our stock. We now estimate
that nearly 43% of our employees own our stock or the right to purchase
our stock at a future date;
- reorganized management responsibilities and reporting structures in our
operations globally, and made several new senior management appointments;
- created a Global Operations function, responsible for high-quality,
cost-efficient support for our operations elsewhere in the Willis Group;
- created a Global Sales and Marketing function, responsible for cultivating
new sales disciplines and recruiting talented individuals to the company;
and
- improved incentive structures for management to encourage growth of both
revenues and earnings.
The growth rate of our total revenues on a constant currency basis was 12%
for 2001 and 22% for the three months ended March 31, 2002, as compared to 2000
and the three months ended March 31, 2001, respectively. See "Supplemental
Constant Currency Financial Data". In addition, our Adjusted EBITDA margin
increased from 15% in 1998 to 26% in 2001. For the three months ended March 31,
2002, our Adjusted EBITDA margin was 34% compared to 28% for the three months
ended March 31, 2001. For an explanation of Adjusted EBITDA, see footnote
(h) under "Prospectus Summary--Summary Consolidated Financial Information".
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 CROSS-SELLING--We are expanding the range of products and services we
sell to our brokerage clients.
- - INCREASE OPERATING EFFICIENCIES--We are implementing measures designed to
further streamline work processes to increase efficiency and margins while
improving client service.
- - CREATE A SINGLE COMPANY CULTURE--We are creating a single company culture
through a group-wide approach to training, operations, 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".
2
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 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 16,000,000 shares of common stock
shareholders(1)............................
Shares to be outstanding after this 147,848,370 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 2,400,000 shares that the underwriters may purchase from
certain of the selling shareholders to cover overallotments of shares, if
any.
(2) Does not include:
- 30,210,324 shares issuable upon the exercise of stock options outstanding
as of March 31, 2002, 8,393,888 of which are subject to currently
exercisable options at an average exercise price of L2.00 ($2.86, based on
the exchange rate as of March 31, 2002 of $1.43=L1.00) per share, and
145,504 restricted shares granted and unforfeited as of March 31, 2002,
10,000 of which have vested; and
- 39,666,354 shares (which includes the 30,355,828 shares issuable upon the
exercise of outstanding stock options and the vesting of restricted shares
granted and unforfeited as of March 31, 2002) authorized and reserved for
issuance under our various stock plans as of March 31, 2002.
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 March 31, 2002 and
for each of the three-month periods ended March 31, 2001 and 2002 and for each
of the years in the three-year period ended December 31, 2001 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 the
year ended December 31, 1997 reflects the financial position and results of
operations of our predecessor.
The summary consolidated financial data presented below as of March 31, 2002
and for the three-month periods ended March 31, 2001 and 2002 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. The unaudited condensed
consolidated financial statements include all adjustments that we consider
necessary for a fair presentation of our financial position as of such dates and
our operating results and cash flows for those periods. Because we earn revenue
in an uneven fashion during the year, the results for the three months ended
March 31, 2002 are not necessarily indicative of the results to be expected for
the year ending December 31, 2002. See "Management Discussion and Analysis of
Financial Condition and Results of Operations".
The summary consolidated financial data presented below for each of the
years in the three-year period ended December 31, 2001 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 the year 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
DECEMBER 31, SEPTEMBER 1, DECEMBER 31, 31,
------------ -------------- -------------- ------------------------------
1997(A) 1998(A) 1998(B) 1999 2000 2001
------------ -------------- -------------- -------- -------- --------
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Total revenues............. $1,134 $ 772 $ 413 $ 1,244 $ 1,305 $ 1,424
General and administrative
expenses (excluding non-
cash compensation)....... (968) (655) (374) (1,136) (1,062) (1,054)
Non-cash compensation--
performance options
(c)...................... -- -- -- -- -- (158)
Unusual items (d).......... -- (59) -- (47) (18) --
Depreciation expense....... (37) (26) (14) (41) (37) (33)
Amortization of goodwill... (29) (20) (11) (35) (35) (35)
Gain (loss) on disposal of
operations............... 7 4 (2) 7 1 17
------ ----- ------- ------- ------- -------
Operating income (loss).... 107 16 12 (8) 154 161
Interest expense........... (1) (3) (27) (89) (89) (82)
Other expenses............. -- -- (8) (7) -- --
Loss on closure of
operations............... -- (34) -- -- -- --
------ ----- ------- ------- ------- -------
Income (loss) before income
taxes, equity in net
earnings of associates
and minority interest.... 106 (21) (23) (104) 65 79
Income tax expense......... (49) (22) (7) (7) (33) (62)
Equity in net earnings
(losses) of associates... 3 13 (4) 7 2 4
Minority interest.......... (1) (1) (10) (28) (25) (19)
------ ----- ------- ------- ------- -------
Net income (loss) available
for common
stockholders............. $ 59 $ (31) $ (44) $ (132) $ 9 $ 2
====== ===== ======= ======= ======= =======
Net earnings (loss) per
share--basic............. $ (0.50) $ (1.11) $ 0.07 $ 0.01
--diluted............ $ (0.50) $ (1.11) $ 0.07 $ 0.01
======= ======= ======= =======
Weighted average number of
common shares
outstanding--basic....... 88 119 121 136
--diluted...... 88 119 121 148
======= ======= ======= =======
WILLIS GROUP HOLDINGS LIMITED
------------------------
THREE MONTHS ENDED
MARCH 31,
------------------------
2001 2002
--------- ---------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Total revenues............. $ 375 $ 451
General and administrative
expenses (excluding non-
cash compensation)....... (268) (297)
Non-cash compensation--
performance options
(c)...................... -- (18)
Unusual items (d).......... -- --
Depreciation expense....... (9) (8)
Amortization of goodwill... (9) --
Gain (loss) on disposal of
operations............... -- --
------ ------
Operating income (loss).... 89 128
Interest expense........... (21) (17)
Other expenses............. -- --
Loss on closure of
operations............... -- --
------ ------
Income (loss) before income
taxes, equity in net
earnings of associates
and minority interest.... 68 111
Income tax expense......... (31) (43)
Equity in net earnings
(losses) of associates... 9 6
Minority interest.......... (7) (6)
------ ------
Net income (loss) available
for common
stockholders............. $ 39 $ 68
====== ======
Net earnings (loss) per
share--basic............. $ 0.31 $ 0.46
--diluted............ $ 0.30 $ 0.43
====== ======
Weighted average number of
common shares
outstanding--basic....... 124 147
--diluted...... 132 159
====== ======
6
PREDECESSOR WILLIS GROUP HOLDINGS LIMITED
----------------------------- -------------------------------------------------
YEAR ENDED JANUARY 1 TO SEPTEMBER 2 TO YEAR ENDED
DECEMBER 31, SEPTEMBER 1, DECEMBER 31, DECEMBER 31,
------------ -------------- -------------- --------------------------------
1997(A) 1998(A) 1998(B) 1999 2000 2001
------------ -------------- -------------- -------- -------- --------
($ IN MILLIONS)
BALANCE SHEET DATA
(AS OF PERIOD END):
Total assets (e)..........
Net assets................
Total long-term debt......
Common shares and
additional paid-in
capital.................
Total stockholders'
equity..................
OTHER FINANCIAL DATA:
EBITDA (f)................ $ 166 $ 117 $ 39 $ 108 $243 $370
EBITDA margin (g)......... 15% 15% 9% 9% 19% 26%
Adjusted EBITDA (h)....... $ 202 $ 135 $ 57 $ 194 $267 $378
Adjusted EBITDA margin
(i)..................... 18% 16% 14% 15% 20% 26%
Operating income before
non-cash compensation--
performance options,
unusual items, goodwill
amortization and gain
(loss) on disposal of
operations (j).......... $ 129 $ 91 $ 25 $ 67 $206 $337
Operating income before
non-cash compensation--
performance options,
unusual items, goodwill
amortization and gain
(loss) on disposal of
operations margin (j)... 11% 12% 6% 5% 16% 24%
Operating cash
earnings(j)............. $ 81 $ 65 $ (26) $ (67) $ 54 $147
Net cash flow provided by
operations (k).......... 128 (51) 70 19 79 221
Net cash flow (used in)
provided by investing
activities (k).......... (225) (50) (1,458) (26) (41) (10)
Net cash flow (used in)
provided by financing
activities (k).......... (19) 21 1,521 (25) (23) (167)
Capital expenditures...... 43 33 16 41 30 40
WILLIS GROUP HOLDINGS LIMITED
------------------------
THREE MONTHS ENDED
MARCH 31,
------------------------
2001 2002
--------- ---------
(UNAUDITED)
BALANCE SHEET DATA
(AS OF PERIOD END):
Total assets (e).......... $10,776
Net assets................ 803
Total long-term debt...... 767
Common shares and
additional paid-in
capital................. 885
Total stockholders'
equity.................. 780
OTHER FINANCIAL DATA:
EBITDA (f)................ $107 $ 154
EBITDA margin (g)......... 28% 34%
Adjusted EBITDA (h)....... $119 $ 166
Adjusted EBITDA margin
(i)..................... 28% 34%
Operating income before
non-cash compensation--
performance options,
unusual items, goodwill
amortization and gain
(loss) on disposal of
operations (j).......... $ 98 $ 146
Operating income before
non-cash compensation--
performance options,
unusual items, goodwill
amortization and gain
(loss) on disposal of
operations margin (j)... 26% 32%
Operating cash
earnings(j)............. $ 48 $ 83
Net cash flow provided by
operations (k).......... 38 88
Net cash flow (used in)
provided by investing
activities (k).......... (3) (7)
Net cash flow (used in)
provided by financing
activities (k).......... (22) (22)
Capital expenditures...... 5 5
- ------------------------------
NOTES TO SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(a) The summary consolidated financial data for the year 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. For the year ended
December 31, 1997, consolidated results of operations were translated into
U.S. dollars at the average exchange rate of $1.64. 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
7
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) Non-cash compensation charges of $158 million and $18 million recognized in
the year ended December 31, 2001 and the three-month period ended March 31,
2002 related to the probable satisfaction of the conditions of
performance-based stock options granted to certain members of management
upon the acquisition of our predecessor in 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview".
(d) Unusual items consist of the following:
- restructuring charges relating to implementation of changes to our North
American business processes, which were $11 million 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 pension 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 10 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.
(e) 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.
(f) EBITDA is defined as operating income before non-cash compensation expense
associated with performance options, unusual items, gain (loss) on disposal
of operations and depreciation and amortization. This definition is
identical to total revenues less general and administrative expenses. 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.
(g) EBITDA margin represents EBITDA as a percentage of total revenues. EBITDA
margin is presented because we believe that it is a useful indicator to
investors of our profitability.
(h) As set forth in the following table, Adjusted EBITDA represents EBITDA
before the non-cash charges described below which were required as a result
of the conversion of our accounts from
8
U.K. GAAP to U.S. GAAP, plus our equity in pre-tax earnings of associates,
together with adjustments to give effect to the items described below.
The non-cash charges excluded from Adjusted EBITDA consist of the following:
- non-cash adjustments for pension expense of $(13) million for the year
ended December 31, 1997, $(2) million and $(2) million for the periods
January 1 to September 1, 1998 and September 2 to December 31, 1998,
$(19) million, $11 million and $13 million for the years ended
December 31, 1999, 2000 and 2001 and $1 million and $1 million for the
three-month periods ended March 31, 2001 and 2002; and
- non-cash adjustments for revaluation of forward exchange contracts and,
for periods ending after January 1, 2001, interest rate swaps of
$(9) million for the year ended December 31, 1997, $0 million and
$(6) million for the periods January 1 to September 1, 1998 and
September 2 to December 31, 1998, $(3) million, $(3) million and
$2 million for the years ended December 31, 1999, 2000, 2001 and
$3 million and $(1) million for the three-month periods ended March 31,
2001 and 2002.
EBITDA is also adjusted to give effect to the following items:
- the elimination of the results of all operations disposed of from
January 1, 1997 to March 31, 2002 as if those dispositions had taken place
on January 1, 1997;
- 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 $10 million of costs relating to investigating and
rectifying unauthorized billing and settlement practices in one of our
business subunits.
9
PREDECESSOR WILLIS GROUP HOLDINGS LIMITED
--------------------------- ---------------------------------------------------------------------
THREE MONTHS
YEAR ENDED JANUARY 1 TO SEPTEMBER 2 TO YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 1, DECEMBER 31, DECEMBER 31, MARCH 31,
------------ ------------ -------------- ------------------------------ -------------------
1997 1998 1998 1999 2000 2001 2001 2002
------------ ------------ -------------- -------- -------- -------- -------- --------
($ IN MILLIONS)
Operating income
(loss)................. $107 $ 16 $12 $ (8) $154 $161 $ 89 $128
Non-cash compensation--
performance options.... -- -- -- -- -- 158 -- 18
Unusual items............ -- 59 -- 47 18 -- -- --
Gain (loss) on disposal
of operations.......... (7) (4) 2 (7) (1) (17) -- --
Depreciation and
amortization........... 66 46 25 76 72 68 18 8
---- ---- --- ---- ---- ---- ---- ----
EBITDA................... 166 117 39 108 243 370 107 154
Non-cash charges excluded
from Adjusted EBITDA... 22 2 8 22 (8) (15) (4) --
Equity in earnings of
associates (before tax
and amortization)...... 3 13 (2) 12 8 12 15 11
Adjustments for
dispositions........... (15) (11) (6) (8) (9) (4) (2) --
Other adjustments:
Severance................ 6 8 8 19 19 10 2 1
Consultancy.............. 14 3 1 17 8 -- -- --
Provisions............... -- -- -- 10 -- -- -- --
Other expenses........... 6 3 9 14 6 5 1 --
---- ---- --- ---- ---- ---- ---- ----
Adjusted EBITDA.......... $202 $135 $57 $194 $267 $378 $119 $166
==== ==== === ==== ==== ==== ==== ====
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 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.
(i) Adjusted EBITDA margin represents Adjusted EBITDA, less share of pre-tax
profits of associates, as a percentage of total revenues. Adjusted EBITDA
margin is presented because we believe that it is a useful indicator to
investors of our profitability.
(j) Operating income before non-cash compensation expense associated with
performance options, unusual items, goodwill amortization and gain (loss) on
disposal of operations, operating income before non-cash compensation
expense associated with performance options, unusual items, goodwill
amortization and gain (loss) on disposal of operations margin and operating
cash earnings are presented because we believe that they are a useful
indicator to investors of our historical operating income and net 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 mandated change in
accounting for goodwill (which became 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
10
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 non-cash compensation expense associated with
performance options, unusual items, goodwill amortization and gain (loss) on
disposal of operations, operating income before non-cash compensation
expense associated with performance options, unusual items, goodwill
amortization and gain (loss) on disposal of operations margin or operating
cash earnings 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 non-cash compensation expense associated with
performance options, unusual items, goodwill amortization and gain
(loss) on disposal of operations adjusts the disclosed operating income
amount for the non-cash compensation expense associated with
performance options described in note (c), the unusual items described
in note (d), goodwill amortization and gain (loss) on disposal of
operations;
- Operating income before non-cash compensation expense associated with
performance options, unusual items, goodwill amortization and gain
(loss) on disposal of operations margin represents operating income
before non-cash compensation expenses associated with performance
options, unusual items, goodwill amortization and gain (loss) on
disposal of operations as a percentage of operating revenues; and
- Operating cash earnings adjusts net income (loss) for the non-cash
compensation expense associated with performance options described in
note (c), the unusual items described in note (d), goodwill
amortization and gain (loss) on disposal of operations after tax
effects of $13 million in the period January 1, 1998 to September 1,
1998, $14 million, $7 million and $31 million in the years ended
December 31, 1999, 2000 and 2001 and $0 and $3 million in the three
months ended March 31, 2001 and 2002 and a non-recurring tax credit of
$11 million for the year ended December 31, 2001 arising from an
internal restructuring. 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.
(k) The summary cash flow data presented for each of the three months ended
March 31, 2001 and 2002 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 three years ended December 31, 2001 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 the year 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
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 and a significant portion of our
increased revenue in 2001 and the first quarter of 2002 was attributable to
increased premium rates, premiums have been cyclical in nature and have varied
widely based on market conditions. From the late 1980s through late 2000,
insurance premium rates generally declined 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.
CLAIMS, LAWSUITS AND PROCEEDINGS--OUR BUSINESS, RESULTS OF OPERATIONS, FINANCIAL
CONDITION AND LIQUIDITY MAY BE MATERIALLY ADVERSELY AFFECTED BY ERRORS AND
OMISSIONS AND THE OUTCOME OF CERTAIN ACTUAL AND POTENTIAL CLAIMS, LAWSUITS AND
PROCEEDINGS.
We are subject to various actual and potential claims, lawsuits and
proceedings relating principally to alleged errors and omissions in connection
with the placement of insurance and reinsurance in the ordinary course of
business. Because we often assist our clients with matters, including the
placement of insurance coverage and the handling of related claims, involving
substantial amounts of money, errors and omissions claims against us may arise
which in turn allege our potential liability for all or part of the amounts in
question. Claimants may seek large damage awards and these claims can involve
potentially significant defense costs. Such claims, lawsuits and proceedings
could, for example, include allegations of damages for 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. We have
established provisions against these items which we believe to be adequate in
the light of current information and legal advice, and we adjust such provisions
from time to time according to developments.
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 business, results of operations, financial condition and
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, claims, lawsuits and proceedings may harm
our reputation and divert management resources away from operating our business.
12
The principal actual or potential claims, lawsuits and proceedings to which
we are currently subject are (i) claims relating to services provided by one of
our U.K. subsidiaries, Willis Faber (Underwriting Management) Limited, to
another subsidiary, Sovereign Marine & General Insurance Company Limited (in
Scheme of Arrangement), that was engaged in insurance underwriting prior to 1991
as well as to certain third party insurance companies; (ii) certain liabilities
relating to the selling of personal pension plans to individuals in the United
Kingdom from 1988 to 1994; (iii) potential claims which could be asserted with
respect to our placement of property and casualty insurance for a number of
entities which were directly impacted by the September 11, 2001 destruction of
New York's World Trade Center complex; (iv) potential claims arising out of
various legal proceedings between reinsurers, reinsureds and their reinsurance
brokers relating to personal accident excess of loss reinsurance placements for
the years 1993 to 1998; and (v) claims relating to activities by a U.S.
subsidiary of ours, Baccala and Shoop Insurance Services, prior to 1984 for
certain insurance issuing companies.
See "Business--Legal Matters" for a detailed description of these risks.
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.
Many of our activities are subject to regulatory supervision in the various
countries and jurisdictions in which we are based or our activities are
undertaken. We have in the past failed to comply with some of these regulations
and future failures to comply 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 more substantial fines and the
possible 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".
DEBT AND DEBT SERVICE REQUIREMENTS--OUR SIGNIFICANT DEBT AND DEBT SERVICE
REQUIREMENTS COULD LIMIT OUR ABILITY TO GROW AND REMAIN COMPETITIVE.
As of March 31, 2002, we had total long-term indebtedness of $767 million,
stockholders' equity of $780 million and a debt to equity ratio of 0.98 to 1.
Our interest expense for the year ended December 31, 2001 was $82 million. Our
business may not generate cash flow in an amount sufficient to enable us to
service our debt or to fund our liquidity needs. Our significant indebtedness
and debt service requirements could also limit our ability to fund planned
capital expenditures, take advantage of attractive potential acquisitions and
investments and otherwise successfully operate our business, including
implementing our expansion strategy. Our ability to make payments on or to
refinance our indebtedness, to fund planned capital expenditures, to make
acquisitions and investments and to otherwise pursue our expansion strategy will
depend on our future performance.
Our acquisition strategy may also 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, including general economic, financial, competitive,
regulatory and other considerations which may be beyond our control.
We may borrow more money for working capital, capital expenditures or other
commitments. If debt is added to our current debt levels, the related risks that
we now face could intensify.
13
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 currently exercised through
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 $24 million if those rights are fully exercised.
Until 2005, the incremental 57% of Gras Savoye may be put to us at a price
equal to the greater of approximately $108 million (at March 31, 2002 exchange
rates) or a price determined by a contractual formula based on earnings and
revenue, which at December 31, 2001 amounted to approximately $135 million.
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.
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 CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 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 Chairman and Chief Executive Officer, Joseph
Plumeri, but also on the individual brokers and teams that service our clients
and
14
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 NON-U.S. OPERATIONS, PARTICULARLY
THOSE IN THE UNITED KINGDOM, EXPOSE US TO EXCHANGE RATE FLUCTUATIONS AND VARIOUS
RISKS THAT COULD IMPACT OUR BUSINESS.
A significant portion of our operations is conducted outside the United
States. 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;
- hyperinflation in certain foreign countries;
- imposition or increase of investment and other restrictions by foreign
governments; and
- the requirement of complying with a wide variety of foreign laws.
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 incur
expenses in the local currency. The table below details the breakdown of
revenues and expenses by currency in 2001.
POUNDS STERLING U.S. DOLLARS OTHER CURRENCIES
--------------- ------------ ----------------
Revenues......................................... 16% 62% 22%
Expenses......................................... 38% 45% 17%
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. Given these facts, the strength of the pound sterling
relative to the U.S. dollar has in the past 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.
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.
15
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
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 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. 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
147,848,370 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, 84,359,749 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.
We, our directors and group executive officers 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. and J.P. Morgan Securities Inc. for a period of 90 days from
the date of this prospectus. Salomon Smith Barney Inc. and J.P. Morgan
Securities Inc. may in their 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.
Except in the case of certain of our shares held by the trust that is party
to our employee stock purchase agreements, certain of our employee and
management shareholders, including our directors and executive officers, are
subject to existing transfer restrictions in excess of 90 days on certain of
their shares pursuant to shareholder and subscription agreements with us. Except
as discussed below,
16
we have agreed not to amend, waive or fail to enforce those transfer
restrictions for a period of 90 days after the date of this prospectus, in each
case without the prior written consent of Salomon Smith Barney Inc. and J.P.
Morgan Securities Inc. However, effective 30 days after the date of this
prospectus, we intend to release these transfer restrictions on an aggregate of
approximately 4,428,000 of these shares, including approximately 1,375,000
shares held by our group executive officers, such that these shares may then be
immediately sold in the open market by any of our employees who are not
affiliates or group executive officers. These shares, other than the shares held
by our group executive officers, are not subject to any lock-up arrangement with
Salomon Smith Barney Inc. or J.P. Morgan Securities Inc.
Our shareholders who are subject to the lock-up agreements or similar
restrictions on transfer will own 73,100,925 shares (excluding approximately
4,428,000 shares we intend to release from existing transfer restrictions) 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.
We have in the past agreed to issue shares of our common stock in connection
with acquisitions 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 of common stock
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.
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
the consortium members described under "Principal and Selling Shareholders" 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 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.
17
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.
18
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.
19
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:
Quarter ended September 30, 2001.......................... $23.95 $16.25
October................................................... $25.02 $22.45
November.................................................. $25.01 $22.20
December.................................................. $23.80 $23.00
Quarter ended December 31, 2001........................... $25.02 $22.20
2002
January................................................... $26.78 $21.70
February.................................................. $28.40 $26.55
March..................................................... $26.90 $24.70
Quarter ended March 31, 2002.............................. $28.40 $21.70
April..................................................... $29.25 $24.65
May (through May 14, 2002)................................ $30.50 $27.86
On May 14, 2002, the last reported sale price of our common stock as
reported by the New York Stock Exchange was $29.38 per share. As of March 31,
2002, there were approximately 580 shareholders of record of our common stock.
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. We currently intend to retain our future earnings to finance
the expansion of our business. In addition, our ability to pay dividends is
effectively limited by the terms of some of the debt instruments of our
subsidiaries, which significantly restrict their ability to pay dividends
directly or indirectly to us. See "Description of Material Indebtedness". Future
dividends on our common stock, if any, will be at the discretion of our board of
directors and will depend on, among other things, our results of operations,
cash requirements and surplus, financial condition, contractual restrictions and
other factors that our board of directors may deem relevant. We would pay cash
dividends, if any, on our common stock in United States dollars.
20
CAPITALIZATION
The following table presents our consolidated capitalization as of
March 31, 2002. You should read this table in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and the accompanying notes and the
unaudited condensed consolidated financial statements and the accompanying notes
included in this prospectus beginning on page F-1:
AS OF
MARCH 31,
2002
----------
($ IN
MILLIONS)
DEBT:
Revolving credit facility (1)............................. $ --
Term loans(2)............................................. 328
9% senior subordinated notes(2)........................... 439
------
Total debt................................................ 767
------
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, 147,842,120 shares issued and
outstanding (3)........................................... --
Additional paid-in capital.................................. 885
Accumulated deficit......................................... (97)
Accumulated other comprehensive income...................... 5
Treasury stock, at cost, 942,386 shares..................... (13)
------
Total stockholders' equity................................ 780
------
TOTAL CAPITALIZATION...................................... $1,547
======
The above information does not give effect to 30,210,324 shares issuable
upon the exercise of outstanding stock options and 145,504 granted and
unforfeited restricted shares as of March 31, 2002; or 39,666,354 shares (which
includes the 30,355,828 shares issuable upon the exercise of outstanding stock
options) authorized and reserved for issuance under our various stock plans as
of March 31, 2002.
- ------------------------
(1) $150 million was available under our revolving credit facility as of
March 31, 2002. As of May 14, 2002, no amounts available under this facility
had been drawn.
(2) The term loans and 9% senior subordinated notes are described under
"Description of Material Indebtedness".
(3) The actual aggregate par value of common shares is $17,002. This amount
rounds to zero in millions of dollars.
21
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below should be read in
conjunction with the audited consolidated financial statements and the unaudited
condensed consolidated financial statements of Willis Group Holdings Limited and
the 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 March 31, 2001 and 2002 and December 31, 1998, 1999,
2000 and 2001 and for each of the three-month periods ended March 31, 2001 and
2002 and for each of the years in the three-year period ended December 31, 2001
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 the year ended December 31, 1997 reflects the financial
position and results of operations of our predecessor.
The selected consolidated financial data presented below as of March 31,
2002 and for the three-month periods ended March 31, 2001 and 2002 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. The unaudited
condensed consolidated financial statements include all adjustments that we
consider necessary for a fair presentation of our financial position as of such
dates and our operating results and cash flow for those periods. Because we earn
revenue in an uneven fashion during the year, the results of the three months
ended March 31, 2002 are not necessarily indicative of the results to be
expected for the year ended December 31, 2002. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
There has been no significant change in our financial condition since
March 31, 2002.
The selected consolidated financial data presented below as of December 31,
2000 and 2001 and for each of the years in the period ended December 31, 2001
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 as of December 31, 1999 have been
derived from the audited consolidated financial statements of Willis Group
Holdings Limited, which are not included in this prospectus. 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 the year 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.
22
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 DECEMBER THREE MONTHS ENDED
DECEMBER 31, SEPTEMBER 1, DECEMBER 31, 31, MARCH 31,
------------ ------------ -------------- ------------------------------ -----------------------
1997(A) 1998(A) 1998(B) 1999 2000 2001 2001 2002
------------ ------------ -------------- -------- -------- -------- ---------- ----------
($ IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
DATA:
Total revenues............. $1,134 $ 772 $ 413 $ 1,244 $ 1,305 $ 1,424 $ 375 $ 451
General and administrative
expenses (excluding non-
cash compensation)....... (968) (655) (374) (1,136) (1,062) (1,054) (268) (297)
Non-cash compensation--
performance options(c)... -- -- -- -- -- (158) -- (18)
Unusual items (d).......... -- (59) -- (47) (18) -- -- --
Depreciation expense....... (37) (26) (14) (41) (37) (33) (9) (8)
Amortization of goodwill... (29) (20) (11) (35) (35) (35) (9) --
Gain (loss) on disposal of
operations............... 7 4 (2) 7 1 17 -- --
------ ----- ------- ------- ------- ------- ------ -------
Operating income (loss).... 107 16 12 (8) 154 161 89 128
Interest expense........... (1) (3) (27) (89) (89) (82) (21) (17)
Other expenses............. -- -- (8) (7) -- -- -- --
Loss on closure of
operations............... -- (34) -- -- -- -- -- --
------ ----- ------- ------- ------- ------- ------ -------
Income (loss) before income
taxes, equity in net
earnings of associates
and minority interest.... 106 (21) (23) (104) 65 79 68 111
Income tax expense......... (49) (22) (7) (7) (33) (62) (31) (43)
Equity in net earnings of
associates............... 3 13 (4) 7 2 4 9 6
Minority interest.......... (1) (1) (10) (28) (25) (19) (7) (6)
------ ----- ------- ------- ------- ------- ------ -------
Net income (loss).......... $ 59 $ (31) $ (44) $ (132) $ 9 $ 2 $ 39 $ 68
====== ===== ======= ======= ======= ======= ====== =======
Net earnings (loss) per
share--basic............... $ (0.50) $ (1.11) $ 0.07 $ 0.01 $ 0.31 $ 0.46
--diluted.............. $ (0.50) $ (1.11) $ 0.07 $ 0.01 $ 0.30 $ 0.43
======= ======= ======= ======= ====== =======
Weighted average number of
common shares
outstanding--basic....... 88 119 121 136 124 147
--diluted...... 88 119 121 148 132 159
======= ======= ======= ======= ====== =======
BALANCE SHEET DATA (AS OF
PERIOD END):
Total assets (e)........... $6,210 $ 6,904 $ 6,969 $ 7,590 $ 8,949 $10,776
Net assets................. 972 601 513 529 712 803
Total long-term debt....... 56 1,040 988 958 787 767
Preference shares.......... -- 267 269 272 -- --
Common shares and
additional paid-in
capital.................. 123 365 401 410 867 885
Total stockholders'
equity................... 963 321 226 238 696 780
OTHER FINANCIAL DATA:
Capital expenditures....... $ 43 $ 33 $ 16 $ 41 $ 30 $ 40 $ 5 $ 5
- ------------------------
(a) The selected consolidated financial data as of and for the year 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. For
the year ended December 31, 1997, consolidated results of operations were
translated into U.S. dollars at the average exchange rates of $1.64 and
assets and liabilities were translated at the year-end exchange
23
rates of $1.65. 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) Non-cash compensation charges of $158 million and $18 million recognized in
the year ended December 31, 2001 and the three-month period ended March 31,
2002 related to the probable satisfaction of the conditions of
performance-based stock options granted to certain members of management
upon the acquisition of our predecessor in 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview".
(d) Unusual items consist of the following:
- restructuring charges relating to implementation of changes to our North
American business processes, which were $11 million 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 10 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.
(e) 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.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We provide a broad range of value-added risk management consulting and
employee benefits and insurance brokerage services, both directly and indirectly
through our associates, to a diverse base of clients internationally. We provide
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 our capacity as an advisor and insurance broker, we act 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 our global distribution network. We also provide other value-added
services.
We generate revenue from commissions and fees on insurance placements and
fees from consulting and other services. We also earn interest on premiums held
before remittance 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 past years, we experience pressure on our revenues and earnings, and when
pricing increases, we tend to benefit, although in both cases there are many
other factors that affect our revenues, including changes in buying and selling
behavior. Beginning in late 2000, market pricing generally began to move upward
for the first time in recent years and this continued throughout 2001. Although
commissions 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 an increasing
preference for fees generally in the insurance market and a rising demand by
clients for fee-generating risk management consulting services. We expect this
trend toward increasing fee income to continue.
The events of September 11, 2001 have had a significant impact on the market
for insurance and reinsurance. Many insurers have reduced the amount of
insurance they write, particularly in the airline, energy and large complex
property areas, and net industry capacity has been reduced, at least
temporarily. Insurers have also increased premium rates and restricted coverage
terms, a process that had commenced before September 11 but which accelerated
after that time. We believe this is due in part to concerns about the ability to
arrange for reinsurance, as well as to a more conservative view on risk,
particularly in the areas mentioned above. As a result of these changes, we
experienced increased difficulty and delays in placing certain risks in the
market during the fourth quarter of 2001, although most insurance renewals
scheduled to be completed during that quarter were ultimately completed on time
at similar, or higher, commissions due to increased premium rates. Results for
the fourth quarter were therefore not adversely affected. Although these trends
appear to have continued after year-end, there can be no assurance that they
will continue in the future.
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:
- Global;
- North America; and
- International.
See "Business" for a description of our operations.
25
During 2001, 52% of our total revenues were derived from Global operations,
36% were from North America operations and 12% were from International
operations.
During the three-year period ended December 31, 2001 and the three-month
period ended March 31, 2002, 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. 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 $19 million,
$19 million and $10 million of severance costs in 1999, 2000 and 2001 and
$2 million and $1 million in each of the three-month periods ended
March 31, 2001 and 2002.
- CONSULTING EXPENSES--consulting expenses primarily incurred in connection
with our improvement initiatives. We incurred $17 million and $8 million
of consulting expenses in 1999 and 2000.
- PERFORMANCE-BASED STOCK OPTIONS--we recorded a $158 million non-cash
charge for performance-based stock options for the year ended
December 31, 2001 and an $18 million non-cash charge in the three-month
period ended March 31, 2002 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 $24 million, $6 million and $5 million of
those expenses in 1999, 2000 and 2001. 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. EBITDA, EBITDA margin, Adjusted EBITDA and Adjusted EBITDA margin
are defined in footnotes (f), (g), (h) and (i), respectively, under "Prospectus
Summary--Summary Consolidated Financial Information".
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 1999 through March 31, 2002:
- KSA--an underwriting agency based in the Netherlands that was sold in
April 1999 for $6 million.
- E J WELTON & CO. 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 and North America presence by making
several investments including the following:
- JASPERS WUPPESAHL--we increased our holding in our German associate to 45%
in January 1999 and to 67% in January 2002.
- HERZFELD LEVY--we acquired a 20% interest in an associate in Argentina in
March 1999; this holding was subsequently increased to 40%.
26
- 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.
- 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.
- BRADSTOCK G.I.S. PTY LIMITED--we acquired a 100% interest in an Australian
insurance brokerage firm in February 2001 that we merged with our existing
Australia operation.
- RICHARD N. GOLDMAN & CO.--we acquired a 100% interest in a California
insurance brokerage firm in December 2001.
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
America business, 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.
Although the financial results in 1999 were disappointing, the improvement
initiatives 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;
- invested in businesses in Norway, South Africa, Colombia and Chile;
- spent $19 million on severance and reduced spending on external
consultants to $8 million;
- named Joseph Plumeri, formerly of Citigroup, as Chairman and Chief
Executive Officer, who 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.
In 2001, under our new Chairman and Chief Executive Officer, we completed an
initial public offering of approximately 16% of our common stock. We used the
proceeds to redeem in full the preference shares of one of our subsidiaries. In
addition, we continued to identify and implement
27
initiatives to increase the rate of growth of our revenues while controlling
costs and eliminating waste, thus significantly improving our financial results.
