UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
or
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 333-74483-02
Willis Group Limited
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
Ten Trinity Square, London EC3P 3AX
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the
Act.
Title of each Name of each exchange
class on which registered
- ----------------- ---------------------------------
None None
- ---------------
Securities registered or to be registered pursuant to Section 12(g) of the
Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
9% Senior Subordinated Notes due 2009
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Ordinary Shares of par value 12.5p per share 481,735,594
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes __________ x No__________
Indicate by check mark which financial statement item the Registrant has
elected to follow.
Item 17 __________ Item 18 __________ x
1
TABLE OF CONTENTS
Page
Certain Definitions 3
Currency Translation 3
Information Concerning Forward-Looking Statements 3
PART I
Item 1 Identity of Directors, Senior Management and Advisers 4
Item 2 Offer Statistics and Expected Timetable 4
Item 3 Key Information 4
Selected Financial Data 4
Risk Factors 7
Item 4 Information on the Company 10
History and Development of the Company 10
Business Overview 10
Organizational Structure 17
Property, Plants and Equipment 18
Item 5 Operating and Financial Review and Prospects 18
Operating Results 20
Liquidity and Capital Resources 23
Item 6 Directors, Senior Management and Employees 27
Directors and Senior Management 27
Compensation 29
Board Practices 34
Employees 35
Share Ownership 35
Item 7 Major Shareholders and Related Party Transactions 37
Major Shareholders 37
Related Party Transactions 37
Item 8 Financial Information 37
Consolidated Statements and Other Financial Information 37
Significant Changes 41
Item 9 The Offer and Listing 41
Markets 41
Item 10 Additional Information 42
Memorandum and Articles of Association 42
Material Contracts 44
Exchange Controls 44
Taxation 44
Documents on Display 44
Item 11 Quantitative and Qualitative Disclosures about Market Risk 45
Item 12 Description of Securities Other Than Equity Securities 48
PART II
Item 13 Defaults, Dividend Arrearages and Delinquencies 49
Item 14 Material Modifications to the Rights of Security Holders and
Use of Proceeds 49
Item 15 Controls and Procedures 49
PART III
Item 17 Financial Statements 49
Item 18 Financial Statements 49
Item 19 Exhibits 49
2
Certain Definitions
The following definitions apply throughout this annual report unless the
context requires otherwise:
"Company" Willis Group Limited.
"Group" The Company and its subsidiaries.
"Guarantors" The Company and Willis Partners, each being a
Guarantor of the $550 million 9% Senior
Subordinated Notes due 2009.
"KKR" Kohlberg Kravis Roberts & Co. L.P.
"Notes" $550 million 9% Senior Subordinated Notes due
2009 issued by Willis North America and
guaranteed by the Company and Willis Partners.
"Ordinary Shares" The issued fully paid Ordinary Shares of par
value 12.5p per share in the Company.
"Shares" The shares of common stock Willis Group Holdings
Limited, par value $0.000115 per share.
"Trinity" Trinity Acquisition Limited, an entity formed by
KKR for the purposes of acquiring the Company in
1998 in a going private transaction.
"Willis Holdings" Willis Group Holdings Limited.
Currency Translation
The Company presents its financial statements expressed in pounds sterling.
In this annual report references to "US dollars", "US$" or "$" are to United
States ("US") currency and references to "pounds sterling", "sterling" or
"(L)" and "pence" or "p" are to the lawful currency of the United Kingdom of
Great Britain and Northern Ireland.
Unless otherwise indicated, in this annual report, translations of pounds
sterling to US dollars have been made at the rate of $1.61 = (L)1, the noon
buying rate in the City of New York for cable transfers in pounds sterling as
announced for customs purposes by the Federal Reserve Bank of New York (the
"Noon Buying Rate") on December 31, 2002. These translations should not be
construed as representations that the pound sterling amounts actually
represent such US dollar amounts or could be converted into US dollars at the
rate indicated or at any other rate. For additional information on exchange
rates between the pound sterling and the US dollar, see "Item 3 Key
Information - Selected Financial Data".
Information Concerning Forward-Looking Statements
We have included in this document 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. These
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results or
those anticipated, depending on a variety of factors such as general economic
conditions in different countries around the world, fluctuations in global
equity and fixed income markets, changes in premium rates, the competitive
environment and the actual cost of resolution of contingent liabilities.
Although we believe that the expectations reflected in forward-looking
statements are reasonable we can give no assurance that those expectations
will prove to have been correct. All forward-looking statements contained in
this document are qualified by reference to this cautionary statement. Further
information concerning the Group and its business, including factors that
potentially could materially affect the Group's financial results are
disclosed under Item 3 "Key Information - Risk Factors".
3
PART I
Item 1 - Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2 - Offer Statistics and Expected Timetable
Not applicable.
Item 3 - Key Information
Selected Financial Data
The selected consolidated financial data presented below at December 31,
2002 and 2001 and for each of the three years ended December 31, 2002, have
been derived from, and should be read in conjunction with, the audited
consolidated financial statements of the Group and the notes thereto that are
included elsewhere in this annual report. The selected consolidated financial
data presented below at December 31, 2000, 1999 and 1998 and for the years
ended December 31, 1999 and 1998 have been derived from the audited
consolidated financial statements of the Group and the notes thereto that are
not included in this annual report.
The Group prepares its consolidated financial statements in accordance with
UK GAAP, which differ in certain respects from US GAAP. Reconciliations of net
income and shareholders' equity reflecting the significant differences between
UK GAAP and US GAAP applicable to the Group are set forth in Note 30 of Notes
to the Financial Statements. Under UK GAAP, the acquisition of the Company by
Trinity has no impact on the historical amounts reported subsequently by the
Company and, accordingly, combined amounts for the year ended December 31,
1998 are presented. Under US GAAP, the purchase of the Company by Trinity
established a new basis of accounting for the purchased assets and liabilities
from September 2, 1998. Accordingly, under US GAAP, it is not appropriate to
present combined amounts for the year ended December 31, 1998.
4
Consolidated Income Statement Data
September 2 January 1
to to
Year ended December 31, December 31, September 1,
------------------------------------------------------------------- ------------ ------------
2002 2001 2000 1999 1998 1998 1998
$ $(a) $(a) $(a) $(a) $(a) $
------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(in millions, except per Ordinary Share amounts)
Amounts in accordance with UK
GAAP:
Operating revenues 1,734.2 1,423.7 1,305.4 1,239.8 1,190.0 413.2 776.8
========== ========== ========== ========== ========== ========== ==========
Operating income before
exceptional items 469.4 320.2 196.9 83.5 137.2 43.1 94.1
Exceptional items (b) -- -- -- (88.3) (67.6) (8.3) (59.3)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income/(loss) 469.4 320.2 196.9 (4.8) 69.6 34.8 34.8
Gain/(loss) on disposal/closure
of operations 1.5 (5.9) (7.7) 2.4 (48.6) (2.2) (46.4)
Share of profit/(loss) of
associates 14.1 10.4 7.0 10.7 10.5 (2.3) 12.8
Net interest income/(expense) 2.4 1.8 0.4 4.2 (5.3) (2.0) (3.3)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income/(loss) before taxation 487.4 326.5 196.6 12.5 26.2 28.3 (2.1)
Taxation (178.1) (116.4) (47.4) (22.6) (66.7) (44.3) (22.4)
Equity Minority Interests (11.8) (7.2) (2.3) (4.9) (4.4) (3.1) (1.3)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income/(loss) 297.5 202.9 146.9 (15.0) (44.9) (19.1) (25.8)
========== ========== ========== ========== ========== ========== ==========
Per Ordinary Share :
Net income/(loss) $0.62 $0.42 $0.31 $(0.03) $(0.10) $(0.04) $(0.06)
========== ========== ========== ========== ========== ========== ==========
Average number of ordinary
shares outstanding 481.7 479.3 476.5 470.8 425.4 427.1 424.6
========== ========== ========== ========== ========== ========== ==========
Amounts in accordance with US
GAAP:
Operating revenues 1,734.2 1,423.7 1,305.4 1,239.8 413.2 776.8
---------- ---------- ---------- ---------- ---------- ----------
Operating income/(loss) 418.5 161.4 155.0 (15.7) 12.9 (17.9)
Net interest income/(expense) 2.4 (0.5) 0.4 4.2 (2.0) (3.3)
---------- ---------- ---------- ---------- ---------- ----------
Income/(loss) before tax 420.9 160.9 155.4 (11.5) 10.9 (21.2)
Income tax expense (162.7) (98.0) (53.6) (19.7) (62.2) (21.5)
Equity in net earnings/(losses)
of associates 8.8 4.0 3.3 7.6 (5.0) 12.6
Minority Interest (11.8) (7.2) (2.3) (4.9) (3.1) (1.3)
---------- ---------- ---------- ---------- ---------- ----------
Net income/(loss) 255.2 59.7 102.8 (28.5) (59.4) (31.4)
========== ========== ========== ========== ========== ==========
Per Ordinary Share:
Net earnings/(loss) $0.53 $0.12 $0.21 $(0.06) $(0.14) $(0.07)
=============================== ========== ========== ========== ========== ========== ==========
5
Consolidated Balance Sheet Data
December 31,
-------------------------------------------------------------------
2002 2001 2000 1999 1998
$ $(a) $(a) $(a) $(a)
- ------------------------------------------------------------ ---------- ---------- ---------- ---------- ----------
(in millions)
Amounts in accordance with UK GAAP:
Total assets 9,819.5 9,523.7 8,230.2 7,669.7 7,596.6
Total long-term debt 566.1 784.4 951.4 979.6 456.1
Net assets 683.1 346.0 179.9 202.1 184.9
Share capital and share premium 319.7 300.1 300.1 290.9 134.5
Total shareholders' equity 658.4 330.5 160.7 184.4 171.6
Amounts in accordance with US GAAP:
Total assets 11,169.1 10,822.2 9,511.1 8,992.3 8,923.5
Total long-term debt 567.4 787.2 957.4 987.6 456.1
Net assets 1,812.3 1,585.5 1,416.5 1,479.5 1,484.7
Share capital and share premium 558.4 458.6 300.1 290.9 134.5
Total shareholders' equity 1,787.6 1,570.0 1,397.3 1,461.8 1,471.4
============================================================ ========== ========== ========== ========== ==========
(a) As restated, see Note 1 of Notes to the Financial Statements.
(b) Exceptional items charged against operating income in 1999 consisted of
additional provisions of $64.7 million for the pensions review,
restructuring charges of $17.0 million and financing costs of $6.6 million
and in 1998 consisted of additional provisions for the pensions review of
$41.4 million and costs of $26.2 million written off in connection with the
acquisition of the Company by Trinity.
Exchange Rates
The following table shows certain information concerning the Noon Buying
Rate for pounds sterling, expressed in US dollars per (L)1.00. The exchange
rate on March 28, 2003 was (L)1 = US$1.57.
Month's Month's
Highest Lowest
Exchange Exchange
Month Rate Rate
- -------------------------------------------------- ----------- -----------
February 2003 1.65 1.57
January 2003 1.65 1.60
December 2002 1.61 1.56
November 2002 1.59 1.54
October 2002 1.57 1.54
September 2002 1.57 1.53
================================================== =========== ===========
Calendar year At year end Average (i)
- -------------------------------------------------- ----------- -----------
1998 $1.66 $1.66
1999 $1.62 $1.61
2000 $1.50 $1.52
2001 $1.45 $1.44
2002 $1.61 $1.50
================================================== =========== ===========
(i) The average of the Noon Buying Rates at the last business day of each month
during the calendar year.
A significant portion of the Group's assets and liabilities, revenues and
expenses are denominated in currencies other than US dollars, principally
pounds sterling. For a discussion of the impact of exchange rate movements,
see Item 5 - "Operating and Financial Review and Prospects - Liquidity and
Capital Resources".
6
Risk Factors
This section describes the material risks affecting the Group's business.
These risks could materially affect the Group's business, its revenues,
operating income, net income, net assets and liquidity and capital resources
and, accordingly should be read in conjunction with any forward-looking
statements in this Annual Report on Form 20-F.
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 increasing over the last year, premiums have
been cyclical in nature and have varied widely based on market conditions.
From the late 1980s through late 2000, insurance premium rates 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 or 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 can 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 or divert management resources away from operating our
business.
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 UK subsidiaries, Willis Faber (Underwriting Management) Limited, to
another subsidiary, Sovereign Marine & General Insurance Company Limited (In
Scheme of Arrangement) ("Sovereign"), that was engaged in insurance
underwriting prior
7
to 1991 as well as 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 US subsidiary of ours, Baccala and Shoop Insurance Services,
prior to 1984 for certain insurance issuing companies.
See Item 8 "Financial Information - Legal Proceedings" 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 jurisdiction 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 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 Item 4 "Information on the Company - Business Overview - Regulation".
Put and Call Arrangements - We have entered into significant put and call
arrangements which may require us to pay substantial amounts to purchase
shares in one of our associates. Those payments would reduce our cash flow and
the funds available to grow our business.