We also:
- grew revenues by 12% on a comparable basis;
- contained expense growth to 5% on a comparable basis;
- repaid an additional $60 million of term loans under our senior credit
facility. We are ahead of our repayment schedule, and the next mandatory
payment is in November 2005. This brings total repayments since 1998 to
$102 million. We also repurchased and retired $111 million of our senior
subordinated notes during 2001;
- improved operating income by $165 million (107%) before a non-cash charge
for performance options;
- improved EBITDA by $127 million and increased our EBITDA margin from 19%
in 2000 to 26% in 2001;
- improved net cash flows from operating activities from $79 million in 2000
to $221 million in 2001; and
- invested in new businesses in Australia and California and restructured
our Italian subsidiary.
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 2001 for example, we generated 26% of our revenues in the
first quarter and 27% of our revenues in the fourth quarter. The second and
third quarters are less substantial revenue generating quarters, accounting for
24% and 23%, respectively, of 2001 revenues. General and administrative expenses
(excluding non-cash compensation), however, are incurred on a relatively even
basis throughout the year, 25%, 25%, 24% and 26% for the first, second, third
and fourth quarters of 2001. 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. EBITDA for each quarter of 2001 as a percentage of the full
year EBITDA was 29%, 21%, 18% and 32% for the first, second, third and fourth
quarters respectively. Operating income in 2001, impacted by the effect of
performance options and net gain on disposals, was $89 million, $62 million,
$(72) million and $82 million for the first, second, third and fourth quarters,
respectively.
In recent years, operating revenues have not been significantly influenced
by inflation. However, with our staff and related costs generally accounting for
approximately 50% of our operating revenues, general inflationary pressures in
each of the countries in which we operate affect us.
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 relative to the U.S. dollar has in the past 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".
As part of the acquisition of our predecessor in 1998, certain members of
management were granted performance-based stock options for meeting or exceeding
2001 and 2002 performance targets. 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
28
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 would be
satisfied. As a result, for the year ended December 31, 2001, we recorded an
initial non-cash charge of $158 million ($132 million, net of tax) based on the
difference between the price of our common stock at December 31, 2001 and the
exercise price of the options, which is generally L2 per share, and an average
elapsed performance period of 68%. A further non-cash charge of $18 million
($15 million, net of tax) was recorded in the three-month period ended March 31,
2002 based on our stock price at March 31, 2002 and a total elapsed period of
72%. A further 12% will elapse through the end of 2002 with the remainder
elapsing thereafter. 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. Based on the March 31, 2002
stock price of $24.70, and assuming all the 11.2 million performance-based
options outstanding at that date will vest and become exercisable, the total
charge would be $245 million ($204 million, net of tax). For every $1 increase
or decrease in our stock price, the total charge would increase or decrease by
$11.2 million and the income tax credit will increase or decrease by
approximately $2.0 million.
At December 31, 2001, we had goodwill and other intangible assets, net of
accumulated amortization, of $1,201 million arising from the acquisition in 1998
of Willis Group Limited by our predecessor and subsequent acquisitions. Up to
December 31, 2001, goodwill and other intangible assets were being amortized
over a period of approximately 40 years and an amortization charge of
$35 million was recognized for 2001. Following the adoption of Statement of
Financial Accounting Standards No. 142, GOODWILL AND INTANGIBLE ASSETS,
effective from January 1, 2002, goodwill is no longer amortized but instead is
subject to annual (or in certain circumstances more frequent) impairment tests.
We have not fully completed an assessment of the impact of the new standard.
However, upon adoption, reclassification of acquired intangible assets
previously accounted for as goodwill was not required and management does not
expect any impairment charges to result from the implementation of SFAS 142.
CRITICAL ACCOUNTING POLICIES
Our accounting policies are described in Note 2 to the consolidated
financial statements. Management believes that the following policies are both
the most important to the portrayal of our financial condition and results and
require management's most difficult, subjective or complex judgments.
REVENUE RECOGNITION
We take credit for commissions (or fees negotiated in lieu of commissions)
in respect of insurance placements at the date when the insured is billed or at
the inception date of the policy, whichever is later. Fees for other services
are generally recognized as the services are provided. Many clients are now
negotiating a combined fee for an agreed period to cover both risk management
advisory services and the placement of insurances, for which there may be
several different renewal dates. Further, an increasing number of policies are
for periods, either longer or shorter, than the traditional one-year policy.
These trends give rise to a number of judgments concerning the allocation of
revenue between accounting periods. We believe we are applying these judgments
in a consistent and appropriate manner.
STOCK-BASED COMPENSATION
During 2001 and the first quarter of 2002, we recorded non-cash charges of
$158 million and $18 million, respectively, for performance-based stock options
on the basis that, in management's judgment, it was probable that the
performance conditions triggering vesting of the options would be satisfied. If
our actual cash flow and EBITDA for 2002 are substantially lower than
management's
29
expectations, then some, or all, of the performance-based options may never
vest. Accordingly, previously recorded non-cash charges for performance-based
stock options would be reversed, either in part or in full, in the quarter in
which management determines that it is no longer probable that the maximum
performance conditions would be satisfied.
DEFERRED TAX
At December 31, 2001, we had deferred tax assets of $186 million against
which a valuation allowance of $92 million had been recognized. To the extent
that the actual future taxable income in the periods during which the temporary
differences are expected to reverse differs from current projections, or assumed
prudent and feasible tax planning strategies fail to materialize, or new tax
planning strategies are developed, or material changes occur in actual tax rates
or loss carryforward time limits, we may adjust the deferred tax asset
considered realizable in future periods. Such adjustments could result in a
significant increase or decrease in the effective tax rate and have a material
impact on our net income, although management does not believe that this is
likely.
PROVISIONS
We have established provisions against actual and potential claims, lawsuits
and proceedings relating principally to alleged errors and omissions in
connection with the placement of insurance and reinsurance in the ordinary
course of business. Such provisions cover claims that have been reported but not
paid and also claims that have been incurred but not yet reported. These
provisions are established based on advice received from qualified
professionals, including external legal advice, and are developed using
actuarial principles and assumptions, including historical claim payment
patterns. A significant change in historical payment patterns or increased
frequency or severity of claims for errors and omissions could have a material
adverse effect on our results of operations.
Further, as detailed in Note 10 to the financial statements, we have
established provisions for the costs of the U.K. review of personal pension
plans sold to individuals between 1988 and 1994, for future lease rental
payments of leasehold properties surplus to operational requirements and for
discontinued operations.
Although there remains some uncertainty as to the ultimate liability with
respect to these matters, we believe that it is unlikely that the eventual
outcome will have a material adverse effect on our reported results.
30
OPERATING RESULTS
THREE-MONTH PERIOD ENDED MARCH 31, 2002 COMPARED WITH THREE-MONTH PERIOD ENDED
MARCH 31, 2001
SUMMARY
Total revenues increased by $76 million (20%) to $451 million in the first
quarter of 2002 from $375 million in the first quarter of 2001. Total revenues
for the first quarter of 2002 benefitted from the consolidation from January 1,
2002 of Jaspers Wuppesahl which generates a significant portion of its revenue
during the first quarter. Excluding the effects of acquisitions (including
Jaspers Wuppesahl) and disposals and adjusting for foreign currency exchange
rate movements, total revenues were 17% higher in the first quarter of 2002 than
in the corresponding quarter of 2001. The increase in revenues was predominantly
due to new business growth and, to a lesser extent, the impact of higher premium
rates prevailing in the market.
Operating income increased by $39 million (44%) to $128 million in the first
quarter of 2002 from $89 million in the first quarter of 2001. Excluding the
non-cash compensation charge in 2002 for performance-based stock options of
$18 million and the non-cash amortization of goodwill of $9 million in 2001,
operating income increased by $48 million (49%) in the first quarter of 2002
over the corresponding period of 2001. In the first quarter of 2002, EBITDA
margin was 34% compared to 28% for the first quarter of 2001.
Net income increased by $29 million (74%) to $68 million ($0.43 per diluted
share) in the first quarter of 2002 from net income of $39 million ($0.30 per
diluted share) in the first quarter of 2001.
Management believes that operating cash earnings is a measure helpful to
investors because it shows the results of our trading and finance costs without
the impact of non-cash items. Operating cash earnings increased by $35 million
(73%) in the first quarter of 2002 compared with the first quarter of 2001. The
derivation of operating cash earnings from net income under U.S. GAAP is shown
below:
THREE MONTHS
ENDED
MARCH 31,
-------------------
2002 2001
-------- --------
($ IN MILLIONS,
EXCEPT PER
SHARE DATA)
Net income, as reported..................................... $ 68 $ 39
Non-cash compensation--performance options (net of tax
$3)....................................................... 15 --
Amortization of goodwill.................................... -- 9
----- -----
Operating cash earnings..................................... $ 83 $ 48
===== =====
Weighted-average number of common shares outstanding:
--diluted................................................. 159 132
--dilutive effect of performance options.................. 7 --
----- -----
Average diluted shares, operating basis..................... 166 132
===== =====
Net income per share--diluted, as reported.................. $0.43 $0.30
===== =====
Operating cash earnings per diluted share, operating
basis..................................................... $0.50 $0.36
===== =====
At March 31, 2002, the year-to-date results had not reached the minimum
threshold target (based on full-year results) to trigger the performance
options. In accordance with Financial Accounting Standards No. 128, EARNINGS PER
SHARE, such options were therefore excluded from the calculation of the reported
net income per diluted share. However, management believes it is likely that the
performance options will ultimately vest in full. It is therefore helpful to
investors to present operating cash earnings per diluted share on the assumption
that the performance options had vested in full at March 31, 2002. On this
basis, an additional 7 million shares would be added to the average number of
31
diluted shares outstanding for the first quarter of 2002 increasing the number
of shares outstanding from 159 million to 166 million.
Operating cash earnings per diluted share on this basis is $0.50 for the
first quarter of 2002 compared with $0.36 for the first quarter of 2001, an
increase of 39%.
REVENUES
Commissions and fees increased by $77 million (21%) to $436 million in the
first quarter of 2002 from $359 million in the first quarter of 2001 and
interest income decreased by $1 million (6%) to $15 million in the first quarter
of 2002 from $16 million in the corresponding period of 2001.
GLOBAL: Revenues generated by our Global business increased by $31 million
(14%) to $247 million in the first quarter of 2002 from $216 million in the
first quarter of 2001. Adjusting for the disposal of Willis National in
July 2001, revenues increased by 19% in constant currency terms. Global's
specialty businesses, aerospace, marine and reinsurance, continued to benefit
from a pronounced increase in the premium rates prevailing in these markets and
new business successes.
NORTH AMERICA: Revenues generated by our North America business increased
by $18 million (15%) to $135 million in the first quarter of 2002 from
$117 million in the first quarter of 2001. In constant currency terms, revenues
increased by 15%. Adjusting for the acquisition of Richard N. Goldman & Co.,
effective December 31, 2001, revenues increased by 12%. The U.S. middle market
experienced significant premium rate increases across all lines.
INTERNATIONAL: Revenues generated by our International business increased
by $27 million (64%) to $69 million in the first quarter of 2002 from
$42 million in the first quarter of 2001. Adjusting for the effect on revenues
of an additional 22% investment in Jaspers Wuppesahl, which resulted in a change
in accounting from the equity method to full consolidation, International
revenues increased by 17% in constant currency terms led by good performances in
Europe, the Eastern Hemisphere and Australia.
EXPENSES
Total expenses increased by $37 million (13%) to $323 million in the first
quarter of 2002 from $286 million in the first quarter of 2001. General and
administrative expenses (excluding non-cash compensation) increased by
$29 million (11%) to $297 million from $268 million in the first quarter of
2001. Excluding the effect of foreign currency exchange rate movements and the
effect of acquisitions and disposals, general and administrative expenses grew
by 11% in the first quarter of 2002 compared to the first quarter of 2001. Much
of the increase related to increased incentive compensation due to positive
results and the impact of hiring production and sales executives.
INTEREST EXPENSE
Interest expense of $17 million in the first quarter of 2002 was $4 million
lower than in the first quarter of 2001, reflecting generally lower interest
rates and lower principal amounts of debt outstanding following the early
repayment 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 first quarter of 2002 amounted to $43 million,
giving an effective tax rate of 39%, compared with 46% in the corresponding
period of 2001. Adjusting for the non-cash performance option charge, of which
only approximately 40% is tax deductible, and excluding goodwill amortization
charges, for which no tax deductions are available, the underlying tax rate for
the first quarter of 2002 was 36%, compared with 40% in the corresponding period
of 2001.
32
ASSOCIATES
Equity in net income of our associates was $6 million in the first quarter
of 2002, compared with $9 million in the corresponding period of 2001,
reflecting the increased investment in Jaspers Wuppesahl from January 1, 2002
when that former associate became a subsidiary.
MINORITY INTEREST
Minority interest for the first quarter of 2002 was $6 million compared with
$7 million for the first quarter of 2001. Minority interest for the first
quarter of 2001 included $6 million in respect of dividends on preference shares
that were redeemed in June 2001. The increase in the first quarter of 2002,
after excluding the amount attributable to preference shares in 2001, was
largely due to the consolidation of Jaspers Wuppesahl (in which we now own a 67%
interest) as a subsidiary from January 1, 2002.
FISCAL 2001 COMPARED WITH FISCAL 2000
SUMMARY
Total revenues increased by $119 million (9%) to $1,424 million in 2001 from
$1,305 million in 2000. Excluding the effects of foreign currency exchange rate
movements and the effects of acquisitions and disposals, total revenues were 12%
higher in 2001 than in 2000. The increase in revenues was primarily due to
increased business from existing clients, new business exceeding lost business,
and generally higher premium rates and volumes.
Operating income increased by $7 million (5%) to $161 million in 2001 from
$154 million in 2000. Excluding the non-cash compensation charge in 2001 for
performance-based stock options of $158 million, net gain on disposal of
operations ($17 million in 2001 and $1 million in 2000) and restructuring costs
($18 million in 2000), operating income increased by $131 million (77%) in 2001.
The effect of foreign currency exchange rate movements on operating income in
2001 was not material.
Primarily as a consequence of the performance-based stock options charge, we
recorded net income in 2001 of $2 million ($0.01 per diluted share) compared
with net income of $9 million ($0.07 per diluted share) in 2000.
Management believes that operating cash earnings is a measure helpful to
investors because it shows the results of our trading and finance costs without
the impact of non-cash and non-recurring items. Operating cash earnings
increased by $93 million (172%) in 2001 compared with 2000. Operating cash
earnings per diluted share were $0.99 in 2001, an increase of 120% over 2000.
The derivation of operating cash earnings from net income is shown below:
YEAR ENDED DECEMBER 31,
--------------------------------------------------
PER DILUTED SHARE
----------------------
2001 2000 2001 2000
-------- -------- -------- --------
($ IN MILLIONS, EXCEPT PER SHARE DATA)
Net income, as reported..................................... $ 2 $ 9 $ 0.01 $ 0.07
Non-cash compensation--performance options (net of tax
$26)...................................................... 132 -- 0.89 --
Amortization of goodwill.................................... 35 35 0.23 0.29
Net gain on disposal of operations (net of tax $6).......... (11) (1) (0.07) (0.01)
Restructuring costs (net of tax $7)......................... -- 11 -- 0.10
Non-recurring tax credit arising from an internal
restructuring............................................. (11) -- (0.07) --
---- ---- ------ ------
Operating cash earnings..................................... $147 $ 54 $ 0.99 $ 0.45
==== ==== ====== ======
Average number of diluted shares outstanding................ 148 121
==== ====
Operating margin, defined as the ratio of revenues less general and
administrative expenses, depreciation and amortization of goodwill to revenues,
increased to 21% in 2001 compared with 13%
33
in 2000. We use EBITDA as a measure of cash generated by the business. EBITDA
margin expanded to 26% in 2001 from 19% in 2000.
REVENUES
Revenues consist of commissions and fees, which increased by $120 million
(10%) to $1,357 million in 2001 from $1,237 million in 2000, and interest
income, which decreased by $1 million (1%) to $67 million in 2001 from
$68 million in 2000.
GLOBAL: Revenues generated by our Global business increased by $68 million
(10%) to $741 million in 2001 from $673 million in 2000. In constant currency
terms, revenues increased by 12%. Adjusting for the effect of the Willis
National disposal in July 2001, revenues increased by 16%, with strong new
business performance being supplemented by rising premium rates.
NORTH AMERICA: Revenues generated by our North America business increased
by $22 million (5%) to $506 million in 2001 from $484 million in 2000. Adjusting
for the effect of the disposal of the PENCO programs division in January 2001,
revenues increased by 7% in constant currency terms, primarily attributable to
increased premium rates.
INTERNATIONAL: Revenues generated by our International business increased
by $30 million (20%) to $177 million in 2001 from $147 million in 2000. In
constant currency terms, revenues increased by 26%, mainly as a result of our
acquisitions in Norway, Colombia and South Africa. Excluding the effect on
revenue of these acquisitions, International business revenues increased by 14%
in constant currency terms. Most international insurance markets increased
premium rates in line with U.K. and U.S. markets, although rates lag in some
countries.
In the comparison above, revenues previously reported for 2000 have been
restated (Global revenue increased and North America revenue decreased) by
$58 million to reflect our reporting structure effective from January 1, 2001.
EXPENSES
Total expenses increased by $112 million (10%) to $1,263 million in 2001
from $1,151 million in 2000. Excluding the non-cash compensation charge of
$158 million for performance-based stock options, and the non-recurring net
gains of $17 million and $1 million on disposal of operations in 2001 and 2000
(which we net against expenses), respectively, and $18 million of restructuring
charges in 2000, total expenses decreased by $12 million (1%) in 2001.
General and administrative expenses (excluding non-cash compensation for
performance-based stock options) were $1,054 million for 2001, down $8 million
or 1% from 2000. Severance and consulting expenses incurred primarily in
connection with our improvement initiatives declined by $17 million in 2001
compared with 2000. Excluding acquisitions and disposals, severance and
consultancy, general and administrative expenses were 5% higher in constant
currency terms than in 2000. Much of this increase related to higher incentive
payments arising from improved revenues and operating profits. Excluding these
incentives and other expenses linked to revenue growth, general and
administrative expenses were flat in 2001 compared with 2000 as we eliminated
waste and improved productivity.
NET GAIN ON DISPOSAL OF OPERATIONS
In July 2001, we completed the sale of Willis National, the U.K. independent
financial advisor in which we had a 51% interest. The gain on disposal amounted
to $22 million. In December 2001, we incurred a $5 million loss on disposal,
including a net goodwill write-off of $3 million, related to the restructuring
of Willis Italia Holdings S.p.A. which involved the sale of part of that
business to a minority shareholder of Willis Italia in exchange for shares of
Willis Italia held by that minority shareholder which resulted in an increase in
our ownership from 50.1% to 67%.
34
INTEREST EXPENSE
Interest expense in 2001 of $82 million was $7 million (8%) lower than in
2000, reflecting the early repayment of term loans under the senior credit
facilities in both years and also the repurchase in the open market and
subsequent cancellation of senior subordinated notes in 2001.
INCOME TAXES
Income tax expense for 2001 amounted to $62 million, an effective tax rate
of 78%. This exceptionally high rate arose because tax deductions are not
expected to be available for approximately 60% of the non-cash performance-based
options charge and 100% of the goodwill amortization charge recorded in 2001.
Also, during 2001, there was a tax credit of $11 million arising from the
restructuring of certain subsidiary companies. Adjusting for these items, and
the $6 million tax charge arising from disposal of operations, the underlying
tax rate for 2001 was 36%.
Income tax expense for 2000 amounted to $33 million, an effective tax rate
of 51%. Excluding goodwill amortization charges 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 increase in the underlying tax rate for 2001 compared with the two
previous years was mainly the result of a changing mix of our taxable income
with a greater proportion arising in jurisdictions with higher tax rates.
ASSOCIATES
Equity in net income of our associates rose by $2 million to $4 million in
2001 mainly from increased earnings of our principal associates, Gras Savoye in
France and Jaspers Wuppesahl in Germany.
MINORITY INTEREST
Minority interest in 2001 declined by $6 million to $19 million from
$25 million in 2000. Preference dividends were $11 million lower than the
previous year following repayment of all the preference shares in June 2001.
FISCAL 2000 COMPARED WITH FISCAL 1999
SUMMARY
Total revenues increased by $61 million (5%) to $1,305 million in 2000 from
$1,244 million in 1999. 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 to income of $154 million in 2000
from a loss of $8 million in 1999. 2000 operating income was impacted by
$18 million in unusual items, consisting of restructuring charges in our North
America business 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 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 to
$189 million in 2000 from $27 million in 1999. Excluding the unusual items
described above and the impact of exchange rate
35
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 to net income of $9 million in 2000
from a net loss of $132 million in 1999. 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%) to $1,237 million in 2000 from $1,180 million in 1999, and interest income
which increased by $4 million (6%) to $68 million from $64 million.
GLOBAL: Revenues generated by our Global business increased by $35 million
(6%) to $616 million in 2000 from $581 million in 1999. In constant currency
terms, revenues increased by 8%, mainly from improved rates and increased
orders.
NORTH AMERICA: Revenues generated by our North America business increased
by $22 million (4%) to $542 million in 2000 from $520 million in 1999. In
constant currency terms, revenues increased by 5%, reflecting firming premium
rates in most areas.
INTERNATIONAL: Revenues generated by our International business increased
by $4 million (3%) to $147 million in 2000 from $143 million in 1999. 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%) to $1,151 million in 2000 from
$1,252 million in 1999, reflecting the benefits from the improvement initiatives
commenced in 1998 and the continuing tight control over expenditures. Total
expenses in 2000 included:
- Restructuring charges of $18 million in our North America business related
to excess lease obligations and employee termination benefits,
and total expenses in 1999 included:
- 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.
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.
NET GAIN ON DISPOSAL OF OPERATIONS
The gain on disposal of operations in 2000 of $1 million arose from the
disposal of the business of E J Welton & Co. Limited, a small U.K.-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.
36
INTEREST EXPENSE
Interest expense of $89 million in 2000 was unchanged from 1999.
INCOME TAXES
Income tax expense for 2000 amounted to $33 million, an effective tax rate
of 51%. Excluding goodwill amortization charges 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 income of our associates declined in 2000 by $5 million from
1999 as a result of lower profits from Germany (accounting for $3 million of the
decline), adverse foreign exchange and higher effective tax rates (each
accounting for $1 million of the decline).
LIQUIDITY AND CAPITAL RESOURCES
As an intermediary, we hold funds generally in a fiduciary capacity for the
account of third parties, typically as the result of premiums received from
clients that are in transit to insurers and claims due to clients that are in
transit from insurers. We report premiums, which are held on account of, or due
from, policyholders as assets with a corresponding liability due to the
insurers. 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, which excludes fiduciary cash movements,
increased by $50 million to $88 million in the three months ended March 31, 2002
from $38 million in the corresponding period of 2001. Net cash provided by
operations increased to $221 million in 2001 from $79 million in 2000 and
$19 million in 1999. These increases were due mainly to increasing revenue and
improving operating margins.
The total cash consideration for acquisitions completed in 2001 amounted to
$11 million, substantially all of which was consideration for the purchase of
Richard N. Goldman & Co. that was not paid until January 2002. There were no
significant payments for acquisitions in 2000, and in 1999 payments of
$19 million included the purchase of an additional 15% of Jaspers Wuppesahl.
Subsequent to December 31, 2001, we acquired an additional 22% of Jaspers
Wuppesahl at a cost of $14 million, of which $5 million is deferred until 2003.
Net cash provided from the disposal of operations in 2001, which included
PENCO and Willis National, amounted to $22 million. No significant proceeds from
disposals were received in 2000 but in 1999 $15 million was received.
In connection with many of our investments in less than wholly-owned
subsidiaries and associates, we retain rights to increase our ownership
percentage over time, typically to a majority or 100% ownership position. In
addition, in certain instances, the other owners 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
37
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 $24 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
$108 million (at March 31, 2002 exchange rates) or a price based on the formula,
which at December 31, 2001 amounted to approximately $135 million. 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 $3 million during 2001 and $6 million in 2000. No
significant cash payments were made in 1999, as such amounts had been pre-funded
in 1998. Payments of about $3 million are expected to be payable in 2002.
Cash payments in connection with the government initiated review of personal
pension plans amounted to $18 million in 2001 and $21 million in both 2000 and
1999 and $3 million in the three-month period ended March 31, 2002. We expect
the remaining provision of $28 million at March 31, 2002 will be paid out over
the next two years.
Capital expenditures for 2001, 2000 and 1999, less the proceeds from
disposals of fixed assets, were $35 million, $23 million and $30 million. We
expect that capital expenditures for 2002 may be higher than 2001 depending upon
the rate at which we undertake the development of new systems. We have funded
our requirements for capital expenditures by cash generated internally from
operations 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 JPMorgan Chase 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 2001, 2000 and 1999, repayments totaling
$60 million, $30 million and $12 million, respectively, were made and, during
the first quarter of 2002, we made additional repayments totaling $20 million.
As a consequence, we are ahead of our repayment schedule. As of May 14, 2002,
the outstanding balance on the term loans was $328 million. The next mandatory
repayment under the facility is not due until 2005. The revolving credit portion
is available for working capital requirements and general corporate purposes,
subject to certain limitations. As of May 14, 2002, 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. During 2001, Willis
North America, using cash from operations, repurchased in the open market and
38
retired $111 million principal amount of the 9% senior subordinated notes. There
was no material gain or loss from the repurchase.
Total long-term debt outstanding as of March 31, 2002 was $767 million, down
from $787 million at the end of 2001.
The net proceeds from our June 2001 initial public offering amounted to
$280 million. Substantially all of the proceeds were used to redeem, on
June 29, 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 JPMorgan Chase Bank under which its LIBOR-based floating
rate interest payment obligations on the full amount of the term loans under the
credit agreement 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 March 31, 2002, we had cash and cash equivalents of $183 million, an
increase of $55 million from December 31, 2001. 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 Note 14 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 predominantly generate revenue and expenses in
the local currency. The table below details the breakdown of revenues and
expenses by currency in 2001.
POUNDS STERLING U.S. DOLLARS OTHER CURRENCIES
--------------- ------------ ----------------
Revenues............................. 16% 62% 22%
Expenses............................. 38% 45% 17%
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.
39
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,
-----------------------------------------------------------------------------
2002 2003
------------------------------------- -------------------------------------
AVERAGE AVERAGE
CONTRACT CONTRACTUAL CONTRACT CONTRACTUAL
AMOUNT EXCHANGE RATE AMOUNT EXCHANGE RATE
------------ ---------------------- ------------ ----------------------
($ MILLIONS) ($ MILLIONS)
DECEMBER 31, 2001
FOREIGN CURRENCY SOLD
U.S. Dollars sold for
sterling.................... 63 $1.49 = L1 45 $1.44 = L1
Japanese Yen sold for
sterling.................... 10 Yen 156.02 = L1 7 Yen 159.79 = L1
Euro sold for sterling........ 20 Euro 1.59 = L1 5 Euro 1.57 = L1
--- --
Total......................... 93 57
=== ==
Fair Value (1)................ 1 1
=== ==
SETTLEMENT DATE BEFORE DECEMBER 31,
--------------------------------------
2004
--------------------------------------
AVERAGE
CONTRACT CONTRACTUAL
AMOUNT EXCHANGE RATE
------------ -----------------------
($ MILLIONS)
DECEMBER 31, 2001
FOREIGN CURRENCY SOLD
U.S. Dollars sold for
sterling.................... 20 $1.41 = L1
Japanese Yen sold for
sterling.................... 3 Yen 156.06 = L1
Euro sold for sterling........ --
--
Total......................... 23
==
Fair Value (1)................ --
==
SETTLEMENT DATE BEFORE DECEMBER 31,
----------------------------------------------------
2001 2002
------------------------------------- ------------
AVERAGE
CONTRACT CONTRACTUAL CONTRACT
AMOUNT EXCHANGE RATE AMOUNT
------------ ---------------------- ------------
($ MILLIONS) ($ MILLIONS)
DECEMBER 31, 2000
FORWARD CURRENCY CONTRACTS
U.S. Dollars sold for sterling...... 73 $1.56 = L1 55
Japanese Yen sold for sterling...... 11 Yen 160.81 = L1 6
Euro sold for sterling.............. 22 Euro 1.58 = L1 8
--- --
Total............................... 106 69
=== ==
Fair Value (1)...................... (2) --
=== ==
SETTLEMENT DATE BEFORE DECEMBER 31,
---------------------------------------------------------
2002 2003
---------------------- --------------------------------
AVERAGE
AVERAGE CONTRACTUAL
CONTRACTUAL CONTRACT EXCHANGE
EXCHANGE RATE AMOUNT RATE
---------------------- ------------ -----------------
($ 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) 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, 2001 or 2000,
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 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 and reinsurance 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
40
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, 2001 or 2000, as appropriate,
or, in the case of interest rate swaps not yet started, at the rates prevailing
at December 31, 2001 or 2000, as appropriate.
EXPECTED TO MATURE BEFORE
DECEMBER 31,
---------------------------------------------------- THERE- FAIR
2002 2003 2004 2005 2006 AFTER TOTAL VALUE(1)
-------- -------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN $ MILLIONS, EXCEPT PERCENTAGES)
DECEMBER 31, 2001
SHORT-TERM INVESTMENTS
Principal ($)............................. 5 7 12 24 24
Fixed rate receivable..................... 5.49% 6.42% 5.53% 5.75%
Principal (L)............................. 5 9 4 18 18
Fixed rate receivable..................... 6.60% 7.17% 7.63% 7.20%
FIDUCIARY INVESTMENTS
Principal ($)............................. 296 296 296
Fixed rate receivable..................... 2.23% 2.23%
Principal (L)............................. 83 83 83
Fixed rate receivable..................... 4.91% 4.91%
Principal (Euro).......................... 48 48 48
Fixed rate receivable..................... 4.12% 4.12%
LONG-TERM DEBT
Principal ($)............................. 439 439 457
Fixed rate payable........................ 9.00% 9.00%
Principal ($)............................. 83 118 147 348 348
Variable rate payable..................... 5.75% 6.95% 7.64% 7.02%
INTEREST RATE SWAPS
Principal ($)............................. 336 248 192 233 35 1,044 22
Fixed rate receivable..................... 6.40% 6.50% 5.82% 5.39% 6.29% 5.91%
Variable rate payable..................... 1.90% 3.21% 3.92% 4.51% 4.96% 4.15%
Principal ($)............................. 328 328 (8)
Fixed rate payable........................ 5.10% 5.10%
Variable rate receivable.................. 4.10% 4.10%
Principle (L)............................. 91 72 41 95 299 3
Fixed rate receivable..................... 6.72% 6.64% 6.63% 5.64% 6.19%
Variable rate payable..................... 4.01% 4.56% 5.16% 5.51% 5.20%
Principle (Euro).......................... 22 6 25 27 9 89 1
Fixed rate receivable..................... 4.49% 5.24% 4.68% 4.58% 4.55% 4.71%
Variable rate payable..................... 3.26% 3.80% 3.93% 4.28% 4.49% 4.27%
FORWARD RATE AGREEMENTS
Principal ($)............................. 210 280 70 560 --
Fixed rate receivable..................... 2.53% 3.29% 4.49% 3.16%
Variable rate payable..................... 2.18% 2.62% 3.64% 3.50%
Principal (L)............................. 41 41 --
Fixed rate receivable..................... 7.21% 7.21%
Variable rate payable..................... 4.69% 4.69%
41
EXPECTED TO MATURE BEFORE
DECEMBER 31,
---------------------------------------------------- THERE- FAIR
2001 2002 2003 2004 2005 AFTER TOTAL VALUE(1)
-------- -------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN $ MILLIONS, 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 ($)............................. 272 272 260
Fixed rate payable........................ 8.50% 8.50%
LONG-TERM DEBT
Principal ($)............................. 550 550 492
Fixed rate payable........................ 9.0% 9.0%
Principal ($)............................. 11 94 302 407 407
Variable rate payable..................... 8.20% 8.28% 8.30% 8.29%
INTEREST RATE SWAPS
Principal ($)............................. 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%
- ------------------------------
(1) Represents the net present value of the expected cash flows discounted at
current market rates of interest.
42
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 180 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 2001.
POUNDS STERLING U.S. DOLLARS OTHER CURRENCIES
--------------- ------------ ----------------
Revenues............................. 16% 62% 22%
Expenses............................. 38% 45% 17%
38% of the Willis Group's expenses are in pounds sterling while only 16% 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 1997 to March 31, 2002 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
43
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 1997 on a
more comparable basis.
YEAR ENDED JANUARY 1- SEPTEMBER 2- THREE MONTHS ENDED
DECEMBER 31, SEPTEMBER 1, DECEMBER 31, YEAR ENDED DECEMBER 31, MARCH 31,
------------ ------------ ------------ ---------------------------------- ---------------------
1997 1998 1998 1999 2000 2001 2001 2002
------------ ------------ ------------ -------- -------- -------- --------- ---------
($ IN MILLIONS)
Reported total
revenues........... $1,134 $772 $413 $1,244 $1,305 $1,424 $ 375 $ 451
Adjustments to
constant exchange
rates (a).......... 3 11 6 39 82 123 35 50
------ ---- ---- ------ ------ ------ ------ ------
Total revenues--
constant currency
(a)................ $1,137 $783 $419 $1,283 $1,387 $1,547 $ 410 $ 501
Reported operating
income (loss)...... 107 16 12 (8) 154 161 89 128
Reported operating
income (loss)
margin (b)......... 9.4% 2.1% 2.9% (0.6)% 11.8% 11.3% 23.7% 28.4%
Adjustments to
constant exchange
rates (a).......... $ (2) $ 1 $ -- $ 9 $ 8 $ 15 $ 8 $ 17
Operating income
(loss)--constant
currency (a)....... $ 105 $ 17 $ 12 $ 1 $ 162 $ 176 $ 97 $ 145
Operating income
(loss) margin--
constant
currency (a)(c).... 9.2% 2.2% 2.9% 0.1% 11.7% 11.4% 23.7% 28.9%
- ------------------------
(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:
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- ----------------------
1997 1998 1999 2000 2001 2001 2002 CONSTANT RATES
-------- -------- -------- -------- -------- -------- -------- --------------
(DENOMINATED PER US DOLLAR)
AVERAGE RATES:
Deutschemark......... 1.73 1.75 1.83 2.11 2.18 2.12 -- 1.70
Euro................. -- -- 0.94 1.08 1.12 1.08 1.14 1.42
French Franc......... 5.83 5.89 6.14 7.08 7.32 7.11 -- 5.69
Italian Lire......... 1,700.66 1,732.36 1,813.56 2,090.39 2,161.05 2,097.98 -- 1,689.05
Japanese Yen......... 120.96 130.45 113.51 107.76 121.45 118.16 132.45 118.29
Pounds Sterling...... 0.61 0.60 0.62 0.66 0.69 0.69 0.70 0.60
ACHIEVED RATES:
Deutschemark......... 1.43 1.64 1.92 2.05 2.20 2.18 -- 1.66
Euro................. -- -- 0.91 1.04 1.10 1.11 1.11 1.42
French Franc......... 5.27 5.61 6.45 6.86 7.38 7.32 -- 5.53
Italian Lire......... 1,713.82 1,742.90 1,903.95 2,027.74 2,178.55 2,159.96 -- 1,724.49
Japanese Yen......... 106.69 119.82 112.30 113.83 115.03 116.49 114.32 115.31
Pounds Sterling...... 0.63 0.63 0.61 0.66 0.69 0.69 0.69 0.63
44
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.
As detailed above, total revenues--constant currency have grown from
$1,137 million in 1997 to $1,547 million in 2001, an 8.0% annual growth rate
since 1997 which compares to a 5.9% annual growth rate for total revenues from
continuing operations on a reported basis. Operating income (loss)--constant
currency has grown from $105 million in 1997 to $176 million in 2001, a 13.8%
annual growth rate, which compares to a 10.8% annual growth rate for operating
income (loss) on a reported basis. We have improved our operating income (loss)
margin--constant currency by 220 basis points from 9.2% in 1997 to 11.4% in
2001, which compares to an increase of 190 basis points, from 9.4% in 1997 to
11.3% in 2001, for operating income (loss) margin on a reported basis.
Total revenues--constant currency have grown to $501 million in the three
months ended March 31, 2002, a 22.2% increase over the three months ended
March 31, 2001, which compares to a 20.3% increase in total revenues on a
reported basis. Operating income--constant currency was $145 million in the
three months ended March 31, 2002 compared to $97 million in the three months
ended March 31, 2001, a 49.5% increase. Operating income margin--constant
currency was 28.9% in the three months ended March 31, 2002 compared to 23.7% in
the three months ended March 31, 2001, an increase of 520 basis points. The
reported operating income margin improved by 470 basis points to 28.4% over the
same period.
45
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 one of the largest insurance brokers 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
approximately 180 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 over 75
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, 2001, our revenues were $1.4 billion.
46
RECENT DEVELOPMENTS
We appointed Joseph Plumeri as our Chairman and Chief Executive Officer in
October 2000 and, since then, we have instituted several important initiatives.
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;
- expanded opportunities for employees to own our stock. We estimate that
nearly 43% of our employees own our stock or the right to purchase our
stock at a future date;
- 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
operations to promote close interaction of these units in servicing their
clients;
- appointed James A. Ratcliffe as Chief Executive Officer of Global
Specialties, Joseph M. McSweeny as Chairman and Chief Executive Officer of
Global Risk Solutions and Sarah J. Turvill as Chief Executive Officer of
International operations;
- created a Global Operations function, responsible for high-quality,
cost-efficient support for our operations elsewhere in the Willis Group;
- expanded our service company in Mumbai, India, as part of Global
Operations. There are now 544 positions in Mumbai;
- appointed Janet Coolick to the position of Group Chief Administrative
Officer. Ms. Coolick is responsible for Global operations, Information
Technology and Operational Efficiency, and is leading the ongoing program
to eliminate waste from the Willis Group;
- appointed Frederick Arnold to the position of Group Executive Vice
President, Strategic Development, with responsibility for developing and
reviewing potential acquisition candidates, and created a specialist
mergers and acquisitions team;
- appointed William P. Bowden, Jr. to the new position of Group General
Counsel, and merged legal, audit, company secretarial and compliance
functions under this new position;
- appointed Mario Vitale to the new position of Executive Vice President,
Group Sales and Marketing, with responsibility for creating top-class
sales disciplines across the Willis Group. Mr. Vitale has improved
reporting and disciplined follow up of sales opportunities throughout the
Willis Group;
- appointed Stephen G. Maycock, Group Human Resources Director, and Grahame
J. Millwater, Chief Operating Officer of Willis Re., to the Group
Executive Committee in addition to those named above;
- instituted programs to recruit talented professionals from the insurance
industry and elsewhere; and
- improved incentive structures for management to encourage growth of both
revenues and profits.
47
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 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.
48
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 one of the
largest insurance brokers 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 over 75 countries, in each case including associates. This strong
global franchise enables us and our associates to serve over 50,000 clients
located in approximately 180 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
2001, 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.
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 Company, Limited, 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 2001, 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.
49
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.
EXPERIENCED AND INCENTIVIZED MANAGEMENT AND EMPLOYEES. Our 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 15 executives average
17 years of experience in the insurance brokerage and insurance industries and
an average of 10 years of experience with us. To date, approximately 4,750
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 approximately $16 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.
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.
50
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.
For fiscal 2001, we estimate that the percentage of our total revenues from
fees, including from insurance placements and consulting and other services, was
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 in both
rising and declining premium and brokerage commission environments.
FOCUS ON CROSS-SELLING. We have taken a number of initiatives to support
the development of a cross-selling culture. They include:
- a global management system to assist our business unit management in
understanding which coverages we do and do not write for each of our
clients;
- the development of a global "know-how" directory that enables all teams to
know where to turn for assistance;
- Group capabilities presentations for use by all teams globally;
- a compensation plan designed to support and reward cross-selling; and
- assistance in identifying cross-selling opportunities as part of the
creation of account development plans.
INCREASE OPERATING EFFICIENCIES. In addition to our revenue growth and
improved client service initiatives, we are implementing a number of measures
designed to streamline work processes to increase efficiency while improving
client service. In 2001, we created the Global Operations function which is
responsible for high-quality, cost-efficient support for our operations
elsewhere in the Willis Group. Other on-going initiatives include:
- intensifying efforts to develop existing and new accounts;
- 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.
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
51
implementation of global best practices and the creation of a single company
culture. The key elements of this strategy are:
- 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 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:
- Global;
- North America; and
- International.
GLOBAL
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 approximately 180 countries, primarily from United Kingdom offices, although
we also serve clients from offices in the United States, Continental Europe and
Asia. This unit is also diversified from a client perspective, with no client
accounting for more than 2% of its revenues in 2001.
In early 2000, we created Global Risk Solutions, or GRS, to meet the often
multinational risk management needs of Fortune 1000 and FTSE 250 companies and
their private equivalents. This major unit comprises our Risk Solutions hubs in
New York and London, as well as such specialist divisions as Global Property and
Casualty, Global Financial and Executive Risks and Structured Financial
Solutions.
52
Within GRS, we 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, utilities, transport authorities and motor manufacturers. We also
handle the design, implementation and servicing of reinsurance protections for
captive insurance companies and offer comprehensive liability programs for
coverage against environmental liability, libel and slander.
Other product lines include directors' and officers' insurance, as well as
professional indemnity insurance for corporations and professional firms. We
secure insurance coverage for crime, computer fraud and unauthorized trading
risks for financial institutions on a worldwide basis, and place specialty
directors' and officers' coverage and related products to the high-technology
industry. Such products and services are tailored to individual client needs and
range from strategic risk assessment to transactional risk transfer and
alternative risk financing solutions.
In addition to GRS, the Global business unit includes our specialist
industry sector divisions, such as Aerospace, Marine, Construction and
Reinsurance, as well as our U.K. and Republic of Ireland Retail operations and
Niche Products business.
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
40 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 domestic home buildings to major,
complex projects such as the construction of bridges, dams, airports and the
deactivation of the Chernobyl nuclear power plant.
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 also have a
consulting unit, which markets its capabilities in acturial 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 approximately 20 locations 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 America business,
overseas subsidiaries and associates.
We have four Niche Products areas:
- Fine Art, Jewelry, and Specie;
53
- 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 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.
Since 1998, we have entered into franchise business relationships with local
U.K. 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. We had approximately 50 franchise agreements in place at
December 31, 2001.
NORTH AMERICA
Our North America business provides 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 America business operates
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 America business' 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 one-fifth 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 America 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. Customer
54
support facilities, which we refer to as centers of excellence, provide fast,
focused and tailored support services to clients operate from Nashville,
Tennessee and Phoenix, Arizona.
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.
In December 2001, we acquired the brokerage firm Richard N. Goldman & Co. of
San Francisco, California. This acquisition, in which the Goldman team will
combine with our San Francisco office, significantly strengthens our position in
the Northern California market.
INTERNATIONAL
Our International unit consists of a network of subsidiaries and associates
other than those in North America, the United Kingdom and the Republic of
Ireland. This operation is located in over 75 countries worldwide, including 22
countries in Europe, 14 in the Asia/Pacific region and 36 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 2001, combined total revenues of our International
subsidiaries and our associates were $478 million compared to $433 million in
2000. Our consolidated total revenues for 2001 only include the revenues of our
International subsidiaries of $177 million and do not include the revenues of
our associates of $301 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.
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. In December 2001, we increased our
interest in Willis Italia, one of Italy's top three brokers, from 50.1% to 67%.
In January 2002, we increased our ownership position from 45% to 67% in Jaspers
Wuppesahl, Germany's third largest insurance broker (since renamed Willis
GmbH & Co. K.G.).
55
The following is a list of the major International associate investments
currently held by us and our interest as of March 31, 2002:
COMPANY COUNTRY % OWNERSHIP
- ------- ------------------- -----------
EUROPE
Gras Savoye & Cie France 33%
Gras Savoye Belgium S.A. Belgium 33%
Willis A/S Denmark 30%
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".
56
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 March 31, 2002:
COMPANY COUNTRY % OWNERSHIP
- ------- ------------------- -----------
EUROPE
Mansfeld, Willis GmbH & Co. K.G. Germany 100%
Willis AB Sweden 82%
Willis OY AB Finland 100%
Willis Italia Holding S.p.A. Italy 67%
Willis Iberia Correduria de Seguros y Reaseguros S.A. Spain 60%
Willis Sev. Dahl A.S.(1) Norway 50%
Willis Corretores de Seguros S.A. Portugal 60%
Willis B.V. Netherlands 100%
Willis CIS L.L.C. Russia 100%
Willis GmbH & Co. K.G. (formerly Jaspers Wuppesahl Industrie
Assekuranz GmbH & Co. K.G.)(2) Germany 67%
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) Limited 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%
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%
Willis S.A. Corretores de Seguros (formerly 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 50.1% interest in the company.
(2) We have a 66.6% interest in the company.
(3) We have a 50.3% interest in the company.
57
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 Company, Limited 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 2001, and our 80 largest clients accounted for less
than 12% of 2001 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 2001.
EMPLOYEES
At December 31, 2001, we had approximately 11,000 employees, including
approximately 3,500 in the United Kingdom, 3,800 in the United States and 3,700
in the rest of the world, and our associates had approximately 2,000 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 10,716 employees, including
approximately 3,916 in the United Kingdom, 4,518 in the United States and 2,282
in the rest of the world, and our associates had approximately 2,556 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 & 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
58
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
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 regulatory responsibilities for our insurance brokerage
activities in the United Kingdom were transferred to the General Insurance
Standards Council on July 3, 2000, other than for complaints that arose 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.
It was announced in December 2001 that the regulatory supervision of general
insurance brokerage activities in the United Kingdom is to be passed to the
Financial Services Authority and the General Insurance Standards Council will
cease to have any regulatory supervisory function. The expectation is that this
change will occur during late 2004.
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 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 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 principal executive office 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
59
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 are subject to various actual and potential claims, lawsuits
and proceedings relating principally to alleged errors and omissions in
connection with the placement of insurance and reinsurance in the ordinary
course of business. Like other corporations, however, we are also subject to a
variety of other claims, including those relating to our employment practices.
Some of these claims, lawsuits and proceedings seek damages in amounts which
could, if assessed, be significant. Most of the claims, lawsuits and proceedings
arising in the ordinary course of business are covered by professional indemnity
or other appropriate insurance. In respect of self-insured deductibles, we have
established provisions against these items which we believe to be adequate in
the light of current information and legal advice and we adjust these provisions
from time to time according to developments. On the basis of current
information, we do not expect that the outcome of the actual claims, lawsuits
and proceedings to which we are subject or potential claims, lawsuits or
proceedings relating to the matters discussed below, either individually or in
the aggregate, will have a material adverse effect on our results of operations,
financial condition or liquidity.
The most significant actual or potential claims, lawsuits and proceedings of
which we are currently aware are:
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 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
60
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, 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.
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
61
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 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 plan. These amounts could be significant and, in that
case, materially adversely affect our operations or financial condition.
Although we believe that the provisions established for the pension review,
totaling $100 million (approximately $72 million of which has been paid as of
March 31, 2002), are prudent, there remains a possibility that the provisions
made will be insufficient. We expect to pay out these established provisions
over the next two years.
WORLD TRADE CENTER. 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 September 11, 2001
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.
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, 2001. There are a number of lawsuits
pending in the United States between the insured parties and the insurers but we
are not a party to any of these lawsuits. The principal issue in dispute is
whether the September 11 events constituted one or more occurrences for the
purposes of the relevant insurance policies, and the outcome of this issue will
significantly impact the amount that the issuers ultimately pay on the property
policies. In connection with these lawsuits, we have entered into a common
interest agreement with Silverstein Properties and certain other parties which
we believe provides us with a legal privilege, subject to certain exceptions,
with respect to our communications with Silverstein Properties and such other
parties. Recently, one of the insurers filed a motion in one of the pending
lawsuits seeking to void the privileges asserted under this agreement. Other
disputes may arise in respect of the World Trade Center insurance placed by us
which could affect us, including claims by one or more of the insureds that we
made culpable errors or 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.
INSURANCE MARKET DISPUTE. 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.
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
62
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 brokerage subsidiary in the United Kingdom, 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 commenced on January 21, 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 is
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 have not reserved any amounts for potential claims other than in
respect of legal costs relating to investigating these issues.
BACCALA AND 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 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. Hartford has not stated what it believes to be its
total aggregate losses potentially attributable to Baccala and Shoop. 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.
63
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.
64
MANAGEMENT
The following are our current directors and executive officers and their
ages as of March 31, 2002 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 and the executive officers named below manage our
operational business and strategic direction.
NAME AGE POSITION
- ---- -------- --------
Joseph J. Plumeri......................... 58 Chairman, Chief Executive Officer and
Director
Henry R. Kravis........................... 58 Director
George R. Roberts......................... 58 Director
Perry Golkin.............................. 48 Director
Todd A. Fisher............................ 36 Director
Scott C. Nuttall.......................... 29 Director
James R. Fisher........................... 46 Director
Paul M. Hazen............................. 60 Director
Frederick Arnold.......................... 47 Group Executive Vice President, Strategic
Development
William P. Bowden, Jr..................... 58 Group General Counsel
Richard J. S. Bucknall.................... 53 Group Chief Operating Officer
Thomas Colraine........................... 43 Group Chief Financial Officer
Janet Coolick............................. 58 Group Chief Administrative Officer
Brian D. Johnson.......................... 59 Chief Executive Officer of the North
American operations
Patrick Lucas............................. 63 Executive Vice President; Managing Partner
of Gras Savoye
Stephen G. Maycock........................ 49 Group Human Resources Director
Joseph M. McSweeny........................ 53 Chairman and Chief Executive Officer of
Global Risk Solutions
Grahame J. Millwater...................... 38 Chief Operating Officer of Willis Re.
John M. Pelly............................. 49 Chairman and Chief Executive Officer of
Willis Re.
James A. Ratcliffe........................ 48 Chief Executive of Global Specialties
Sarah J. Turvill.......................... 48 Chief Executive Officer of International
operations (excluding United Kingdom and
North America)
Mario Vitale.............................. 46 Executive Vice President -- Group Sales
and Marketing
JOSEPH J. PLUMERI--Joseph J. Plumeri is our Chairman, Chief Executive
Officer and director and has been a director of our predecessor, TA I Limited
("TA I"), since October 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
65
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 and The
National Center on Addiction and Substance Abuse. He is also a commissioner of
the New Jersey Sports and Exposition Authority.
HENRY R. KRAVIS--Henry R. Kravis is our director and has been a director of
TA I since 1998. 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 KKR. Mr. Kravis is also a general
partner of KKR Associates, L.P. and a director of Accuride Corporation, Amphenol
Corporation, Borden Chemical, Inc., The Boyds Collection, Ltd., BRW
Acquisition, Inc., Evenflo Company, Inc., KinderCare Learning Centers, Inc., KSL
Recreation Corporation, PRIMEDIA, Inc., Sotheby's Holdings, Inc., Accel-KKR
Company, Alliance Imaging, 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 since 1998. 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 Chemical, Inc., The Boyds
Collection, Ltd., DPL Inc. (The Dayton Power & Light Co.), Evenflo
Company, Inc., KinderCare Learning Centers, Inc., KSL Recreation Corporation,
Owens-Illinois, Inc., PRIMEDIA, Inc., Safeway Inc., Accel-KKR Company, Alliance
Imaging, Inc., United Fixtures Company and WorldCrest Group.
PERRY GOLKIN--Perry Golkin is our director and has been a director of TA I
since 1998. 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 (Bermuda), Ltd., Rockwood Specialties, Inc.
and Walter Industries, Inc.
TODD A. FISHER--Todd A. Fisher is our director and has been a director of
TA I since 1998. 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 (Bermuda), Ltd. and Rockwood Specialties, Inc.
SCOTT C. NUTTALL--Scott C. Nuttall is our director and has been a director
of TA I since 1998. 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
Alea Group Holdings (Bermuda), Ltd., Amphenol Corporation, BRW
Acquisition, Inc., KinderCare Learning Centers and Walter Industries, Inc.
JAMES R. FISHER--James R. Fisher is our director and has been a director of
TA I since 1998. Mr. Fisher is the managing member and majority owner of Fisher
Capital Corp. 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 Re-Insurance 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.
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Mr. Fisher is also Chairman and 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 since January 1, 2001. Mr. Hazen joined Wells Fargo in 1970, was named
Chairman on November 2, 1998 and retired in 2001. 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, KSL Recreation Corporation and is Chairman of
Accel-KKR Company, Deputy Chairman and a director of Vodafone plc. and is
President of Intermountain Center for Human Development.
FREDERICK ARNOLD--Frederick Arnold is a member of the Group Executive
Committee and Group Executive Vice President, Strategic Development. Mr. Arnold
joined us 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 us,
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 Group 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 is a member of the Group
Executive Committee and 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 35 years of experience in the
insurance brokerage industry, of which 16 years have been with us.
THOMAS COLRAINE--Thomas Colraine is a member of the Group Executive
Committee 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 14 years of experience in the insurance
brokerage industry, all 14 years of which have been with us.
JANET COOLICK--Janet Coolick became a member of the Group Executive
Committee and was appointed the Group Chief Administrative Officer on July 1,
2001. Ms. Coolick joined the Willis Group on March 5, 2001 as Executive Vice
President and Director, Operational Efficiency. Before joining us, Ms. 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.
BRIAN D. JOHNSON--Brian D. Johnson is a member of the Group Executive
Committee. He is an actuary and has been the Chief Executive Officer of the
Group's North American operations since October 1, 1999. From 1994 until 1999 he
was Vice Chairman and Chief Operating Officer of the North American retail
business and from 1999 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.
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STEPHEN G. MAYCOCK--Stephen G. Maycock became a member of 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 5 years of experience in the insurance brokerage
industry, all of which have been with us.
JOSEPH M. MCSWEENY--Joseph M. McSweeny is a member of the Group Executive
Committee. He became Chairman and Chief Executive Officer of Global Risk
Solutions 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 operations, a
position held until June 2001. Mr. McSweeny has 25 years of experience in the
insurance industry, of which 7 years have been with us.
GRAHAME J. MILLWATER--Grahame J. Millwater became a member of the Group
Executive Committee on December 18, 2001 and is the Chief Operating Officer of
Willis Re. Mr. Millwater joined the Willis Group in September 1985 and, while
always focused on reinsurance, has had several additional cross-Group
responsibilities during his career with us. Mr Millwater has 16 years of
experience in the insurance brokerage industry, all of which have been with us.
JOHN M. PELLY--John M. Pelly is a member of the Group Executive Committee.
He is Chairman and Chief Executive Officer of the Willis Re., a position held
since 1995. Mr. Pelly has 30 years of experience in the insurance brokerage
industry, all 30 years of which have been with us. Mr. Pelly is also a
non-executive director of Mitsui Sumitomo Insurance (London Management) Ltd.
JAMES A. RATCLIFFE--James A. Ratcliffe became a member of the Group
Executive Committee on December 18, 2001 and is the Chief Executive of Global
Specialties. Mr. Ratcliffe joined us in September 1999 as Managing Director of
the Aerospace Division. Prior to joining us, Mr. Ratcliffe was part of the
Granada Group Plc for five years, encompassing responsibilities as the Managing
Director of the Granada UK Rental Group and a Director of On Digital, the
world's first digital terrestrial multi-channel television company. He was also
Managing Director of Granada's Air Travel Group of companies. Prior to joining
Granada Group, he was Managing Director of ADT Security Systems, Britain's
largest electronic security company. Mr. Ratcliffe has 2 1/2 years of experience
in the insurance brokerage industry, all of which have been with us.
SARAH J. TURVILL--Sarah J. Turvill became a member of the Group Executive
Committee on July 1, 2001. Miss 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 Miss Turvill has been the Chief Executive
Officer of Willis Group's International operations. She has 24 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--Group Sales and Marketing on November 13, 2000 and is a member of the
Group Executive Committee. 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 May 3, 2002. 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, compensation and executive
committees.
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THE AUDIT COMMITTEE assists the board of directors in fulfilling its
oversight responsibilities with respect to (a) the annual financial information
to be provided to shareholders and the Securities and Exchange Commission;
(b) the system of internal controls that management has established; and
(c) the internal and external audit process. In addition, the Audit Committee
provides an avenue for communication between our internal audit department, the
independent auditors, management and the board of directors. The members of the
Audit Committee are J.R. Fisher, P. Golkin, T.A. Fisher, S.C. Nuttall and P.M.
Hazen.
THE COMPENSATION COMMITTEE determines the compensation of the Chairman and
other senior executives. In addition, the Compensation Committee administers our
stock-based award plans. The members of the Compensation Committee are
P. Golkin, T.A. Fisher, S.C. Nuttall and P.M. Hazen.
THE EXECUTIVE COMMITTEE has all the powers of the board of directors, when
it is not in session, in the management of our business and affairs except as
otherwise provided in resolutions of the board of directors and under applicable
law. The members of the Executive Committee are J.J. Plumeri, P. Golkin and T.A.
Fisher.
COMPENSATION OF DIRECTORS AND OFFICERS
The directors, other than Mr. Plumeri, 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 Non-Employee Directors' Deferred
Compensation Plan described below. Mr. Plumeri receives no specific compensation
for his services as a director or member of any committee of the board of
directors.
In the year ended December 31, 2001, the aggregate fees or compensation and
benefits paid to all our directors and executive officers, except Mr. Lucas, as
a group (21 persons) was $11,272,496. The aggregate amount of compensation and
benefits of Mr. Plumeri, the highest paid director or executive officer in the
fiscal year, was $2,604,744.
The aggregate amount set aside or accrued to provide pension, retirement and
similar benefits for the directors and executive officers, except Mr. Lucas,
during the year ended December 31, 2001 was $614,439.
The compensation and pension contributions for Mr. Lucas are paid by his
employing company, our associate Gras Savoye & Cie.
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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 March 31, 2002. All our existing directors and executive officers as a
group held options to purchase 8,708,218 shares as of March 31, 2002.
NO. OF
SHARES
UNDERLYING
OPTIONS EXERCISE
DATE OF GRANT GRANTED PRICE(1) OPTION EXPIRATION PERIOD
------------------ ---------- -------- ------------------------
Joseph J. Plumeri................ October 15, 2000 5,164,222 L2 October 15, 2010
Henry R. Kravis.................. -- -- --
George R. Roberts................ -- -- --
Perry Golkin..................... -- -- --
Todd A. Fisher................... -- -- --
Scott C. Nuttall................. -- -- --
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 400,000 L2 December 18, 2008
June 11, 2001 393 L9.85 January 31, 2005
February 27, 2002 5,547 $26.84 August 26, 2005
Janet Coolick.................... June 11, 2001 5,554 $13.50 June 11, 2011
Brian D. Johnson................. December 18, 1998 400,000 L2 December 18, 2008
Stephen G. Maycock............... December 18, 1998 210,496 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
Grahame J. Millwater............. December 18, 1998 213,902 L2 December 18, 2008
June 11, 2001 393 L9.85 January 31, 2005
February 27, 2002 4,718 $26.84 August 26, 2005
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
James A. Ratcliffe............... July 6, 2000 120,000 L2 July 6, 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, 2010
- ------------------------
(1) L2 equals $2.86, based on the exchange rate as of March 31, 2002 of
$1.43 = L1.00 and L9.85 equals $14.09, 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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ANNUAL INCENTIVE PLAN
The Annual Incentive Plan provides a cash bonus to middle and senior
management as well as certain directors and officers based on performance by
reference to the results of the Willis Group and qualitative objectives.
NON-EMPLOYEE DIRECTORS' DEFERRED COMPENSATION PLAN
Under the Non-Employee Directors' Deferred Compensation 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 March 31, 2002, there were 500,000 shares available for
distribution into stock accounts under this plan of which 6,896 shares have been
credited in the 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.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER'S EMPLOYMENT ARRANGEMENTS
On October 15, 2000, we entered into a five-year employment agreement with
Mr. Plumeri, pursuant to which Mr. Plumeri receives an annual $1,000,000 base
salary, subject to 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 are met. The agreement also contains
certain non-compete covenants. In respect of 2001, Mr. Plumeri received a base
salary of $1,000,000 plus a contractually guaranteed bonus of $1,000,000.
Mr. Plumeri was awarded an additional $1,000,000 discretionary bonus determined
by the board of directors for extraordinary performance, less $244,000 of
corporate costs relating to our private airplane and other travel, lodging and
business entertainment expenses, for which Mr. Plumeri wanted to be personally
responsible as an example of corporate cost consciousness to other officers and
employees. Out of the $756,000 discretionary bonus payable, Mr. Plumeri elected
to purchase 6,194 restricted stock units for $166,250, which we matched with an
additional 1,548 units,
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all in accordance with the terms of the Bonus and Stock Plan described below
applicable to other officers and employees.
The agreement's term ends upon the earlier of October 15, 2005 or the giving
by either party of 90 days' prior written notice. In general, upon
Mr. Plumeri's termination of employment without cause or by Mr. Plumeri's
resignation with good reason (which terms are defined in the agreement),
including a resignation by Mr. Plumeri following a change of control of our
company (as defined in the agreement), he will receive payments and benefits
based on formulae, which in no event will exceed an amount equal to the sum of
three times the annual base salary, bonus and benefits due to him.
Further, if any payment or benefit payable to Mr. Plumeri after a change in
ownership or control (as defined in the U.S. Internal Revenue Code) of our
company would be considered to be an "excess parachute payment" subject to a
federal "excess parachute payment" excise tax to be paid by Mr. Plumeri, then
Mr. Plumeri will be paid an additional payment or benefit to gross up the amount
of the excise tax.
Following his retirement (or any termination of Mr. Plumeri's employment) at
the normal retirement age of 65, he will be eligible to receive a retirement
benefit for the rest of his life, generally equal to 5.3% of his base salary.
Eligible compensation for pension purposes is limited by the Internal Revenue
Service.
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;
- 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 March 31, 2002, of the time- and performance-based options granted,
27,803,583 remained unforfeited under the 1998 Plan and 150,000 vested options
had been granted and 130,850 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 the
72
exercisability of 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 (as defined under the plans). 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.
Our board of directors and its compensation committee administer the 1998
Plan and Willis Award Plan. 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 board of directors retains 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 (the "2001 Plan") provides for the
grant of options, including "incentive stock options", to purchase our shares of
common stock and restricted shares and other share-based grants to our employees
and employees of our subsidiaries. The 2001 Share Purchase and Option Plan is
intended to accomplish the same purposes as the 1998 Plan and Willis Award Plan
described above.
As of March 31, 2002, options and restricted shares granted over 1,998,894
shares of our common stock remain unforfeited under the 2001 plan. There are a
total of 10,000,000 shares available to be granted under the 2001 Plan
(including the 1,998,894 shares referred to above), of which 5,000,000 may be
granted to any one employee in any given calendar year. Options generally become
exercisable on the sixth or eighth anniversary of their grant. The
exercisability of certain option grants may accelerate depending on the
achievement of certain performance goals and options granted may terminate based
on the circumstances surrounding an optionee's termination of employment. The
exercisability of options and other share-based awards may also be accelerated,
at the discretion of our board of directors, upon a change in control of our
company (as defined in the 2001 Plan). In connection with certain of our option
grants, employees have agreed, and may in the future agree to, restrict the
transferability of certain of the shares of 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 of
common stock.
Unless sooner terminated by our board of directors, the 2001 Plan will
expire 10 years after its adoption. The termination will not affect the validity
of any grant outstanding on the date of the plan's termination.
Our board of directors and its compensation committee administer 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.
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In May 2002, we granted options to purchase shares of our common stock to up
to 185 management employees under the 2001 plan. These options have a per share
exercise price equal to the fair market value of our shares of common stock on
the date the option was granted. The number of shares subject to each employee's
option is 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 was granted, and
which the employee agrees to be subject to restrictions on transferability. We
or our related trust sold shares of our common stock under our S-8 registration
statement at fair market value to those employees who agreed to acquire
additional shares to be credited to their account prior to the May 2002 option
grant.
BONUS AND STOCK PLAN
The Bonus and Stock Plan is a sub-plan of the 2001 Share Purchase and Option
Plan and provides for awards of restricted stock units, which is, except for
U.K. employees, a promise by us to deliver on the third anniversary of the grant
of the award shares of our common stock equal to the number of restricted stock
units awarded. For all U.K. employees the award takes the form of a zero cost
option. The award is determined in accordance with a formula based on the bonus
to which an employee is otherwise eligible, and the quoted market price of our
common stock at the date of the award. Further, we match the award with an
additional award of restricted stock units, equal to 25% of the initial award.
As of March 31, 2002, restricted stock unit awards over 128,174 shares of our
common stock had been awarded and remained unforfeited, 32,670 of which were in
the form of zero cost options. The Bonus and Stock Plan is a sub-plan of the
2001 Plan and restricted stock units granted under the Bonus and Stock Plan are
part of the 10,000,000 shares available for grant under the 2001 Plan.
EMPLOYEE STOCK PURCHASE PLAN
Under the Employee Stock Purchase Plan, or ESPP, employees of certain of our
subsidiaries, currently U.S. and Canadian subsidiaries, have the opportunity to
purchase up to a specified maximum amount of shares of our common stock through
payroll deductions over certain specified periods of time. Participants in the
ESPP are offered 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 shares of our common stock in
any given calendar year. The purchase price of these shares will be the lesser
of the closing price of a share of our common stock on the first day or the last
day of an offering period as defined under the ESPP. The ESPP qualifies as an
employee stock purchase plan under section 423 of the Internal Revenue Code,
which provides the participants in the ESPP with certain tax benefits upon their
subsequent sale or other disposition of the shares of our common stock that they
purchase under the terms of the ESPP. As of March 31, 2002, 103,055 shares of
our common stock had been issued at fair market value under this plan and we
expect that approximately 55,000 additional shares of our common stock will be
issued at fair market value under this plan in the current ESPP offering. There
are 1,000,000 shares available for sale and purchase under the ESPP.
SHARESAVE PLANS
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 who have completed a
minimum service requirement not exceeding five years and are subject to certain
taxes in the United Kingdom are granted options to purchase shares of our common
stock. The Sharesave Plan is a sub-plan of the 2001 Plan. Options may be granted
with an option price in pounds sterling 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
74
savings contract with a savings provider under which he or she agrees to save a
regular monthly amount, not to exceed L250 per month. At the end of the savings
period, the participants receive their savings back plus a tax-free bonus, which
may be used, at the participant's discretion, to exercise the option. Options
not exercised within six months from the end of the contract will lapse. In
addition, in the event of a change of control, options may be exercised within
six months of the change of control. The options granted in 2001 were issued at
fair market value and vest in August 2004. The maximum monthly saving amount was
L100. As of March 31, 2002, 549,796 shares of our common stock remain
unforfeited.
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 U.K. Inland Revenue, to reflect variations in our share capital, including
the capitalization, rights issue and subdivision, consolidation or reduction in
our capital. Also, the board of directors may at any time amend the Sharesave
Plan, which amendments must be approved by the U.K. 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.
In 2002, we established our International Sharesave Plan, known as TWISP,
for employees of our subsidiaries who are resident under relevant tax laws in 24
countries and our Irish Sharesave Plan for our employees in the Republic of
Ireland. Both plans operate on a similar basis to the Sharesave Plan described
above.
In May 2002, we expect to grant options under each of the Sharesave Plans
that will vest in three years and a maximum monthly saving amount of L100 or
local currency equivalent.
The Sharesave Plans are sub-plans of the 2001 Plan and the 1,050,084 shares
available for grant under these plans are part of the 10,000,000 shares
available for grant under the 2001 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 expect that
shortly after this offering that we or our related trust will repurchase such
employees' shares of our common stock at a price per share equal to the price
received by the selling shareholders in this offering less the underwriting
discount. In addition, effective 30 days after the date of this prospectus, we
intend to release these transfer restrictions on an aggregate of approximately
4,428,000 of these shares (including approximately 1,375,000 shares held by our
group executive officers) such that these shares may be immediately sold in the
open market by any of our employees who are not affiliates or group executive
officers. These shares, other than the shares held by our group executive
officers, are not subject to any lock-up arrangement with Salomon Smith Barney
Inc. or J.P. Morgan Securities Inc.
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 exercisable options at a
75
stated repurchase or 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
March 31, 2002, held 791,512 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 Zero Cost Share Option 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 March 31, 2002, the trust had an interest in 942,386 shares of our common
stock, which can be purchased by employees or used to satisfy option grants made
by us. As of March 31, 2002, 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.
76
PRINCIPAL AND SELLING SHAREHOLDERS
BENEFICIAL OWNERSHIP
The following presents information with respect to the beneficial ownership
of our shares as of May 14, 2002, 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 Company, Limited, who owned shares of our common stock as of
April 30, 2002, (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 2,400,000 additional shares of common stock granted to the
underwriters by the selling shareholders. If the underwriters elect to exercise
their over-allotment option, Profit Sharing (Overseas) and Fisher Capital 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 147,848,370 shares
of common stock outstanding on May 14, 2002.