In connection with many of our investments in our associates, we retain
rights to increase our ownership percentages of these associates over time
and, in some cases, the existing owners also have a right to put their shares
to us. The put arrangement in place for shares of our associate, Gras Savoye,
may require us to pay substantial amounts to purchase those shares, which may
cause a significant decrease in our liquidity and the funds available to grow
our business.
The rights under the put arrangement may be 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
before 2011, but have certain put rights on their death, disability or
retirement. Payments in connection with management put rights would not have
exceeded $35 million if those rights had been fully exercised at December 31,
2002.
Until 2005, the incremental 57% of Gras Savoye may be put to us at a price
equal to the greater of approximately 800 million French francs ($128 million
at December 31, 2002 exchange rates) or a price determined by a contractual
formula based on earnings and revenue, which at December 31, 2002 would have
amounted to approximately $197 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 arrangements may significantly exceed these
estimates.
8
See Item 5 "Operating and Financial Review and Prospects - Liquidity and
Capital Resources".
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 Item 4 "Information on the Company - Business Overview - 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 J. Plumeri, but also on the individual brokers and teams that service
our clients and maintain client relationships. The insurance brokerage
industry has in the past experienced intense competition for the services of
leading individual brokers and brokerage teams, and we have lost key
individuals and teams to competitors in the past. We believe that our future
success will depend in large part on our ability to attract and retain
additional highly skilled and qualified personnel and to expand, train and
manage our employee base. We may not be successful in doing so, because the
competition for qualified personnel in our industry is intense.
International Operations - Our significant non-US 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 US dollars. Our
US 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
9
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 2002:
Pounds Other
Sterling US Dollars Currencies
----------- ----------- -----------
Revenues 14% 57% 29%
Expenses 36% 43% 21%
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 US 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 US dollars together with sufficient US 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.
Item 4 - Information on the Company
History and Development of the Company
The Company is a wholly-owned subsidiary of Willis Holdings and the holding
company of a group which is one of the largest insurance brokers in the world.
We trace our history to 1828.
The Company is headquartered in London and the registered address and
contact details are:
Willis Group Limited,
Ten Trinity Square,
London EC3P 3AX.
Tel: +44 (0)20 7488 8111.
The Company is incorporated in Great Britain and registered in, and operates
under, the laws of England and Wales.
Our ultimate parent, Willis Holdings, was incorporated in Bermuda on
February 8, 2001 as an exempted company under the Companies Act 1981 of
Bermuda, as amended, for the sole purpose of redomiciling our ultimate parent
company at that time, TA I Limited ("TA I"), from the United Kingdom to
Bermuda. On incorporation Willis Holdings was wholly-owned by Profit Sharing
(Overseas), Limited Partnership, an affiliate of KKR and one of the existing
shareholders of TA I.
Business Overview
General
We provide a broad range of value-added risk management consulting and
insurance brokerage services to in excess of 50,000 clients worldwide. We have
significant market positions in the United States, in the United Kingdom and,
directly and through our associates, in many other countries. We
10
are one of three recognized leaders in providing specialized risk management
advisory and other services on a global basis to clients in various industries
including the aerospace, marine, construction 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; 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 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 about 300
offices in some 80 countries, in each case including our associates, 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.
Business Strategy
Our strategic objectives are to continue to grow revenues, cash flow and
earnings and to enhance our position as one of the largest global providers 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 a strong, global
franchise, emphasize our value-added services, focus on cross-selling our
services, increase efficiencies, implement global best practices and create a
single company structure. We also pursue strategic acquisitions and
investments to strengthen our global franchise.
Our Business
Insurance is a global business, and its participants are affected by global
trends in capacity and pricing. Accordingly, we operate as one global business
which ensures all clients' interests are handled efficiently and
comprehensively, whatever their initial point of contact. We organize our
business into three main areas: Global, North America and International. For
information regarding segment revenue, see Note 3 of Notes to the Consolidated
Financial Statements contained herein.
Global
Our Global business provides specialist brokerage and consulting services to
clients worldwide for the risks arising from 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 around 180 countries, primarily from United Kingdom
offices, although we also serve clients from offices in the United States,
Continental Europe and Asia.
11
The Global business is divided into Global Specialties, Global Markets,
Willis Risk Solutions, Global Reinsurance and UK and Republic of Ireland
Retail.
Global Specialties has strong global positions in aerospace, marine,
construction and several niche businesses. In aerospace we are highly
experienced in the provision of insurance and reinsurance brokerage and risk
management services to aerospace 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, contract and leasing risk management, safety services
and markets information. Aerospace is also a leading reinsurance broker of
aerospace risks. Aerospace's clients are spread throughout the world and
include 250 airlines and more than 40% of the world's leading insured non-
American airports by passenger movement. Aerospace is also prominent in
supplying the space industry through providing insurance and risk management
services to over 40 companies. Other clients include those introduced from
other intermediaries as well as insurers seeking reinsurance.
We provide marine insurance and reinsurance 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 dating
back to our establishment in 1828. Other services of marine include claims
collection and recoveries.
The construction practice provides risk management advice and places cover
for a wide range of UK and international construction activities. These range
from domestic home buildings to such major complex projects such as Hong
Kong's Chek Lap Kok airport and the deactivation of the Chernobyl nuclear
power plant.
We have four niche business areas: Fine Art, Jewellery, and Specie; Special
Contingency Risks; Hughes-Gibb; and Willis Commercial Network.
The Fine Art, Jewellery, 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 insurers
worldwide. The Willis Commercial Network comprises franchise partnerships with
more than 50 privately-owned local UK insurance brokers and is designed to
enable them to meet the insurance requirements of small companies and
individuals.
Global Markets comprises Global Markets North America, Global Markets
International, Global Markets Structured Financial Solutions, Global Markets
Bermuda and Global Markets Carrier Relations. Global Markets North America
develops global solutions and marketing capability for all our businesses
based in North America. The core areas of focus are property, casualty and
management liability risks. Our business links with the UK and International
retail networks to further develop access to global markets, and provide
structuring and placing skills in the relevant areas of property, casualty and
management liability. This unit also includes the specialist global energy
business. Global Markets Structured Financial Solutions specializes in
strategic risk assessment, transactional risk transfer and alternative risk
financing solutions. It incorporates our market-leading political risk unit,
as well as structured finance and credit teams. Global Markets Bermuda enables
our clients around the world to benefit from the increasing insurance and
reinsurance capacity in Bermuda. Over the years it has built up a significant
placing capability for complex risks to provide access to the capacity
available, in particular for casualty and management liability risks. Finally,
Global Markets Carrier
12
Relations analyzes, oversees and coordinates our Group activities and
relationships with underwriting markets globally.
Willis Risk Solutions arranges tailored solutions for major companies
including constituents of the UK FTSE 250. Its retail broking services are
provided by teams specializing in major industry sectors. It also provides
extensive advisory services in business risk practice, operational risk
management, loss management, captive management, environmental and revenue
enhancement.
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, financial
and balance sheet analysis and reinsurance optimization studies. We also have
a consulting unit, which markets its capabilities in actuarial and hazard
modeling, as well as knowledge of the financial implications of catastrophe
losses.
The UK and Republic of Ireland Retail offers risk management and brokering
services to corporate clients and individuals through approximately 17
offices. Each office services its own clients accessing the Group's global
resources as appropriate to suit the clients' requirements.
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.
In addition, we supply specialist consulting and brokerage services, including
construction; employee benefits; healthcare; and advanced risk management
services. Our North America business operates through a network of more than
80 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.
The North America business comprises both our large account and middle
market units which were brought together after the year end. This amalgamation
will enable us to service our clients and present ourselves to prospects in a
consistent manner, without regard for the size, geography or industry of the
audience.
The construction division specializes in providing risk management,
insurance and surety bonding services to the construction industry. This
division provides services to around one-fifth of the Engineering New Record
Top 400 contractors (a listing of the largest 400 North American contractors
based on revenue). It also has one-third of the US largest homebuilders as
clients. 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 in the
United States. 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, 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 support
facilities, which we refer to as centers of excellence, provide fast, focused
and tailored support services to clients from Nashville, Tennessee and in
Phoenix, Arizona.
We also have a wholesale unit that provides specialist services to the US
insurance industry. The major entity within the unit is Stewart Smith which
assists brokers by offering advice and 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.
13
International
Our International unit consists of a network of subsidiaries and associates
other than those in North America, the United Kingdom and Republic of Ireland.
This operation is located in 72 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 2002, combined total revenues of our International
subsidiaries and our associates were $540 million compared to $478 million in
2001. Our consolidated total revenues for 2002 only include the revenues of
our International subsidiaries of $257 million and do not include the revenues
of our associates of $283 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 is
the 33% interest in Gras Savoye, France's leading insurance broker and the
tenth largest broker in the world. During 2002, we increased our investment in
Willis GmbH, Germany's third largest insurance broker, from 45% to 78%,
increased our ownership in businesses in Australia, Indonesia and Italy and
acquired a 100% interest in two Swedish companies, Propacta Pensionsplanering
AB and Kombro Risk Management AB. In January 2003, we increased our investment
in Willis GmbH to 100% and increased the ownership in Willis Iberia Correduria
de Seguros y Reaseguros SA to 77%, with our French associate, Gras Savoye
owning the other 23%.
The following is a list of the major International associate investments
currently held by us and our interest as of December 31, 2002:
Company Country % Ownership
------------------------------------------- ------------------------- -------------------------
Europe
Gras Savoye & Cie France 33%
Willis A/S Denmark 30%
Asia/Pacific
Multi-Risk Consultants (Thailand) Limited Thailand 25%
Willis (Malaysia) Sdn. Bhd Malaysia 30%
Willis 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 Item 5 "Operating and Financial Review and
Prospects - Liquidity and Capital Resources".
14
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 December 31, 2002:
Company Country % Ownership
------------------------------------------- ------------------------- -------------------------
Europe
Willis Re GmbH & Co., K.G. Germany 100%
Propacta Pensionsplanering AB Sweden 100%
Willis AB Sweden 80%
Willis Global Financial and Executive Risks AB Sweden 75%
Willis OY AB Finland 100%
Willis GmbH & Co. K.G.(1) Germany 78%
Willis Italia Holding S.r.l. Italy 67%
Willis Iberia Correduria de Seguros y Reaseguros S.A.(2) Spain 54%
Willis A.S.(3) Norway 50%
Willis Corretores de Seguros S.A. Portugal 54%
Willis B.V. Netherlands 100%
Willis CIS L.L.C. Russia 100%
Willis Polska S.A. Poland 70%
Willis sro Czech Republic 100%
Willis Kft Hungary 80%
Willis A.G. Switzerland 100%
Asia/Pacific
Willis China (Hong Kong) Limited Hong Kong 100%
PT Willis Indonesia Indonesia 100%
Willis Korea Limited Korea 100%
Willis (Singapore) Pte Ltd Singapore 100%
Willis (Taiwan) Limited Taiwan 100%
Rest of the World
Willis 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 Corretores de Seguros Limitada 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%
Willis Agente de Seguros y Fianzas, S.A. de C.V. Mexico 51%
Willis South Africa (Pty) Limited South Africa 70%
Rontarca Prima Willis, C.A. Venezuela 51%
Willis Colombia Corredores de Seguros S.A. Colombia 51%
(1) Increased to 100% interest in January 2003.
(2) Increased to 84.6% in January 2003.
(3) We have a 50.1% interest in the company.
15
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. No one client accounted for more than 10% of revenues for fiscal year
2002. Additionally, we place insurance with over 5,000 insurance carriers,
none of which individually accounted for more than 9% of the total premiums we
placed on behalf of our clients in 2002.
Competition
We face competition in all fields in which we operate. According to the July
2002 edition of Business Insurance, the 173 largest commercial insurance
brokers globally reported brokerage revenues totalling $24.4 billion in 2001.
The insurance brokerage industry, having recently gone through a period of
rapid consolidation, is led by three global participants: Marsh & McLennan
Companies, Inc., with approximately 30% of the worldwide market referred to
above; Aon Corporation, with approximately 23% 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 4% of the worldwide market.
Competition in the insurance brokerage 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 are
currently retaining a greater proportion of their risk portfolios than
previously. Industrial and commercial companies are increasingly relying upon
captive insurance companies, self-insurance pools, risk retention groups,
mutual insurance companies and other mechanisms for funding their risks,
rather than buying insurance. We provide management and similar services for
those alternative risk transfer programs. Additional competitive pressures
arise from the entry of new market participants, such as banks, accounting
firms and insurance carriers themselves, offering risk management or transfer
services. Our market share has been stable in recent years. We believe that
our strategies of building on our strong global franchise, expanding on our
employee benefit capabilities, increasing our operating efficiencies and
creating a single company culture will allow us to retain and gain clients in
the competitive marketplace. We also believe that our market position will
provide us with opportunities to acquire smaller companies with strong
regional presence or specialized expertise.