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)........ 77,750,683 52.6% 12,538,101 65,212,582 44.1%
Henry R. Kravis(1)................... 77,750,683 52.6% 12,538,101 65,212,582 44.1%
George R. Roberts(1)................. 77,750,683 52.6% 12,538,101 65,212,582 44.1%
Perry Golkin(1)...................... 77,784,683 52.6% 12,538,101 65,246,582 44.1%
Todd A. Fisher(1).................... 77,758,683 52.6% 12,538,101 65,220,582 44.1%
Scott C. Nuttall(1).................. 77,753,683 52.6% 12,538,101 65,215,582 44.1%
James R. Fisher(2)................... 534,157 0.4% 81,542 452,615 0.3%
Paul Hazen........................... 37,037 * -- 37,037 *
Axa Insurance UK plc(3).............. 862,723 0.6% -- 862,723 0.6%
Axa General Insurance Limited(3)..... 517,634 0.4% -- 517,634 0.4%
77
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)............................. 3,380,357 2.3% -- 3,380,357 2.3%
The Chubb Corporation(5)............. 3,380,357 2.3% 3,380,357 -- --
The Hartford Financial Services
Group, Inc.(6)..................... 1,816,964 1.2% -- 1,816,964 1.2%
The Tokio Marine and Fire Insurance
Company, Limited(7)................ 500,000 0.3% -- 500,000 0.3%
Joseph J. Plumeri.................... 2,854,251 1.9% -- 2,854,251 1.9%
Frederick Arnold..................... 105,176 * -- 105,176 *
William P. Bowden, Jr................ 19,886 * -- 19,886 *
Richard J.S. Bucknall................ 310,000 * -- 310,000 *
Thomas Colraine...................... 189,100 * -- 189,100 *
Janet Coolick........................ 13,731 * -- 13,731 *
Brian D. Johnson..................... 250,000 * -- 250,000 *
Patrick Lucas........................ 50,000 * -- 50,000 *
Stephen G. Maycock................... 96,036 * -- 96,036 *
Joseph M. McSweeny................... 192,871 * -- 192,871 *
Grahame J. Millwater................. 85,040 * -- 85,040 *
John M. Pelly........................ 305,000 * -- 305,000 *
James A. Ratcliffe................... 51,360 * -- 51,360 *
Sarah J. Turvill..................... 77,000 * -- 77,000 *
Mario Vitale......................... 145,000 * -- 145,000 *
All our directors and executive
officers (22 persons)(8)........... 4,918,909 3.3% -- 4,918,909 3.3%
- ------------------------
* 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 52.6% 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., 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
78
respectively. The address of KKR 1996 Overseas, Limited is Ugland House,
P.O. Box 309, George 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 505,657 of our shares, which include
currently exercisable options to purchase 422,501 shares. Fisher Capital
Corp. L.L.C. will sell 81,542 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 63,921 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) The address of The Tokio Marine and Fire Insurance Company, Limited is 2-1
Marunouchi 1-Chome, Chiyoda-ku, Tokyo, 100, Japan.
(8) This includes 52,453 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 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 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
79
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 the registration statement filed
in November 2001 and 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.
80
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Following this offering, KKR Overseas Limited, an entity controlled by KKR,
will own approximately 44.1% of our outstanding common stock, or 39.2% 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".
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 1999, 2000 and 2001, we paid $1.0 million,
$1.0 million and $1.0 million to KKR and $350,000, $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.
Our United States subsidiary, Willis North America Inc., holds an interest
of approximately 7.5% 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, upon
exercise, could increase its interest to approximately 12.5% 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 16.7% 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.
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. At that time, the partners and employees of KKR,
some of whom serve as our directors, had 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 7.1% of our common stock prior to the completion of this offering.
From time to time in the ordinary course of business and on commercial
terms, our insurance brokerage subsidiaries may provide services to directors or
executive officers and their families in connection with their personal
insurance requirements.
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 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
81
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 Chairman and Chief Executive Officer, 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.
82
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
JPMorgan Chase 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 May 14, 2002, voluntary prepayments totaling $122 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 $36.0 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 and six months after the initial funding date, with nominal
interim amortization. The revolving credit
83
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.
84
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 from and after February 1, 2004, 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 May 14, 2002, Willis North America had repurchased in the open market
and retired notes in a principal amount of $111 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.
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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 147,848,370 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.
Pursuant to the Exempted Undertakings Tax Protection Act 1966, as amended,
we have received an undertaking from the Bermuda Ministry of Finance 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 presently not to exceed $27,825, based upon our assessable
capital.
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 the tax
consequences that could apply to persons that own 10% or more of our voting
stock.
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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. subsidiaries were so classified, a U.S.
Holder would be required, regardless of that holder's percentage
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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 corporation's 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.
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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 affect the prevailing market price.
Upon completion of this offering, we will have outstanding
147,848,370 shares of common stock, without taking into account 30,204,074
shares that may be issued upon exercise of options outstanding as of the date of
this offering.
The 16,000,000 shares of common stock being sold in this offering and the
40,500,000 shares of common stock sold in our initial public offering and first
secondary 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. 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".
We, our directors and group executive officers, 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. and J.P. Morgan Securities Inc. for a period of 90 days from
the date of this prospectus. Salomon Smith Barney Inc. and J.P. Morgan
Securities Inc. in their sole discretion may release any of the securities
subject to these arrangements at any time without notice.
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 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, are subject to existing transfer restrictions on their
shares pursuant to shareholder and subscription agreements with us. We have
agreed not to amend, waive or fail to enforce those transfer restrictions for a
period of 90 days after the date of this prospectus, in each case without the
prior written consent of Salomon Smith Barney Inc. and J.P. Morgan Securities
Inc. However, effective 30 days from the date of this prospectus, we intend to
release these transfer restrictions on an aggregate of approximately 4,428,000
of these shares (including approximately 1,374,000 shares held by our group
executive officers) such that these shares may be immediately sold in the open
market by any of our employees who are not affiliates or group executive
officers. These shares, other than the shares held by our group executive
officers, are not subject to any lock-up arrangement with Salomon Smith
Barney Inc. or J.P. Morgan Securities Inc.
Following the expiration of the lock-up periods, and assuming the
underwriters' over-allotment option is not exercised, 84,359,749 shares of
common stock will be available for sale in the public market subject to
compliance with Rule 144, including approximately 12,196,943 shares eligible for
sale under Rule 144(k).
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
95
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
148 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 several 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 $30.00 (the last
sale price of our common stock on the New York Stock Exchange on May 3, 2002) we
would issue approximately 121,375 new shares on the third anniversary.
In connection with our acquisition of Richard N. Goldman & Co., we issued
482,969 shares of our common stock to the former owners, 471,229 of which are
subject to transfer restrictions equal to or in excess of 3 years. In addition,
we have agreed to issue shares 26 months from the date of the acquisition if
certain performance targets are achieved. Assuming those targets are achieved,
based on a price of $30.00 (the last sale price of our common stock on the New
York Stock Exchange on May 3, 2002), we would issue approximately 91,000 new
shares on such date.
96
UNDERWRITING
Salomon Smith Barney Inc. and J.P. Morgan Securities Inc. are acting as
joint bookrunning lead managers of this offering and Banc of America Securities
LLC and Credit Suisse First Boston Corporation are acting as co-lead managers
and, together with Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan
Stanley & Co. 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....................................
J.P. Morgan Securities Inc..................................
Banc of America Securities LLC..............................
Credit Suisse First Boston Corporation......................
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Morgan Stanley & Co. Incorporated...........................
UBS Warburg LLC.............................................
----------
Total............................................... 16,000,000
==========
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 $ per share. The underwriters may allow, and the dealers may
reallow, a concession not to exceed $ 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.
Certain of the selling shareholders have granted to the underwriters an
option, exercisable for 30 days from the date of this prospectus, to purchase up
to 2,400,000 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.
We, our directors and group executive officers, 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. and J.P. Morgan Securities Inc. for a period of 90 days from
the date of this prospectus. Salomon Smith Barney Inc. and J.P. Morgan
Securities Inc. in their sole discretion may release any of the securities
subject to these arrangements at any time without notice.
97
Except in the case of certain of our shares held by the trust that is party
to our employee stock purchase agreements, certain of our employee and
management shareholders, including our directors and executive officers, are
subject to existing transfer restrictions in excess of 90 days on certain of
their shares pursuant to shareholder and subscription agreements with us. We
have agreed not to amend, waive or fail to enforce those transfer restrictions
for a period of 90 days after the date of this prospectus, in each case without
the prior written consent of Salomon Smith Barney Inc. and J.P. Morgan
Securities Inc. However, effective 30 days after the date of this prospectus, we
intend to release these transfer restrictions on an aggregate of approximately
4,428,000 of these shares (including approximately 1,374,000 shares held by our
group executive officers) such that these shares may be immediately sold in the
open market by any of our employees who are not affiliates or group executive
officers. These shares, other than the shares held by our group executive
officers, are not subject to any lock-up arrangement with Salomon Smith Barney
Inc. or J.P. Morgan Securities Inc.
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................................................... $ $
----------- -----------
Total....................................................... $ $
=========== ===========
In connection with this offering, Salomon Smith Barney Inc. and J.P. Morgan
Securities 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. or J.P. Morgan Securities Inc. repurchases shares
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
98
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 $535,000, which consist of approximately $35,000 for filing and
listing fees and approximately $500,000 for accounting and legal fees and
expenses.
JPMorgan Chase 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 subsciption 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.
99
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, 2001 and 2000 and for each of the three years in the period ended
December 31, 2001 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
currently 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 currently 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
100
------------------------
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.
------------------------
101
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
WILLIS GROUP HOLDINGS LIMITED
INDEPENDENT AUDITORS' REPORT................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001
AND 2000 AND FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 2001:
Consolidated Statements of Operations..................... F-3
Consolidated Balance Sheets (as of December 31, 2001 and
2000)................................................... F-4
Consolidated Statements of Cash Flows..................... F-6
Consolidated Statements of Stockholders' Equity........... F-8
Notes to Consolidated Financial Statements................ F-9
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF
MARCH 31, 2002 AND DECEMBER 31, 2001 AND FOR EACH OF THE
THREE-MONTH PERIODS ENDED MARCH 31, 2002 AND MARCH 31,
2001:
Condensed Consolidated Statements of Operations........... F-42
Condensed Consolidated Balance Sheets..................... F-43
Condensed Consolidated Statements of Cash Flows........... F-44
Notes to Unaudited Condensed Consolidated Financial
Statements.............................................. F-45
F-1
WILLIS GROUP HOLDINGS LIMITED
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Willis Group Holdings Limited
Hamilton, Bermuda
We have audited the accompanying consolidated balance sheets of Willis Group
Holdings Limited and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, cash flows and stockholders'
equity for each of the three years in the period ended December 31, 2001. 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 Willis Group Holdings Limited
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
Deloitte & Touche
London, England
February 5, 2002
F-2
WILLIS GROUP HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
-------- -------- --------
(MILLIONS, EXCEPT PER SHARE
DATA)
REVENUES:
Commissions and fees...................................... $1,357 $1,237 $1,180
Interest income........................................... 67 68 64
------ ------ ------
Total revenues.......................................... 1,424 1,305 1,244
------ ------ ------
EXPENSES:
General and administrative expenses (excluding non-cash
compensation)........................................... 1,054 1,062 1,136
Non-cash compensation -- performance options (Note 13).... 158 -- --
Depreciation expense...................................... 33 37 41
Amortization of goodwill.................................. 35 35 35
Net gain on disposal of operations (Note 4)............... (17) (1) (7)
Restructuring costs (Note 3).............................. -- 18 7
Pension review expense (Note 10).......................... -- -- 40
------ ------ ------
Total expenses.......................................... 1,263 1,151 1,252
------ ------ ------
OPERATING INCOME (LOSS)..................................... 161 154 (8)
------ ------ ------
OTHER EXPENSES:
Interest expense.......................................... 82 89 89
Other expenses............................................ -- -- 7
------ ------ ------
Total other expenses.................................... 82 89 96
------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES, EQUITY IN NET INCOME OF
ASSOCIATES AND MINORITY INTEREST.......................... 79 65 (104)
INCOME TAX EXPENSE (Note 5)................................. 62 33 7
------ ------ ------
INCOME (LOSS) BEFORE EQUITY IN NET INCOME OF ASSOCIATES AND
MINORITY INTEREST......................................... 17 32 (111)
EQUITY IN NET INCOME OF ASSOCIATES (Note 6)................. 4 2 7
MINORITY INTEREST (Including $12, $23 and $23, respectively,
of preferred stock dividends)............................. (19) (25) (28)
------ ------ ------
NET INCOME (LOSS)........................................... $ 2 $ 9 $ (132)
====== ====== ======
NET INCOME (LOSS) PER COMMON SHARE (Note 7)
-- Basic.................................................. $ 0.01 $ 0.07 $(1.11)
-- Diluted................................................ $ 0.01 $ 0.07 $(1.11)
====== ====== ======
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (Note
7)
-- Basic.................................................. 136 121 119
-- Diluted................................................ 148 121 119
====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
WILLIS GROUP HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
-------- --------
(MILLIONS, EXCEPT
SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 128 $ 88
Fiduciary funds -- restricted (Note 8).................... 1,282 978
Short-term investments (Note 8)........................... 42 41
Accounts receivable, net of allowance for doubtful
accounts of $25 and $24, respectively................... 5,703 4,675
Deferred tax assets (Note 5).............................. 16 14
Other current assets...................................... 78 94
------ ------
Total current assets.................................... 7,249 5,890
------ ------
NONCURRENT ASSETS:
Fixed assets, net of accumulated depreciation of $95 and
$79, respectively (Note 9).............................. 185 192
Goodwill, net of accumulated amortization of $115 and $80,
respectively............................................ 1,201 1,225
Investments in associates (Note 6)........................ 135 134
Deferred tax assets (Note 5).............................. 59 45
Other noncurrent assets................................... 120 104
------ ------
Total noncurrent assets................................. 1,700 1,700
------ ------
TOTAL....................................................... $8,949 $7,590
====== ======
(Continued)
F-4
WILLIS GROUP HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2001 AND 2000
2001 2000
-------- --------
(MILLIONS, EXCEPT
SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $6,799 $5,484
Deferred revenue and accrued expenses..................... 163 130
Provisions (Note 10)...................................... 38 37
Income taxes payable...................................... 75 43
Other current liabilities................................. 167 189
------ ------
Total current liabilities............................... 7,242 5,883
------ ------
NONCURRENT LIABILITIES:
Long-term debt (Note 11).................................. 787 958
Provisions (Note 10)...................................... 102 121
Other noncurrent liabilities.............................. 106 99
------ ------
Total noncurrent liabilities............................ 995 1,178
------ ------
Total liabilities....................................... 8,237 7,061
------ ------
COMMITMENTS AND CONTINGENCIES (Note 17)
MINORITY INTEREST........................................... 16 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, 147,635,170 shares and 123,698,539
shares respectively..................................... -- --
Additional paid-in capital................................ 867 410
Accumulated deficit....................................... (165) (167)
Accumulated other comprehensive income (loss) (Note 15)... 5 (5)
Treasury stock, at cost, 816,981 shares at December 31,
2001.................................................... (11) --
------ ------
Total stockholders' equity.............................. 696 238
------ ------
TOTAL....................................................... $8,949 $7,590
====== ======
(Concluded)
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
WILLIS GROUP HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
-------- -------- --------
(MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 2 $ 9 $(132)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Net (gain) loss on sale of subsidiary, fixed assets and
short-term investments................................ (17) 2 (4)
Depreciation............................................ 33 37 41
Amortization of goodwill................................ 35 35 35
Provision for doubtful accounts......................... 10 8 10
Minority interest....................................... 6 3 5
Provisions.............................................. (13) (23) 23
Provision for deferred income taxes..................... (18) (8) (18)
Non-cash compensation expense attributable to
performance options................................... 158 -- --
Other................................................... -- 3 4
Changes in operating assets and liabilities, net of
effects from purchase of subsidiaries:
Fiduciary funds -- restricted........................... (320) (124) (66)
Accounts receivable..................................... (1,142) (742) (84)
Accounts payable........................................ 1,446 851 154
Other................................................... 41 28 51
------ ---- -----
Net cash provided by operating activities................. 221 79 19
------ ---- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on disposal of fixed assets...................... 5 7 11
Additions to fixed assets................................. (40) (30) (41)
Net cash proceeds from sale of operations................. 22 1 15
Acquisitions of subsidiaries, net of cash acquired........ -- (8) (19)
Investments in and advances to associates................. -- (1) (17)
Tax refund relating to prior acquisition.................. 5 -- --
Purchase of short-term investments........................ (16) (32) (22)
Proceeds on sale of short-term investments................ 14 25 46
Other..................................................... -- (3) 1
------ ---- -----
Net cash used in investing activities................... (10) (41) (26)
------ ---- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of issue of debt................................. -- -- 550
Repayments of debt........................................ (172) (32) (598)
Repayment of preference shares............................ (273) -- --
Proceeds from initial public offering, net of offering
costs................................................... 282 -- --
Debt issue costs.......................................... -- -- (13)
Purchase of treasury stock................................ (11) -- --
Proceeds from issue of common shares...................... 7 9 36
------ ---- -----
Net cash used in financing activities................... (167) (23) (25)
------ ---- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 44 15 (32)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS................................................. (4) (7) (6)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 88 80 118
------ ---- -----
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 128 $ 88 $ 80
====== ==== =====
(Continued)
F-6
WILLIS GROUP HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
-------- -------- --------
(MILLIONS)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for income taxes............................ $ 41 $ 27 $ 18
Cash payments for interest................................ $ 82 $ 85 $ 72
====== ==== =====
SUPPLEMENTAL DISCLOSURES OF NON-CASH FLOW INVESTING AND
FINANCING ACTIVITIES:
Investment in associated companies........................ $ -- $ -- $ 1
Issue of preference shares in lieu of dividend............ 1 3 2
Purchase of fixed assets.................................. 1 -- 2
Issue of common stock on acquisition of subsidiaries...... 11 -- --
Deferred payments on acquisitions of subsidiaries......... 11 4 6
Acquisitions:
Fair value of assets acquired........................... 19 38 39
Less: liabilities assumed............................... (15) (25) (21)
Cash acquired........................................... (5) (6) (2)
------ ---- -----
Acquisitions, net of cash acquired........................ $ (1) $ 7 $ 16
====== ==== =====
(Concluded)
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
WILLIS GROUP HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
----------- ----------- -----------
(MILLIONS, EXCEPT SHARE DATA)
COMMON SHARES OUTSTANDING (number)
Balance, beginning of year............................ 123,698,539 120,567,702 109,599,817
Common shares issued................................ 23,698,061 3,069,462 10,967,885
Exercise of stock options........................... 238,570 61,375 --
----------- ----------- -----------
Balance, end of year.................................. 147,635,170 123,698,539 120,567,702
=========== =========== ===========
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of year............................ $ 410 $ 401 $ 365
Proceeds from issue of common shares, net of
offering costs in 2001 of $30 million............. 296 9 36
Non-cash compensation -- performance options........ 158 -- --
Gains on sale of treasury stock..................... 3 -- --
----------- ----------- -----------
Balance, end of year.................................. 867 410 401
----------- ----------- -----------
ACCUMULATED DEFICIT
Balance, beginning of year............................ (167) (176) (44)
Net income (loss)................................... 2 9 (132)
----------- ----------- -----------
Balance, end of year.................................. (165) (167) (176)
----------- ----------- -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance, beginning of year............................ (5) 1 --
Foreign currency translation adjustment............. (4) (8) 3
Cumulative effect of accounting change.............. 8 -- --
Unrealized holding gains (losses)................... 1 2 (2)
Net gain on derivative instruments.................. 5 -- --
----------- ----------- -----------
Balance, end of year.................................. 5 (5) 1
----------- ----------- -----------
TREASURY STOCK
Balance, beginning of year............................ -- -- --
Cost of shares acquired............................. (11) -- --
----------- ----------- -----------
Balance, end of year.................................. (11) -- --
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY............................ $ 696 $ 238 $ 226
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. THE COMPANY AND ITS OPERATIONS
BUSINESS--Willis Group Holdings Limited ("Willis Group Holdings") and
subsidiaries (collectively, the "Company") provide a broad range of value-added
risk management consulting and insurance brokerage 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.
ORGANIZATION--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 ("UK") 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. 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 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 were 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 acquired
a majority voting interest in Willis Group Holdings. Under accounting principles
generally accepted in the United States of America ("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
has been 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. For periods prior to the exchange
offers, the equity of Willis Group Holdings is the historical equity of TA I
prior to the reverse acquisition, retroactively restated to reflect the number
of shares received in the exchange offers.
F-9
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
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 US GAAP, 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 income only upon sale or liquidation of the underlying foreign
subsidiary or associated company.
USE OF ESTIMATES--The preparation of financial statements in conformity with
US GAAP requires 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 insurers.
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-10
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
included in net income (loss) 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 brokerage 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 accounts receivable was $2 million, $7 million and
$5 million in the years ended December 31, 2001, 2000 and 1999, respectively.
SHORT-TERM INVESTMENTS--The Company classifies all short-term investments as
available-for-sale in accordance with the provisions of Statement of Financial
Accounting Standards ("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 net income (loss)
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 certain identifiable
intangibles to be disposed of are reported at the lower of carrying amount or
fair value less cost to sell.
F-11
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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. Goodwill is being
amortized on a straight-line basis over periods up to 40 years except for
goodwill on acquisitions completed after June 30, 2001, which is not amortized.
Acquired intangible assets are amortized on a straight-line basis over their
estimated useful life.
INVESTMENTS IN ASSOCIATES--Investments in entities less than 50% owned 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 net
income (loss) since acquisition, less dividends received. Investments in
entities less than 20% owned 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 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. Forward foreign currency exchange contracts are used to manage
currency exposures arising from future income. The fair value of derivative
contracts are recorded in other current and noncurrent assets and liabilities
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. Amounts are reclassified from other comprehensive
income into earnings when the hedged exposure affects earnings.
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 and capital 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
F-12
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 UK and the other in the US. The plans cover substantially all eligible
employees and benefits are based on employees' length of service and salary
history. 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
POST RETIREMENT 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 quoted market
price (or estimated fair value for options granted before the initial public
offering) 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 13, the required SFAS 123 pro forma disclosures of net income
(loss) and net income (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, 2001, 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 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.
ACCOUNTING CHANGES AND 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, was effective for the Company from 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
F-13
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting. The adoption of SFAS 133, effective January 1, 2001, resulted in an
increase in other comprehensive income, net of tax, of $8 million reported as
the cumulative effect of adopting an accounting principle.
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 became 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. SFAS 142 also requires the Company to perform a
transitional assessment of whether there is an indication that goodwill was
impaired at the date of initial application, January 1, 2002. Any goodwill
impairment loss is required to be recognized as the cumulative effect of a
change in accounting principle no later than the end of the year of initial
application. The Company is also required to review its other intangible assets
for impairment and to reassess the useful lives of such assets and make
necessary adjustments. At January 1, 2002, the Company had goodwill, net of
accumulated amortization, of approximately $1,201 million, which would be
subject to the transitional assessment provisions of SFAS 142. Amortization of
goodwill for the year ended December 31, 2001 was $35 million.
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 No. 144 became effective for fiscal years beginning after December 15,
2001. The Company does not expect the application of this standard will have a
material effect.
3. RESTRUCTURING COSTS
The Company recorded charges of $18 million and $7 million 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 expected 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 million representing employee
termination benefits in 1999 and a charge of $11 million representing excess
operating lease obligations (net of expected sublease income) in 2000. As of
December 31, 2001, 277 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,
F-14
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
3. RESTRUCTURING COSTS (CONTINUED)
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 non-strategic businesses is expected
to be completed during the second quarter of 2002. Restructuring charges of
$7 million were recorded by the Company in the fourth quarter of 2000,
representing $4 million of employee termination benefits, $1 million of excess
operating lease obligations and $2 million of other exit costs relating to these
plans. As of December 31, 2001, 75 employees had been terminated.
Selected information for restructuring charges follows:
EXCESS
EMPLOYEE OPERATING
TERMINATION LEASE
BENEFITS OBLIGATIONS OTHER TOTAL
----------- ----------- --------- ---------
(MILLIONS)
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
Used in year........................... (3) (3) -- (6)
---- ---- ---- ----
December 31, 2001...................... $ 2 $ 5 $ 2 $ 9
==== ==== ==== ====
4. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS--During 2001, 2000 and 1999, the Company acquired, or increased
its investments in, a number of businesses. The aggregate purchase price of all
acquisitions completed during 2001, 2000 and 1999 approximated $25 million,
$12 million and $32 million, respectively, inclusive of deferred payments
amounting to $nil, $4 million and $6 million. Additional consideration of up to
$4 million is payable in future periods contingent upon future revenues of the
acquired businesses reaching specified thresholds. 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 net income 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. Pro
forma results from these acquisitions would not have been materially different
from the amounts reported.
The preliminary purchase price allocations for the acquisitions are subject
to adjustment during the year following acquisition. 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. Goodwill
arising on acquisitions occurring before June 30, 2001 is being amortized on a
straight-line basis over 20 years. Goodwill arising on acquisitions after that
date is being tested at least annually for impairment.
F-15
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
4. ACQUISITIONS AND DISPOSITIONS (CONTINUED)
DISPOSITIONS--In July, 2001, the Company completed the sale of its 51%
interest in Willis National Holdings Limited. The gain on disposal amounted to
$22 million and has been recorded in the statement of operations. In
December 2001, the Company completed a restructuring of Willis Italia Holdings
S.p.A. in which a subsidiary of that entity was disposed of in exchange for an
increase in the Company's investment in Willis Italia Holdings S.p.A. from 50.1%
to 67%. The loss on disposal of $5 million, included a net goodwill write-off of
$3 million.
Total proceeds relating to 2000 were not material. Total proceeds relating
to 1999 dispositions of subsidiaries and associates amounted to $7 million with
a gain of $7 million recorded in the consolidated statement of operations.
Additional cash was received in 1999 in the amount of $7 million, which related
to deferred amounts on acquisitions completed in prior years.
5. INCOME TAXES
The components of income (loss) before income taxes, equity in net income of
associates and minority interest for the years ended December 31, are as
follows:
2001 2000 1999
-------- -------- --------
(MILLIONS)
UK.......................................................... $ 10 $ 23 $ (88)
US.......................................................... 15 21 (57)
Other jurisdictions......................................... 54 21 41
----- ----- -----
Income (loss) before income taxes, equity in net income of
associates and minority interest.......................... $ 79 $ 65 $(104)
===== ===== =====
The provision for income taxes by location of the taxing jurisdiction for
the years ended December 31, consisted of the following:
2001 2000 1999
-------- -------- --------
(MILLIONS)
Current income taxes:
UK corporation tax........................................ $ 30 $ 4 $ 6
US federal tax............................................ 27 13 --
US state and local taxes.................................. 10 5 2
Other jurisdictions....................................... 12 14 16
----- ----- -----
Total current taxes......................................... 79 36 24
----- ----- -----
Deferred taxes:
UK corporation tax........................................ 9 6 2
US federal tax............................................ (23) (5) (16)
US state and local taxes.................................. (6) (1) (3)
Other jurisdictions....................................... 3 (3) --
----- ----- -----
Total deferred taxes........................................ (17) (3) (17)
----- ----- -----
Total income taxes.......................................... $ 62 $ 33 $ 7
===== ===== =====
F-16
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
5. INCOME TAXES (CONTINUED)
Under current Bermuda law, the Company is not required to pay any taxes in
Bermuda on its income, profits or capital gains. Accordingly, the following
table reconciles, for the years ended December 31, the income tax expense
(benefit) in these financial statements to that which would be expected at the
UK corporation tax rate, being the domestic federal rate applicable to TA I:
2001 2000 1999
-------- -------- --------
(MILLIONS)
Income (loss) before income taxes, equity in net income of
associates and minority interest.......................... $ 79 $ 65 $(104)
----- ----- -----
Corporation tax rate........................................ 30% 30% 30%
----- ----- -----
Income tax expense (benefit) at corporation tax rate........ 24 19 (31)
Adjustments to derive effective rate:
Non-deductible items:
Goodwill amortization................................... 11 11 13
Stock options........................................... 26 -- --
Other................................................... (3) 8 6
Other items:
Change in valuation allowance........................... -- (2) 29
Prior year adjustment................................... (1) (1) --
Tax differentials of foreign earnings:
US earnings........................................... 2 3 (3)
Other jurisdictions................................... 3 4 2
Other................................................... -- (9) (9)
----- ----- -----
Provision for income taxes................................ $ 62 $ 33 $ 7
===== ===== =====
F-17
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
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:
2001 2000
-------- --------
(MILLIONS)
Deferred tax assets:
Accrued expenses not currently deductible................. $ 12 $ 9
UK net operating losses................................... 29 30
UK capital losses......................................... 63 71
Accrued retirement benefits............................... 6 19
Provisions................................................ 27 32
Allowance for doubtful accounts........................... 1 4
Deferred compensation..................................... 16 12
Stock options............................................. 30 --
Other..................................................... 2 2
----- -----
Gross deferred tax assets............................... 186 179
Less: valuation allowance............................... (92) (101)
----- -----
Net deferred tax assets................................. 94 78
----- -----
Deferred tax liabilities:
Tax-leasing transactions.................................. 11 12
Unremitted foreign earnings............................... 2 2
Other..................................................... 6 5
----- -----
Deferred tax liabilities.................................. 19 19
----- -----
Net deferred tax assets..................................... $ 75 $ 59
===== =====
Balance sheet classifications:
Deferred tax assets -- current............................ $ 16 $ 14
Deferred tax assets -- noncurrent......................... 59 45
----- -----
$ 75 $ 59
===== =====
As of December 31, 2001, the Company had a valuation allowance of
$92 million to reduce its deferred tax assets to estimated realizable value. The
valuation allowance relates to the deferred tax assets arising from UK tax
operating loss carryforwards and capital loss carryforwards which have no
expiration date. The utilization of operating loss 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,
2001 arises principally from the utilization of UK capital loss carryforwards
following the disposal of Willis National. As of December 31, 2001, 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 valuation allowances. 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
F-18
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
5. INCOME TAXES (CONTINUED)
allowance of $92 million as of December 31, 2001 is reduced in future years to
recognize deferred tax assets, $63 million 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. INVESTMENTS IN ASSOCIATES
As of December 31, 2001 and 2000, 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,
2001, is as follows:
COUNTRY 2001 2000
--------- -------- --------
Al-Futtaim Willis Faber (Private) Limited................... Dubai 49% 49%
Willis GmbH & Co. K.G. (formerly 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% 40%
Of those listed above, the Company's principal investments as of
December 31, 2001 and 2000 comprised of Gras Savoye, a French insurance broker,
and Jaspers Wuppesahl, a German insurance broker. Included in the carrying
amount of the Gras Savoye investment is goodwill of $72 million and $74 million
net of accumulated goodwill amortization of $7 million and $5 million as of
December 31, 2001 and 2000, respectively. Included in the carrying amount of the
Jaspers Wuppesahl investment is goodwill of $35 million and $35 million net of
accumulated goodwill amortization of $3 million and $3 million as of
December 31, 2001 and 2000, respectively. Goodwill related to Gras Savoye and
Jaspers Wuppesahl is being amortized on a straight-line basis over a
weighted-average period of 37 years. As of December 31, 2001 and 2000, 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, 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.
F-19
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
6. INVESTMENTS IN ASSOCIATES (CONTINUED)
Unaudited condensed financial information for associates, in the aggregate,
as of and for the years ended December 31, 2001, 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) condensed statement
of operations data has been translated to US dollars at the relevant average
exchange rate.
2001 2000 1999
-------- -------- --------
(MILLIONS)
Condensed statement of operations data:
Net sales................................................. $ 307 $ 286 $ 296
Income before income taxes................................ 35 33 35
Net income................................................ 24 17 33
Condensed balance sheet data:
Current assets............................................ 647 650
Noncurrent assets......................................... 95 110
Current liabilities....................................... (631) (638)
Stockholders' equity...................................... 77 77
7. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is calculated by dividing net
income (loss) by the weighted-average number of common shares outstanding during
each year. The computation of diluted net income (loss) 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 issue of common shares that then shared in the net income (loss)
of the Company.
The computation of net income (loss) per share has been retroactively
restated to reflect the number of shares of Willis Group Holdings, after
consummation of the exchange offers.
For the year ended December 31, 2001, time-based and performance-based
options to purchase 19,266,392 and 11,274,672 common shares, respectively, were
outstanding. The basic and diluted weighted-average number of shares outstanding
for the year ended December 31, 2001, was 136,172,762 and 147,863,513,
respectively, giving basic and diluted net income per common share of $0.01 and
$0.01, respectively.
For the years ended December 31, 2000 and 1999, time-based options to
purchase 17,865,957 and 11,426,610, respectively, of management 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. Accordingly, such options had no dilutive nor
antidilutive effect on net income (loss) per share for the years ended
December 31, 2000 and 1999.
F-20
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
8. FIDUCIARY FUNDS--RESTRICTED AND SHORT-TERM INVESTMENTS
The Company's short-term investments and fiduciary funds-restricted consist
of cash, time deposits, 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, 2001 and 2000, the amortized cost
of securities approximated fair value.
Realized gains and losses, net of tax, on debt securities are included in
net income. During 2001, 2000 and 1999, sales of debt securities totaled
$21 million, $52 million and $72 million, respectively, on which realized gains
and losses were not material to the consolidated results of the Company.
As of December 31, fiduciary funds-restricted and short-term investments
consist of the following:
2001 2000
-------- --------
(MILLIONS)
Short-term investments(1):
US Government securities.................................. $ 4 $ 8
UK Government securities.................................. 3 5
Other foreign government securities....................... 21 20
Corporate debt securities................................. 14 8
------ ------
$ 42 $ 41
====== ======
Fiduciary funds-restricted:
Cash and cash equivalents(2).............................. $ 855 $ 632
Certificates of deposits.................................. 416 306
US Treasury bills(1)...................................... 7 7
Time deposits............................................. 4 33
------ ------
$1,282 $ 978
====== ======
- ------------------------
(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.
F-21
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
9. FIXED ASSETS
The components of fixed assets as of December 31, are as follows:
2001 2000
-------- --------
(MILLIONS)
Land and buildings.......................................... $ 98 $ 102
Leasehold improvements...................................... 33 27
Vehicles.................................................... 21 24
Furniture and equipment..................................... 128 118
------ ------
Total fixed assets, cost.................................... 280 271
Less accumulated depreciation............................... (95) (79)
------ ------
Total fixed assets, net..................................... $ 185 $ 192
====== ======
10. PROVISIONS
Provisions as of and for the years ended December 31, are as follows:
PENSIONS SURPLUS DISCONTINUED
CLAIMS REVIEW PROPERTIES OPERATIONS TOTAL
-------- -------- ---------- ------------ --------
(MILLIONS)
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
Charge to operations.................... 29 -- 1 -- 30
Used in the year........................ (14) (18) (7) (4) (43)
Foreign exchange and other
adjustments........................... (2) (2) -- (1) (5)
---- ---- ---- ---- ----
December 31, 2001....................... $ 66 $ 31 $ 17 $ 26 $140
==== ==== ==== ==== ====
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, 2001 and 2000.
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
F-22
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
10. PROVISIONS (CONTINUED)
required by the Financial Services 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 million,
$24 million of which was recorded as a purchase price adjustment and
$40 million 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 million in the fourth quarter of 1999 was necessitated
by adverse changes in the demographic assumptions 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 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.
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
payments 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.
F-23
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
11. LONG-TERM DEBT
Long-term debt as of December 31, consists of the following:
2001 2000
-------- --------
(MILLIONS)
Senior Credit Facility term loan, variable rate due 2005 to
2008...................................................... $348 $408
9% senior subordinated notes, due 2009...................... 439 550
---- ----
$787 $958
==== ====
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 JPMorgan Chase
Bank, as administrative agent and collateral agent, providing up to
$450 million in term loans and $150 million 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
2001 and 2000, the Company made non-mandatory early repayments totaling
$60 million and $30 million, respectively. As a consequence, the Company's next
scheduled repayment under the facility is not due until 2005. For the years
ended December 31, 2001 and 2000, the weighted-average interest rate relating to
all loans under the Senior Credit Facility ranged from 5.63% to 6.88% and 8.40%
to 9.22%, respectively; net of an interest rate swap, the ranges were 6.26% to
7.50% and 6.96% to 7.76%.