Regulation
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
16
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 broking 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.
The European Union Insurance Mediation Directive was adopted on September
30, 2002 and all European Union member states will have to implement the
Directive by January 2005. The Directive introduces rules to enable insurance
and reinsurance intermediaries to operate and provide services within each
member state of the EU on a basis consistent with the EU single market and
customer protection aims. Each EU member state is required to ensure that the
insurance and reinsurance intermediaries resident in their country are
registered with a statutory body in that country and that each intermediary
meets professional requirements in relation to their competence, good repute,
professional indemnity cover and financial capacity. In the United Kingdom the
statutory body will be the Financial Services Authority and as a consequence
such body will replace the General Insurance Standards Council and will become
the sole regulator over insurance and reinsurance intermediary activities in
the United Kingdom.
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 brokerage services and third
party administration within the United States are subject to regulation and
supervision by state authorities. Although the scope of regulation and form of
supervision may vary from jurisdiction to jurisdiction, insurance laws in the
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 brokerage 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.
Organizational Structure
Principal operating subsidiary undertakings
The Company is a holding company and its principal subsidiary companies are:
Investment Holding
Willis Faber Limited(a)
Willis Europe BV (incorporated and operates in the Netherlands)
Willis International Holdings Limited
Insurance brokerage and risk management
Willis Limited
Willis North America Inc. (incorporated and operates principally in the
United States)
Notes
(a) Held directly by the Company. All other undertakings are indirectly held.
(b) Unless stated otherwise, undertakings are incorporated in Great Britain,
registered in England and Wales and operate principally within the United
Kingdom.
17
Property, Plants and Equipment
We own and lease a number of properties for use as offices throughout the
world and believe that our properties are generally suitable and adequate for
the purposes for which they are used. The principal properties are located in
the United Kingdom and the United States. Our headquarters at Ten Trinity
Square in London is a landmark building which we own.
Item 5 - Operating and Financial Review and Prospects
The following discussion generally relates to the Group's historical
consolidated results of operations and financial condition and should be read
in conjunction with the consolidated financial statements included in this
annual report beginning on page F-1. These consolidated financial statements
have been prepared in accordance with UK GAAP, which differ in certain
respects from US GAAP. The principal differences between UK GAAP and US GAAP
as they relate to the Company and its subsidiaries are discussed in Note 30 of
the Financial Statements.
Overview
The Group provides 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 Group 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
Group 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 Group's global distribution network. The
Group also provides 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 revenue is commission based and varies based upon the
premiums on the policies we place 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
conflicting factors, 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 and 2002. We
anticipate premium rates will continue to rise, at least during 2003.
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 2002 for example, we generated 26% of our revenues in
the first quarter and 28% of our revenues in the fourth quarter. The second
and third quarters are less substantial revenue quarters, accounting for 24%
and 22% respectively, of 2002 revenues. Operating expenses, however, are
incurred on a relatively even basis throughout the year. As a result, we have
historically earned the majority of our operating income in the first and
fourth quarters, with the second and third quarters accounting for a lower
percentage of full year operating income. Operating income in 2002 as a
percentage of the full year was 31%, 22%, 17% and 30% for the first, second,
third and fourth quarters respectively.
We conduct our business in over 100 currencies. Accordingly, movements in
foreign currency exchange rates affect our results. Our exposure to market
risk from foreign currency exchange rates is
18
discussed below under Item 11 "Quantitative and Qualitative Disclosures about
Market Risk - Financial Risk Management". In the discussion below, we have
expressed certain percentage changes in terms of constant currency, meaning
that we have translated the foreign currency amounts included in the totals
for both periods using the same exchange rates rather than the applicable
actual exchange rates.
In recent years we have completed a number of acquisitions and dispositions
as part of our efforts to focus our business on our core broking activities
and to expand our global capabilities. During 2002, we increased our
investment in Willis GmbH, Germany's third largest insurance broker, from 45%
to 78%. In early 2002, we also acquired Richard N. Goldman & Co., a broker
based in San Francisco, California. We also completed two acquisitions in
Sweden, strengthening our leading share in that market place, and increased
our ownership to 100% of certain businesses in Australia and Indonesia. In the
fourth quarter of 2002, we announced the acquisition of Special Risk Advisors,
a sports and entertainment insurance broker based in Marietta, Georgia and
Sunaro, an employee benefits technology solutions company, based in Atlanta,
Georgia. The aggregate purchase price of these acquisitions was $50.9 million.
Subsequent to the 2002 year-end, we acquired the remaining 22% interest in
Willis GmbH and increased our ownership of Willis Iberia to 77%, with our
French associate, Gras Savoye, owning the other 23%.
During 2001, we increased our investment in Willis Italia Holdings S.p.A.
from 50.1% to 67% in exchange for the disposal of a subsidiary of that entity.
During 2000 we acquired several businesses in Latin America, South Africa and
Norway.
During 2002, we disposed of two third-party administration units and several
other non-core businesses. In 2001, we disposed of our 51% interest in Willis
National, an independent financial advisory business and the PENCO programs
division of our North America Wholesale operation.
Critical Accounting Policies
The Group's accounting policies are described in Note 1 to the consolidated
financial statements. Management believes that the following policies are the
most important to the portrayal of the Group's financial condition.
Revenue recognition
The Group 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 the later. Fees
for other services are generally recognized as the services are provided.
Negotiated fee arrangements for an agreed period covering the placement of
multiple insurances and the provision of risk management or other services are
becoming more widespread. This trend gives rise to judgements concerning the
allocation of revenue between accounting periods. This allocation is
determined, contract by contract, on the basis of the relative fair value of
the services completed and the services yet to be rendered.
Provisions
The Group has 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
effect on the Group's results of operations.
19
Further, as detailed in Note 21 to the financial statements, the Group has
established provisions for the costs of the UK 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, management believes that it
is unlikely that the eventual outcome will have a material adverse effect on
the Group's reported results.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 30 of Notes
to the Consolidated Financial Statements contained elsewhere in this Report.
Operating Results
2002 compared with 2001
Total revenues increased by $310.5 million (22%) to $1,734.2 million in 2002
from $1,423.7 million in 2001. Of this increase in revenues of 22%,
approximately 2% arose from the effects of foreign currency exchange rate
movements and approximately 2% was attributable to the effects of acquisitions
and disposals. Adjusting for these items, total revenues on an underlying
basis were 18% higher in 2002 than in 2001. We estimate the increase in
revenues was due 55% to net new business growth and 45% due to the impact of
higher premium rates prevailing in the market.
Operating income increased by $149.2 million (47%) to $469.4 million in 2002
from $320.2 million in 2001. In constant currency terms, operating income
increased by 50%.
Net income increased by $94.6 million (47%) to $297.5 million in 2002 from
$202.9 million in 2001.
Revenues
Revenues consist of commissions and fees, which increased by $303.5 million
(22%) to $1,660.2 million in 2002 from $1,356.7 million in 2001, and interest
income, which increased by $7.0 million (10%) to $74.0 million in 2002 from
$67.0 million in 2001.
Global: Revenues generated by our Global business increased by $150.4
million (20%) to $891.5 million in 2002 from $741.1 million in 2001. Of this
increase in revenues of 20%, approximately 5% arose from the effects of
foreign currency exchange rate movements. The disposal of Willis National in
July 2001 had a negative impact of approximately 3% on increased revenues.
Adjusting for these items, Global's revenues on an underlying basis increased
by 18%. Global's reinsurance and specialty businesses, particularly aerospace
and marine, continued to benefit from the rising premium rates prevailing in
these markets, although there were some indications of the rate of growth
slowing in some markets in the fourth quarter of 2002.
North America: Revenues generated by our North America business increased by
$79.8 million (16%) to $585.5 million in 2002 from $505.7 million in 2001. The
disposal of the third-party administration units, offset by the acquisition of
Goldman, negatively impacted the increase in revenues by approximately 1%.
Adjusting for these items, North America's revenues on an underlying basis
increased by 17%. Middle market and upper middle market experienced
significant premium rate increases across all lines.
International: Revenues generated by our International business increased by
$80.3 million (45%) to $257.2 million in 2002 from $176.9 million in 2001. Of
this increase in revenues of 45%, approximately 24% arose from our increased
investment in Willis GmbH, which resulted in full consolidation as a
subsidiary from January 1, 2002, and other acquisitions. The impact on
increased
20
revenues from the effects of foreign currency exchange rate movements was not
significant. Adjusting for these items, International's revenues on an
underlying basis increased by 21%, led by good performance in Continental
Europe, Eastern Hemisphere (especially Australia) and Latin America. We
believe that many new business wins resulted from co-ordinated efforts with
our Global specialty businesses.
Operating Expenses
Operating expenses increased by $161.3 million (15%) to $1,264.8 million in
2002 from $1,103.5 million in 2001. On an underlying basis, excluding
acquisitions and disposals, operating expenses were 11% higher in constant
currency terms than in 2001. Much of the increase related to revenue
generating expenses. We continued to invest in recruitment and training as
well as systems and information technology to enhance our client service and
management information capabilities. Increased revenues and profitability led
to higher performance-based compensation. However, the growth rate in revenues
more than outpaced expense growth leading to increased operating margins.
Operating Results
2001 compared with 2000
Total revenues increased by $118.3 million (9%) to $1,423.7 million in 2001
from $1,305.4 million in 2000. The effect of foreign exchange rate movements
had a negative impact of approximately 2% and the effect of acquisitions and
disposals had a negative impact of approximately 1% on the 9% increase in
total revenues. Adjusting for these items, total revenues on an underlying
basis 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 $123.3 million (63%) to $320.2 million in 2001
from $196.9 million in 2000. In constant currency terms, operating income
increased by 63%.
Net income increased by $56.0 million (38%) to $202.9 million in 2001 from
$146.9 million in 2000.
Revenues
Revenues consist of commissions and fees, which increased by $119.5 million
(10%) to $1,356.7 million in 2001 from $1,237.2 million in 2000, and interest
income, which fell by $1.2 million (2%) to $67.0 million in 2001 from $68.2
million in 2000.
Global: Revenues generated by our Global business increased by $68.1 million
(10%) to $741.1 million in 2001 from $673.0 million in 2000. The effect of
foreign exchange rate movements had a negative impact of approximately 2% and
the effect of the Willis National disposal in July 2001 had a negative impact
of approximately 4% on the 10% increase in revenues. Adjusting for these
items, Global's revenues on an underlying basis 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
$21.3 million (4%) to $505.7 million in 2001 from $484.4 million in 2000. The
disposal of the PENCO programs division in January 2001 negatively impacted
revenues by approximately 3%. Adjusting for this impact, North America's
revenues on an underlying basis increased by 7%, primarily attributable to
increased premium rates.
International: Revenues generated by our International business increased by
$28.9 million (20%) to $176.9 million in 2001 from $148.0 million in 2000. The
effect of foreign exchange rate movements had a negative impact of
approximately 6% and our acquisitions in Norway, Colombia and South
21
Africa contributed approximately 12% of the 20% increase in revenues.
Adjusting for these items, International's revenues on an underlying basis
increased by 14%. Most international insurance markets hardened in line with
UK and US markets, although rates lagged in some countries.
Operating Expenses
Operating expenses fell by $5.0 million to $1,103.5 million in 2001 from
$1,108.5 million in 2000. Severance and consulting expenses declined by $17.2
million in 2001 compared with 2000, equivalent to a decline of approximately
2% in expenses from 2000 to 2001. The effect of acquisitions and disposals was
approximately 2% and the impact of foreign currency exchange rate movements
was approximately 1%. Adjusting for these items, general and administrative
expenses on an underlying basis were 5% higher in 2001 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, expenses were flat in 2001 compared with 2000 as we
eliminated waste and improved productivity.
(Loss)/Gain on Disposal/Closure of Operations
In June 2002, we sold Safety Solutions, a small health and safety consulting
business in the UK, recognizing an $11.9 million loss on disposal, which
included a non-cash goodwill write-off of $11.1 million. Under UK GAAP,
goodwill arising on acquisitions occurring before January 1, 1998 was
immediately eliminated against reserves and on disposal is reinstated and
written off. In November 2002, we completed the sale of our life and health
third-party administration unit, based in Nashville, Tennessee, and Wichita,
Kansas. The gain on disposal amounting to $14.2 million included a goodwill
write-off of $3.0 million relating to reinstated goodwill previously
eliminated against reserves.
In July 2001, we completed the sale of Willis National, the UK independent
financial advisor in which we had a 51% interest. The gain on disposal
amounted to $18.6 million, net of a goodwill write-off of $3.8 million.. In
December 2001, we incurred a $13.3 million loss on disposal, including a net
goodwill write-off of $11.9 million, related to the restructure of Willis
Italia Holdings S.p.A., which involved the disposal of part of that business
in exchange for an increase in our ownership from 50.1% to 67%. Also, in
January 2001, the sale of PENCO, for which provision had been made in 2000,
was completed and related goodwill previously eliminated against reserves of
$11.2 million was reinstated and written off.
Associates
Our share of income before taxation of our associates rose by $3.7 million
to $14.1 million in 2002 as most of our associates, led by Gras Savoye in
France, reported higher earnings. In 2001, our share of income before tax of
our associates rose by $3.4 million to $10.4 million in 2001, mainly from
higher earnings of Gras Savoye and Willis GmbH. Willis GmbH became a
subsidiary from January 1, 2002.
Interest
Interest income in 2002 was $65.4 million compared with $83.8 million in
2001 and $88.2 million in 2000. The fall in interest income reflects lower
principal amounts outstanding on loans advanced to our indirect parent
company, Trinity Acquisition Limited.
Interest expense in 2002 was $63.0 million compared with $82.0 million in
2001 and $87.8 million in 2000, reflecting lower principal amounts of debt
outstanding following early repayment of term loans under our senior credit
facilities and the repurchase in the open market, and subsequent cancellation,
of senior subordinated notes.
22
Taxation
The tax charge for 2002 amounted to $178.1 million, giving an effective tax
rate of 37% compared with an effective rate of 36% in 2001 and 24% in 2000.
The tax charge for 2000 benefited from the recognition of tax relief on
provisions established in prior years.
Minority Interest
Minority interest increased by $4.6 million in 2002 to $11.8 million. This
increase was largely due to the consolidation of Willis GmbH from January 1,
2002, when that former associate became a subsidiary, and higher earnings of
our less than wholly-owned subsidiaries, notably within Continental Europe. In
2001, minority interest increased by $4.9 million to $7.2 million as a result
of higher earnings and acquisitions during 2000 in Latin America, South Africa
and Norway.
Differences between UK GAAP and US GAAP
Net income in 2002 of $297.5 million, $202.9 million in 2001 and for $146.9
million in 2000, under UK GAAP, compares with net income of $255.2 million,
$59.7 million and $102.8 million, respectively, under US GAAP.
The differences arise principally from the differing accounting treatment
for performance-based stock options, goodwill, derivative financial
instruments, pension costs and related deferred taxation. Details of
reconciling differences are given in Note 30 to the Financial Statements.
In addition to the critical accounting policies referred to above,
Management believes that the following policies on pension expense and
deferred tax are also important to the portrayal of the Group's financial
condition under US GAAP.
The key assumptions in determining pension expense for the Group's defined
benefit plans are the expected long-term rate of return on plan assets, the
expected long-term rate of compensation increase and the discount rate
applicable to the plan liabilities.
At December 31, 2002, the selected discount rates, based on AA-rated
corporate bonds, were 5.6% for the UK plan liabilities and 6.5% for the US
plan liabilities. A 0.25% change in these discount rates, in the absence of
any other factors, would impact 2003 net pension expense under US GAAP by
approximately $5 million. The selected long-term rates of return, based on the
asset mix of the respective funds, were 7.25% for UK plan assets and 8.5% for
US plan assets. A 0.25% change in the long-term rate of return would impact
2003 net pension expense under US GAAP by approximately $4 million.
At December 31, 2002, the Group had gross deferred tax assets of $272.9
million against which a valuation allowance of $70.7 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, the Group
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.
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 clients, as assets with a corresponding liability due to the
insurers. Claims held by, or due to, us
23
which are due to clients are also shown as both assets and liabilities. All
these 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 inflow from operating activities fell by $192.2 million to $490.8
million in 2002 from $683.0 million in 2001 having increased by $370.0 million
from $313.0 million in 2000. Net cash flow from operating activities for 2002
and 2001 was significantly impacted by higher than normal amounts of cash in
transit between clients and insurers at the 2001 year-end. Increasing revenues
and widening operating margins over the three-year period were the main
reasons for the underlying improvement in net cash from operating activities.
Although we discontinued our UK underwriting operations in 1991, we still
handle the administration of claims arising from insurance business previously
written by our subsidiary Willis Faber (Underwriting Management), on behalf of
Sovereign Marine & General Insurance Company Limited (in Scheme of
Arrangement) and third party insurance carriers. Cash payments in connection
with the renegotiated arrangements for administering the WFUM run-off amounted
to $5.8 million during 2002, $2.7 million in 2001 and $5.0 million in 2000. We
expect payments in 2003 will be around the same level as recent years.
Cash payments in connection with the government initiated review of personal
pension plans amounted to $11.8 million, $18.0 million and $20.8 million in
2002, 2001 and 2000, respectively. We expect the remaining provision of $22.8
million at December 31, 2002 to be paid out over the next year.
Capital expenditures for 2002, 2001 and 2000 less the proceeds from
disposals of fixed assets, were $43.5 million, $35.5 million and $23.2
million, respectively. Much of the increased capital expenditure in 2002
related to information technology systems. This is being managed in a
disciplined manner with future information technology expenditures not being
committed ahead of cash generation. We expect capital expenditures for 2003 to
rise modestly over 2002 levels. We have funded our requirements for capital
expenditures by cash generated internally from operations and expect to
continue to do so in the future.
During 2002, the net cash inflow for acquisitions less proceeds from
disposals amounted to $23.5 million and included proceeds of $24.2 million
mainly arising from the disposal of the third-party administration units.
During 2001, the net cash inflow for acquisitions less proceeds from disposals
amounted to $19.1 million and included proceeds of $29.7 million mainly
arising from the disposal of PENCO and Willis National. During 2000, the net
cash outflow for acquisitions less proceeds from disposals amounted to $8.7
million.
24
Contractual Obligations
Our contractual obligations at December 31, 2002 were:
Payments due by period
-----------------------------------------------------------------------
Less than 1 After 5
Obligations (millions) Total year 1-3 years 4-5 years years
- -------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Senior Credit Facility $ 157.2 $ - $ 82.8 $ 74.4 $ -
9% Senior Subordinated Notes 408.9 - - - 408.9
Operating leases 305.5 61.8 91.8 67.5 84.4
Put & call options relating to subsidiaries and
associates(1) 337.7 245.6 16.5 18.3 57.3
----------- ----------- ----------- ----------- -----------
Total contractual obligations $1,209.3 $307.4 $191.1 $160.2 $550.6
======================================================== =========== =========== =========== =========== ===========
(1) Based on the earliest dates on which options could be exercised.
In 1998, our wholly owned subsidiary, Willis North America entered into a
credit agreement consisting of a term loan facility of $450 million, and a
revolving credit facility of $150 million. The term loans were drawn in full
in 1998 to refinance certain of our existing indebtedness. During 2002, 2001
and 2000, repayments totaling $190.8 million, $59.5 million and $30.0 million,
respectively, were made. As a consequence, we are ahead of our repayment
schedule. As of December 31, 2002, the outstanding balance on the term loans
was $157.2 million. The next mandatory repayment under the facility is not due
until 2005, with final maturity in 2006. The revolving credit portion is
available for working capital requirements and general corporate purposes,
subject to certain limitations, and remained undrawn as of December 31, 2002.
Willis North America has entered into an interest rate swap agreement on
December 4, 1998 with JP Morgan Chase Bank under which its LIBOR-based
floating rate interest payment obligations on the full amount of the term
loans have been swapped for fixed rate interest payment obligations, resulting
in an effective base rate of 5.099% per annum, plus the applicable margin,
until the final maturity of those term loans. The swap agreement provides for
a reduction of the notional amount of the swap obligation on a semi-annual
basis and, to the extent the actual amount outstanding under the term loans
exceeds the notional amount at any time, Willis North America would be exposed
to the risk of increased interest rates on that excess.
In 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 2002 and 2001, Willis
North America, using cash from operations repurchased in the open market and
retired $29.0 million and $111.0 million, respectively, of these Notes. There
was no material gain or loss from the repurchase. As of December 31, 2002, the
principal amount outstanding was $410.2 million.
Total long-term debt outstanding at December 31, 2002 was $567.4 million,
down from $787.2 million at the end of 2001.
The Company and its subsidiaries may pay interest on any intercompany note
issued in favor of Trinity, and may make loans or pay dividends to Trinity in
an amount sufficient to enable Trinity to pay interest and principal then due
on any intercompany note, intercompany subordinated note or intercompany bank
note issued by Trinity, in each case so long as such amounts are immediately
repaid to the Company or its subsidiaries. The aggregate amount of
intercompany notes issued in favor of Trinity outstanding at December 31, 2002
was $410.2 million, the aggregate amount of intercompany notes issued by
Trinity outstanding was $652.8 million.
25
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 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. Until 2011, we will be obligated to buy the
shares of certain shareholders to the extent that those shareholders put their
shares, potentially increasing our ownership from 33% to 90% if all
shareholders put their shares, at a price determined by a contractual formula
based on earnings and revenue. Management shareholders of Gras Savoye
(representing approximately 10% of shares) do not have general put rights
before 2011, but have certain put rights on their death, disability or
retirement from which payments at December 31, 2002 based on the formula,
would not have exceeded $34.5 million. Until 2005, the incremental 57% of Gras
Savoye may be put to us at a price equal to the greater of approximately 800
million French francs ($127.9 million at December 31, 2002 exchange rates), or
a price based on the formula, which at December 31, 2002 amounted to
approximately $196.9 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.
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
our undrawn $150 million revolving credit facility.
Off Balance Sheet Transactions
Apart from commitments, guarantees and contingencies, as disclosed in Notes
26 and 27 of Notes to the Consolidated Financial Statements, the Group has no
off-balance sheet arrangements that have, or are reasonably likely to have, a
material effect on the Group's financial condition, results of operations or
liquidity.
26
Item 6 - Directors, Senior Management and Employees
Directors and Senior Management
The Group Executive Committee manages the operational business and strategic
direction of our operating subsidiaries. It consists of the Chairman and Chief
Executive Officer, directors and eight senior Group executives who are not
directors, whose ages and positions at January 1, 2003 are:
Name Age Position
- ---- --- --------
Joseph J. Plumeri 59 Chairman and Chief Executive Officer
Frederick Arnold 48 Group Executive Vice President, Strategic Development
William P. Bowden Jr. 58 Group General Counsel
Richard J. S. Bucknall 54 Group Chief Operating Officer
Thomas Colraine 44 Group Chief Financial Officer
Janet Coolick 59 Group Chief Administrative Officer
Patrick Lucas 63 Executive Vice President; Managing Partner of Gras Savoye
Stephen G. Maycock 50 Group Human Resources Director
Joseph M. McSweeny 53 Chairman of Willis Risk Solutions - North America
Grahame J. Millwater 39 Chief Executive Officer of Global Markets
John M. Pelly 49 Chairman and Chief Executive of Willis Re.
James A. Ratcliffe 49 Chief Executive of Global Specialties
Michael J. Sicard 33 Chief Operating Officer, Willis North America
Sarah J. Turvill 49 Chief Executive Officer of International operations (excluding United Kingdom
and North America)
Mario Vitale 47 Chief Executive Officer, Willis North America
Joseph J. Plumeri--Joseph J. Plumeri is our Chairman and a director and has
been a director of TA I Limited 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 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. He is also a board
member and advisor to many organizations, including The Board of Visitors of
the College of William & Mary, The United Negro College Fund, The National
Center on Addiction and Substance Abuse. He is also a commissioner of the New
Jersey Sports and Exposition Authority.
Frederick Arnold--Frederick Arnold is a member of the Group Executive
Committee and 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 US 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
27
Specialities, Risk Solutions UK, International Holdings, and UK and Republic
of Ireland Retail businesses. He also has responsibilities for the
discontinued United Kingdom underwriting operations. Mr. Bucknall has 36 years
of experience in the insurance broking industry, of which 17 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 15 years of experience in the insurance
brokerage industry, all 15 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.
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 36 years of experience in the insurance brokerage
industry.
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 six 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 and Chairman of Willis Risk Solutions - North America. 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. He
became Chairman and Chief Executive Officer of Global Risk Solutions on July
1, 2001. Mr. McSweeny has 26 years of experience in the insurance industry, of
which eight 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 Executive Officer of
Global Markets. Mr. Millwater joined the Willis Group in September 1985 and
has had several additional cross Group responsibilities during his career with
us. Mr Millwater has 17 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 of Willis Re., a position held since 1995.
Mr. Pelly has 31 years of experience in the insurance brokerage industry, all
31 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 Managing Director of
Granada's Air Travel Group of
28
companies. Prior to joining Granada Group, he was Managing Director of ADT
Security Systems, Britain's largest electronic security company. Mr. Ratcliffe
has 3 1/2 years of experience in the insurance brokerage industry, all of
which have been with us.
Michael J. Sicard--Michael J. Sicard became a member of the Group Executive
Committee on June 19, 2002 and is the Chief Operating Officer, Willis North
America. Mr. Sicard joined us in December 1998 as Director of Strategic
Planning and Development in Willis North America. Prior to joining the Willis
Group, Mr. Sicard was a senior engagement manager with McKinsey & Co., based
out of Atlanta, Georgia, serving as a consultant to Willis Group for
approximately two years.