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 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 senior subordinated 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. At December 31, 2001, the Company was in compliance with all
covenants.
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
F-24
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
11. LONG-TERM DEBT (CONTINUED)
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 million. The interest on
the Notes is payable semi-annually 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 was able to 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.
During 2001, Willis North America bought back and cancelled Notes totaling
$111 million. The difference between the market price paid and the book value
was not material.
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 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 asset 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. At
December 31, 2001, the Company was in compliance with all covenants.
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.
F-25
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
11. LONG-TERM DEBT (CONTINUED)
SCHEDULED DEBT REPAYMENTS--Aggregate maturities of long-term debt for the
five years subsequent to December 31, 2001 are as follows:
(MILLIONS)
2005........................................................ $ 83
2006........................................................ 118
Thereafter.................................................. 586
------
$ 787
======
LINES OF CREDIT--The Company also has available $2 million in lines of
credit, of which $nil was drawn as of December 31, 2001 (excluding the
$150 million revolving credit facility).
12. 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 2001, 2000 and 1999 were
approximately $5 million, $6 million and $5 million, 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-26
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
12. 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
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(MILLIONS)
Change in benefit obligation:
Benefit obligation, beginning of year............. $ 946 $ 997 $ 337 $ 314
Service cost...................................... 24 27 13 13
Interest cost..................................... 54 56 24 22
Employee contribution............................. 2 2 -- --
Actuarial loss (gain)............................. 16 (17) 12 2
Benefits paid..................................... (38) (44) (15) (14)
Foreign currency changes.......................... (31) (75) -- --
------ ------ ------ ------
Benefit obligations, end of year.................... 973 946 371 337
------ ------ ------ ------
Change in plan assets:
Fair value of plan assets, beginning of year...... 1,246 1,363 358 366
Actual return on plan assets...................... (80) 12 (8) 5
Employee contributions............................ 2 2 -- --
Employer contributions............................ 15 14 5 1
Benefits paid..................................... (38) (44) (15) (14)
Foreign currency changes.......................... (43) (101) -- --
------ ------ ------ ------
Fair value of plan assets, end of year.............. 1,102 1,246 340 358
------ ------ ------ ------
Reconciliation of funded status:
Funded status..................................... 129 300 (31) 21
Unrecognized net actuarial gain................... (84) (277) (20) (75)
------ ------ ------ ------
Net asset (liability) recognized.................... 45 23 (51) (54)
------ ------ ------ ------
Amounts recognized in balance sheet consist of:
Prepaid benefit cost.............................. 45 23 -- --
Accrued benefit liability......................... -- -- (51) (54)
------ ------ ------ ------
Net asset (liability) recognized.................... $ 45 $ 23 $ (51) $ (54)
====== ====== ====== ======
F-27
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
12. 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
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Weighted-average assumptions:
Discount rate.......................................... 5.8% 6.0% 7.0% 7.3%
Expected return on plan assets......................... 7.3% 7.3% 8.5% 8.5%
Rate of compensation increase.......................... 3.5% 3.8% 5.0% 5.0%
The components of the net periodic benefit cost (income) of the UK and US
defined benefit plans for the years ended December 31, are as follows:
UK PENSION BENEFITS US PENSION BENEFITS
------------------------------ ------------------------------
2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- --------
(MILLIONS)
Components of net periodic benefit cost
(income):
Service cost................................. $ 24 $ 27 $ 34 $ 13 $ 13 $ 16
Interest cost................................ 54 56 58 24 22 21
Expected return on plan assets............... (80) (80) (77) (30) (30) (28)
Termination benefits......................... -- -- -- -- -- 22
Recognized actuarial gain.................... (6) (2) -- (5) (9) (2)
---- ---- ---- ---- ---- ----
Net periodic benefit cost (income)............. $ (8) $ 1 $ 15 $ 2 $ (4) $ 29
==== ==== ==== ==== ==== ====
13. STOCK BENEFIT PLANS
Willis Group Holdings has adopted the plans described below providing for
the grant of time-based options and performance-based 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
and performance-based 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 Willis Group
Holdings on a fully diluted basis. All options granted under this plan are
exercisable at L2 per share ($2.90 using the year-end exchange rate of L1 =
$1.45) except for 111,111 time-based options which are exercisable at $13.50. No
further grants are to be made under this plan.
Time-based options are earned upon the fulfilment of vesting requirements.
Options are generally exercisable in equal instalments of 20% per year over a
five-year period commencing on or after December 18, 2000.
F-28
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
13. STOCK BENEFIT PLANS (CONTINUED)
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 Willis Group
Limited, 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 instalments of 25% per year over a
four-year period commencing on or after December 18, 2001.
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 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 Willis Group Holdings on a
fully diluted basis. All options granted under this plan are exercisable at L2
per share ($2.90 using the year-end exchange rate of L1 = $1.45). The options
vest immediately on the grant date and are exercisable any time up to July 13,
2010.
2001 SHARE PURCHASE AND OPTION PLAN--This plan, which was established on
May 3, 2001, provides for the granting of time-based options and various other
share-based grants at fair market value to employees of the Company. There are
10,000,000 common shares available for grant under this plan. Options are
exercisable from the third, sixth or eighth anniversary of grant, although for
certain options the exercisable date may accelerate depending on the achievement
of certain performance goals. Unless terminated sooner by the board of
directors, the 2001 Plan will expire 10 years after its adoption. That
termination will not affect the validity of any grant outstanding at that date.
COMPENSATION EXPENSE--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 (time-based
options, options granted pursuant to the Willis Award Plan and various other
share-based grants to employees) are measured as the difference between the
quoted (or 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 (performance-based options), however, is measured as the
difference between the quoted market price at the date when the number of shares
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 expense is unknown until the
performance conditions are satisfied, estimates of compensation expense are
recorded before the measurement date based on the quoted 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 management's best estimate of market price at the
measurement date prior to Willis Group Holdings' initial public offering and
equal to quoted market price subsequent to the offering. Accordingly, no
compensation expense has been recognized for the fixed option plans in the
consolidated statements of operations pursuant to APB 25. In respect of the
performance-based options, management determined in the third quarter of 2001
that it was probable that the maximum performance condition would be attained.
Accordingly, compensation expense of $158 million ($132 million, net of tax) has
been recognized in the year ended December 31, 2001 based
F-29
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
13. STOCK BENEFIT PLANS (CONTINUED)
on the 11.3 million unforfeited performance options outstanding at that date, a
quoted market price of $23.55 and an average elapsed performance period of 68%.
Had compensation expense for such plans been determined consistent with the fair
value method prescribed by SFAS 123, the Company's pro forma net income (loss)
and net income (loss) per share for 2001, 2000 and 1999 would have been as
indicated in the table below.
2001 2000 1999
-------- -------- --------
(MILLIONS, EXCEPT PER SHARE
DATA)
Net income (loss):
As reported............................................... $ 2 $ 9 $ (132)
Pro forma................................................. 127 4 (136)
Net income (loss) per share:
Basic:
As reported............................................. $0.01 $0.07 $(1.11)
Pro forma............................................... 0.93 0.03 (1.14)
Diluted:
As reported............................................. $0.01 $0.07 $(1.11)
Pro forma............................................... 0.86 0.03 (1.14)
The fair value of each option grant 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 2001, 2000 and 1999, respectively: dividend yield 0% and expected
volatility of 30% in all years, risk-free interest rate of 4.15% in 2001, 5.26%
in 2000 and 6.42% in 1999, and a weighted-average expected life of three years
in all years. The compensation expense 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, 2001, 2000 and 1999 was $4.04, $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-30
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
13. STOCK BENEFIT PLANS (CONTINUED)
Time-based stock option transactions under the plans are as follows:
2001 2000 1999
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE(1) SHARES PRICE(1) SHARES PRICE(1)
---------- -------- ---------- -------- ---------- --------
Balance, beginning of year..... 17,323,456 $ 2.90 11,004,108 $3.00 10,988,483 $3.24
Granted........................ 1,962,640 $16.93 7,155,472 $3.00 398,125 $3.24
Exercised...................... (238,570) $ 3.31 (61,375) $3.00 -- --
Forfeited...................... (323,635) $ 3.07 (774,749) $3.00 (382,500) $3.24
---------- ------ ---------- ----- ---------- -----
Balance, end of year........... 18,723,891 $ 4.37 17,323,456 $3.00 11,004,108 $3.24
========== ====== ========== ===== ========== =====
Options exercisable at
year-end..................... 5,385,939 $ 2.90 2,438,622 $3.00 -- --
========== ====== ========== ===== ========== =====
- ------------------------
(1) Certain options are exercisable at L2 per share. Year-end exchange rates of
L1 = $1.45, L1 = $1.50 and L1 = $1.62 have been used as of December 31,
2001, 2000 and 1999, respectively.
A summary of time-based options outstanding and exercisable at December 31,
2001 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ----------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
SHARES CONTRACTUAL AVERAGE SHARES AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- ------------ -------------- ----------- --------------
$2.90...................... 16,791,619 7 $ 2.90 5,385,939 $2.90
$13.50..................... 1,082,602 10 $13.50 -- --
$18.23-$23.32.............. 849,670 10 $21.74 -- --
---------- -- ------ --------- -----
$2.90-$23.32............... 18,723,891 7 $ 4.37 5,385,939 $2.90
========== == ====== ========= =====
F-31
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
13. STOCK BENEFIT PLANS (CONTINUED)
Performance-based stock option transactions under the plans are as follows:
2001 2000 1999
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE(1) SHARES PRICE(1) SHARES PRICE(1)
---------- -------- ---------- -------- ---------- --------
Balance, beginning of year..... 11,608,109 $2.90 11,004,108 $3.00 10,988,483 $3.24
Granted........................ 25,000 $2.90 1,378,750 $3.00 398,125 $3.24
Forfeited...................... (358,437) $2.90 (774,749) $3.00 (382,500) $3.24
---------- ----- ---------- ----- ---------- -----
Balance, end of year........... 11,274,672 $2.90 11,608,109 $3.00 11,004,108 $3.24
========== ===== ========== ===== ========== =====
Options exercisable at
year-end..................... -- -- -- -- -- --
========== ===== ========== ===== ========== =====
- ------------------------
(1) Certain options are exercisable at L2 per share. Year-end exchange rates of
L1 = $1.45, L1 = $1.50 and L1 = $1.62 have been used as of December 31,
2001, 2000 and 1999, respectively.
The weighted-average remaining contractual life of performance-based options
outstanding at December 31, 2001, was 7 years.
14. 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.
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.
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.
F-32
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
14. FINANCIAL INSTRUMENTS (CONTINUED)
The Company has designated the interest rate swap agreement as a cash flow
hedge as defined by SFAS 133 with the fair value recorded in other noncurrent
liabilities on the balance sheet. Changes in fair value are recorded as a
component of other comprehensive income. Losses of $9 million were recorded for
the year ended December 31, 2001. Amounts are reclassified from other
comprehensive income into earnings when the hedged exposure affects earnings.
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.
The fair value of these contracts is recorded in other current and
noncurrent assets and liabilities, with changes in fair value of effective
cashflow hedges recorded in other comprehensive income and changes in fair value
of ineffective hedges recorded in general and administrative expenses. Amounts
are reclassified from other comprehensive income into earnings when the hedged
exposure affects earnings. For the year ended December 31, 2001, the Company has
recorded gains of $8 million in other comprehensive income relating to changes
in fair value on contracts which are effective cashflow hedges as defined in
SFAS 133. For contracts which were not designed for hedge accounting as defined
in SFAS 133, the Company has recorded gains of $8 million in general and
administrative expenses representing the change in fair value for the year ended
December 31, 2001.
F-33
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
14. FINANCIAL INSTRUMENTS (CONTINUED)
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
--------- ----------------- -------- --------
(MILLION) % %
2001
US dollar............ Receive fixed -- pay variable $1,044 2002-2006 5.91 4.15
Receive variable -- pay fixed 328 2006 4.10 5.10
Pounds sterling...... Receive fixed -- pay variable 299 2002-2005 6.19 5.20
Euro................. Receive fixed -- pay variable 89 2002-2006 4.71 4.27
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
- ------------------------
(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 manner, to meet its 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 million 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
predominantly 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.
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.
The fair value of these contracts is recorded in other current and
noncurrent assets and liabilities, with changes in the fair value of effective
cashflow hedges recorded in other comprehensive income and changes in fair value
of ineffective hedges recorded in general and administrative expenses. Amounts
are reclassified from other comprehensive income into earnings when the hedged
exposure
F-34
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
14. FINANCIAL INSTRUMENTS (CONTINUED)
affects earnings. For the year ended December 31, 2001, the Company has recorded
a gain of $6 million in other comprehensive income relating to changes in the
fair value on contracts which are effective cashflow 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 loss of $6 million in general
and administrative expenses representing the change in the fair value for the
year ended December 31, 2001.
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 at December 31.
SELL SELL
2001(1) 2000
-------- --------
(MILLION)
US dollar................................................... $128 $143
Euro........................................................ 25 30
Japanese yen................................................ 20 15
- ------------------------
(1) Forward exchange contracts range in maturity from 2002 to 2004.
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 non-performance 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
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, 2001.
FAIR VALUE--The estimated fair value of the Company's financial instruments
at December 31 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
F-35
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
14. FINANCIAL INSTRUMENTS (CONTINUED)
would realize upon disposition nor do they indicate the Company's intent or
ability to dispose of the financial instrument.
2001 2000
--------------------- ---------------------
BOOK ESTIMATED BOOK ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
(MILLIONS)
Primary financial instruments held or issued to
finance the Company's operations:
Cash and cash equivalents....................... $ 128 $ 128 $ 88 $ 88
Fiduciary funds -- restricted................... 1,282 1,282 978 978
Short-term investments.......................... 42 42 41 41
Long-term debt.................................. 787 805 958 900
Company-obligated mandatorily redeemable
preferred capital securities of subsidiary.... -- -- 272 260
Derivative financial instruments held to manage
interest rate and currency exposures:
Interest rate swaps -- assets................... 28 28 -- 16
-- liabilities.................. 10 10 -- 2
Forward foreign exchange contracts -- assets.... 5 5 3 3
-- liabilities... 3 3 4 4
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.
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.
F-36
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) for the years ended
December 31, are as follows:
2001 2000 1999
-------- -------- --------
(MILLIONS)
Net income (loss)........................................... $ 2 $ 9 $(132)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment..................... (4) (8) 3
Cumulative effect of accounting change (net of tax of $5,
$--
and $--).................................................. 8 -- --
Unrealized holding gains (losses) (net of tax of $--, $1 and
($1))..................................................... 1 2 (2)
Net gain on derivative instruments (net of tax of $--, $--
and $--).................................................. 5 -- --
----- ----- -----
Other comprehensive income (loss), net of tax............... 10 (6) 1
----- ----- -----
Comprehensive income (loss)................................. $ 12 $ 3 $(131)
===== ===== =====
The components of accumulated other comprehensive income (loss) as of
December 31, are as follows:
2001 2000 1999
-------- -------- --------
(MILLIONS)
Net foreign currency translation adjustment................. $ (9) $ (5) $ 3
Net cumulative effect of accounting change.................. 8 -- --
Net unrealized holding gains................................ 1 -- (2)
Net gain on derivative instruments.......................... 5 -- --
----- ----- -----
$ 5 $ (5) $ 1
===== ===== =====
16. 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
$280 million after deducting underwriting discounts, commissions and other
expenses of the offering of $30 million. The net proceeds were used to redeem
all the outstanding $273 million preference shares of a subsidiary on June 29,
2001.
In addition, during 2001 the Company issued 698,061 common shares for total
consideration of $13 million and a further 238,570 common shares as a result of
the exercise of stock options for a consideration of $3 million.
17. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES--The Company leases certain land, buildings and equipment
under various operating lease arrangements. Original non-cancellable 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-37
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of December 31, 2001, the aggregate future minimum rental commitments
under all non-cancellable operating lease agreements are as follows:
GROSS RENTAL RENTALS FROM NET RENTAL
COMMITMENTS SUBLEASES COMMITMENTS
------------ ------------ -----------
(MILLIONS)
2002........................................... $ 52 $ 8 $ 44
2003........................................... 44 8 36
2004........................................... 39 7 32
2005........................................... 32 6 26
2006........................................... 28 6 22
Thereafter..................................... 96 25 71
---- ---- ----
Total.......................................... $291 $ 60 $231
==== ==== ====
Rent expense amounted to $63 million, $66 million and $64 million for the
years ended December 31, 2001, 2000 and 1999, respectively. The Company's rental
income from subleases was $6 million, $4 million and $3 million for the years
ended December 31, 2001, 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 $120 million and $157 million at December 31, 2001 and
2000, respectively.
In addition, the Company has given guarantees to bankers and other third
parties relating principally to letters of credit amounting to $7 million and
$8 million at December 31, 2001 and 2000, 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 certain 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. Based on current
projections of profitability and exchange rates, the potential amount payable in
2002 from these options is not expected to exceed $147 million. Of this balance,
$135 million relates to Gras Savoye, as disclosed in Note 6.
CLAIMS, LAWSUITS AND PROCEEDINGS--The Company is subject to various actual
and potential claims, lawsuits and proceedings relating principally to alleged
errors and omissions in connection with the placement of insurance and
reinsurance in the ordinary course of business. Some of those claims, lawsuits
and proceedings seek damages in amounts which could, if assessed, be
significant.
F-38
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
17. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company acted as broker, but not as underwriter, for the placement of
both property and casualty insurance for a number of entities that were directly
impacted by the September 11, 2001 destruction of the World Trade Center
complex, including Silverstein Properties L.L.C., 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. There are a number of
lawsuits pending in the US between the insured parties and the insurers.
Although the Company is not a party to any of these lawsuits, other disputes may
arise with respect to the destruction of the World Trade Center complex which
could affect the Company.
The Company maintains insurance, subject to certain deductibles and
self-insurance, against such claims, lawsuits and proceedings. The Company has
also established provisions against these items which are believed to be
adequate in the light of current information and legal advice, and the Company
adjusts such provisions from time to time according to developments. On the
basis of current information, the Company does not expect that the ultimate
outcome of the actual or potential claims, lawsuits and proceedings to which the
Company is subject, either individually or in the aggregate, will have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
18. 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 brokerage activities through
three operating segments: Global, North America and International. 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, 2001, 2000
and 1999.
F-39
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
18. SEGMENT INFORMATION (CONTINUED)
Information regarding the Company's geographic locations for the years ended
December 31, is as follows:
UK US OTHER(3) TOTAL
-------- -------- -------- --------
(MILLIONS)
2001
Commissions and fees(1)............................. $ 516 $ 669 $ 172 $1,357
Long-lived assets(2)................................ 120 53 12 185
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.
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.
19. RELATED PARTY TRANSACTIONS
The Company has an Employee Stock Ownership Plan (the "ESOP") which invests
in Willis Group Holding's common shares. The trustee of the ESOP transferred
424,724 and 527,495 common shares during the years ended December 31, 2001 and
2000, respectively. At December 31, 2001 and 2000, the ESOP shares outstanding
were 828,687 and 1,253,411, respectively. No dividends have been distributed on
the common shares held by the ESOP.
KKR 1996 Fund (Overseas), Limited Partnership beneficially owns
approximately 53% 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 partner is KKR
1996 Overseas, Limited, a company owned by Messrs. Kravis, Roberts, Golkin and
T.A. 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,
F-40
WILLIS GROUP HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
19. RELATED PARTY TRANSACTIONS (CONTINUED)
render management, consulting and certain other services to the Company for
annual fees payable quarterly in arrears. In 2001 and 2000, the Company paid
amounts 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 $0 and $249,970 payable to Kohlberg Kravis Roberts & Co.
L.P. and $70,827 and $87,520 payable to Fisher Capital Corp. LLC as of
December 31, 2001 and 2000, 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. LLC may be deemed to share beneficial ownership of any options
owned by Fisher Capital Corp., LLC but disclaims such beneficial ownership.
During 2000, Willis North America acquired from Mr. J.J. Plumeri, the
Chairman of Willis Group Holdings, 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 payable. This transaction was consummated on terms equivalent to those that
prevail in arm's-length transactions.
20. SUBSEQUENT EVENTS
On January 1, 2002, the Company acquired a further 22%, in addition to the
45% already owned, in Jaspers Wuppesahl, Germany's third largest insurance
broker, to improve the Company's market position and broaden its global offering
and capabilities on behalf of its clients. Accordingly, Jaspers Wuppesahl (since
renamed Willis GmbH & Co. K.G.) will be accounted for as a subsidiary from the
date of acquisition. The aggregate cash purchase price was $14 million, of which
$5 million was deferred to 2003.
The following table summarizes the estimated fair value of the assets and
liabilities acquired on a 100% basis as they will be consolidated from
January 1, 2002:
(MILLIONS)
----------
Current assets.............................................. $ 73
Fixed assets................................................ 12
Goodwill.................................................... 48
Current liabilities......................................... (78)
Minority interest........................................... (2)
----
53
Less: Equity investment at December 31, 2001................ 39
----
Net assets acquired......................................... $ 14
====
The purchase price allocation has yet to be finalized. None of the goodwill
will be deductible for tax purposes.
F-41
WILLIS GROUP HOLDINGS LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
-----------------------
2002 2001
-------- --------
(MILLIONS, EXCEPT
PER SHARE DATA)
REVENUES:
Commissions and fees...................................... $ 436 $ 359
Interest income........................................... 15 16
----- -----
Total revenues.......................................... 451 375
----- -----
EXPENSES:
General and administrative expenses (excluding non-cash
compensation)........................................... 297 268
Non-cash compensation -- performance options -- (Note
6)...................................................... 18 --
Depreciation expense...................................... 8 9
Amortization of goodwill -- (Note 3)...................... -- 9
----- -----
Total expenses.......................................... 323 286
----- -----
OPERATING INCOME............................................ 128 89
INTEREST EXPENSE............................................ 17 21
----- -----
INCOME BEFORE INCOME TAXES, EQUITY IN NET INCOME OF
ASSOCIATES AND MINORITY INTEREST.......................... 111 68
INCOME TAX EXPENSE.......................................... 43 31
----- -----
INCOME BEFORE EQUITY IN NET INCOME OF ASSOCIATES AND
MINORITY INTEREST......................................... 68 37
EQUITY IN NET INCOME OF ASSOCIATES.......................... 6 9
MINORITY INTEREST (including $0 and $6, respectively of
preferred
stock dividends).......................................... (6) (7)
----- -----
NET INCOME.................................................. $ 68 $ 39
===== =====
NET INCOME PER COMMON SHARE -- (Note 7)
--Basic................................................... $0.46 $0.31
--Diluted................................................. $0.43 $0.30
===== =====
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES OUTSTANDING --
(Note 7)
--Basic................................................... 147 124
--Diluted................................................. 159 132
===== =====
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-42
WILLIS GROUP HOLDINGS LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2002 2001
----------- ------------
(MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 183 $ 128
Fiduciary funds -- restricted............................. 1,341 1,282
Short-term investments.................................... 49 42
Accounts receivable, net of allowance for doubtful
accounts of $26 and $25, respectively................... 7,389 5,703
Deferred tax assets....................................... 16 16
Other current assets...................................... 75 78
------- ------
Total current assets.................................... 9,053 7,249
------- ------
NONCURRENT ASSETS:
Fixed assets, net of accumulated depreciation of $102 and
$95, respectively....................................... 183 185
Goodwill, net of accumulated amortization of $118 and
$115, respectively...................................... 1,250 1,201
Investments in associates................................. 102 135
Deferred tax assets....................................... 64 59
Other noncurrent assets................................... 124 120
------- ------
Total noncurrent assets................................. 1,723 1,700
------- ------
TOTAL....................................................... $10,776 $8,949
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 8,562 $6,799
Deferred revenue and accrued expenses..................... 139 163
Provisions................................................ 38 38
Income taxes payable...................................... 111 75
Other current liabilities................................. 151 167
------- ------
Total current liabilities............................... 9,001 7,242
------- ------
NONCURRENT LIABILITIES:
Long-term debt............................................ 767 787
Provisions................................................ 97 102
Other noncurrent liabilities.............................. 108 106
------- ------
Total noncurrent liabilities............................ 972 995
------- ------
Total liabilities....................................... 9,973 8,237
------- ------
COMMITMENTS AND CONTINGENCIES (Note 10)
MINORITY INTEREST........................................... 23 16
STOCKHOLDERS' EQUITY:
Common shares, $0.000115 par value; Authorized:
4,000,000,000;
Issued and outstanding, 147,842,120 shares and 147,635,170
shares respectively..................................... -- --
Additional paid-in capital................................ 885 867
Accumulated deficit....................................... (97) (165)
Accumulated other comprehensive income (Note 8)........... 5 5
Treasury stock, at cost, 942,386 and 816,981 shares
respectively............................................ (13) (11)
------- ------
Total stockholders' equity.............................. 780 696
------- ------
TOTAL....................................................... $10,776 $8,949
======= ======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-43
WILLIS GROUP HOLDINGS LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
-------------------
2002 2001
-------- --------
(MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 68 $ 39
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 8 9
Amortization of goodwill................................ -- 9
Provision for doubtful accounts......................... 1 2
Minority interest....................................... 6 2
Provisions.............................................. (3) (6)
Provision for deferred income taxes..................... (4) (1)
Non-cash compensation expense attributable to
performance options................................... 18 --
Other................................................... (7) (8)
Changes in operating assets and liabilities, net of
effects from purchase of subsidiaries
Fiduciary funds -- restricted, net...................... (80) (46)
Accounts receivable..................................... (1,689) (1,174)
Accounts payable........................................ 1,765 1,233
Other................................................... 5 (21)
------ ------
Net cash provided by operations........................... 88 38
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on disposal of fixed assets...................... -- 1
Additions to fixed assets................................. (5) (5)
Net cash proceeds from sale of operations................. -- 4
Acquisition of subsidiaries, net of cash acquired......... 6 (2)
Purchase of short-term investments........................ (18) (1)
Proceeds on sale of short-term investments................ 10 --
------ ------
Net cash used in investing activities..................... (7) (3)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt........................................ (20) (23)
Proceeds from issue of common shares...................... -- 1
Purchase of treasury stock................................ (2) --
------ ------
Net cash used in financing activities..................... (22) (22)
------ ------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 59 13
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................... (4) (5)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 128 88
------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 183 $ 96
====== ======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-44
WILLIS GROUP HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND ITS OPERATIONS
BUSINESS--Willis Group Holdings Limited ("Willis Group Holdings") and
subsidiaries (collectively, the "Company") provide a broad range of value-added
risk management consulting and insurance brokerage 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.
ORGANIZATION--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 ("UK") 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 (the "Exchange
Offer").
As a result of the Exchange Offer, the former stockholders of TA I 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 has been
accounted for as a "reverse acquisition" for financial reporting purposes with
TA I 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") have been 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 did not change. For the three month period ended
March 31, 2001, the equity of Willis Group Holdings is the historical equity of
TA I prior to the reverse acquisition, retroactively restated to reflect the
number of shares received in the exchange offers.
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 three
F-45
WILLIS GROUP HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
month period ended March 31, 2002 may not necessarily be indicative of the
operating results that may be incurred for the entire fiscal year.
The December 31, 2001 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,
2001 and 2000, and the related consolidated statements of operations, cash flows
and changes in stockholders' equity for each of the three years in the period
ended December 31, 2001.
3. GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted Statement of Financial Accounting Standards No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS 142"), with effect from January 1,
2002. For business combinations for which the acquisition date was before
July 1, 2001, the Company did not recognize and account for acquired intangible
assets as assets separate from goodwill. Accordingly, upon initial adoption of
SFAS 142, reclassification of the carrying amounts of previously acquired
intangible assets was not required.
In accordance with SFAS 142, the Company no longer amortizes goodwill and
other intangible assets that have an indefinite useful life but rather tests
such assets at least annually for impairment. The Company will complete its
transitional impairment test of goodwill before June 30, 2002. The following pro
forma disclosures are given for the three month periods ended March 31:
2002 2001
-------- --------
(MILLIONS, EXCEPT PER
SHARE DATA)
Net income, as reported..................................... $ 68 $ 39
Amortization of goodwill.................................... -- 9
----- -----
Adjusted net income......................................... $ 68 $ 48
===== =====
Basic net income per common share, as reported.............. $0.46 $0.31
Amortization of goodwill.................................... -- 0.08
----- -----
Adjusted basic net income per common share.................. $0.46 $0.39
===== =====
Diluted net income per common share, as reported............ $0.43 $0.30
Amortization of goodwill.................................... -- 0.06
----- -----
Adjusted diluted net income per common share................ $0.43 $0.36
===== =====
4. ACQUISITIONS
On January 1, 2002, the Company acquired a further 22%, in addition to the
45% already owned, in Jaspers Wuppesahl, Germany's third largest insurance
broker, to improve the Company's market position and broaden its global offering
and capabilities on behalf of its clients. Accordingly, Jaspers Wuppesahl (since
renamed Willis GmbH & Co. K.G.) has been accounted for as a subsidiary from the
date of acquisition. The aggregate cash purchase price for the further 22% stake
was $14 million, of which $5 million was deferred to 2003. The Company initially
recorded goodwill of $14 million pending completion of the purchase price
allocation.
F-46
WILLIS GROUP HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITIONS (CONTINUED)
The following table provides supplemental pro forma information for the
period ended March 31, 2001 about the Company's results of operations as though
the business combination had been completed as of the beginning of the reporting
period:
THREE MONTHS ENDED
MARCH 31,
----------------------
2002 2001
ACTUAL PRO FORMA
--------- ----------
(MILLIONS, EXCEPT PER
SHARE DATA)
Total revenues.............................................. $ 451 $ 399
Income before income taxes, equity in net income of
associates and minority interest.......................... 111 83
Net income.................................................. 68 42
===== =====
Net income per common share
- --Basic..................................................... $0.46 $0.34
- --Diluted................................................... $0.43 $0.32
===== =====
5. DERIVATIVE FINANCIAL INSTRUMENTS
The financial risks the Company manages through the use of 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. The Company has applied SFAS NO. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"), in accounting for these
financial instruments.
INTEREST RATE CONTRACTS--The fair values of interest rate contracts are
recorded in other current and noncurrent assets and liabilities on the balance
sheet. Changes in fair value of contracts that are effective cash flow hedges as
defined by SFAS 133 are recorded as a component of other comprehensive income
with a loss of $1 million recorded for the three month period ended March 31,
2002 (2001: Loss $5 million). Amounts are reclassified from other comprehensive
income into earnings when the hedged exposure affects earnings.
For interest rate contracts which were not effective for hedge accounting as
defined in SFAS 133, the Company has recorded a loss of $1 million in general
and administrative expenses, representing the change in fair value for the three
month period ended March 31, 2002 (2001: Loss $7 million).
FOREIGN CURRENCY CONTRACTS--The fair values of foreign currency contracts
are recorded in other current and noncurrent assets and liabilities, with
changes in fair value of effective cashflow hedges recorded in other
comprehensive income and changes in fair value of ineffective hedges recorded in
general and administrative expenses. Amounts are reclassified from other
comprehensive income into earnings when the hedged exposure affects earnings.
For the three month period ended March 31, 2002, the Company has recorded $0
in other comprehensive income relating to changes in fair value on contracts
which are effective cashflow hedges as defined in SFAS 133 (2001: Gain
$1 million). For contracts which were not effective for hedge accounting as
defined in SFAS 133, the Company has recorded $0 in general and administrative
expenses, representing the change in fair value for the three month period ended
March 31, 2002 (2001: Loss $6 million).
F-47
WILLIS GROUP HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NON-CASH COMPENSATION
Willis Group Holdings applies the intrinsic value method allowed by
Accounting Practices Board 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 quoted market price at the date when the number of shares
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 expense are recorded before
the measurement date based on the quoted 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 $18 million ($15 million, net of tax) has
been recognized in the three month period ended March 31, 2002 based on the
11.2 million performance options outstanding at that date, a market price of
$24.70 and an average elapsed performance period of 72%.
7. NET INCOME PER COMMON SHARE
Basic net income per common share, is calculated by dividing net income by
the weighted-average number of common shares outstanding during each period. The
computation of diluted net income per common 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
issue of common shares that then shared in the net income of the Company.
The computation of net 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 three month period ended March 31, 2002, time-based options to
purchase 19,012,371 (2001: 17,672,895) common shares and 145,504 restricted
shares (2001: 0) were outstanding. The following table represents the basic and
diluted net income per common share for the three month period ended March 31:
2002 2001
-------- --------
(MILLIONS, EXCEPT PER
SHARE DATA)
Basic weighted-average number of common shares
outstanding............................................... 147 124
Dilutive effect of potentially issuable common shares....... 12 8
----- -----
Diluted weighted-average number of common shares
outstanding............................................... 159 132
===== =====
Basic net income per common share........................... $0.46 $0.31
Dilutive effect of potentially issuable common shares....... (0.03) (0.01)
----- -----
Diluted net income per common share......................... $0.43 $0.30
===== =====
At March 31, 2002, the minimum threshold to trigger the 11.2 million
performance-based options outstanding at that date had not been reached. In
accordance with SFAS No. 128, EARNINGS PER SHARE, such options were therefore
excluded from the calculation of the reported diluted net income per common
share.
F-48
WILLIS GROUP HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
THREE
MONTHS
ENDED
MARCH 31,
-------------------
2002 2001
-------- --------
(MILLIONS)
Net income.................................................. $68 $39
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment................... 2 (9)
Cumulative effect of accounting change (net of tax of
$5)..................................................... -- 8
Unrealized holding loss (net of tax of $0)................ (1) --
Net loss on derivative instruments (net of tax of $0 and
$3)..................................................... (1) (4)
--- ---
Other comprehensive loss, net of tax........................ -- (5)
--- ---
Comprehensive income........................................ $68 $34
=== ===
The components of accumulated other comprehensive income at March 31, 2002,
and December 31, 2001, are as follows:
2002 2001
-------- --------
(MILLIONS)
Net foreign currency translation adjustment................. $(7) $(9)
Net cumulative effect of accounting change.................. 8 8
Net unrealized holding gains................................ -- 1
Net gain on derivative instruments.......................... 4 5
--- ---
Accumulated other comprehensive income...................... $ 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
$280 million after deducting underwriting discounts, commissions and other
expenses of the offering of $30 million. The net proceeds were used to redeem
all the outstanding $273 million 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 ("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 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.
F-49
WILLIS GROUP HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At March 31, 2002, the Company had a provision of $28 million relating to
this issue. Although the Company considers these 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.
At March 31, 2002, the Company had a provision of $25 million 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 is subject to various actual and potential claims, lawsuits and
proceedings relating principally to alleged errors and omissions in connection
with the placement of insurance and reinsurance in the ordinary course of
business. Some of those claims, lawsuits and proceedings seek damages in amounts
which could, if assessed, be significant.
The Company acted as broker, but not as underwriter, for the placement of
both property and casualty insurance for a number of entities that were directly
impacted by the September 11, 2001 destruction of the World Trade Center
complex, including Silverstein Properties L.L.C., 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. There are a number of
lawsuits pending in the US between the insured parties and the insurers.