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 25 years
of experience in the insurance brokerage industry, all of which have been with
us.
Mario Vitale--Mario Vitale is a member of the Group Executive Committee and
Chief Executive Officer of Willis North America. Mr Vitale joined us as a
Group Executive Vice President - Group Sales and Marketing on November 13,
2000 and was Chairman of Willis Risk Solutions from September 2002 to January
2003. 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 26 years of experience in the
insurance industry.
There are no family relationships among the directors and officers of the
Company.
Brian D. Johnson resigned as a director of the Company on December 31, 2002.
Compensation
In the year ended December 31, 2002, the aggregate compensation and benefits
paid to or accrued to all the directors and members of the Group Executive
Committee, except Mr. Lucas, as a group (15 persons) was $15,397,354. The
aggregate amount of compensation and benefits of Mr. Plumeri, the highest paid
director, in the year was $3,817,990.
The aggregate amount set aside or accrued to provide pension, retirement and
similar benefits for the directors and members of the Group Executive
Committee, except Mr. Lucas, during the year ended December 31, 2002 was
$726,956.
The compensation and pension contributions for Mr. Lucas are paid by his
employing company, our associate Gras Savoye.
Annual Incentive Plan
The Annual Incentive Plan provides a cash bonus to middle and senior
management as well as the directors and executive officers based on
predetermined corporate and individual performance objectives and criteria
which support the Group's overall goals.
Amended and Restated 1998 Stock Option Plan
The Amended and Restated 1998 Share Purchase and Option Plan for Key
Employees of Willis Holdings provides for the grant of time-based vesting
options, performance-based vesting options and various other share-based
grants to our employees to purchase Shares. The 1998 Plan is intended to
29
promote the Group's 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 shareholders of Willis Holdings through opportunities for increased
share ownership in that company.
As of March 7, 2003, of the time- and performance-based options granted,
24,946,165 remained unforfeited under the 1998 Plan. Under the 1998 Plan,
unless otherwise provided by the Board of Directors of Willis Holdings, 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 the Company'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 the Company's
achievement of the cash flow targets, and the remaining 70% of the
performance-based options are calculated based upon the Company's achievement
of the EBITDA targets. Effective from January 1, 2003, it was determined that
the targets had been achieved and the performance-based options would vest and
become exercisable in four equal annual installments, generally beginning on
the third anniversary of the date of grant. The exercisability of the options
may accelerate or terminate based on the circumstances surrounding an
optionee's termination of employment, and both time-based and performance-
based options may (in the discretion of Willis Holdings' Board of Directors),
fully accelerate upon a change in control of Willis Holdings.
Unless sooner terminated by Willis Holdings' Board of Directors, the 1998
Plan will expire 10 years after its adoption. That termination will not affect
the validity of any grant outstanding on the date of the termination of the
1998 Plan.
The Board of Willis Holdings and its compensation committee administer the
1998 Plan and may from time to time amend the terms of any grant, but, except
for adjustments made upon a change in the 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 with respect to the options without at least a majority of
the participants approving such action. The Willis Holdings' Board of
Directors retains the right to amend, suspend or terminate the 1998 Plan at
any time. No further grants are to be made under the 1998 Plan.
2001 Share Purchase and Option Plan
The Willis Group Holdings Limited 2001 Share Purchase and Option Plan (the
"2001 Plan") provides for the grant of options, to purchase Shares and
restricted Shares and other Share-based grants to any of the Group's employees
(including members of Willis Holdings' Board of Directors who are employees).
Members of Willis Holdings' Board of Directors who are not employees of the
Group may not receive awards under the 2001 Plan. Approximately 4,300
employees currently participate in the 2001 Plan, including Mr. Plumeri and
nine executive officers. The 2001 Plan is intended to accomplish the same
purposes as the 1998 Plan explained above.
As of March 7, 2003, options on 3,459,300 Shares and 222,218 restricted
Shares remained outstanding (whether vested or unvested). There are currently
10,000,000 shares available to be granted under the 2001 Plan, of which
5,000,000 may be granted to any one employee in any given calendar year. In
connection with certain of the option grants, employees have agreed and may in
the future agree to restrict the transferability of the Shares 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.
30
Stock options generally become exercisable on the sixth or eighth
anniversary of grant. Certain option grants may accelerate depending on the
achievement of certain performance goals and option grants may terminate based
on the circumstances surrounding an optionee's termination of employment. The
vesting and exercisability of options and other share-based awards may also be
accelerated, at the discretion of Willis Holdings' Board of Directors, upon a
change in control of that company.
Stock options granted under the 2001 Plan may be either incentive stock
options or non-qualified stock options. Any incentive stock options shall have
an exercise price at least equal to the fair market value of the Shares
subject to the option on the date of the grant. No stock option may have a
term that is longer than 10 years after the date the option is granted. Stock
options granted under the plan may have vesting periods, expiration dates, or
other restrictions, as the compensation committee of the Willis Holdings'
Board of Directors (the "Compensation Committee") in its sole discretion will
determine.
The Compensation Committee may grant to plan participants Shares subject to
certain restrictions. Subject to certain limitations, restricted Shares shall
not have a restriction period of less than 6 months.
The Compensation Committee may grant to plan participants the opportunity to
purchase Shares. The Compensation Committee also may grant to plan
participants awards that are denominated in units, payable in Shares,
including awards valued other than with respect to the fair market value of
the Shares.
Unless sooner terminated by the Board of Directors of Willis Holdings, the
2001 Plan will expire 10 years after its adoption. Any termination or
expiration will not affect the validity of any grant outstanding on the date
of the plan's termination or expiration.
Willis Holdings' Board of Directors and the 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 (including, without
limitation, the acceleration of the vesting of any award). The Compensation
Committee may from time to time amend the terms of any grant so long as such
amendment is consistent with the terms of the plan, and Willis Holdings' Board
of Directors retains the right to amend, suspend or terminate the 2001 Plan at
any time.
Bonus and Stock Plan
The Bonus and Stock Plan is a sub-plan of the 2001 Plan and provides for
awards of restricted stock units (the "Award") which is, except for UK
employees, simply a promise by Willis Holdings to deliver on the third
anniversary of the grant of an Award Shares equal to the Award. For all UK
employees, the Award takes the form of a Zero Cost Option. The Award is
determined in accordance with a formula based on the eligible bonus and the
quoted market price of the Share at the date of the Award. Further, Willis
Holdings matches the Award with an additional award of restricted stock units,
equal to 25% of the Award. As of March 7, 2003, restricted stock unit awards
over 211,915 Shares had been awarded and remain unforfeited, 59,697 of which
are in the form of zero cost options.
Sharesave Plans
Willis Holdings established in 2001 a "save as you earn" plan, which is
referred to as the Sharesave Plan, which has been approved by the Inland
Revenue of the United Kingdom, under which all executive directors and
employees of the Group 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. The Sharesave Plan is a sub-plan of
the 2001 Plan. Options may be granted with a sterling option price that is not
less than 80% of the market value of the Shares on the date of grant
31
and, where the Shares are to be subscribed, the nominal value if greater. The
options may vest in three, five or seven years' time, with each participant
being able to pay for his or her options by entering into a savings contract
with a savings provider under which he or she agrees to save a regular monthly
amount, not to exceed (L)250 per month. The current maximum monthly saving
amount per grant is (L)100. Options have been granted in 2001 and 2002 which
vest in August 2004 and July 2005 respectively. 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 of Willis Holdings,
options may be exercised within six months of the change of control.
The Board of Directors of Willis Holdings may determine the maximum number
of Shares available for any option grant. Options may be adjusted, subject to
the prior approval of the UK Inland Revenue, to reflect variations in the
share capital of Willis Holdings, including the capitalization, rights issue
and subdivision, consolidation or reduction in the capital of Willis Holdings.
Also, the Board of Directors of Willis Holdings may at any time amend the
Sharesave Plan, which amendments must be approved by the UK Inland Revenue
prior to taking effect in order to ensure that the Sharesave Plan retains its
tax-qualified status. However, the Board of Directors of Willis Holdings 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, Willis Holdings established an International Sharesave Plan, known
as TWISP, for employees of our subsidiaries who are resident under relevant
tax laws in 24 countries and an Irish Sharesave Plan for our employees in the
Republic of Ireland. Both plans operate on a similar basis to the Sharesave
Plan described above. The first offer under the plans was made in May 2002
with vesting in three years and a maximum monthly saving amount of (L)100 or
local currency equivalent.
As of March 7, 2003, 896,155 Shares remained unforfeited under the Sharesave
Plans.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan ("ESPP"), employees of certain of our
subsidiaries, currently US and Canadian subsidiaries, have the opportunity to
purchase up to a specified amount of Shares 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. In no event may a participant purchase more than $25,000
worth of Shares in any given calendar year. The purchase price for the Shares
will be the lesser of the closing price of a Share on the first day or the
last day of an offering period 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 that they will
purchase under the terms of the ESPP. As of March 7, 2003 143,878 Shares have
been issued under this plan.
Employee Stock Purchase Agreements
Shares purchased by employees and former employees, the options granted to
employees and Shares an employee may receive upon exercise of an option (all
as granted under the 1998 Plan), generally are subject to transfer
restrictions until the sixth anniversary of the date the employees originally
purchased their Shares. One exception to this transfer restriction allows an
employee to sell Shares under an effective registration statement at the time
Profit Sharing (Overseas), Limited Partnership, the majority shareholder of
Willis Holdings 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. Shares and options are also
subject to certain risks of forfeiture, in whole or in part, prior to
32
the sixth anniversary of the date the employees originally purchased their
shares, including, without limitation, Willis Holdings' right to repurchase
the Shares and to terminate exercisable options at a stated repurchase or
termination price, which price ranges from the fair market value of the Shares
to the Market Price per Share (as defined in the 1998 Plan) (for Shares
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) sells all or a portion of its Shares to an unaffiliated
third party, the Shares 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
The Company maintains Employee Share Ownership Plans, which as of March 7,
2003, held 779,003 Shares on behalf of the Company's directors, officers and
other Group employees. These Shares were acquired by the Plans at the time of
the 1998 acquisition of the Company by Trinity, 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), 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 (L)1 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 those 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 options are, as also described
above, required by Profit Sharing (Overseas) to be sold to a third party, the
participants 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 Willis Holdings including the capitalization, rights issue and
subdivision, consolidation or reduction in the capital of Willis Holdings. The
Board of Directors of Willis Holdings may amend the provisions of the Zero
Cost Share Option Scheme at any time; however, the Board of Directors of
Willis Holdings 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 of the Company by
Trinity, which through its trustees, is a party to the Management and Employee
Shareholders' and Subscription Agreement, which governs the Shares purchased
by our employees. Under this agreement, the trust can be required to purchase
Shares 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 and the power to sell Shares at fair market
value to current employees which is undertaken in connection with certain
option grants under the 2001 Plan. As of March 7, 2003, the trust had an
interest in 903,635 Shares which can be purchased by employees or used to
satisfy options grants made by us. As of March 7, 2003, 331,250 of the Shares
held by the trust were reserved to satisfy option grants when exercised.
33
Others
We also maintain a deferred compensation plan for certain employees that
allows employees to defer a portion of their annual compensation and Willis
North America Inc. has a 401(k) plan covering all eligible employees of Willis
North America and its subsidiaries. Shares are available as an investment
option to participants in Willis North America's 401(k) plan.
Board Practices
The employment contracts of the directors and executive officers generally
provide for between six and twelve months' notice.
On October 15, 2000, Willis North America Inc. entered into a five-year
employment agreement with Joseph J. Plumeri, pursuant to which Mr. Plumeri
receives an annual $1,000,000 base salary, plus a guaranteed $1,000,000 annual
bonus (subsequently waived for 2002 and 2003) and an additional annual
discretionary bonus provided for therein. The agreement also contains certain
non-compete covenants.
In respect of 2001, Mr. Plumeri received a base salary of $1,000,000, plus
his contractually guaranteed $1,000,000 bonus. Mr. Plumeri was awarded an
additional $756,000 discretionary bonus determined by the Board of Directors
of Willis Holdings for extraordinary performance, after taking into account
$244,000 of corporate costs relating to Willis Holdings' private airplane and
other travel, lodging and business entertainment expenses for which Mr.
Plumeri wanted to be accountable as an example of corporate cost consciousness
to other officers and employees of the Group. Out of the $756,000
discretionary bonus payable, Mr. Plumeri deferred $166,250 into the purchase
of 6,194 restricted stock units which the Company matched with an additional
1,548 units in accordance with the terms of the Willis Holdings Bonus and
Stock Plan applicable to other officers and employees of the Group.
In respect of 2002, Mr. Plumeri received a base salary of $1,000,000, but
waived his contractually guaranteed $1,000,000 bonus to better align his
compensation with Willis Holdings' corporate culture of performance-based
remuneration. Mr. Plumeri was awarded a $2,800,000 discretionary bonus
determined by the Board of Directors of Willis Holdings for extraordinary 2002
performance after taking into account the waiver of Mr. Plumeri's
contractually guaranteed bonus and $700,000 of corporate costs relating to the
Group's private airplane and other business expenses for which Mr. Plumeri
again wished to be accountable as an example to his Willis colleagues.
The term of the agreement 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 (as
defined in the agreement), he will receive payments and benefits based on
certain formulae, which in no case exceeds an amount equal to the sum of three
times 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 would be considered to be an excess parachute payment
subject to a federal excise tax, then Mr. Plumeri will be paid an additional
payment or benefit to gross up the amount of the excise tax.
Following Mr. Plumeri's retirement at normal retirement age 65, he will be
eligible to receive a retirement benefit for the rest of his life equal to
$54,142 per year, pursuant to the Group's United States Willis Pension Plan.
The Company has neither an audit nor a remuneration committee. These
committees are established within Willis Holdings.
34
Employees
At December 31, 2002, 2001 and 2000 we had approximately 10,450, 11,300 and
10,470 employees, broken down by geographic location as follows:
Year United Kingdom United States Rest of the World
--------------------------------------------------------------- ------------------ ------------------ ------------------
2002 3,310 3,350 3,790
2001 3,485 3,885 3,930
2000 3,890 3,870 2,710
We are not involved in any material dispute with employees and management
believes that relations with employees are good.
Share Ownership
The interests of the directors and members of the Group Executive Committee
in Shares at March 7, 2003 were as follows:
Percent Ownership
No. of Shares(1) of Shares
------------------------------- -------------------- --------------------
Joseph J. Plumeri 3,887,095 2.6%
Frederick Arnold 175,176 *
William P. Bowden Jr. 20,090 *
Richard J. S. Bucknall 487,500 *
Thomas Colraine 329,100 *
Janet Coolick 20,853 *
Patrick Lucas 50,000 *
Stephen G. Maycock 148,874 *
Joseph M. McSweeny 332,944 *
Grahame J. Millwater 155,040 *
John M. Pelly 470,000 *
James A. Ratcliffe 93,360 *
Michael J. Sicard 98,601 *
Sarah J. Turvill 119,000 *
Mario Vitale 195,000 *
* less than 1%
(1) The figures disclosed include options exercisable within 60 days from March
7, 2003.
35
The following table provides information for each of our directors and
members of the Group Executive Committee who held options to purchase Shares
at March 7, 2003.
No. of Shares
Underlying Exercise
Date of Grant Options Granted Price(1) Option Expiration Period
---------------------------- ----------------- -------- ----------------------------
Joseph J. Plumeri October 15, 2000 5,164,222 (L)2 October 15, 2010
Frederick Arnold July 6, 2000 200,000 (L)2 December 18, 2010
William P. Bowden, Jr. September 10, 2001 11,362 $17.60 September 10, 2011
February 11, 2003 500 $27.60 February 11, 2013
Richard J. S. Bucknall December 18, 1998 400,000 (L)2 December 18, 2008
December 29, 2000 187,500 (L)2 December 29, 2010
June 11, 2001 393 (L)9.85 January 31, 2005
May 30, 2002 157 (L)19.26 December 31, 2005
Thomas Colraine December 18, 1998 400,000 (L)2 December 18, 2008
June 11, 2001 393 (L)9.85 January 31, 2005
February 27, 2002 5,547 $26.84 August 27, 2005
May 30, 2002 197 (L)19.26 December 31, 2005
Janet Coolick June 11, 2001 5,554 $13.50 June 11, 2011
February 11, 2003 500 $27.60 February 11, 2013
Stephen G. Maycock December 18, 1998 200,000 (L)2 December 18, 2008
June 11, 2001 393 (L)9.85 January 31, 2005
May 30, 2002 197 (L)19.26 December 31, 2005
Joseph M. McSweeny December 18, 1998 209,411 (L)2 December 18, 2008
July 6, 2000 218,644 (L)2 July 6, 2010
Grahame J. Millwater December 18, 1998 213,902 (L)2 December 18, 2008
June 11, 2001 393 (L)9.85 January 31, 2005
May 30, 2002 197 (L)19.26 December 31, 2005
John M. Pelly December 18, 1998 360,000 (L)2 December 18, 2008
December 29, 2000 125,000 (L)2 December 29, 2010
June 11, 2001 393 (L)9.85 January 31, 2005
May 30, 2002 197 (L)19.26 December 31, 2005
James A. Ratcliffe July 6, 2000 120,000 (L)2 July 6, 2010
June 11, 2001 393 (L)9.85 January 31, 2005
May 30, 2002 197 (L)19.26 December 31, 2005
Michael J. Sicard December 18, 1998 120,000 (L)2 December 18, 2008
Sarah J. Turvill December 18, 1998 108,000 (L)2 December 18, 2008
June 11, 2001 393 (L)9.85 January 31, 2005
May 30, 2002 197 (L)19.26 December 31, 2005
February 11, 2003 3,050 $26.74 August 11, 2006
Mario Vitale December 29, 2000 250,000 (L)2 December 29, 2010
- ---------------
(1) (L)2 equals $3.22, based on the exchange rate as of December 31, 2002 of
$1.61 = (L)1.00. (L)9.85 and (L)19.26 equals $15.86 and $31.00 respectively
based on the same exchange rate. (L)9.85 was the pound sterling equivalent
of $13.50, the initial public offering price of the Shares, at the time of
the offering and (L)19.26 was the sterling equivalent of the closing price
of the Shares on the date prior to the grant.
36
Item 7 - Major Shareholders and Related Party Transactions
Major Shareholders
The Company is a wholly-owned subsidiary of TA IV Limited, following the
transfer of equity by Trinity effective from January 1, 2001. The Company's
ultimate parent company is Willis Holdings.
The Company's ultimate controlling party is KKR 1996 Overseas Limited, which
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
beneficially owns 39.1% or 59,069,037 Shares. During 2002, as a consequence of
a public offering, the percentage owned decreased from 52.6% or 77,750,683
Shares.
Related Party Transactions
In 2002, the Company paid annual fees, quarterly in arrears, of $1.0 million
to KKR and $350,000 to Fisher Capital Corp. L.L.C. (a company for which Mr J.
R. Fisher, a director of Willis Holdings, is the managing member and majority
owner) for management, consulting, and certain other services provided to the
Company and its subsidiaries. We also reimburse their incidental expenses in
connection with those services.
Our US subsidiary, Willis North America Inc., has 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 on
exercise could increase its interest to approximately 13.0% 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 16.6% in the
aggregate in OneShield Inc. Fisher Capital Corp. L.L.C. also has an interest
of 0.2% in OneShield Inc.
From time to time, in the ordinary course of business and on commercial
terms the Company's insurance brokerage subsidiaries may provide services to
directors or executive officers and their families in connection with their
personal insurance requirements.
Richard J.S. Bucknall continued as an Underwriting Member of Lloyd's during
2002 in respect of the run-off of liabilities of business not settled at the
time of his resignation in 1997 as an Underwriting Member of Lloyd's. Some of
our insurance brokerage subsidiaries placed risks with the syndicates in which
Richard J.S. Bucknall participated in the normal course of their brokerage
activities on the same basis as those subsidiaries did with other Lloyd's
syndicates. The Company has guaranteed the performance obligations of Willis
North America Inc. in respect of the pension benefits for Brian D. Johnson
under the Willis North America Inc. Executive Supplemental Retirement Plan, an
unfunded pension plan. Willis Holdings has also given Joseph J. Plumeri a
guarantee in respect of Willis North America Inc.'s performance obligations
under its employment agreement with Mr. Plumeri.
Item 8 - Financial Information
Consolidated Statements and Other Financial Information
Financial Statements
See "Item 18 - Financial Statements".
Legal Proceedings
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. Similar to other corporations we are also subject to a
37
variety of other claims, including those relating to our employment practices.
Some of those 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
are believed to be adequate in the light of current information and legal
advice, and we adjust such 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 and proceedings relating to matters discussed
below, either individually or in the aggregate, will have a material adverse
effect on our financial condition, results of operations 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 United Kingdom 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 the Company provided unlimited financial support. The Company's
directors decided that, in the interests of our shareholders, this support for
Sovereign could not be justified. Accordingly, Sovereign's directors placed
Sovereign into provisional liquidation on July 11, 1997. On January 5, 2000, a
scheme of arrangement proposed by Sovereign to its creditors became effective.
The stated purpose of the scheme of arrangement is to resolve Sovereign's
liabilities and provide that Sovereign's business is run off in as orderly a
manner as possible. Sovereign's provisional liquidators have been discharged
from office and have been appointed as scheme administrators. On January 16,
2001, the scheme administrators announced an initial payment percentage of 30%
payable out of Sovereign's assets. Those creditors with established scheme
liabilities received payment by May 2001. Sovereign's assets are separate and
38
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, the Company and certain of our
brokerage 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 the Company and hold it responsible for the liabilities of
its subsidiaries. Although claims that the Company 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 the Company.
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 UK government. Sellers of personal pension plans have been
subject to liabilities based on claims that they allegedly mis-sold pension
products or gave improper advice. In particular, the regulators of the
companies that engaged in this business, such as our independent financial
advisory business, Willis Corroon Financial Planning Limited, required these
companies to compensate individuals who withdrew from their previous or
existing company pension plans or who were otherwise advised to set up
personal plans, to the extent that following withdrawal, and the consequent
loss of the employer contribution, that individual's personal pension plan did
not produce returns equal to those that would have been achievable with an
employer's company-sponsored plan. Whether compensation is due to a particular
individual, and the amount of any
39
compensation, is dependent on the subsequent performance of the pension plan
sold and the relative cost to reinstate that individual into his or her prior
company pension plan. The pension review, as required by Willis Corroon
Financial Planning Limited's regulator, is in its final stages and we expect
to have paid all identified claims by December 31, 2003. The cost of the
review has been met from provisions established in prior years. We expect the
remaining provision of $23 million at December 31, 2002 will be sufficient to
meet claims during 2003 and thereafter, although we cannot assure you that
further claims will nto arise and that the balance of the provision will be
adequate to deal with future claims over time.
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 for several placements, including the Silverstein property
placement, but we are not a party to any of these lawsuits. The principal
issue in dispute in the Silverstein property litigation 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 insurers ultimately pay on the
property policies. Other disputes may also arise in respect of the World Trade
Center insurance placed by us which could affect the Group, 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 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
(concluding in
40
January 2003) 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 and the judgment is not expected until the end of the first
quarter. 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 principals to the reinsurance
contracts placed at Willis Limited 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 US
subsidiary, 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, the 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 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.
Significant Changes
None.
Item 9 - The Offer and Listing
Markets
The Ordinary Shares are held by TA IV Limited and there is therefore no
trading market in such shares.
The Notes are listed for trading on the Luxembourg Stock Exchange. However,
no trades have been executed on the Luxembourg Stock Exchange since the first
listing date. Willis North America has not applied for and does not intend to
apply for listing of the Notes on any securities exchange (other than listing
on the Luxembourg Stock Exchange) or for the quotation of the Notes through
NASDAQ. The underwriter of the Notes issued acts as a market maker for the
Notes. However, the underwriter is not
41
obligated to do so and may discontinue any market making at any time without
notice. No assurance can be given as to the liquidity of the trading market
for the Notes or that an active market for the Notes will develop. If an
active public market for the Notes does not develop or fails to be maintained,
the market price and liquidity of the Notes may be adversely affected.
Kredietbank S.A. Luxembourgeoise is the listing agent for the Notes on the
Luxembourg Stock Exchange. The Notes have been accepted for clearance by
Euroclear Operator and Cedel Bank. The Notes have been assigned the following
CUSIP number: 970620AC4; a Euroclear common code number of 009610391; and an
ISIN number of US970620AC42.
Item 10 - Additional Information
Memorandum and Articles of Association
The following is only a summary of certain material rights of the Company's
shareholders under the provisions of the Company's Memorandum and Articles of
Association and is qualified in its entirety by reference to the Companies Act
1985, as amended of Great Britain ("Companies Act") and the Memorandum and
Articles of Association. Copies of the Company's Memorandum and Articles of
Association have been filed as exhibits to this Annual Report on Form 20-F.
Objects
The Company is registered in England and Wales with registered number
621757. The third clause of the Company's Memorandum and Articles of
Association permits the Company to act as an investment holding company, to
carry on the business of insurance brokers, insurance agents and underwriting
agents and to acquire shares or stocks, debentures, debenture stock, bonds,
obligations or any other securities as well as carrying on any other business
as may be considered to be incidental or conductive to any of the Company's
objects.
Directors
Under the Company's Articles of Association the directors are permitted to
be interested in any contract, transaction or arrangement to which the Company
is a party or in which the Company is in any way interested, as long as the
director has declared the nature of his interest as required by the Companies
Act.
The directors have the authority to determine the aggregate fees up to a
fixed limit of (L)100,000 annually and to grant special remuneration to any
director for any special or extra services tendered. In addition, the
directors have the power to pay and agree to pay any retirement, death or
disability benefits to any director or ex-director. Further, the directors
have power to purchase and maintain liability insurance for their benefit or
for that of officers, employees and ex-directors of the Company.