Although the Company is not a party to any of these lawsuits, other disputes may
arise with respect to the destruction of the World Trade Center complex which
could affect the Company.
The Company maintains insurance, subject to certain deductibles and
self-insurance, against such claims, lawsuits and proceedings. The Company has
also established provisions against these items which are believed to be
adequate in the light of current information and legal advice, and the Company
adjusts such provisions from time to time according to developments. On the
basis of current information, the Company does not expect that the ultimate
outcome of the actual or potential claims, lawsuits and proceedings to which the
Company is subject, either individually or in the aggregate, will have a
material adverse effect on the Company's financial condition, results of
operations or liquidity.
11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following table provides supplemental disclosures of cash flow
information:
THREE MONTHS ENDED
MARCH 31,
-------------------------
2002 2001
-------- --------
(MILLIONS)
Cash payments for income taxes.............................. $ 10 $ 10
==== ====
Cash payments for interest.................................. $ 28 $ 32
==== ====
F-50
WILLIS GROUP HOLDINGS LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (CONTINUED)
The following table provides supplemental disclosures of non-cash flow
investing and financing activities:
THREE MONTHS
ENDED
MARCH 31,
-------------------------
2002 2001
-------- --------
(MILLIONS)
Acquisitions:
Fair value of assets acquired............................. $ 72 $ 8
Less: liabilities assumed................................. (71) (8)
Cash acquired............................................. (19) (1)
---- ---
Acquisitions, net of cash acquired.......................... $(18) $(1)
==== ===
12. SEGMENT INFORMATION
The Company conducts its worldwide insurance brokerage activities through
three operating segments: Global, North America and International. 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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
16,000,000 SHARES
WILLIS GROUP HOLDINGS LIMITED
COMMON STOCK
[LOGO]
------
P R O S P E C T U S
, 2002
---------
SALOMON SMITH BARNEY
JPMORGAN
BANC OF AMERICA SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
MERRILL LYNCH & CO.
MORGAN STANLEY
UBS WARBURG
- --------------------------------------------------
- --------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 6 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bye-laws of the Registrant provide for indemnification of the
Registrant's officers and directors against all liabilities, loss, damage or
expense incurred or suffered by such party as an officer or director of the
Registrant; provided that such indemnification shall not extend to any matter
which would render it void pursuant to the Companies Act 1981 as in effect from
time to time in Bermuda.
The Companies Act provides that a Bermuda company may indemnify its
directors in respect of any loss arising or liability attaching to them as a
result of any negligence, default, breach of duty or breach of trust of which
they may be guilty. However, the Companies Act also provides that any provision,
whether contained in the company's bye-laws or in a contract or arrangement
between the company and the director, indemnifying a director against any
liability which would attach to him in respect of his fraud or dishonesty will
be void.
The directors and officers of the Registrant are covered by directors' and
officers' insurance policies maintained by the Registrant.
Under the Amended and Restated Limited Partnership Agreement of Profit
Sharing (Overseas), Limited Partnership, directors of the Registrant who are
officers, directors, employees, partners, stockholders, members or agents of KKR
1996 Fund (Overseas), Limited Partnership or its affiliates are indemnified by
Profit Sharing (Overseas), Limited Partnership to the fullest extent permitted
by law from and against all liabilities, loss, damage or expense relating to the
performance as a director of the Registrant during the period of time in which
Profit Sharing (Overseas), Limited Partnership holds an interest in the
Registrant; provided that such indemnification shall not cover acts not made in
good faith and not in the best interest of Profit Sharing (Overseas), Limited
Partnership or constitute malfeasance.
ITEM 7 RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of the transactions by the Registrant during the
past three years involving sales of the Registrant's securities that were not
registered under the Securities Act of 1933:
- an exchange by Profit Sharing (Overseas), Limited Partnership and each
consortium member of their shares in TA I Limited for shares of our common
stock;
- a one-for-one exchange of shares of TA I Limited held by certain employees
and former employees of TA I Limited for shares of our common stock and a
one-for-one exchange of options to purchase TA I Limited shares for
options to purchase our common stock; and
- an issuance pursuant to Rule 701 under the Securities Act of 37,037 shares
of common stock at an aggregate purchase price of $500,000 to
Paul M. Hazen in connection with Mr. Hazen's becoming a member of the
board of directors.
- an issuance pursuant to Section 4(2) under the Securities Act of 482,969
shares of common stock to certain shareholders of Richard N. Goldman & Co.
as part of the consideration of the Registrant's acquisition of such
company.
II-1
ITEM 8 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
1. Form of Underwriting Agreement (filed herewith)
3.1 Memorandum of Association of Willis Group Holdings Limited,
dated February 8, 2001, as altered by registration pursuant
to the Companies Act 1981 of Bermuda on April 10, 2001
(incorporated by reference to Exhibit No. 3.1 to
Registration Statement No. 333-60982)
3.2 Form of Bye-Laws of Willis Group Holdings Limited
(incorporated by reference to Exhibit No. 3.2 to
Registration Statement No. 333-60982)
3.3 Memorandum of Increase in the Share Capital of Willis Group
Holdings Limited (incorporated by reference to Exhibit No.
3.3 to Registration Statement No. 333-60982)
4.1 Form of Specimen Certificate for Registrant's Common Stock
(incorporated by reference to Exhibit No. 4.1 to
Registration Statement No. 333-60982)
4.2 Registration Rights Agreement, dated December 18, 1998,
between TA I Limited and Profit Sharing (Overseas), Limited
Partnership (the "Profit Sharing Registration Rights
Agreement") (incorporated by reference to Exhibit No. 4.2 to
Registration Statement No. 333-60982)
4.3 Amendment No. 1 to the Profit Sharing Registration Rights
Agreement (incorporated by reference to Exhibit No. 4.3 to
Registration Statement No. 333-60982)
4.4 Registration Rights Agreement, dated July 21, 1998, among TA
I Limited, TA II Limited, Royal & Sun Alliance Insurance
Group plc, Guardian Royal Exchange plc, The Chubb
Corporation, The Hartford Financial Services Group, Inc. and
The Travelers Indemnity Company (the "Consortium
Registration Rights Agreement") (incorporated by reference
to Exhibit No. 4.4 to Registration Statement No. 333-60982)
4.5 Amendment and Assumption Agreement, dated November 12, 1998,
relating to the Consortium Registration Rights Agreement
(incorporated by reference to Exhibit No. 4.5 to
Registration Statement No. 333-60982)
4.6 Amendment to the Carrier Agreements relating to, among other
things, the Consortium Registration Rights Agreement
(incorporated by reference to Exhibit No. 4.6 to
Registration Statement No. 333-60982)
4.7 Management and Employee Shareholders' and Subscription
Agreement, dated as of December 20, 1999, among TA I
Limited, Mourant & Co. Trustees Limited, and certain
management members of TA I Limited and its subsidiaries (the
"Management Registration Rights Agreement") (incorporated by
reference to Exhibit No. 4.7 to Registration Statement No.
333-60982)
4.8 Global Amendment to the Equity Participation Plan Agreements
of TA I Limited (incorporated by reference to Exhibit No.
4.8 to Registration Statement No. 333-60982)
5.1 Opinion of Appleby Spurling & Kempe (filed herewith)
10.1 Credit Agreement, dated as of July 22, 1998, and amended and
restated as of February 19, 1999 and amended as of
January 1, 2001, among Willis Corroon Corporation, as
borrower, Willis Corroon Group Limited and Trinity
Acquisition plc, as guarantors, the lenders thereunder and
JPMorgan Chase Bank, as administrative agent and collateral
agent (the "Credit Agreement") (incorporated by reference to
Exhibit No. 10.2 to Registration Statement No. 333-74483)
II-2
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.2 Indenture, dated February 2, 1999, among Willis Corroon
Corporation, as issuer, Willis Corroon Partners and Willis
Corroon Group Limited, as guarantors, and The Bank of New
York, as trustee (incorporated by reference to Exhibit No.
4.1 to Registration Statement No. 333-74483)
10.3 Form of 9% Senior Subordinated Notes due 2009 (the "Exchange
Notes") (included as part of Exhibit 10.2 hereto)
10.4 Willis Group Holdings Limited Non-Employee Directors'
Deferred Compensation Plan (incorporated by reference to
Exhibit No. 4.3 to Registration Statement No. 333-63186)
10.5 The Willis Group Holdings Limited Non-Employee Directors
Share Option Scheme (incorporated by reference to Exhibit
No. 4.4 to Registration Statement No. 333-63186)
10.6 Amended and Restated 1998 Share Purchase and Option Plan for
Key Employees of Willis Group Holdings Limited (incorporated
by reference to Exhibit No. 4.5 to Registration Statement
No. 333-63186)
10.7 Amended and Restated Willis Award Plan for Key Employees of
Willis Group Holdings Limited (incorporated by reference to
Exhibit No. 4.6 to Registration Statement No. 333-63186)
10.8 Willis Group Holdings Limited 2001 Share Purchase and Option
Plan (incorporated by reference to Exhibit No. 10.8 to
Registration Statement No. 333-60982)
10.9 The Willis Group Holdings Limited 2001 Bonus and Stock Plan
(incorporated by reference to Exhibit No. 4.8 to
registration No. 333-63186)
10.10 Willis Group Holdings Limited North America 2001 Employee
Stock Purchase Plan (incorporated by reference to Exhibit
No. 4.3 to Registration Statement No. 333-62780)
10.11 Willis North America Inc. Financial Security Partnership
Plan (incorporated by reference to Exhibit No. 4.3 to
Registration Statement No. 333-67466)
10.12 Form of Amended and Restated Employment Agreement, dated as
of March 26, 2001, between Willis Group Holdings Limited and
Joseph J. Plumeri (incorporated by reference to Exhibit No.
10.9 to Registration Statement No. 333-60982)
10.13 Guarantee by Willis Corroon Group Limited of pension plan of
Brian Johnson (incorporated by reference to Exhibit No.
10.11 to Registration Statement No. 333-74483)
10.14 Form of Willis Group Holdings Limited Zero Cost Share Option
Scheme (incorporated by reference to Exhibit No. 10.12 to
Registration Statement No. 333-74483)
10.15 Form of Amendment to TA I Limited Zero Cost Share Option
Scheme (incorporated by reference to Exhibit No. 10.12 to
Registration Statement No. 333-60982)
10.16 Agreement, dated July 23, 1997, among Assurances Generales
de France IART, UAP Incendie-Accidents, Athena, Gras Savoye
Euro Finance S.A., Mr. Emmanuel Gras, Mr. Patrick Lucas,
Mr. Daniel Naftalski, Willis Corroon Group plc,
Willis Corroon Europe B.V., and Gras Savoye & Cie, along
with Amendment No. 1 thereto, dated December 11, 1997, and
Addendum thereto dated July 23, 1997 (incorporated by
reference to Exhibit No. 2.11 to Registration Statement
No. 333-74483)
10.17 Shareholder Rights Agreement dated as of July 22, 1998 among
TA I Limited, TA II Limited, Profit Sharing (Overseas),
Limited Partnership, Royal & Sun Alliance Insurance Group
plc, Guardian Royal Exchange plc, The Chubb Corporation, The
Hartford Financial Services Group, Inc. and The Travelers
Indemnity Company (incorporated by reference to Exhibit
No. 10.14 to Registration Statement No. 333-60982) (amended
by Exhibit 4.8 filed herewith)
II-3
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.18 Contribution and Share Subscription Agreement dated as of
July 22, 1998 among TA I Limited, TA II Limited, TA III plc,
Trinity Acquisition plc, KKR 1996 Fund (Overseas), Limited
Partnership and Profit Sharing (Overseas), Limited
Partnership (incorporated by reference to Exhibit No. 10.15
to Registration Statement No. 333-60982)
10.19 Share Subscription Agreement dated as of July 22, 1998 among
TA I Limited, TA II Limited and the consortium members
listed therein (incorporated by reference to Exhibit No.
10.16 to Registration Statement No. 333-60982)
10.20 Share Subscription Agreement dated as of November 12, 1998
among The Tokio Marine and Fire Insurance Co., Ltd., TA I
Limited and TA II Limited (incorporated by reference to
Exhibit No. 10.17 to Registration Statement No. 333-60982)
21.1 List of subsidiaries of Willis Group Holdings Limited
(previously filed)
23.1 Consent of Appleby Spurling & Kempe (included as part of
Exhibit 5.1)
23.2 Consent of Deloitte & Touche (filed herewith)
24.1 Powers of Attorney (included in signature page)
ITEM 9 UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 6, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form F-1 and has duly caused this Amendment to
the Registration Statement on Form F-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, Country of
United States, on May 15, 2002.
WILLIS GROUP HOLDINGS LIMITED
By: /s/ WILLIAM P. BOWDEN, JR.
-----------------------------------------
William P. Bowden, Jr.
GROUP GENERAL COUNSEL
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to the Registration Statement has been signed by the following persons
in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman, Chief Executive
------------------------------------------- Officer and Director May 15, 2002
Joseph J. Plumeri (principal executive officer)
*
------------------------------------------- Group Chief Financial Officer May 15, 2002
Thomas Colraine (principal accounting officer)
*
------------------------------------------- Director May 15, 2002
Henry R. Kravis
*
------------------------------------------- Director May 15, 2002
George R. Roberts
*
------------------------------------------- Director May 15, 2002
Perry Golkin
*
------------------------------------------- Director May 15, 2002
Todd A. Fisher
*
------------------------------------------- Director May 15, 2002
Scott C. Nuttall
II-5
SIGNATURE TITLE DATE
--------- ----- ----
*
------------------------------------------- Director May 15, 2002
James R. Fisher
*
------------------------------------------- Director May 15, 2002
Paul M. Hazen
/s/ WILLIAM P. BOWDEN, JR.
------------------------------------------- Authorized U.S. Representative May 15, 2002
William P. Bowden, Jr.
*By: /s/ WILLIAM P. BOWDEN, JR.
-------------------------------------- Attorney-in-fact May 15, 2002
William P. Bowden, Jr.
II-6
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
1. Form of Underwriting Agreement (filed herewith)
3.1 Memorandum of Association of Willis Group Holdings Limited,
dated February 8, 2001, as altered by registration pursuant
to the Companies Act 1981 of Bermuda on April 10, 2001
(incorporated by reference to Exhibit No. 3.1 to
Registration Statement No. 333-60982)
3.2 Form of Bye-Laws of Willis Group Holdings Limited
(incorporated by reference to Exhibit No. 3.2 to
Registration Statement No. 333-60982)
3.3 Memorandum of Increase in the Share Capital of Willis Group
Holdings Limited (incorporated by reference to Exhibit No.
3.3 to Registration Statement No. 333-60982)
4.1 Form of Specimen Certificate for Registrant's Common Stock
(incorporated by reference to Exhibit No. 4.1 to
Registration Statement No. 333-60982)
4.2 Registration Rights Agreement, dated December 18, 1998,
between TA I Limited and Profit Sharing (Overseas), Limited
Partnership (the "Profit Sharing Registration Rights
Agreement") (incorporated by reference to Exhibit No. 4.2 to
Registration Statement No. 333-60982)
4.3 Amendment No. 1 to the Profit Sharing Registration Rights
Agreement (incorporated by reference to Exhibit No. 4.3 to
Registration Statement No. 333-60982)
4.4 Registration Rights Agreement, dated July 21, 1998, among TA
I Limited, TA II Limited, Royal & Sun Alliance Insurance
Group plc, Guardian Royal Exchange plc, The Chubb
Corporation, The Hartford Financial Services Group, Inc. and
The Travelers Indemnity Company (the "Consortium
Registration Rights Agreement") (incorporated by reference
to Exhibit No. 4.4 to Registration Statement No. 333-60982)
4.5 Amendment and Assumption Agreement, dated November 12, 1998,
relating to the Consortium Registration Rights Agreement
(incorporated by reference to Exhibit No. 4.5 to
Registration Statement No. 333-60982)
4.6 Amendment to the Carrier Agreements relating to, among other
things, the Consortium Registration Rights Agreement
(incorporated by reference to Exhibit No. 4.6 to
Registration Statement No. 333-60982)
4.7 Management and Employee Shareholders' and Subscription
Agreement, dated as of December 20, 1999, among TA I
Limited, Mourant & Co. Trustees Limited, and certain
management members of TA I Limited and its subsidiaries (the
"Management Registration Rights Agreement") (incorporated by
reference to Exhibit No. 4.7 to Registration Statement No.
333-60982)
4.8 Global Amendment to the Equity Participation Plan Agreements
of TA I Limited (incorporated by reference to Exhibit No.
4.8 to Registration Statement No. 333-60982)
5.1 Opinion of Appleby Spurling & Kempe (filed herewith)
10.1 Credit Agreement, dated as of July 22, 1998, and amended and
restated as of February 19, 1999 and amended as of
January 1, 2001, among Willis Corroon Corporation, as
borrower, Willis Corroon Group Limited and Trinity
Acquisition plc, as guarantors, the lenders thereunder and
JPMorgan Chase Bank, as administrative agent and collateral
agent (the "Credit Agreement") (incorporated by reference to
Exhibit No. 10.2 to Registration Statement No. 333-74483)
10.2 Indenture, dated February 2, 1999, among Willis Corroon
Corporation, as issuer, Willis Corroon Partners and Willis
Corroon Group Limited, as guarantors, and The Bank of New
York, as trustee (incorporated by reference to Exhibit No.
4.1 to Registration Statement No. 333-74483)
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.3 Form of 9% Senior Subordinated Notes due 2009 (the "Exchange
Notes") (included as part of Exhibit 10.2 hereto)
10.4 Willis Group Holdings Limited Non-Employee Directors'
Deferred Compensation Plan (incorporated by reference to
Exhibit No. 4.3 to Registration Statement No. 333-63186)
10.5 The Willis Group Holdings Limited Non-Employee Directors
Share Option Scheme (incorporated by reference to Exhibit
No. 4.4 to Registration Statement No. 333-63186)
10.6 Amended and Restated 1998 Share Purchase and Option Plan for
Key Employees of Willis Group Holdings Limited (incorporated
by reference to Exhibit No. 4.5 to Registration Statement
No. 333-63186)
10.7 Amended and Restated Willis Award Plan for Key Employees of
Willis Group Holdings Limited (incorporated by reference to
Exhibit No. 4.6 to Registration Statement No. 333-63186)
10.8 Willis Group Holdings Limited 2001 Share Purchase and Option
Plan (incorporated by reference to Exhibit No. 10.8 to
Registration Statement No. 333-60982)
10.9 The Willis Group Holdings Limited 2001 Bonus and Stock Plan
(incorporated by reference to Exhibit No. 4.8 to
registration No. 333-63186)
10.10 Willis Group Holdings Limited North America 2001 Employee
Stock Purchase Plan (incorporated by reference to Exhibit
No. 4.3 to Registration Statement No. 333-62780)
10.11 Willis North America Inc. Financial Security Partnership
Plan (incorporated by reference to Exhibit No. 4.3 to
Registration Statement No. 333-67466)
10.12 Form of Amended and Restated Employment Agreement, dated as
of March 26, 2001, between Willis Group Holdings Limited and
Joseph J. Plumeri (incorporated by reference to Exhibit No.
10.9 to Registration Statement No. 333-60982)
10.13 Guarantee by Willis Corroon Group Limited of pension plan of
Brian Johnson (incorporated by reference to Exhibit No.
10.11 to Registration Statement No. 333-74483)
10.14 Form of Willis Group Holdings Limited Zero Cost Share Option
Scheme (incorporated by reference to Exhibit No. 10.12 to
Registration Statement No. 333-74483)
10.15 Form of Amendment to TA I Limited Zero Cost Share Option
Scheme (incorporated by reference to Exhibit No. 10.12 to
Registration Statement No. 333-60982)
10.16 Agreement, dated July 23, 1997, among Assurances Generales
de France IART, UAP Incendie-Accidents, Athena, Gras Savoye
Euro Finance S.A., Mr. Emmanuel Gras, Mr. Patrick Lucas,
Mr. Daniel Naftalski, Willis Corroon Group plc,
Willis Corroon Europe B.V., and Gras Savoye & Cie, along
with Amendment No. 1 thereto, dated December 11, 1997, and
Addendum thereto dated July 23, 1997 (incorporated by
reference to Exhibit No. 2.11 to Registration Statement
No. 333-74483)
10.17 Shareholder Rights Agreement dated as of July 22, 1998 among
TA I Limited, TA II Limited, Profit Sharing (Overseas),
Limited Partnership, Royal & Sun Alliance Insurance Group
plc, Guardian Royal Exchange plc, The Chubb Corporation, The
Hartford Financial Services Group, Inc. and The Travelers
Indemnity Company (incorporated by reference to Exhibit
No. 10.14 to Registration Statement No. 333-60982) (amended
by Exhibit 4.8 filed herewith)
10.18 Contribution and Share Subscription Agreement dated as of
July 22, 1998 among TA I Limited, TA II Limited, TA III plc,
Trinity Acquisition plc, KKR 1996 Fund (Overseas), Limited
Partnership and Profit Sharing (Overseas), Limited
Partnership (incorporated by reference to Exhibit No. 10.15
to Registration Statement No. 333-60982)
10.19 Share Subscription Agreement dated as of July 22, 1998 among
TA I Limited, TA II Limited and the consortium members
listed therein (incorporated by reference to Exhibit No.
10.16 to Registration Statement No. 333-60982)
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.20 Share Subscription Agreement dated as of November 12, 1998
among The Tokio Marine and Fire Insurance Co., Ltd., TA I
Limited and TA II Limited (incorporated by reference to
Exhibit No. 10.17 to Registration Statement No. 333-60982)
21.1 List of subsidiaries of Willis Group Holdings Limited
(previously filed)
23.1 Consent of Appleby Spurling & Kempe (included as part of
Exhibit 5.1)
23.2 Consent of Deloitte & Touche (filed herewith)
24.1 Powers of Attorney (included in signature page)
Exhibit 1
Willis Group Holdings Limited
16,000,000 Shares(a)
Common Stock
($0.000115 par value)
Form of Underwriting Agreement
New York, New York
May 15, 2002
Salomon Smith Barney Inc.
J.P. Morgan Securities Inc.
Banc of America Securities LLC
Credit Suisse First Boston Corporation
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
UBS Warburg LLC
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Profit Sharing (Overseas), Limited Partnership, a limited
partnership formed pursuant to the laws of the Province of Alberta ("Overseas"),
Fisher Capital Corp. L.L.C., a Delaware limited liability company ("Fisher
Capital") and The Chubb Corporation, a New Jersey corporation ("Chubb" and,
collectively with Overseas and Fisher Capital, the "Selling Stockholders")
propose to sell to the several underwriters named in Schedule I hereto (the
"Underwriters"), for whom you (the "Representatives") are acting as
representatives, 16,000,000 shares of Common Stock, par value $0.000115 per
share ("Common Stock"), of Willis Group Holdings Limited, a Bermuda company (the
"Company") (said shares to be sold by the Selling Stockholders being hereinafter
called the "Underwritten Securities"). The Selling Stockholders also propose to
grant to the Underwriters an option to purchase up to 2,400,000 additional
shares of Common Stock to cover over-allotments (the "Option Securities"; the
Option Securities, together with the Underwritten Securities, being hereinafter
called the "Securities"). To the extent there are no additional Underwriters
listed on Schedule I other than you, the term Representatives as used herein
shall mean you, as Underwriters, and the terms Representatives and Underwriters
shall mean either the singular or plural as the context requires. In addition,
to the extent that there is not more than one Selling Stockholder named in
Schedule II, the term Selling Stockholder shall mean either the singular or
plural. The use of the neuter in this Agreement shall include the feminine and
masculine wherever appropriate. Certain terms used herein are defined in Section
17 hereof.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
SELLING STOCKHOLDERS. (a) The Company represents and warrants to, and agrees
with, each Underwriter that:
- --------
(a) Plus an option to purchase from the Selling Stockholders, up to
2,400,000 additional shares of Common Stock to cover over-allotments.
1
(i) The Company has prepared and filed with the
Commission a registration statement (file number 333-87662) on
Form F-1, including a related preliminary prospectus, for
registration under the Act of the offering and sale of the
Securities. The Company may have filed one or more amendments
thereto, including a related preliminary prospectus, each of
which has previously been furnished to you. The Company will
next file with the Commission either (1) prior to the
Effective Date of such registration statement, a further
amendment to such registration statement (including the form
of final prospectus) or (2) after the Effective Date of such
registration statement, a final prospectus in accordance with
Rules 430A and 424(b). In the case of clause (2), the Company
has included in such registration statement, as amended at the
Effective Date, all information (other than Rule 430A
Information) required by the Act and the rules thereunder to
be included in such registration statement and the Prospectus.
As filed, such amendment and form of final prospectus, or such
final prospectus, shall contain all Rule 430A Information,
together with all other such required information, and, except
to the extent the Representatives shall agree in writing to a
modification, shall be in all substantive respects in the form
furnished to you prior to the Execution Time or, to the extent
not completed at the Execution Time, shall contain only such
specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus) as the Company
has advised you, prior to the Execution Time, will be included
or made therein.
(ii) On the Effective Date, the Registration
Statement did or will, and when the Prospectus is first filed
(if required) in accordance with Rule 424(b) and on the
Closing Date (as defined herein) and on any date on which
Option Securities are purchased, if such date is not the
Closing Date (a "settlement date"), the Prospectus (and any
supplements thereto) will, comply in all material respects
with the applicable requirements of the Act and the rules
thereunder; on the Effective Date and at the Execution Time,
the Registration Statement did not or will not contain any
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and, on
the Effective Date, the Prospectus, if not filed pursuant to
Rule 424(b), will not, and on the date of any filing pursuant
to Rule 424(b) and on the Closing Date and any settlement
date, the Prospectus (together with any supplement thereto)
will not, include any untrue statement of a material fact or
omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading; PROVIDED, HOWEVER, that
the Company makes no representations or warranties as to the
information contained in or omitted from the Registration
Statement, or the Prospectus (or any supplement thereto) in
reliance upon and in conformity with information furnished in
writing to the Company by or on behalf of any Selling
Stockholder or Underwriter through the Representatives
specifically for inclusion in the Registration Statement or
the Prospectus (or any supplement thereto).
(iii) Each of the Company and its subsidiaries (other
than Sovereign Marine & General Insurance Company Limited and
its subsidiaries) has been duly organized and is validly
existing and in good standing under the laws of the
jurisdiction in which it is organized with requisite power and
authority to own or lease, as the case may be, and to operate
its properties and conduct its business as described in the
2
Prospectus, and is duly qualified to do business and is in
good standing under the laws of each jurisdiction which
requires such qualification, except where the failure to be so
qualified would not, individually or in the aggregate,
reasonably be expected to have a material adverse effect on
the condition (financial or otherwise), business or results of
operations of the Company and its subsidiaries, taken as a
whole (a "Material Adverse Effect").
(iv) All the outstanding common equity interests in
each of the Company's subsidiaries have been duly authorized
and validly issued and are fully paid and nonassessable, and,
except as otherwise set forth on Schedule III, all outstanding
common equity interests in each such subsidiary are owned by
the Company either directly or indirectly and, except as set
forth in the Prospectus, are owned free and clear of any
perfected security interest or any other security interests,
claims, liens or encumbrances.
(v) The Company's authorized equity capitalization is
as set forth in the Prospectus; the capital stock of the
Company conforms in all material respects to the description
thereof contained in the Prospectus; the outstanding shares of
Common Stock, including the Securities, have been duly
authorized and validly issued and are fully paid and
nonassessable; the Securities are duly listed, and admitted
and authorized for trading, on the New York Stock Exchange; on
the Closing Date the certificates for the Underwritten
Securities will be in valid and sufficient form; in the event
that Option Securities are purchased, on the Closing Date or
any settlement date, as applicable, the certificates for such
Option Securities will be in valid and sufficient form; the
holders of outstanding shares of capital stock of the Company
are not entitled to preemptive or other rights to subscribe
for the Securities; and, except as set forth in the
Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or rights to convert
any obligations into or exchange any securities for, shares of
capital stock of or ownership interests in the Company are
outstanding.
(vi) The descriptions in the Prospectus (exclusive of
any supplement thereto) of statutes, and other laws, rules and
regulations, legal and governmental proceedings and contracts
and other documents are accurate and fairly present in all
material respects the information that is required to be
described therein under the Act; and there is no franchise,
contract or other document of a character required to be
described in the Registration Statement or Prospectus, or to
be filed as an exhibit thereto, which is not described or
filed as required.
(vii) This Agreement has been duly authorized,
executed and delivered by the Company.
(viii) The Company is not and, after giving effect to
the offering and sale of the Securities as described in the
Prospectus, will not be an "investment company" as defined in
the Investment Company Act of 1940, as amended.
(ix) No consent, approval, authorization, filing,
order, registration or qualification of or with any court or
governmental agency or body is required in connection with the
transactions contemplated herein, except (1) that (i) the
consent of the Bermuda Monetary Authority (the
3
"Authority") is required and has been obtained for the sale
and subsequent transferability of the Securities; and (ii) the
Prospectus is required to be and has been filed with the
Registrar of Companies in Bermuda pursuant to Part III of the
Companies Act 1981 of Bermuda; (2) such as have been obtained
under the Act; and (3) such as may be required under the state
securities laws ("Blue Sky laws") of any jurisdiction in
connection with the purchase and distribution of the
Securities by the Underwriters in the manner contemplated
herein and in the Prospectus.
(x) None of the execution and delivery of this
Agreement, the sale of the Securities, the consummation of any
other of the transactions herein contemplated or the
fulfillment of the terms hereof will conflict with, result in
a breach or violation of, or constitute a default under, or
result in the imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of its
subsidiaries pursuant to (i) the Memorandum of Association or
Bye-laws of the Company or the charter or by-laws (or similar
organizational documents) of any of the Company's
subsidiaries, (ii) the terms of any indenture, contract,
lease, mortgage, deed of trust, note agreement, loan
agreement, partnership agreement, joint venture agreement or
other agreement or instrument to which the Company or any of
its subsidiaries is a party or is bound or to which its or
their properties or assets are subject (collectively,
"Contracts") or (iii) any statute, law, rule, regulation,
judgment, order or decree applicable to the Company or any of
its subsidiaries of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority
having jurisdiction over the Company or any of its
subsidiaries or any of its or their properties or assets,
except in the case of clauses (ii) and (iii) for such
conflicts, breaches, violations or defaults that would not,
individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect.
(xi) The consolidated historical financial statements
of the Company and its consolidated subsidiaries, and the
related notes thereto, included in the Prospectus and the
Registration Statement present fairly in all material respects
the consolidated financial condition, results of operations
and cash flows of the Company as of the dates and for the
periods indicated, comply as to form in all material respects
with the applicable accounting requirements of the Act and
have been prepared in conformity with United States generally
accepted accounting principles applied on a consistent basis
throughout the periods involved (except as otherwise noted
therein). The selected financial data set forth under the
caption "Selected Historical Consolidated Financial Data" and
the summary financial data set forth under the caption
"Prospectus Summary--Summary Consolidated Financial
Information" each in the Prospectus and Registration Statement
fairly present in all material respects, on the basis stated
in the Prospectus and the Registration Statement, the
information included therein.
(xii) Except as disclosed in the Prospectus
(exclusive of any supplement thereto), there is (i) no action,
suit or proceeding before or by any court, arbitrator or
governmental agency, body or official, domestic or foreign,
now pending, or to the knowledge of the Company or any of its
subsidiaries threatened or contemplated, to which the Company
or any of its subsidiaries is or may be a party or to which
the business, property or assets of the Company or any of its
subsidiaries is or may be subject, (ii) to the Company's
knowledge, no statute, rule, regulation or order that has
4
been enacted, adopted or issued by any governmental agency or
that has been proposed by any governmental body, and (iii) no
injunction, restraining order or order of any nature by a
court of competent jurisdiction to which the Company or any of
its subsidiaries is or may be subject, that has been issued
and is outstanding that, in the case of clauses (i), (ii) or
(iii) above (x) would reasonably be expected to have a
Material Adverse Effect or (y) seeks to restrain, enjoin,
interfere with, or would reasonably be expected to adversely
affect in any material respect, the performance of this
Agreement or any of the transactions contemplated by this
Agreement; and the Company and each of its subsidiaries has
complied with any and all requests by any securities authority
in any jurisdiction for additional information to be included
in the Prospectus.
(xiii) None of the Company or its Subsidiaries is (i)
in violation of its charter or by-laws (or similar
organizational documents), (ii) in breach or violation of any
statute, judgment, decree, order, rule or regulation
applicable to the Company or its Subsidiaries or any of their
properties or assets or (iii) in breach or default in the
performance of any Contract, except, in the case of clauses
(i), (ii) and (iii) (and in the case of clause (i), only with
respect to the Subsidiaries) for any such violation, breach or
default that would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
(xiv) Deloitte & Touche, who have certified certain
financial statements of the Company and its consolidated
subsidiaries and delivered their report with respect to
certain audited consolidated financial statements included in
the Prospectus, are independent public accountants with
respect to the Company within the meaning of the Act and the
applicable rules and regulations thereunder. Ernst & Young,
who have certified certain financial statements and financial
statement schedules of Willis Corroon Group Limited for all
years prior to 1999 included in the Willis Corroon Corporation
Registration Statement on Form F-4 (File No. 333-74483) (the
"Willis Corroon Corporation Form F-4"), were at such time
independent public accountants with respect to Willis Corroon
Group Limited within the meaning of the Act and the applicable
rules and regulations thereunder.
(xv) No stamp duty, stock exchange tax, value-added
tax, withholding or any other similar duty or tax is payable
in the United States, the United Kingdom, Bermuda or any other
jurisdiction in which either the Company or any of its
subsidiaries is organized or engaged in business for tax
purposes or, in each case, any political subdivision thereof
or any authority having power to tax, in connection with the
execution or delivery of this Agreement by the Company or the
sale or delivery of the Securities by the Selling Stockholders
to the Underwriters or the initial resales thereof by the
Underwriters in the manner contemplated by this Agreement and
the Prospectus.
(xvi) Each of the Company and its subsidiaries has
filed all necessary federal, state and foreign (including,
without limitation, United Kingdom and Bermuda) income and
franchise tax returns required to be filed to the date hereof,
except where the failure to so file such returns would not,
individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect, and has paid all material
taxes shown as due thereon; and other than tax deficiencies
which the Company or any subsidiary is contesting in good
faith and for which the Company or such
5
subsidiary has provided adequate reserves, there is no tax
deficiency that has been asserted against the Company or any
of the subsidiaries that would reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect.
(xvii) Each of the Company and its subsidiaries has
good and marketable title, free and clear of all liens,
claims, encumbrances and restrictions, to all property and
assets described in the Prospectus as being owned by it and
good title to all leasehold estates in the real property
described in the Prospectus as being leased by it except for
(i) liens for taxes not yet due and payable, (ii) liens and
encumbrances that are contemplated by the Senior Credit
Facility, (iii) liens, claims, encumbrances and restrictions
that do not materially interfere with the use made and
proposed to be made of such properties (including, without
limitation, purchase money mortgages), and (iv) to the extent
the failure to have such title or the existence of such liens,
claims, encumbrances and restrictions would not reasonably be
expected to have a Material Adverse Effect.
(xviii) Neither the Company nor any of its
subsidiaries is involved in any labor dispute nor, to the best
of the knowledge of the Company and its subsidiaries, is any
labor dispute threatened which, if such dispute were to occur,
would reasonably be expected to have a Material Adverse
Effect.
(xix) The Company and each of its subsidiaries
maintain insurance insuring against such losses and risks as
the Company reasonably believes is adequate to protect the
Company and each of its subsidiaries and their respective
businesses, except where the failure to maintain such
insurance would not reasonably be expected to have a Material
Adverse Effect; the Company and its subsidiaries are in
compliance with the terms of such policies and instruments in
all material respects; and there are no claims by the Company
or any of its subsidiaries under any such policy or instrument
as to which any insurance company is denying liability or
defending under a reservation of rights clause that would
reasonably be expected to have a Material Adverse Effect; none
of the Company or its subsidiaries has been refused any
insurance coverage sought or applied for; and neither the
Company nor any such subsidiary has any reason to believe that
it will not be able to renew its existing insurance coverage
as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue
its business at a cost that would not reasonably be expected
to have a Material Adverse Effect whether or not arising from
transactions in the ordinary course of business, except as set
forth in the Prospectus (exclusive of any supplement thereto).
(xx) Under the current laws and regulations of
Bermuda, all dividends and other distributions declared and
payable on the Securities may be paid by the Company to the
holder thereof in United States dollars that may be freely
transferred out of Bermuda and all such payments made to
holders thereof who are non-residents of Bermuda will not be
subject to income, withholding or other taxes under the laws
or regulations of Bermuda and will otherwise be free of any
other tax, duty, withholding or deduction in Bermuda and
without the necessity of obtaining any governmental
authorization in Bermuda.
(xxi) Each of the Company and its subsidiaries
possesses all licenses, permits, certificates, consents,
orders, approvals and other
6
authorizations from, and has made all declarations and filings
with, all appropriate federal, state, local, foreign and other
governmental authorities, all self-regulatory organizations
and all courts and other tribunals, presently required or
necessary to own or lease, as the case may be, and to operate
their respective properties and to carry on the business of
the Company and its subsidiaries as now conducted as set forth
in the Prospectus, the lack of which would, individually or in
the aggregate, reasonably be expected to have a Material
Adverse Effect ("Permits"); each of the Company and its
subsidiaries has fulfilled and performed all of its
obligations with respect to such Permits and, to the best
knowledge of the Company, no event has occurred which allows,
or after notice or lapse of time would allow, revocation or
termination thereof or results in any other impairment of the
rights of the holder of any such Permit, except where the
failure to fulfill or perform such obligations or such
impairment, would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect; and
none of the Company or its subsidiaries has received any
notice of any proceeding relating to revocation or
modification of any such Permit except where such revocation
or modification would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
(xxii) Each of the Company and its subsidiaries
maintain a system of internal accounting controls sufficient
to provide reasonable assurance that transactions are recorded
as necessary to permit preparation of consolidated financial
statements in conformity with United States generally accepted
accounting principles.
(xxiii) The Company has not taken, directly or
indirectly, any action designed to or that would constitute or
that might reasonably be expected to cause or result in, under
the Exchange Act or otherwise, stabilization or manipulation
of the price of any security of the Company to facilitate the
sale or resale of the Securities.
(xxiv) Except as would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse
Effect, to the knowledge of the Company and its subsidiaries,
the Company and its subsidiaries are in compliance with all
applicable existing federal, state, local and foreign laws and
regulations relating to the protection of human health or the
environment or imposing liability or requiring standards of
conduct concerning any Hazardous Materials ("Environmental
Laws"). The term "Hazardous Material" means (a) any "hazardous
substance" as defined by the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended,
(b) any "hazardous waste" as defined by the Resource
Conservation and Recovery Act, as amended, (c) any petroleum
or petroleum product, (d) any polychlorinated biphenyl and (e)
any pollutant or contaminant or hazardous, dangerous or toxic
chemical, material, waste or substance regulated under or
within the meaning of any other Environmental Law. None of the
Company or its subsidiaries has received any written notice
and there is no pending or, to the best knowledge of the
Company and its subsidiaries, threatened action, suit or
proceeding before or by any court or governmental agency or
body alleging liability (including, without limitation,
alleged or potential liability for investigatory costs,
cleanup costs, governmental response costs, natural resources
damages, property damages, personal injuries, or penalties) of
the Company or any of its subsidiaries arising out of, based
on or resulting from (i) the presence or release into the
environment of any
7
Hazardous Material at any location owned by the Company or any
subsidiary of the Company, or (ii) any violation or alleged
violation of any Environmental Law, in either case (x) which
alleged or potential liability would be required to be
described in the Registration Statement under the Act, or (y)
which alleged or potential liability would, individually or in
the aggregate, reasonably be expected to have a Material
Adverse Effect.
(xxv) None of the Company or its subsidiaries has any
material liability for any prohibited transaction or funding
deficiency or any complete or partial withdrawal liability
with respect to any pension, profit sharing or other plan
which is subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), to which it makes or ever
has made a contribution and in which any employee of it is or
has ever been a participant. With respect to such plans, each
of the Company and its subsidiaries is in compliance in all
material respects with all applicable provisions of ERISA. In
addition, the Company has caused (i) all pension schemes
maintained by or for the benefit of any of its subsidiaries
organized under the laws of England and Wales or any of its
employees to be maintained and operated in all material
respects in accordance with all applicable laws from time to
time and (ii) all such pension schemes to be funded in
accordance with the governing provisions of such schemes,
except to the extent failure to do so would not, individually
or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(xxvi) The subsidiaries listed on Schedule IV
attached hereto are the only significant subsidiaries of the
Company as defined by Rule 1-02 of Regulation S-X (the
"Subsidiaries").
(xxvii) The Company and each of its subsidiaries own
or possess adequate licenses or other rights to use all
patents, patent applications, trademarks, service marks, trade
names, trademark registrations, service mark registrations,
copyrights, licenses and know-how (including, without
limitation, trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems
or procedures) and copyrights necessary to conduct the
business described in the Prospectus, except where the failure
to own or possess or have the ability to acquire any of the
foregoing would not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect, and
none of the Company or its subsidiaries has received any
notice of infringement of or conflict with asserted rights of
others with respect to any patents, trademarks, service marks,
trade names or copyrights which, if such assertion of
infringement or conflict were sustained, would individually or
in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(xxviii) None of the Company or its subsidiaries or
its or their properties or assets has any immunity from the
jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgment,
attachment in aid of execution or otherwise) under the laws of
the United States, the United Kingdom or Bermuda.
(xxix) The Company is a "foreign private issuer" as
defined by Rule 405 of the Act.
(xxx) To ensure the legality, validity,
enforceability and admissibility into evidence of each of this
Agreement, the Securities and
8
any other document to be furnished hereunder in Bermuda, it is
not necessary that this Agreement, the Securities or such
other document be filed or recorded with any court or other
authority in Bermuda or any stamp or similar tax be paid in
Bermuda on or in respect of this Agreement, the Securities or
any such other document except that (i) the consent of the
Authority is required and has been obtained for the sale and
subsequent transferability of the Securities; and (ii) the
Prospectus is required to be and has been filed with the
Registrar of Companies in Bermuda pursuant to Part III of the
Companies Act 1981 of Bermuda.
(xxxi) Each offer or sale of securities in connection
with the transactions described in the Registration Statement
under the heading "Recent Sales of Unregistered Securities"
was exempt from, or not subject to, the registration
requirements of the Act, and no offer or sale of a security of
the Company or any of its subsidiaries has been or will be
made that would be integrated for purposes of the Act with the
offering of the Securities contemplated in this Agreement.
(xxxii) The Company has duly and irrevocably
appointed William P. Bowden, Jr., Willis Group Holdings
Limited, 7 Hanover Square, New York, New York, 10004, as its
agent to receive service of process with respect to actions
arising out of or in connection with (i) this Agreement; and
(ii) violations of United States federal securities laws
relating to offers and sales of the Securities.
(xxxiii) Under Bermuda law the Underwriters will not
be deemed to be resident, domiciled, carrying on any
commercial activity in Bermuda or subject to any taxation in
Bermuda by reason only of the entry into, performance or
enforcement of this Agreement to which they are a party or the
transactions contemplated hereby. It is not necessary under
Bermuda law that the Underwriters be authorised, licensed,
qualified or otherwise entitled to carry on business in
Bermuda for their execution, delivery, performance or
enforcement of this Agreement.
(xxxiv) A final and conclusive judgment of a court
located outside Bermuda against the Company based upon this
Agreement (other than a court of jurisdiction to which The
Judgments (Reciprocal Enforcement) Act, 1958 applies, and it
does not apply to the federal and state courts of the Borough
of Manhattan in New York City) under which a sum of money is
payable (not being a sum payable in respect of taxes or other
charges of a like nature, in respect of a fine or other
penalty, or in respect of multiple damages as defined in The
Protection of Trading Interests Act 1981) may be the subject
of enforcement proceedings in the Supreme Court of Bermuda
under the common law doctrine of obligation by action on the
debt evidenced by the judgment of such court located outside
Bermuda.
(xxxv) The Company beneficially owns 100% of the
issued share capital of TAI Limited.
(xxxvi) All currently outstanding shares of Common
Stock held by directors, officers and other employees
(including former employees) of the Company or its
subsidiaries, and all shares of Common Stock that will be
issued pursuant to any employee stock option plan, stock
ownership plan, stock purchase plan, dividend reinvestment
plan or other employee or director benefit plan (other than
the shares held pursuant to the 2001
9
Share Purchase and Option Plan, Employee Stock Purchase Plan
and Sharesave Plan) of the Company to, or that will be issued
upon the exercise of options by, such directors, officers or
other employees of the Company or its subsidiaries (the
"Management Shares") are subject to the provisions of various
Management and Employee Shareholders' and Subscription
Agreements (the "Management Registration Rights Agreement"),
true and complete copies of which have been provided to the
Representatives prior to the date of this Agreement; pursuant
to the Management Registration Rights Agreement, no officer or
other employee is permitted to sell, transfer, assign, pledge
or hypothecate its shares of Common Stock prior to the sixth
anniversary of the date such officer or other employee
purchased shares (except that he may sell his shares under an
effective registration statement or pursuant to sale
participation rights at the time Overseas sells its shares; it
being understood that (a) the Company or Mourant & Co.
Trustees Limited may repurchase such portion of his shares as
he would have been permitted to include in the Registration
Statement in lieu of including such shares in the offering
contemplated by this Agreement and (b) the Company intends to
release from the Management Transfer Restrictions (as defined
below), effective thirty days after the date of this
Agreement, such portion of his shares as is equal to the sum
of (x) the number of shares he would have been permitted to
include in the registration statement filed in connection with
the November 2001 secondary offering of shares of Common Stock
and (y) the number of shares he would have been permitted to
include in the Registration Statement, in each case pursuant
to the Management Registration Rights Agreement), and, in any
event, prior to the 90th day following the sale of the
Securities as contemplated hereby, in each case without the
prior written consent of the Company (the "Management Transfer
Restrictions"); and prior to the date of this Agreement the
shares of Common Stock held by Overseas, Fisher Capital and
Chubb, together with the Management Shares beneficially owned
as of the date of this Agreement, comprise [ ]% of the issued
Common Stock.
Any certificate signed by any officer of the Company and delivered to the
Representatives or counsel for the Underwriters in connection with the offering
of the Securities shall be deemed a representation and warranty by the Company,
as to matters covered thereby, to each Underwriter.
(b) Each Selling Stockholder, severally and not jointly,
represents and warrants to, and agrees with, each Underwriter that:
(i) Such Selling Stockholder is the record owner of
the Securities to be sold by it hereunder free and clear of
all liens, encumbrances, equities and claims and has duly
endorsed such Securities in blank.
(ii) Such Selling Stockholder has not taken, directly
or indirectly, any action designed to or that would constitute
or that might reasonably be expected to cause or result in,
under the Exchange Act or otherwise, stabilization or
manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities.
(iii) No consent, approval, authorization, filing,
order, registration or qualification of or with any court or
governmental agency or body is required for the sale of the
Securities by such Selling Stockholder, except (1) that (i)
the consent of the Authority is required and has been obtained
for the sale and subsequent transferability of the Securities;
and (ii) the
10
Prospectus is required to be and has been filed with the
Registrar of Companies in Bermuda pursuant to Part III of the
Companies Act 1981 of Bermuda; (2) such as have been obtained
under the Act; and (3) such as may be required under the Blue
Sky laws of any jurisdiction in connection with the purchase
and distribution of the Securities by the Underwriters in the
manner contemplated herein and in the Prospectus.
(iv) Neither the sale of the Securities being sold by
such Selling Stockholder nor the fulfillment of the terms
hereof by such Selling Stockholder will conflict with, result
in a breach or violation of, or constitute a default under any
law or, if applicable, the charter or by-laws of such Selling
Stockholder or the terms of any indenture or other agreement
or instrument to which such Selling Stockholder or, if
applicable, any of its subsidiaries, is a party or bound, or
any judgment, order or decree applicable to such Selling
Stockholder or, if applicable, any of its subsidiaries, of any
court, regulatory body, administrative agency, governmental
body or arbitrator having jurisdiction over such Selling
Stockholder or, if applicable, any of its subsidiaries.
(vi) The sale of Securities by such Selling
Stockholder pursuant hereto is not prompted by any information
concerning the Company or any of its subsidiaries which is not
set forth in the Prospectus or any supplement thereto.
(v) In respect of any statements in or omissions from
the Registration Statement or the Prospectus or any
supplements thereto, in each case made in reliance upon and in
conformity with information furnished in writing to the
Company by such Selling Stockholder specifically for use in
connection with the preparation thereof, such statements
comply in all material respects with the applicable
requirements of the Act and the rules thereunder; and on the
Effective Date, at the Execution Time, on the date of any
filing of the Prospectus pursuant to Rule 424(b) and on the
Closing Date and any settlement date, such statements did not
or will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not
misleading.
Any certificate signed by any Selling Stockholder and, if applicable, any
officer of any Selling Stockholder and delivered to the Representatives or
counsel for the Underwriters in connection with the offering of the Securities
shall be deemed a representation and warranty by such Selling Stockholder, as to
matters covered thereby, to each Underwriter.
2. PURCHASE AND SALE. (a) Subject to the terms and conditions
and in reliance upon the representations and warranties herein set forth, each
Selling Stockholder agrees to sell to the several Underwriters the amount of
Underwritten Securities set forth opposite such Selling Stockholder's name in
Schedule II hereto, and each Underwriter agrees, severally and not jointly, to
purchase from each Selling Stockholder, at a purchase price of $[ ] per share,
such selling Stockholder's proportionate share of the amount of the Underwritten
Securities set forth opposite such Underwriter's name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Selling Stockholders
hereby grant an option to the several Underwriters to purchase, severally and
not jointly, up to 2,400,000 Option Securities at the same purchase price per
share as the Underwriters shall pay for the Underwritten Securities. Said option
may be exercised only to cover over-allotments
11
in the sale of the Underwritten Securities by the Underwriters. Said option may
be exercised in whole or in part at any time (but not more than once) on or
before the 30th day after the date of the Prospectus upon written or telegraphic
notice by the Representatives to the Selling Stockholders setting forth the
number of shares of the Option Securities as to which the several Underwriters
are exercising the option and the settlement date. The maximum number of Option
Securities which each Selling Stockholder agrees to sell is set forth in
Schedule II hereto. In the event that the Underwriters exercise less than their
full over-allotment option, the number of Option Securities to be sold by each
Selling Stockholder listed in Schedule II shall be, as nearly as practicable, in
the same proportion as the maximum number of Option Securities to be sold by
each Selling Stockholder and the number of Option Securities to be sold. The
number of Option Securities to be purchased by each Underwriter shall be the
same percentage of the total number of shares of the Option Securities to be
purchased by the several Underwriters as such Underwriter is purchasing of the
Underwritten Securities, subject to such adjustments as you in your absolute
discretion shall make to eliminate any fractional shares.
3. DELIVERY AND PAYMENT. Delivery of and payment for the
Underwritten Securities and the Option Securities (if the option provided for in
Section 2(b) hereof shall have been exercised on or before the third Business
Day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on
May [21], 2002, or at such time on such later date not more than three Business
Days after the foregoing date as the Representatives shall designate, which date
and time may be postponed by agreement between the Representatives and the
Selling Stockholders or as provided in Section 9 hereof (such date and time of
delivery and payment for the Securities being herein called the "Closing Date").
Delivery of the Securities shall be made to the Representatives for the
respective accounts of the several Underwriters against payment by the several
Underwriters through the Representatives of the aggregate purchase price of the
Securities being sold by each of the Selling Stockholders to or upon the order
of such Selling Stockholder by wire transfer payable in same-day funds to an
account specified by such Selling Stockholder. Delivery of the Underwritten
Securities and the Option Securities shall be made through the facilities of The
Depository Trust Company unless the Representatives shall otherwise instruct.
Each Selling Stockholder will pay all applicable state
transfer taxes, if any, involved in the transfer to the several Underwriters of
the Securities to be purchased by them from such Selling Stockholder and the
respective Underwriters will pay any additional stock transfer taxes involved in
further transfers.
If the option provided for in Section 2(b) hereof is exercised
after the third Business Day prior to the Closing Date, the Selling Stockholders
will deliver the Option Securities (at the expense of the Company) to the
Representatives, at 388 Greenwich Street, New York, New York 10013, on the date
specified by the Representatives (which shall be within three Business Days
after exercise of said option) for the respective accounts of the several
Underwriters, against payment by the several Underwriters through the
Representatives of the purchase price thereof to or upon the order of each of
the Selling Stockholders by wire transfer payable in same-day funds to an
account specified by such Selling Stockholder. If settlement for the Option
Securities occurs after the Closing Date, the Company and the Selling
Stockholders will deliver to the Representatives on the settlement date for the
Option Securities, and the obligation of the Underwriters to purchase the Option
Securities shall be conditioned upon receipt of, supplemental opinions,
certificates and letters confirming as of such date the opinions, certificates
and letters delivered on the Closing Date pursuant to Section 6 hereof.
12
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. AGREEMENTS. (a) The Company agrees with the several
Underwriters that:
(i) The Company will use its best efforts to cause
the Registration Statement, if not effective at the Execution
Time, and any amendment thereof, to become effective. Prior to
the termination of the offering of the Securities, the Company
will not file any amendment of the Registration Statement or
supplement to the Prospectus or any Rule 462(b) Registration
Statement unless the Company has furnished you a copy for your
review prior to filing and will not file any such proposed
amendment or supplement to which you reasonably object.
Subject to the foregoing sentence, if the Registration
Statement has become or becomes effective pursuant to Rule
430A, or filing of the Prospectus is otherwise required under
Rule 424(b), the Company will cause the Prospectus, properly
completed, and any supplement thereto to be filed with the
Commission pursuant to the applicable paragraph of Rule 424(b)
within the time period prescribed. The Company will promptly
advise the Representatives (1) when the Registration
Statement, if not effective at the Execution Time, shall have
become effective, (2) when the Prospectus, and any supplement
thereto, shall have been filed (if required) with the
Commission pursuant to Rule 424(b) or when any Rule 462(b)
Registration Statement shall have been filed with the
Commission, (3) when, prior to termination of the offering of
the Securities, any amendment to the Registration Statement
shall have been filed or become effective, (4) of any request
by the Commission or its staff for any amendment of the
Registration Statement, or any Rule 462(b) Registration
Statement, or for any supplement to the Prospectus or for any
additional information, (5) of the issuance by the Commission
of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of
any proceeding for that purpose and (6) of the receipt by the
Company of any notification with respect to the suspension of
the qualification of the Securities for sale in any
jurisdiction or the institution or threatening of any
proceeding for such purpose. The Company will use its best
efforts to prevent the issuance of any such stop order or the
suspension of any such qualification and, if issued, to obtain
as soon as possible the withdrawal thereof.
(ii) If, at any time when a prospectus relating to
the Securities is required to be delivered under the Act, any
event occurs as a result of which the Prospectus as then
supplemented would include any untrue statement of a material
fact or omit to state any material fact necessary to make the
statements therein in the light of the circumstances under
which they were made not misleading, or if it shall be
necessary to amend the Registration Statement or supplement
the Prospectus to comply with the Act or the rules thereunder,
the Company will (1) promptly notify the Representatives of
any such event, (2) as soon as practicable, prepare and file
with the Commission, subject to the second sentence of
paragraph (a)(i) of this Section 5, an amendment or supplement
which will correct such statement or omission or effect such
compliance; and (3) thereafter, promptly supply any
supplemented Prospectus to you in such quantities as you may
reasonably request.
13
(iii) As soon as practicable, the Company will make
generally available to its security holders and to the
Representatives an earnings statement or statements of the
Company and its subsidiaries which will satisfy the provisions
of Section 11(a) of the Act and Rule 158 under the Act.
(iv) The Company will furnish to the Representatives
and counsel for the Underwriters signed copies of the
Registration Statement (including exhibits thereto) and to
each other Underwriter a copy of the Registration Statement
(without exhibits thereto) and, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the
Act, as many copies of each Preliminary Prospectus and the
Prospectus and any supplement thereto as the Representatives
may reasonably request.
(v) The Company will cooperate with you and counsel
for the Underwriters in connection with the qualification of
the Securities for sale under the laws of such jurisdictions
as the Representatives may designate and will maintain such
qualifications in effect so long as required for the
distribution of the Securities; PROVIDED that in no event
shall the Company be obligated to qualify to do business in
any jurisdiction where it is not now so qualified or to take
any action that would subject it to service of process in
suits, other than those arising out of the offering or sale of
the Securities, or taxation in any jurisdiction where it is
not now so subject.
(vi) The Company will not, without the prior written
consent of Salomon Smith Barney Inc. and J.P. Morgan
Securities Inc., (1) offer, sell, contract to sell, pledge, or
otherwise dispose of (or enter into any transaction which is
designed to, or might reasonably be expected to, result in the
disposition (whether by actual disposition or effective
economic disposition due to cash settlement or otherwise) by
the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company),
directly or indirectly, including the filing (or participation
in the filing) of a registration statement with the Commission
in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position
within the meaning of Section 16 of the Exchange Act, any
shares of Common Stock or any securities convertible into, or
exercisable, or exchangeable for, shares of Common Stock; (2)
publicly announce an intention to effect any such transaction;
or (3) amend, waive or fail to enforce the Management Transfer
Restrictions in respect of the Management Shares (except that
after the expiration of 30 days from the date of this
Agreement the Company may waive such Management Transfer
Restrictions with respect to up to an aggregate of 4,428,000
shares of Common Stock); in the case of clauses (1), (2), or
(3) for a period of 90 days after the date of this Agreement,
PROVIDED, HOWEVER, that the Company or Mourant & Co. Trustees
Limited (with respect to clauses (w), (x) and (y) below) may
(w) repurchase from the directors, officers and other
employees (including former employees) of the Company or its
subsidiaries such portion of the shares of each such person as
each such person would have been permitted to include in the
Registration Statement in lieu of including such shares in the
offering contemplated by this Agreement, (x) issue and sell
Common Stock and options pursuant to any employee stock option
plan, stock ownership plan, stock purchase plan, dividend
reinvestment plan or other employee or director benefit plan
of the Company described in the Prospectus (upon the terms of
such plan as described in the Prospectus), (y) issue Common
Stock issuable upon the exercise of options pursuant to any
such plans and
14
(z) issue Common Stock as consideration in connection with the
acquisition by the Company or any of its subsidiaries of any
person (including broker teams) or assets and, in connection
therewith, file a registration statement with the SEC,
PROVIDED that in the case of this clause (z), such
registration does not become effective prior to the expiration
of the 90 day period set forth above and the recipient of such
Common Stock agrees to sign a lock-up letter having
restrictions similar to those set forth in Section 5(b)(i)
hereof for the remainder of such 90 day period.
(vii) The Company will not take, directly or
indirectly, any action designed to or that would constitute or
that might reasonably be expected to cause or result in, under
the Exchange Act or otherwise, stabilization or manipulation
of the price of any security of the Company to facilitate the
sale or resale of the Securities.
(viii) The Company agrees to pay the costs and
expenses relating to the following matters: (1) the
preparation, printing or reproduction and filing with the
Commission of the Registration Statement (including financial
statements and exhibits thereto), each Preliminary Prospectus,
the Prospectus, and each amendment or supplement to any of
them; (2) the printing (or reproduction) and delivery
(including postage, air freight charges and charges for
counting and packaging) of such copies of the Registration
Statement, each Preliminary Prospectus, the Prospectus, and
all amendments or supplements to any of them, as may, in each
case, be reasonably requested for use in connection with the
offering and sale of the Securities; (3) the preparation,
printing, authentication, issuance and delivery of
certificates for the Securities, including any stamp or
transfer taxes in connection with the original sale by the
Selling Stockholders to the Underwriters of the Securities;
(4) the printing (or reproduction) and delivery of this
Agreement, any blue sky memorandum and all other agree ments
or documents printed (or reproduced) and delivered in
connection with the offering of the Securities; (5) the
registration of the Securities under the Exchange Act and the
listing of the Securities on the New York Stock Exchange; (6)
any registration or qualification of the Securities for offer
and sale under the securities or blue sky laws of the several
states (including filing fees and the reasonable fees and
expenses of one counsel for the Underwriters relating to such
registration and qualification); (7) any filings required to
be made with the National Association of Securities Dealers,
Inc. (including filing fees and the reasonable fees and
expenses of one counsel for the Underwriters relating to such
filings); (8) one-half of the aircraft costs; and all other
transportation and other expenses incurred by or on behalf of
Company representatives in connection with presentations to
prospective purchasers of the Securities; (9) the fees and
expenses of the Company's accountants and the fees and
expenses of counsel (including local and special counsel) for
the Company and the Selling Stockholders, as previously
agreed; and (10) all other costs and expenses incurred by the
Company that are incidental to the performance by the Company
or the Selling Stockholders of their obligations hereunder.
(b) Each Selling Stockholder agrees with the several
Underwriters that:
(i) Such Selling Stockholder will not, without the
prior written consent of Salomon Smith Barney Inc. and J.P.
Morgan Securities Inc., offer, sell, contract to sell, pledge
or otherwise dispose of (or enter into any transaction which
is designed to, or might reasonably be expected to, result in
the disposition (whether by actual disposition or effective
15
economic disposition due to cash settlement or otherwise) by
such Selling Stockholder or any affiliate of such Selling
Stockholder or any person in privity with such Selling
Stockholder or any affiliate of such Selling Stockholder),
directly or indirectly, or file (or participate in the filing
of) a registration statement with the Commission in respect
of, or establish or increase a put equivalent position or
liquidate or decrease a call equivalent position within the
meaning of Section 16 of the Exchange Act with respect to, any
shares of capital stock of the Company or any securities
convertible into or exercisable or exchangeable for such
capital stock, or publicly announce an intention to effect any
such transaction, for a period of 90 days after the date of
the Underwriting Agreement, other than shares of Common Stock
(i) disposed of as bona fide gifts approved by Salomon Smith
Barney Inc. and J.P. Morgan Securities Inc., (ii) transferred
by such Selling Stockholder to its affiliates who agree to be
bound by the terms hereof and (iii) transferred by such
Selling Stockholder to bona fide family members or trusts who
agree to be bound by the terms hereof.
(ii) Such Selling Stockholder will not take, directly
or indirectly, any action designed to or that would constitute
or that might reasonably be expected to cause or result in,
under the Exchange Act or otherwise, stabilization or
manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities.
(iii) Such Selling Stockholder will advise you
promptly, and if requested by you, will confirm such advice in
writing, so long as delivery of a prospectus relating to the
Securities by an underwriter or dealer may be required under
the Act, of any change in information in the Registration
Statement or the Prospectus relating to such Selling
Stockholder.
6. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the Underwriters to purchase the Underwritten Securities and the
Option Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholders contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, to the accuracy of the statements
of the Company and the Selling Stockholders made in any certificates pursuant to
the provisions hereof, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder and to the following
additional conditions:
(a) If the Registration Statement has not become effective
prior to the Execution Time, unless the Representatives agree in
writing to a later time, the Registration Statement will become
effective not later than (i) 6:00 PM New York City time on the date of
determination of the public offering price, if such determination
occurred at or prior to 3:00 PM New York City time on such date or (ii)
9:30 AM on the Business Day following the day on which the public
offering price was determined, if such determination occurred after
3:00 PM New York City time on such date; if filing of the Prospectus,
or any supplement thereto, is required pursuant to Rule 424(b), the
Prospectus, and any such supplement, will be filed in the manner and
within the time period required by Rule 424(b); and no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Company shall have requested and caused Simpson
Thacher & Bartlett, U.S. counsel for the Company, to have furnished to
the Representatives
16
their opinion, dated the Closing Date and addressed to the
Representatives, in the form set forth on Annex A hereto.
(c) Overseas shall have requested and caused each of Simpson
Thacher & Bartlett, U.S. counsel for Overseas, and Gowling Lafleur
Henderson LLP, Canadian counsel for Overseas, to have furnished to the
Representatives their opinion, each dated the Closing Date and
addressed to the Representatives in the form set forth on Annex A
hereto (in the case of the opinion of Simpson Thacher & Bartlett) and
in the form set forth on Annex B hereto (in the case of the opinion of
Gowling Lafleur Henderson LLP).
(d) Fisher Capital and Chubb shall have requested and caused
counsel for such Selling Stockholder reasonably acceptable to the
Underwriters to have furnished to the Representatives their opinion
under New York law (with respect to the validity of this Agreement and
clauses (ii) and (iii) below) and under the law of the jurisdiction of
formation of such Selling Stockholder (with respect to clauses (i),
(iii) and (iv) below), dated the Closing Date and addressed to the
Representatives, to the effect that:
(i) this Agreement has been duly authorized, executed
and delivered by such Selling Stockholder and such Selling
Stockholder has full legal right and authority to sell,
transfer and deliver in the manner provided in this Agreement
the Securities being sold by such Selling Stockholder
hereunder;
(ii) assuming that each Underwriter acquires its
interest in the Securities it has purchased from such Selling
Stockholder without notice of any adverse claim (within the
meaning of Section 8-105 of the UCC), each Underwriter that
has purchased such Securities delivered on the Closing Date to
The Depository Trust Company or other securities intermediary
by making payment therefor as provided herein, and that has
had such Securities credited to the securities account or
accounts of such Underwriters maintained with The Depository
Trust Company or such other securities intermediary will have
acquired a security entitlement (within the meaning of Section
8-102(a)(17) of the UCC) to such Securities purchased by such
Underwriter, and no action based on an adverse claim (within
the meaning of Section 8-105 of the UCC) may be asserted
against such Underwriter with respect to such Securities;
(iii) no consent, approval, authorization, filing,
order, registration or qualification of or with any court or
governmental agency or body is required in connection with the
transactions contemplated herein, except (1) that (i) the
consent of the Authority is required and has been obtained for
the sale and subsequent transferability of the Securities; and
(ii) the Prospectus is required to be and has been filed with
the Registrar of Companies in Bermuda pursuant to Part III of
the Companies Act 1981 of Bermuda; (2) such as have been
obtained under the Act; and (3) such as may be required under
the Blue Sky laws of any jurisdiction in connection with the
purchase and distribution of the Securities by the
Underwriters in the manner contemplated herein and in the
Prospectus; and
(iv) neither the sale of the Securities being sold by
such Selling Stockholder nor the consummation of any other of
the transactions herein contemplated by such Selling
Stockholder or the fulfillment of the terms hereof by such
Selling Stockholder will conflict with, result in a breach or
violation of, or constitute a default under any law or, if
applicable, the
17
charter, by-laws or other similar organizational documents of
such Selling Stockholder or the terms of any indenture or
other agreement or instrument known to such counsel and to
which such Selling Stockholder or, if applicable, any of its
subsidiaries, is a party or bound, or any judgment, order or
decree known to such counsel to be applicable to such Selling
Stockholder or, if applicable, any of its subsidiaries, of any
court, regulatory body, administrative agency, governmental
body or arbitrator having jurisdiction over such Selling
Stockholder or, if applicable, any of its subsidiaries.
(e) The Company shall have requested and caused Appleby
Spurling & Kempe, Bermuda counsel for the Company, to have furnished to
the Representatives their opinion, dated the Closing Date and addressed
to the Representatives, in the form set forth on Annex C hereto.
(f) Oliver Goodinge, Esq., the Company's Assistant General
Counsel, shall have furnished to the Representatives his opinion, dated
the Closing Date and addressed to the Representatives, in the form set
forth on Annex D hereto.
(g) William P. Bowden, Jr., the Company's General Counsel,
shall have furnished to the Representatives his opinion, dated the
Closing Date and addressed to the Representatives, in the form set
forth on Annex E hereto.
(h) The Representatives shall have received from Cravath,
Swaine & Moore, counsel for the Underwriters, such opinion or opinions,
dated the Closing Date and addressed to the Representatives, with
respect to the sale of the Securities, the Registration Statement, the
Prospectus (together with any supplement thereto) and other related
matters as the Representatives may reasonably require, and the Company
and each Selling Stockholder shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon
such matters.
(i) The Company shall have furnished to the Representatives a
certificate of the Company, signed by Thomas Colraine and William P.
Bowden, Jr., Esq., dated the Closing Date, to the effect that the
signers of such certificate have carefully examined the Registration
Statement, the Prospectus, any supplements to the Prospectus and this
Agreement and that:
(i) the representations and warranties of the Company
in this Agreement are true and correct on and as of the
Closing Date with the same effect as if made on the Closing
Date and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or
satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the Company's
knowledge, threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectus (exclusive of any
supplement thereto), there has been no event or development
that has had, or that would reasonably be expected to have, a
Material Adverse Effect.
(j) Each Selling Stockholder shall have furnished to the
Representatives a certificate, signed by its principal financial or
accounting officer, general partner or managing member, dated the
Closing Date, to the effect that the representations
18
and warranties of such Selling Stockholder in this Agreement are true
and correct in all material respects on and as of the Closing Date to
the same effect as if made on the Closing Date.