The Articles of Association do not restrict in any way the power of the
directors to borrow and raise funds.
There is no age limit requirement whereby directors have to retire or any
requirement for directors to hold shares in the Company by way of
qualification.
Rights attaching to Ordinary Shares
Under English law, dividends are only payable out of the Company's profits
available for distribution, as determined in accordance with the UK GAAP and
by the Companies Act. Holders of the Company's shares on which the dividend is
declared by the shareholders in general meeting are paid a dividend in
proportion to the amount paid up on those shares. In declaring such dividend,
the general meeting may, at the recommendation of the directors, direct that
it shall be satisfied wholly or partly by a distribution of assets.
42
The directors may also pay interim dividends to the shareholders if it
appears to them that they are justified by the Company's profits available for
distribution.
Any dividend which has remained unclaimed for twelve years from the date
when it became due for payment, may, if the directors so resolve, be forfeited
and will revert to the Company.
Voting Rights
At any general meeting, voting is by a show of hands, unless a poll is
demanded, with each shareholder present, in person, by proxy or, if a
corporation, by a duly authorised representative having one vote regardless of
the number of shares held.
However, before or on the declaration of the result of any vote, a poll may
be demanded which entitles shareholders to one vote for every share held by
them. A poll may be demanded by:
a) the chairman of the meeting; or
b) at least two members having the right to vote at the meeting; or
c) a member or members representing not less than one-tenth of the total
voting rights of all the members having the right to vote at the
meeting; or
d) a member or members holding shares conferring a right to vote at the
meeting being shares on which an aggregate sum has been paid up equal
to not less than one-tenth of the total sum paid up on all the shares
conferring that right.
A demand for a poll by a person as proxy shall be treated as the same as a
demand by a member.
In the case of an equality of votes, whether on a show of hands or on a
poll, the chairman of the meeting is entitled to a casting vote in addition to
any other vote he may have.
No business can be transacted at any general meeting unless a quorum of two
persons entitled to vote upon the business to be transacted is present,
whether in person or by proxy.
The Company has passed an elective resolution to dispense with the need to
hold Annual General Meetings. Other meetings must be convened upon advance
written notice of 21 days for the passing of a special resolution and 14 days
for any other resolution, depending on the nature of the business to be
transacted. The days of delivery or receipt of notice are not included. The
notice must specify the nature of the business to be transacted.
Matters are transacted at general meetings of the Company by the proposing
and passing of resolutions of which there are four kinds: ordinary, special,
extraordinary and elective. An ordinary resolution requires a simple majority
of the votes of those persons voting, at a meeting at which there is a quorum.
Special and extraordinary resolutions requires the approval of 75% of those
voting at a meeting at which there is a quorum. An elective resolution has to
be approved by all the Company's shareholders.
Variation of Rights
The Company's share capital may be varied with the consent in writing of
holders of 75% in value of the shares held or upon the adoption of an
extraordinary resolution by the shareholders.
Rights in Winding up
In the event of a winding up, the liquidator may following the adoption of
an extraordinary resolution of shareholders, divide the whole or any part of
the assets of the Company between the
43
shareholders. The assets available for distribution to members are subject to
any liabilities or payments to creditors, whether statutorily preferred or
not.
Material Contracts
See the matters described in Item 7 "Major Shareholders and Related Party
Transactions".
Exchange Controls
There are currently no UK foreign exchange control restrictions on the
conduct of the Group's operations. While there are certain foreign exchange
control restrictions which may affect the ability of certain of the Company's
subsidiaries to pay dividends to the Company, the amounts involved have not
been material to the Company in the past and the Company does not believe that
such restrictions will have a material adverse impact on the Company or its
ability to meet its cash flow requirements.
Taxation
The statements set forth below in this Item are based on current law and
published practice at the date of this annual report and are subject to
change.
Under current law if the Company, as guarantor, makes any payments in
respect of interest on the Notes (or other amounts due under the Notes other
than repayment of principal) such payments may be subject to UK withholding
tax at the basic rate. Relief from such withholding may be available pursuant
to the provisions of any applicable double taxation treaty. In particular,
under the terms of the US/UK double taxation treaty, holders of the Notes
entitled to the benefit of that treaty would be able to recover in full any UK
tax withheld by making a claim on the appropriate form. Alternatively, a claim
may be made by a holder of the Notes in advance of a payment in respect of
interest. If the claim is accepted by the UK Inland Revenue, it will authorize
subsequent payments to be made without deduction of UK withholding tax. Claims
for repayment must be made within six years of the end of the UK year of
assessment (generally April 5 in each year) to which the interest relates and
must be accompanied by the original statement provided by the Company when the
interest payment was made showing the amount of UK income tax deducted.
Because a claim is not considered until the UK Inland Revenue receives the
appropriate form from the Internal Revenue Service, forms should be sent to
the Internal Revenue Service, in the case of an advance claim well before the
relevant interest payment date or, in the case of a claim for repayment of the
tax, well before the end of the appropriate limitation period.
The Company has agreed, subject to specific exceptions and limitations, to
pay to the holders of the Notes such additional amounts in respect of any
applicable UK withholding tax in order that the interest (and other amounts
due under the Notes) they receive, net of any applicable UK withholding tax,
will equal the amounts which would have been receivable by them in the absence
of such UK withholding tax.
Under current law the sale or transfer in the United Kingdom of the Notes
will not be subject to stamp duty or stamp duty reserve tax or any other
transfer tax in the United Kingdom.
Documents on Display
It is possible to read and copy documents referred to in this annual report
on Form 20-F that have been filed with the SEC at the SEC's public reference
room located at 450 Fifth Street, NW, Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms
and their copy charges.
44
Item 11 - Quantitative and Qualitative Disclosures about Market Risk
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 1 of the consolidated financial statements and
further disclosure is provided in Note 24 to the consolidated financial
statements, included elsewhere in this annual report.
Foreign exchange risk management
We report our operating results and financial condition in US dollars. Our
US operations earn revenue and incur expenses primarily in US 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 2002.
Pounds US Other
Sterling Dollars currencies
----------- ----------- -----------
Revenues 14% 57% 29%
Expenses 36% 43% 21%
Our operations are exposed to foreign exchange risk arising from cash flows
and financial instruments that are denominated in currencies other than the US
dollar. Our primary foreign exchange risk arises from changes in the exchange
rates between US dollars and pounds sterling. Our objective is to maximize our
cash flow in US dollars. Our policy is to convert into pounds sterling all
revenue arising in currencies other than US dollars together with sufficient
US 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 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 do not generally hedge
exposures beyond three years.
45
The table below provides information about our foreign currency forward
exchange contracts, which are sensitive to exchange rate risk. The table
summarizes the US 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,
-------------------------------------------------------------------------------------------
2003 2004 2005
---------------------------- ---------------------------- ----------------------------
Average Average Average
Contract contractual Contract contractual Contract contractual
December 31, 2002 amount exchange rate amount exchange rate amount exchange rate
- ------------------------------------ -------- --------------- -------- --------------- -------- ---------------
($ million) ($ million) ($ million)
Foreign currency sold
US dollars sold for sterling 70 $1.45 = (L)1 37 $1.42 = (L)1 17 $1.44 = (L)1
Yen 164.33 = Yen 165.48 = Yen 162.61 =
Japanese Yen sold for sterling 13 (L)1 11 (L)1 6 (L)1
Euro 1.56 = Euro 1.54 = Euro 1.53 =
Euro sold for sterling 41 (L)1 27 (L)1 14 (L)1
-------- -------- --------
Total 124 75 37
======== ======== ========
Fair Value(1) 8 4 2
======== ======== ========
Settlement date before December 31,
-------------------------------------------------------------------------------------------
2002 2003 2004
---------------------------- ---------------------------- ----------------------------
Average Average Average
Contract contractual Contract contractual Contract contractual
December 31, 2001 amount exchange rate amount exchange rate amount exchange rate
- ------------------------------------ -------- --------------- -------- --------------- -------- ---------------
($ million) ($ million) ($ million)
Foreign currency sold
US dollars sold for sterling 63 $1.49 = (L)1 45 $1.44 = (L)1 20 $1.41 = (L)1
Yen 156.02 = Yen 157.79= Yen 156.06 =
Japanese Yen sold for sterling 10 (L)1 7 (L)1 3 (L)1
Euro 1.59 =
Euro sold for sterling 20 (L)1 5 Euro 1.57= (L)1 - -
-------- -------- --------
Total 93 57 23
======== ======== ========
Fair Value(1) 1 1 -
======== ======== ========
(1) Represents the difference between the contract amount and the cash flow in
US dollars which would have been receivable had the foreign currency
forward exchange contracts been entered into on December 31, 2002 or 2001
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 US 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 minimise
our exposure to increases in the 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 consolidated 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
46
of interest rate swaps. It is our policy that, for currencies with significant
balances, a minimum of 25% of forecast income arising is hedged for each of
the next three years.
The table below provides information about our derivative instruments and
other financial instruments that are sensitive to changes in interest. For
interest rate swaps, the table presents notional principal amounts and average
interest rates analyzed by expected maturity dates. Notional principal amounts
are used to calculate the contractual payments to be exchanged under the
contracts. The duration of interest rate swaps varies between one and five
years, with an average re-fixing period of three months. Average variable
rates are based on interest rates set at December 31, 2002 or 2001, as
appropriate, or, in the case of interest rate swaps not yet started, at the
rates prevailing at December 31, 2002 or 2001, as appropriate.
Expected to mature before December 31,
------------------------------------------------------ Fair
December 31, 2002 2003 2004 2005 2006 2007 Thereafter Total value(1)
------------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
($ million, except percentages)
Short-term investments
Principal ($) 7 17 7 31 31
Fixed rate receivable 6.42% 5.83% 5.82% 5.92%
Principal ((L)) 7 7 6 3 23 23
Fixed rate receivable 7.44% 7.67% 7.76% 6.25% 7.42%
Fiduciary investments
Principal ($) 118 118 118
Fixed rate receivable 1.30% 1.30%
Principal (Euro) 6 1 3 1 11 11
Fixed rate receivable 2.92% 2.90% 3.30% 4.40% 3.20%
Long-term debt
Principal ($) 410 410 439
Fixed rate payable 9.00% 9.00%
Principal ($) 83 74 157 157
Variable rate payable 3.24% 4.53% 3.94%
Interest rate swaps
Principal ($) 248 292 233 105 878 42
Fixed rate receivable 7.03% 4.97% 5.47% 5.92% 5.57%
Variable rate payable 1.39% 1.62% 1.95% 2.45% 1.66%
Principal ($) 157 157 (6)
Fixed rate payable 5.10% 5.10%
Variable rate receivable 1.72% 1.72%
Principal ((L)) 80 72 106 58 316 6
Fixed rate receivable 6.66% 5.66% 5.64% 5.51% 5.68%
Variable rate payable 3.98% 3.97% 4.20% 4.63% 4.04%
Principal (Euro) 16 29 32 32 109 3
Fixed rate receivable 4.70% 4.68% 4.56% 4.86% 4.70%
Variable rate payable 2.79% 2.79% 2.94% 3.21% 2.85%
Forward rate agreements
Principal ($) 140 70 210 1
Fixed rate receivable 3.69% 4.49% 3.96%
Variable rate payable 1.38% 1.48% 1.40%
Principal ((L)) 45 45 -
Fixed rate receivable 7.21% 7.21%
Variable rate payable 3.99% 3.99%
- ---------------
(1) Represents the net present value of the expected cash flows discounted at
current market rates of interest.
47
Expected to mature before December 31,
------------------------------------------------------ Fair
December 31, 2001 2002 2003 2004 2005 2006 Thereafter Total value(1)
------------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
($ million, except percentages)
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%
Principal ((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%
Principal (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
- ---------------
(1) Represents the net present value of the expected cash flows discounted at
current market rates of interest.
Item 12 - Description of Securities Other Than Equity Securities
Not applicable.
48
Item 13 - Defaults, Dividend ArrearagesTand Delinquencies
None.
Item 14 - Material Modification to the Rights of Security Holders and Use of
Proceeds
None.
Item 15 - Controls and Procedures
Within the 90 days prior to the date of filing this Annual Report on Form
20-F, the Group carried out an evaluation, under the supervision and with the
participation of the Group's management, including the Chairman and Chief
Executive Officer and the Group Chief Financial Officer, of the effectiveness
of the design and operation of the Group's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Group's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Group (including its consolidated
subsidiaries) required to be included in the Group's periodic SEC filings.
Subsequent to the date of that evaluation, there have been no significant
changes in the Group's internal controls or in other factors that could
significantly affect internal controls, nor were any corrective actions
required with regard to significant deficiencies and material weaknesses.
PART III
Item 17 - Financial Statements
Not applicable.