(k) The Company shall have requested and caused Deloitte &
Touche to have furnished to the Representatives, at the Execution Time
and at the Closing Date, letters, dated respectively as of the
Execution Time and as of the Closing Date, in form and substance
satisfactory to the Representatives, confirming that they are
independent accountants within the meaning of the Act and the
applicable rules and regulations adopted by the Commission thereunder
and that they have
performed a review of the unaudited interim financial information of
the Company for the three-month periods ended March 31, 2001 and 2002,
in accordance with Statement on Accounting Matters No. 71, and stating
in effect that:
(i) in their opinion the audited financial statements
and financial statement schedules included in the Registration
Statement and the Prospectus and reported on by them comply as
to form in all material respects with the applicable
accounting requirements of the Act and the related rules and
regulations adopted by the Commission;
(ii) on the basis of carrying out certain specified
procedures (but not an examination in accordance with
generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the
comments set forth in such letter; a reading of the minutes of
the meetings of the stockholders, directors and audit
committee of the Company and the Subsidiaries and inquiries of
certain officials of the Company who have responsibility for
financial and accounting matters of the Company and its
subsidiaries as to transactions and events subsequent to
December 31, 2001, nothing came to their attention which
caused them to believe that:
(1) any unaudited financial statements
included in the Registration Statement and the
Prospectus do not comply as to form in all material
respects with applicable accounting requirements of
the Act and with the related rules and regulations
adopted by the Commission with respect to
registration statements on Form F-1; and said
unaudited financial statements are not in conformity
with generally accepted accounting principles applied
on a basis substantially consistent with that of the
audited financial statements included in the
Registration Statement and the Prospectus;
(2) with respect to the period subsequent to
March 31, 2002, there were any changes, at a
specified date not more than five days prior to the
date of the letter and excluding any charge for
performance-based stock options booked after March
31, 2002, in the total long-term debt of the Company
and its subsidiaries or capital stock of the Company
or decreases in the total stockholders' equity of the
Company as compared with the amounts shown on the
March 31, 2002 consolidated balance sheet included in
the Registration Statement and the Prospectus, or for
the period from April 1, 2002 to such specified date,
excluding the charge for performance-based stock
options and excluding any dilutive effect of shares
issued in the initial public offering in June 2001,
there were any decreases, as compared with the
corresponding period in
19
the preceding year, in total revenues, net income,
operating income, EBITDA or basic and diluted net
earnings per share, except in all instances for
changes or decreases set forth in such letter, in
which case the letter shall be accompanied by an
explanation by the Company as to the significance
thereof unless said explanation is not deemed
necessary by the Representatives;
(3) the information included in the
Registration Statement and Prospectus in response to
Form 20-F, Item 3.A. (Key Information - Selected
Financial Data), Item 8 (Financial Information) and
Item 6.B. (Directors, Senior Management and Employees
- Compensation) is not in conformity with the
applicable disclosure requirements of Form 20-F and
Regulation S-K; and
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company and its subsidiaries) set forth in the Registration
Statement and the Prospectus that has previously been
identified to you agrees with the accounting records of the
Company and its subsidiaries, excluding any questions of legal
interpretation.
References to the Prospectus in this paragraph (k) include any
supplement thereto at the date of the letter.
(l) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of
any supplement thereto), there shall not have been (i) any change or
decrease specified in the letter or letters referred to in paragraph
(k) of this Section 6 or (ii) any change, or any development that can
be expected to have a material adverse effect on the condition
(financial or otherwise), business or results of operations of the
Company and its subsidiaries taken as a whole, whether or not arising
from transactions in the ordinary course of business, except as set
forth in the Prospectus (exclusive of any supplement thereto) the
effect of which, in any case referred to in clause (i) or (ii) above,
is, in the judgment of the Representatives, so material and adverse as
to make it impractical or inadvisable to proceed with the offering or
delivery of the Securities as contemplated by the Registration
Statement (exclusive of any amendment thereof) and the Prospectus
(exclusive of any supplement thereto).
(m) Prior to the Closing Date, the Company and the Selling
Stockholders shall have furnished to the Representatives such further
customary information, certificates and documents as the
Representatives may reasonably request.
(n) Subsequent to the Execution Time, there shall not have
been any decrease in the rating of debt securities of the Company or
any of its subsidiaries by any "nationally recognized statistical
rating organization" (as defined for purposes of Rule 436(g) under the
Act) or any notice given of any intended or potential decrease in any
such rating or of a possible change in any such rating that does not
indicate the direction of the possible change.
(o) At the Execution Time, the Company shall have furnished to
the Representatives a letter substantially in the form of Exhibit A
hereto (each a
20
"Lock-up Letter") and addressed to the Representatives from each person
listed on Schedule V.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, this Agreement and all obligations of the Underwriters hereunder
may be canceled at, or at any time prior to, the Closing Date by the
Representatives. Notice of such cancelation shall be given to the Company and
the Selling Stockholders in writing or by telephone or facsimile confirmed in
writing.
The documents required to be delivered by this Section 6 shall
be delivered at the office of Cravath, Swaine & Moore, counsel for the
Underwriters, at Worldwide Plaza, 825 Eighth Avenue, New York, New York,
10019-7475 on the Closing Date.
7. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied
because of any refusal, inability or failure on the part of the Company or any
Selling Stockholder to perform any agreement herein or comply with any provision
hereof other than by reason of a default by any of the Underwriters, the Company
will reimburse the Underwriters severally through Salomon Smith Barney Inc. on
demand accompanied by reasonable supporting documentation for all reasonable
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them in connection with the proposed purchase
and sale of the Securities. If the Company is required to make any payments to
the Underwriters under this Section 7 because of any Selling Stockholder's
refusal, inability or failure to satisfy any condition to the obligations of the
Underwriters set forth in Section 6, such Selling Stockholder shall reimburse
the Company on demand for all amounts so paid.
8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each Underwriter, the directors, officers, employees
and agents of each Underwriter and each person who controls any Underwriter
within the meaning of either the Act or the Exchange Act against any and all
losses, claims, damages or liabilities, joint or several, to which they or any
of them may become subject under the Act, the Exchange Act or other foreign,
federal, state or statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement for the
registration of the Securities as originally filed or in any amendment thereof,
or in any Preliminary Prospectus or the Prospectus, or in any amendment thereof
or supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and agrees to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through the Representatives
specifically for inclusion therein; PROVIDED, FURTHER, that with respect to any
untrue statement or omission of
21
material fact made in any Preliminary Prospectus, the indemnity agreement
contained in this Section 8(a) shall not inure to the benefit of any Underwriter
from whom the person asserting any such loss, claim, damage or liability
purchased the Securities concerned, to the extent that any such loss, claim,
damage or liability of such Underwriter occurs under the circumstance where it
shall be determined by a court of competent jurisdiction by final and
non-appealable judgment that (i) the Company had previously furnished copies of
the Prospectus to the Representatives, (ii) the untrue statement or omission of
a material fact contained in the Preliminary Prospectus was corrected in the
Prospectus and (iii) such loss, claim, damage or liability results from the fact
that there was not sent or given to such person at or prior to the written
confirmation of the sale of such Securities to such person, a copy of the
Prospectus. This indemnity agreement will be in addition to any liability which
the Company may otherwise have.
(b) Each Selling Stockholder severally and not jointly agrees
to indemnify and hold harmless the Company, each of its directors, each of its
officers who signs the
Registration Statement, each Underwriter, the directors, officers, employees and
agents of each Underwriter and each person who controls the Company or any
Underwriter within the meaning of either the Act or the Exchange Act and each
other Selling Stockholder, if any, to the same extent as the foregoing indemnity
from the Company to each Underwriter, but only with reference to written
information furnished to the Company by or on behalf of such Selling Stockholder
specifically for inclusion in the documents referred to in the foregoing
indemnity; and such indemnity will be limited to an amount equal to the
aggregate gross proceeds, net of the underwriting discounts, received by such
Selling Stockholder from the sale of the Securities to the Underwriters. This
indemnity agreement will be in addition to any liability which any Selling
Stockholder may otherwise have. Each Underwriter acknowledges that the name of
each Selling Stockholder, the number of securities each Selling Stockholder is
offering, in the case of Overseas only, the first and second sentences under the
caption "Business--Competitive Strengths--Strong Sponsorship" with respect to
Overseas in the Prospectus constitute the only information furnished in writing
by or on behalf of each of the Selling Stockholders for inclusion in any
Preliminary Prospectus or the Prospectus.
(c) Each Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, each of its
officers who signs the Registration Statement, and each person who controls the
Company within the meaning of either the Act or the Exchange Act and each
Selling Stockholder, to the same extent as the foregoing indemnity from the
Company to each Underwriter, but only with reference to written information
relating to such Underwriter furnished to the Company by or on behalf of such
Underwriter through the Representatives specifically for inclusion in the
documents referred to in the foregoing indemnity. This indemnity agreement will
be in addition to any liability which any Underwriter may otherwise have. The
Company and each Selling Stockholder acknowledge that the statements set forth
in the last paragraph of the cover page regarding delivery of the Securities
and, under the heading "Underwriting", (i) the list of Underwriters and their
respective participation in the sale of the Securities, (ii) the third
paragraph, (iii) the ninth, tenth and eleventh paragraphs related to
stabilization, syndicate covering transactions and penalty bids in any
Preliminary Prospectus and (iv) the sixteenth paragraph relating to electronic
prospectuses and the Prospectus, constitute the only information furnished in
writing by or on behalf of the several Underwriters for inclusion in any
Preliminary Prospectus or the Prospectus.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a), (b)
22
or (c) above unless and to the extent it did not otherwise learn of such action
and such failure results in the forfeiture by the indemnifying party of
substantial rights and defenses and (ii) will not, in any event, relieve the
indemnifying party from any obligations to any indemnified party other than the
indemnification obligation provided in paragraph (a), (b) or (c) above. The
indemnifying party shall be entitled to appoint counsel of the indemnifying
party's choice at the indemnifying party's expense to represent the indemnified
party in any action for which indemnification is sought (in which case the
indemnifying party shall not thereafter be responsible for the fees and expenses
of any separate counsel retained by the indemnified party or parties except as
set forth below); PROVIDED, HOWEVER, that such counsel shall be reasonably
satisfactory to the indemnified party. Notwithstanding the indemnifying party's
election to appoint counsel to represent the indemnified party in an action, the
indemnified party shall have the right to employ separate counsel (including
local counsel), and the indemnifying party shall bear the reasonable fees, costs
and expenses of such separate counsel if (i) the use of counsel chosen by the
indemnifying party to represent the indemnified party would present such counsel
with a conflict of interest, (ii) the actual or potential defendants in, or
targets of, any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, (iii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of the institution of such action or
(iv) the indemnifying party shall authorize the indemnified party to employ
separate counsel at the expense of the indemnifying party. An indemnifying party
will not, without the prior written consent of the indemnified parties (which
consent shall not be unreasonably withheld), settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
(e) In the event that the indemnity provided in paragraph (a),
(b) or (c) of this Section 8 is unavailable to or insufficient to hold harmless
an indemnified party for any reason, the Company, each of the Selling
Stockholders and the Underwriters agree to contribute to the aggregate losses,
claims, damages and liabilities (including legal or other expenses reasonably
incurred in connection with investigating or defending same) (collectively
"Losses") to which the Company, each of the Selling Stockholders and one or more
of the Underwriters may be subject in such proportion as is appropriate to
reflect the relative benefits received by the Company, by each of the Selling
Stockholders and by the Underwriters from the offering of the Securities;
PROVIDED, HOWEVER, that in no case shall (i) any Underwriter (except as may be
provided in any agreement among underwriters relating to the offering of the
Securities) be responsible for any amount in excess of the underwriting discount
or commission applicable to the Securities purchased by such Underwriter
hereunder. If the allocation provided by the immediately preceding sentence is
unavailable for any reason, the Company, each of the Selling Stockholders and
the Underwriters shall contribute in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company, of each of the Selling Stockholders and of the Underwriters in
connection with the statements or omissions which resulted in such Losses as
well as any other relevant equitable considerations. Benefits received by the
Company and/or by each of the Selling Stockholders shall be deemed to be equal
to the total net proceeds from the offering (before deducting expenses) received
by such Selling Stockholder, and benefits received by the Underwriters shall be
deemed to be equal to the total underwriting discounts and commissions, in each
case as set forth on the cover page of the Prospectus. Relative fault shall be
determined by reference to, among other things, whether any untrue or any
23
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information provided by the Company, such
Selling Stockholder or the Underwriters, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The Company, each of the Selling Stockholders
and the Underwriters agree that it would not be just and equitable if
contribution were determined by pro rata allocation or any other method of
allocation which does not take account of the equitable considerations referred
to above. Notwithstanding the provisions of this paragraph (e), no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person who
controls an Underwriter within the meaning of either the Act or the Exchange Act
and each director, officer, employee and agent of an Underwriter shall have the
same rights to contribution as such Underwriter, and each person who controls
the Company within the meaning of either the Act or the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and conditions of this
paragraph (e).
(f) The liability of each Selling Stockholder under such
Selling Stockholder's representations and warranties contained in Section 1
hereof and under the indemnity and contribution agreements contained in this
Section 8 shall be limited to an amount equal to the aggregate gross proceeds,
net of underwriting discounts, received by such Selling Stockholder from the
sale of the Securities to the Underwriters. The Company and the Selling
Stockholders may agree, as among themselves and without limiting the rights of
the Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
(g) The Company agrees to indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each Underwriter
and each person who controls any Underwriter within the meaning of either the
Act or the Exchange Act against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become subject
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any failure or alleged failure by the
Company to comply with the terms of the Consortium Registration Rights
Agreement, the Profit Sharing Registration Rights Agreement or the Management
Registration Rights Agreement in connection with the transactions contemplated
by this Agreement.
9. DEFAULT BY AN UNDERWRITER. If any one or more Underwriters
shall fail to purchase and pay for any of the Securities agreed to be purchased
by such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; PROVIDED, HOWEVER, that in the event that the aggregate amount of
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such non-defaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any non- defaulting Underwriter,
the Selling Stockholders or the Company. In the event of a default by any
Underwriter as set forth in this Section 9, the Closing Date shall be postponed
for such period, not exceeding five Business Days, as the Representatives shall
24
determine in order that the required changes in the Registration Statement and
the Prospectus or in any other documents or arrangements may be effected.
Nothing contained in this Agreement shall relieve any defaulting Underwriter of
its liability, if any, to the Company, the Selling Stockholders and any
non-defaulting Underwriter for damages occasioned by its default hereunder.
10. TERMINATION. This Agreement shall be subject to
termination in the absolute discretion of the Representatives, by notice given
to the Company and the Selling Stockholders prior to delivery of and payment for
the Securities, if (a) at any time subsequent to the execution and delivery of
this Agreement and prior to such time (i) trading in the Company's Common Stock
shall have been suspended by the Commission or the New York Stock Exchange or
trading in securities generally on the New York Stock Exchange shall have been
suspended or limited or minimum prices shall have been established on such
Exchange, (ii) a banking moratorium shall have been declared either by Federal
or New York State authorities or (iii) there shall have occurred any outbreak or
escalation of hostilities, declaration by the United States or the United
Kingdom of a national emergency or war, or other calamity or crisis that is
material and adverse and
(b) in the case of any of the events specified in clauses 10(a)(i) through
10(a)(iii), the effect of such event, singly or together with any other such
event, makes it, in the judgment of the Representatives, impractical or
inadvisable to proceed with the offering or delivery of the Securities as
contemplated by the Prospectus (exclusive of any supplement thereto).
11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of each Selling Stockholder and of the Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter,
any Selling Stockholder or the Company or any of the officers, directors,
employees, agents or controlling persons referred to in Section 8 hereof, and
will survive delivery of and payment for the Securities. The provisions of
Sections 7 and 8 hereof shall survive the termination or cancelation of this
Agreement.
12. NOTICES. All communications hereunder will be in writing
and effective only on receipt, and, if sent to the Representatives, will be
mailed, delivered or telefaxed to the Salomon Smith Barney Inc. General Counsel
(fax no.: (212) 816-7912) and confirmed to the General Counsel, Salomon Smith
Barney Inc., at 388 Greenwich Street, New York, New York, 10013, Attention:
General Counsel; if sent to the Company, will be mailed, delivered or telefaxed
to 44(0)20 7481 7183 and confirmed to it at Ten Trinity Square, London, England,
EC3P 3AX, Attention: Corporate Secretary; or if sent to the Selling
Stockholders, will be mailed, delivered or telefaxed to each of the addresses or
telefax numbers set forth in Schedule II hereto.
13. SUCCESSORS. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and the
officers, directors, employees, agents and controlling persons referred to in
Section 8 hereof, and no other person will have any right or obligation
hereunder.
14. APPLICABLE LAW. This Agreement will be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York. The Company and
each Selling Stockholder hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in New York City in any
suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
25
15. COUNTERPARTS. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. HEADINGS. The section headings used herein are for
convenience only and shall not affect the construction hereof.
17. DEFINITIONS. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a legal holiday or a day on which banking institutions or
trust companies are authorized or obligated by law to close in New York
City.
"Commission" shall mean the Securities and Exchange
Commission.
"Consortium" shall mean Axa Insurance UK plc, Axa General
Insurance Group plc, Royal & Sun Alliance Insurance Group plc, The
Chubb Corporation, The Hartford Financial Services Group, Inc.,
Travelers Casualty and Surety Company and The Tokio Marine and Fire
Insurance Co., Limited.
"Consortium Registration Rights Agreement" shall mean the
Registration Rights Agreement dated July 21, 1998, among the Company
and the Consortium, as amended prior to the date of this Agreement.
"Effective Date" shall mean each date and time that the
Registration Statement, any post-effective amendment or amendments
thereto and any Rule 462(b) Registration Statement became or become
effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this
Agreement is executed and delivered by the parties hereto.
"Management Registration Rights Agreement" shall mean the
Management and Employee Shareholders' and Subscription Agreements dated
December 18, 1998, May 7, 1999, December 20, 1999, July 6, 2000, July
13, 2000, October 5, 2000, October 15, 2000, December 29, 2000 and
January 19, 2001 among TA I Limited, Mourant & Co. Trustees Limited and
certain management members of TA I Limited and its subsidiaries, as
amended prior to the date of this Agreement.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(a)(i) above and any preliminary prospectus
included in the Registration Statement at the Effective Date that omits
Rule 430A Information.
"Profit Sharing Registration Rights Agreement" shall mean the
Registration Rights Agreement dated December 18, 1998 between TA I
Limited and Overseas, as amended prior to the date of this Agreement.
26
"Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 424(b) after the
Execution Time or, if no filing pursuant to Rule 424(b) is required,
shall mean the form of final prospectus relating to the Securities
included in the Registration Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a)(i) above, including exhibits and
financial statements, as amended at the Execution Time (or, if not
effective at the Execution Time, in the form in which it shall become
effective) and, in the event any post-effective amendment thereto or
any Rule 462(b) Registration Statement becomes effective prior to the
Closing Date, shall also mean such registration statement as so amended
or such Rule 462(b) Registration Statement, as the case may be. Such
term shall include any Rule 430A Information deemed to be included
therein at the Effective Date as provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules
under the Act.
"Rule 430A Information" shall mean information with respect to
the Securities and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule
430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b)
relating to the offering covered by the registration statement referred
to in Section 1(a)(i) hereof.
"Senior Credit Facility" shall mean the Credit Agreement,
dated as of July 22, 1998, and amended and restated as of February 19,
1999 and amended as of January 1, 2001, among Willis Corroon
Corporation, as borrower, Willis Corroon Group Limited and Trinity
Acquisition plc, as guarantors, the Lenders thereunder and JPMorgan
Chase Bank (as successor to the Chase Manhattan Bank), as
administrative agent and collateral agent.
27
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company and the several Underwriters.
Very truly yours,
WILLIS GROUP HOLDINGS LIMITED
by
--------------------------------------------
Name:
Title:
PROFIT SHARING (OVERSEAS), LIMITED
PARTNERSHIP
by KKR 1996 FUND (OVERSEAS),
LIMITED PARTNERSHIP,
its general partner,
by KKR ASSOCIATES II (1996),
LIMITED PARTNERSHIP,
its general partner,
by KKR 1996 OVERSEAS LIMITED,
its general partner,
by
--------------------------------------------
Name:
Title:
FISHER CAPITAL CORP. L.L.C.
by
--------------------------------------------
Name:
Title:
THE CHUBB CORPORATION
by
--------------------------------------------
Name:
Title:
28
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
Salomon Smith Barney Inc.,
J.P. Morgan Securities Inc.
by Salomon Smith Barney Inc.,
by
-----------------------------------
Name:
Title:
For itself and the other several Underwriters named in Schedule I to the
foregoing Agreement.
29
SCHEDULE I
NUMBER OF UNDERWRITTEN
SECURITIES TO BE
UNDERWRITERS PURCHASED
- ------------ ---------
Salomon Smith Barney Inc..................................................................................................
J.P. Morgan Securities Inc................................................................................................
Banc of America Securities LLC............................................................................................
Credit Suisse First Boston Corporation....................................................................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated........................................................................
Morgan Stanley & Co. Incorporated.........................................................................................
UBS Warburg LLC...........................................................................................................
[Other Underwriters]
Total: ........................................................................................................16,000,000
30
SCHEDULE II
NUMBER OF UNDERWRITTEN MAXIMUM NUMBER
NUMBER OF UNDERWRITTEN OF OPTION SECURITIES
SELLING STOCKHOLDERS: SECURITIES TO BE SOLD TO BE SOLD
- --------------------- --------------------- ----------
Profit Sharing (Overseas), Limited
Partnership
Ugland House
P.O. Box 309
George Town, Grand Cayman
Cayman Islands, B.W.I.
Fax: (212) 750-0003....................
Fisher Capital Corp. L.L.C. 8 Clarke
Drive
Cranbury, NJ 08512
Fax: (609) 409-1235.....................
The Chubb Corporation
15 Mountain View Road
Warren, NJ 07059
Fax: (908) 903-3607
Total: .......................... 16,000,000 2,400,000
========== =========
31
SCHEDULE III
COMPANY NAME OWNED
- ------------ -----
Venture Reinsurance Company Limited 90%
Willis SA 60%
Willis Faber Chile Limitada 100%
Willis Faber Chile Corredores de Reaseguro Limitada 99.8%
Willis Correa Insurance Services S.A. 80%
Suma Corresdores de Seguros S.A. 51%
PT Willis Corroon BancBali 50.34%
BMZ-Willis Agente de Seguros y de Fianza, S.A. de C.V. 51%
Willis Sev Dahl AS 50.1%
Willis Sev Dahl Stavanger AS 100%
Willis Polska S.A. 70%
Willis South Africa Pty Limited 70%
Bolgey Holding S.A. 60%
Willis Iberia Correduria de Seguros y Reaseguros SA 53%
Willis Correstores de Seguros SA 53%
Willis ANDAL Correduria de Seguros SA (Seville) 53%
Willis AB 82%
Willis Employee Benefits AB 76%
Willis Faber Kirke Van-Orsdel Limited (in liquidation) 51%
Willis New Zealand Limited 99%
G.I.S. Statewide Pty Limited 67%
Willis B.V. 100%
Rontarca-Prima Y Asociados, C.A. 51%
Plan Administrativo Rontarca Salud, C.A. 51%
Segur Auto 911, C.A. 51%
C.A. Prima 51%
Willis Kft 80%
Willis Italia Holding S.p.A.* 67%
Willis Italia S.p.A 100%
Willis Re Italia S.p.A. 99.9%
Willis GmbH & Co. K.G. 66.6%
* Majority equity interest held.
32
SCHEDULE IV
Significant Subsidiaries:
Willis Group Limited
Willis Limited
Willis North America Inc.
Willis Faber Limited
33
SCHEDULE V
[List all Directors and General Executive Committee members of the Company]
1. Joseph J. Plumeri, Chairman, Chief Executive Officer and Director
2. Henry R. Kravis, Director
3. George R. Roberts, Director
4. Perry Golkin, Director
5. Todd A. Fisher, Director
6. Scott C. Nuttall, Director
7. James R. Fisher, Director
8. Paul M. Hazen, Director
9. Frederick Arnold, Group Executive Vice President, Strategic Development
10. William P. Bowden, Jr., Group General Counsel
11. Richard J. S. Bucknall, Group Chief Operating Officer
12. Thomas Colraine, Group Chief Financial Officer
13. Janet Coolick, Group Chief Administrative Officer
14. Brian D. Johnson, Chief Executive Officer of the North American
operations
15. Patrick Lucas, Executive Vice President; Managing Partner of Gras Savoye
16. Stephen G. Maycock, Group Human Resources Director
17. Joseph M. McSweeny, Chairman and Chief Executive Officer of Global Risk
Solutions
18. Grahame J. Millwater, Chief Operating Officer of Willis Re.
19. John M. Pelly, Chairman and Chief Executive Officer of Willis Re.
20. James A. Ratcliffe, Chief Executive of Global Specialties
21. Sarah J. Turvill, Chief Executive Officer of International operations
(excluding United Kingdom and North America)
22. Mario Vitale, Executive Vice President----Group Sales and Marketing
34
Exhibit A
[LETTERHEAD OF COMPANY SHAREHOLDER]
WILLIS GROUP HOLDING LIMITED
PUBLIC OFFERING OF COMMON STOCK
May __, 2002
Salomon Smith Barney Inc.
J.P. Morgan Securities Inc.
Banc of America Securities LLC
Credit Suisse First Boston Corporation
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
UBS Warburg LLC
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the
proposed Underwriting Agreement (the "Underwriting Agreement"), between Willis
Group Holdings Limited (the "Company"), and you as representatives of a group of
Underwriters named therein, relating to an underwritten public offering of
Common Stock, par value $0.000115 per share (the "Common Stock"), of the
Company.
In order to induce you and the other Underwriters to enter into
the Underwriting Agreement, the undersigned will not, without the prior written
consent of Salomon Smith Barney Inc. and J.P. Morgan Securities Inc., offer,
sell, contract to sell, pledge or otherwise dispose of, (or enter into any
transaction which is designed to, or might reasonably be expected to, result in
the disposition (whether by actual disposition or effective economic disposition
due to cash settlement or otherwise) by the undersigned or any affiliate of the
undersigned or any person in privity with the undersigned or any affiliate of
the undersigned), directly or indirectly, including the filing (or participation
in the filing) of a registration statement with the Securities and Exchange
Commission in respect of, or establish or increase a put equivalent position or
liquidate or decrease a call equivalent position within the meaning of Section
16 of the Securities Exchange Act of 1934, as amended, and the rules and
regulations of the Securities and Exchange Commission promulgated thereunder
with respect to, any shares of capital stock of the Company or any securities
convertible into, or exercisable or exchangeable for such capital stock, or
publicly announce an intention to effect any such transaction, for a period of
90 days after the date of the Underwriting Agreement, other than shares of
Common Stock disposed of as bona fide gifts approved by Salomon Smith Barney Inc
and J.P. Morgan Securities Inc.
35
Notwithstanding the foregoing, it is agreed that the following
transfers are not subject to the restrictions set forth in this letter and may
be made without the consent of Salomon Smith Barney Inc. and J.P. Morgan
Securities Inc.:
(1) transfers by the undersigned to its affiliates who agree to be
bound by the terms hereof; and
(2) transfers by the undersigned to bona fide family members or
trusts who agree to be bound by the terms hereof.
If for any reason the Underwriting Agreement shall be terminated
prior to the Closing Date (as defined in the Underwriting Agreement), the
agreement set forth above shall likewise be terminated.
Yours very truly,
---------------------------
[SIGNATURE OF
COMPANY
SHAREHOLDER]
[NAME AND ADDRESS
OF COMPANY
SHAREHOLDER]
36
EXHIBIT 5.1
[LETTERHEAD OF APPLEBY SPURLING & KEMPE]
14 May 2001
The Bank of New York
as Transfer Agent and U.S. Branch Registrar
1 Wall Street
New York, NY 10286
USA
Dear Sirs
WILLIS GROUP HOLDINGS LIMITED (THE "COMPANY")
We have acted as Bermuda counsel to the Company, and this opinion as to
Bermuda law is addressed to you in connection with the filing by the Company
with the United States Securities and Exchange Commission under the Securities
Act of 1933, as amended, of a Registration Statement on Form F-1 and related
documents (the "Registration Statement") in relation to the sale by certain
shareholders of the Company (the "Shareholders") of 16,000,000 of the issued
common shares of the Company, US$0.000115 par value per share (the "Shares"),
held by them. The underwriters have been granted an option to purchase up to
2,400,000 additional shares from certain of the Shareholders to cover over
allotments.
For the purposes of this opinion we have examined and relied upon the
documents listed, and in some cases defined, in the Schedule to this opinion
(the "Documents").
Unless otherwise defined herein or in the Schedule to this opinion, terms
defined in the Registration Statement have the same meanings when used in this
opinion.
ASSUMPTIONS
In stating our opinion we have assumed:
(a) the authenticity, accuracy and completeness of all Documents submitted
to us as originals and the conformity to authentic original Documents of
all Documents submitted to us as certified, conformed, notarised, faxed
or photostatic copies;
(b) the genuineness of all signatures on the Documents;
(c) the authority, capacity and power of each of the persons signing the
Documents which we have reviewed (other than the Company or its Directors
or Officers);
(d) that any statements of fact or law, other than as to Bermuda law, made
in any of the Documents are true, accurate and complete;
(e) that the records which were the subject of the Company Search were
complete and accurate at the time of such search and disclosed all
information which is material for the purposes of this opinion and such
information has not since the date of the Company Search been materially
altered;
(f) that the records which were the subject of the Litigation Search were
complete and accurate at the time of such search and disclosed all
information which is material for the purposes of this opinion and such
information has not since the date of the Litigation Search been
materially altered;
1
(g) that there are no provisions of the laws or regulations of any
jurisdiction other than Bermuda which would be contravened by the
transfer of the Shares or which would have any implication in relation to
the opinion expressed herein and that, in so far as any obligation to be
performed or action to be taken as described in the Registration
Statement is required to be performed or taken in any jurisdiction
outside Bermuda, the performance of such obligation or the taking of such
action will constitute a valid and binding obligation of each of the
parties thereto under the laws of that jurisdiction and will not be
illegal by virtue of the laws of that jurisdiction; and
(h) that the Resolutions are in full force and effect, have not been
rescinded, either in whole or in part, and accurately record the
resolutions passed by the Board of Directors of the Company in a meeting
which was duly convened and at which a duly constituted quorum was
present and voting throughout and that there is no matter affecting the
authority of the Directors not disclosed by the Constitutional Documents,
the Company Search, the Litigation Search, or the Resolutions, which
would have any adverse implication in relation to the opinions expressed
herein.
OPINION
Based upon and subject to the foregoing and subject to the reservations set
out below and to any matters not disclosed to us, we are of the opinion that:
(1) The Company is an exempted company validly organised and existing and in
good standing under the laws of Bermuda.
(2) All necessary corporate action required to have been taken by the
Company in connection with the original issuance by the Company of the
Shares, and all necessary corporate action required to be taken by the
Company in connection with the transfer of the Shares by the
Shareholders, pursuant to Bermuda law, has been taken by or on behalf of
the Company, and all necessary approvals of Governmental authorities in
Bermuda were duly obtained for the original issuance by the Company of
the Shares and have been duly obtained for the transfer by the
Shareholders of the Shares.
(3) Based solely upon the entries in the Share Registrar of the Company, the
shares are validly issued, fully paid and non-assessable shares in the
capital of the Company.
(4) There are no taxes, duties or other charges payable to or chargeable by
the Government of Bermuda, or any authority or agency thereof in respect
of the transfer of the Shares.
RESERVATIONS
We have the following reservations:
(a) We express no opinion as to any law other than Bermuda law and none of
the opinions expressed herein relates to compliance with or matters
governed by the laws of any jurisdiction except Bermuda. This opinion is
limited to Bermuda law as applied by the courts of Bermuda at the date
hereof.
(b) In paragraph (1) above, the term "good standing" means only that the
Company has received a Certificate of Compliance from the Registrar of
Companies in Hamilton Bermuda which confirms that the Company has neither
failed to make any filing with any Bermuda governmental authority nor to
pay any Bermuda government fee or tax, which might make it liable to be
struck off the Registrar of Companies and thereby cease to exist under
the laws of Bermuda.
2
(c) Any reference in this opinion to shares being "non-assessable" shall
mean, in relation to fully paid shares of the Company and subject to any
contrary provision in any agreement in writing between such company and
the holder of such shares, that no shareholder shall be bound by an
alteration to the Memorandum of Association or Bye-laws of the Company
after the date on which he became a shareholder, if and so far as the
alteration requires him to take, or subscribe for additional shares, or
in any way increases his liability to contribute to the share capital of,
or otherwise to pay money to, the Company.
(d) Searches of the Register of Companies at the office of the Registrar of
Companies and of the Supreme Court Causes Book at the Registry of the
Supreme Court are not conclusive and it should be noted that the Register
of Companies and the Supreme Court Causes Book do not reveal:
(i) details of matters which have been lodged for filing or registration
which as a matter of general practice of the Registrar of Companies
would have or should have been disclosed on the public file but have
not actually been registered or to the extent that they have been
registered have not been disclosed or do not appear in the public
records at the date and time the search is concluded; or
(ii) details of matters which should have been lodged for registration
but have not been lodged for registration at the date the search is
concluded.
(e) In order to issue this opinion we have carried out the Company Search as
referred to in the Schedule to this opinion and have not enquired as to
whether there has been any change since the date of such search.
(f) In order to issue this opinion we have carried out the Litigation Search
as referred to in the Schedule to this opinion and have not enquired as
to whether there has been any change since the date of such search.
(g) Where an obligation is to be performed in a jurisdiction other than
Bermuda, the courts of Bermuda may refuse to enforce it to the extent
that such performance would be illegal under the laws of, or contrary to
public policy of, such other jurisdiction.
DISCLOSURE
This opinion is addressed to you in connection with the filing by the
Company of the Registration Statement with the United States Securities and
Exchange Commission and is not to be made available to, or relied on by any
other person or entity, or for any other purpose, without our prior written
consent.
This opinion is addressed to you solely for your benefit and is neither to
be transmitted to any other person, nor relied upon by any other person or for
any other purpose nor quoted or referred to in any public document nor filed
with any governmental agency or person, without our prior written consent,
except as may be required by law or regulatory authority. Further, this opinion
speaks as of its date and is strictly limited to the matters stated herein and
we assume no obligation to review or update this opinion if applicable laws or
the existing facts or circumstances should change.
This opinion is governed by and is to be construed in accordance with
Bermuda law. It is given on the basis that it will not give rise to any legal
proceedings with respect thereto in any jurisdiction other than Bermuda.
Yours faithfully
/s/ Appleby Spurling & Kempe
3
SCHEDULE
1. Certified copies of the Memorandum of Association and Bye-Laws of the
Company (collectively referred to as the "Constitutional Documents").
2. A copy of the Registration Statement.
3. A copy of the permission dated 9 May 2002 given by the Bermuda Monetary
Authority under the Exchange Control Act 1972 and related regulations for
the free transferability of the Shares.
4. The entries and filings shown in respect of the Company on the file of the
Company maintained in the Register of Companies at the office of the
Registrar of Companies in Hamilton, Bermuda, as revealed by a search on 13
May 2002 (the "Company Search").
5. The entries and filings shown in respect of the Company in the Supreme Court
Causes Book maintained at the Registry of the Supreme Court in Hamilton,
Bermuda, as revealed by a search on 13 May 2002 in respect of the Company
(the "Litigation Search").
6. A Certificate of Compliance, dated 13 May 2002 issued by the Registrar of
Companies in respect of the Company.
4
EXHIBIT 23.2
[Letterhead of Deloitte & Touche]
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to the Registration Statement No.
333-87662 of Willis Group Holdings Limited of our report dated February 5, 2002,
appearing in the Prospectus, which is a part of such Registration Statement, and
to the reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche
Deloitte & Touche
May 15, 2002