Item 18 - Financial Statements
The following financial statements and schedule, together with the report of
Deloitte & Touche thereon, are filed as part of this annual report:
Report of Independent Auditors F-1
Consolidated Statements of Operations F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
Schedule
Schedule II - Valuation and Qualifying Accounts S-1
Item 19 - Exhibits
2.1 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
No. 333-77483)
2.2 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
49
thereunder and JPMorgan Chase Bank, as administrative agent and
collateral agent (incorporated by reference to Exhibit No. 10.2 to
Registration Statement No. 333-74483)
4.1 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)
4.2 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)
4.3 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)
4.4 Willis Group Holdings Limited 2001 Share Purchase and Option Plan
(incorporated by reference to Exhibit No. 10.8 to Registration
Statement No. 333-60982)
4.5 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)
4.6 Willis North America Inc. Financial Security Partnership Plan
(incorporated by reference to Exhibit No. 4.3 to Registration
Statement No. 333-67466)
4.7 Form of Willis Group Holdings Limited Zero Cost Share Option Scheme
(incorporated by reference to Exhibit 10.12 to Registration
Statement No.333-74483)
4.8 The Willis Group Holdings Limited 2001 Bonus and Stock Plan
(incorporated by reference to Exhibit 4.8 to Registration Statement
No.333-63186)
4.9 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)
4.10 Second Amendment to the Amended and Restated Employment Agreement
between Willis Group Holdings Limited and Joseph J. Plumeri
4.11 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)
8.1 List of subsidiaries of the Company - (see the list of our
principal subsidiaries in Item 4 "Information on the Company -
Business Overview")
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
50
SIGNATURES
The Registrant hereby certifies that it meets all the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.
WILLIS GROUP LIMITED
(Registrant)
By: /s/ THOMAS COLRAINE
_________________________________
Name: Thomas Colraine
Title: Group Chief Financial Officer
Dated: London, March 31, 2003
51
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of Willis Group
Limited and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, movements in shareholders' equity, cash
flows and total recognized gains and losses for each of the three years in the
period ended December 31, 2002. Our audits also included the financial
statement schedule listed in the Index at Item 18. These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and the financial statement schedule 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 an 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 Limited and
subsidiaries as of December 31, 2002 and 2001 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United Kingdom. Also, in our opinion, such related financial
statement schedule when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted in
the United States of America. The application of the latter would have
affected the determination of net income for each of the three years in the
period ended December 31, 2002 and the determination of shareholders' equity
as of December 31, 2002 and 2001, to the extent summarized in Note 30.
Deloitte & Touche
Chartered Accountants and Registered Auditors
London, England.
March 31, 2003
F-1
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
As restated As restated
(Note 1) (Note 1)
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million, except per share data)
Commissions and fees (Note 3) 1,660.2 1,356.7 1,237.2
Interest and investment income (Note 4) 74.0 67.0 68.2
----------- ----------- -----------
Operating revenues 1,734.2 1,423.7 1,305.4
Operating expenses (1,264.8) (1,103.5) (1,108.5)
----------- ----------- -----------
Operating income (Note 4) 469.4 320.2 196.9
Share of operating profit of associates 14.1 10.4 7.0
Gain/(loss) on disposal/closure of operations 1.5 (5.9) (7.7)
Interest income (Note 6) 65.4 83.8 88.2
Interest expense (Note 7) (63.0) (82.0) (87.8)
----------- ----------- -----------
Income before taxation (Note 8) 487.4 326.5 196.6
Taxation (Note 9) (178.1) (116.4) (47.4)
----------- ----------- -----------
Income after taxation 309.3 210.1 149.2
Equity minority interests (11.8) (7.2) (2.3)
----------- ----------- -----------
Net income (i) 297.5 202.9 146.9
Dividends (Note 10) - (11.6) (108.3)
----------- ----------- -----------
Retained income 297.5 191.3 38.6
=========== =========== ===========
Per ordinary share
Net income (i) (Note 11) $0.62 $0.42 $0.31
=========== =========== ===========
Average number of ordinary shares outstanding (in millions) 481.7 479.3 476.5
====================================================================================== =========== =========== ===========
(i) A summary of the adjustments to net income that would be required if United
States generally accepted accounting principles ("US GAAP") were to be
applied instead of those accounting principles generally accepted in the
United Kingdom ("UK GAAP") is set forth in Note 30.
The Notes to the Financial Statements are an integral part of these Financial
Statements
F-2
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
As restated
(Note 1)
- ----------------------------------------------------------------------- -------------------------- --------------------------
($ million)
ASSETS
Current assets
Cash and short-term deposits 1,003.4 968.2
Investments (Note 12) 624.5 478.7
Accounts receivable, net (Note 13) 7,816.6 7,776.3
----------- -----------
Total current assets 9,444.5 9,223.2
Fixed assets
Intangible assets - goodwill, net (Note 14) 115.7 44.7
Tangible assets, net (Note 15) 211.9 185.1
Investments (Note 16) 47.4 70.7
----------- -----------
Total fixed assets 375.0 300.5
----------- -----------
Total assets 9,819.5 9,523.7
======================================================================= =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 7,724.8 6,796.3
Corporate tax payable 168.7 108.5
Accruals and deferred income 233.9 161.2
Bank loans and overdrafts (Note 18) 3.0 -
Other current liabilities (Note 17) 259.2 1,134.7
----------- -----------
Total current liabilities 8,389.6 8,200.7
Noncurrent liabilities
Bank loans (Note 18) 157.2 348.0
Loan notes (Note 18) 408.9 436.4
Other noncurrent liabilities (Note 19) 51.7 52.5
----------- -----------
Total noncurrent liabilities 617.8 836.9
Provisions for liabilities and charges (Note 21) 129.0 140.1
Equity minority interests 24.7 15.5
----------- -----------
Total liabilities and minority interests 9,161.1 9,193.2
Shareholders' equity (i)
Share capital 97.9 97.5
Share premium 221.8 202.6
Revaluation reserve 21.5 21.5
Retained earnings 317.2 8.9
----------- -----------
Total shareholders' equity 658.4 330.5
----------- -----------
Total liabilities and shareholders' equity 9,819.5 9,523.7
======================================================================= =========== ===========
(i) A summary of the adjustments to shareholders' equity that would be required
if US GAAP were to be applied instead of UK GAAP is set forth in Note 30.
The Notes to the Financial Statements are an integral part of these Financial
Statements
F-3
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF MOVEMENTS IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Authorized Share Capital Ordinary Shares
--------------------------------------------------- ----------------------------
((L)
Number (000) million)
At January 1 and December 31, 2002, 2001 and 2000 528,000 66.0
=================================================== ============ ============
Issued Share Capital
---------------------------- Share Revaluation Retained
Issued Share Capital and Reserves Ordinary Shares premium(i) reserve(i) earnings(ii)
--------------------------------------------------- ---------------------------- ------------ ------------ ------------
Number (000) ($ million)
At January 1, 2000 as previously stated 476,130 96.9 194.0 24.1 (148.8)
Adoption of FRS 19 at January 1, 2000 - - - - 18.2
------------ ------------ ------------ ------------ ------------
At January 1, 2000 as restated 476,130 96.9 194.0 24.1 (130.6)
Retained income(iv) - - - - 38.6
Issued for cash 3,193 0.6 8.6 - -
Goodwill reinstated on disposals - - - - 0.3
Exchange adjustments - - - (1.8) (70.0)
------------ ------------ ------------ ------------ ------------
At December 31, 2000 as restated 479,323 97.5 202.6 22.3 (161.7)
Retained income(iv) - - - - 191.3
Goodwill reinstated on disposals - - - - 14.5
Exchange adjustments - - - (0.8) (35.2)
------------ ------------ ------------ ------------ ------------
At December 31, 2001 as restated 479,323 97.5 202.6 21.5 8.9
Retained income - - - - 297.5
Ordinary shares issued 2,412 0.4 19.2 - -
Goodwill reinstated on disposals - - - - 14.6
Capital contribution - - - - 3.6
Exchange adjustments - - - - (7.4)
------------ ------------ ------------ ------------ ------------
At December 31, 2002 481,735 97.9 221.8 21.5 317.2
=================================================== ============ ============ ============ ============ ============
(i) The share premium and revaluation reserve are not distributable.
(ii) Retained earnings at December 31, 2002 included $22.9 million (2001:
$18.0 million, 2000: $13.7 million) in respect of associates.
(iii) The cumulative amount of goodwill eliminated before December 31, 1997,
net of goodwill relating to subsidiaries sold, amounts to $749.6 million.
(iv) As restated (Note 1).
The Notes to the Financial Statements are an integral part of these Financial
Statements
F-4
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Net cash inflow from operating activities (Note 23) 490.8 683.0 313.0
----------- ----------- -----------
Dividends from associates 3.0 3.7 4.9
----------- ----------- -----------
Returns on investments and servicing of finance
Interest received 68.0 89.0 88.7
Interest paid (63.0) (83.0) (85.8)
Dividends paid to minority interests (2.8) (3.3) (0.9)
----------- ----------- -----------
Net cash inflow for returns on investment and servicing of finance 2.2 2.7 2.0
----------- ----------- -----------
Taxation (70.2) (41.3) (27.3)
----------- ----------- -----------
Capital expenditure and financial investment
Purchase of tangible fixed assets (46.0) (40.3) (30.2)
Purchase of fixed asset investments - (0.3) (2.3)
Sale of tangible fixed assets 2.5 4.8 7.0
Sale of fixed asset investments - 0.1 -
----------- ----------- -----------
Net cash outflow for capital expenditure and financial investment (43.5) (35.7) (25.5)
----------- ----------- -----------
Acquisitions and disposals
Purchase of subsidiaries (22.5) (5.0) (13.6)
Purchase of associates - - (1.2)
Proceeds from sale of business - 3.5 -
Sale of subsidiaries 24.2 29.7 0.5
Net cash transferred on purchase/sale of subsidiaries 21.8 (9.1) 5.6
----------- ----------- -----------
Net cash inflow/(outflow) for acquisitions and disposals 23.5 19.1 (8.7)
----------- ----------- -----------
Equity dividends paid - (21.8) (20.4)
----------- ----------- -----------
Cash flow before management of liquid resources and financing 405.8 609.7 238.0
----------- ----------- -----------
Management of liquid resources (54.0) (7.8) (49.3)
----------- ----------- -----------
Financing
Issue of ordinary share capital - - 9.2
Capital contribution 3.6 0.7 -
Amounts owed by parent company (70.4) (51.1) 30.0
Amounts owed to parent company (11.0) (24.6) (121.6)
Debt due beyond a year:
Decrease in long-term borrowings (219.8) (170.2) (30.0)
----------- ----------- -----------
Net cash outflow from financing (297.6) (245.2) (112.4)
----------- ----------- -----------
Increase in cash 54.2 356.7 76.3
====================================================================================== =========== =========== ===========
(i) The differences between the consolidated statements of cash flows presented
above and that required under US GAAP are described in Note 30.
The Notes to the Financial Statements are an integral part of these Financial
Statements
F-5
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF TOTAL RECOGNIZED GAINS AND LOSSES
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
As restated As restated
(Note 1) (Note 1)
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Net income
Parent and subsidiaries 288.3 196.4 143.5
Associates 9.2 6.5 3.4
----------- ----------- -----------
297.5 202.9 146.9
Currency translation differences
Subsidiaries (11.5) (34.2) (68.5)
Associates 4.1 (1.0) (1.5)
----------- ----------- -----------
Total recognized gains and losses for the financial year 290.1 167.7 76.9
Prior year adjustment (Note 1) 21.4 - -
----------- ----------- -----------
Total recognized gains and losses since last annual report 311.5 167.7 76.9
====================================================================================== =========== =========== ===========
(i) A statement of Comprehensive Income under US GAAP is set forth in Note 30
of Notes to the Financial Statements.
The Notes to the Financial Statements are an integral part of these Financial
Statements
F-6
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 1 - Accounting policies
Organization
Willis Group Limited (the "Company") and its subsidiaries (collectively, the
"Group") 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 Group 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
Group 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 Group's global distribution network. The
Group also provides other value-added services.
Basis of preparation and restatement of prior years
The consolidated financial statements of the Company and its subsidiaries
have been prepared on the going concern basis under the historical cost
convention as modified by the revaluation of certain land and buildings. The
Group's consolidated financial statements comply with UK GAAP.
The Company has changed its reporting currency to United States dollars ($)
from pounds sterling. For comparative purposes, the 2000 and 2001 statements
of operations previously reported in pounds sterling, have been translated
into US dollars at the average exchange rates for the respective years. The
2000 and 2001 balance sheets previously reported in pounds sterling, have been
translated into US dollars at the respective year end closing rates of
exchange.
The adoption of UK Financial Reporting Standard ("FRS") 19 "Deferred Tax"
("FRS 19") with effect from January 1, 2002 has required changes in the method
of accounting for deferred tax assets and liabilities. As a result of this
change in accounting policy, the balance sheets at December 31, 2001 and 2000
have been restated to increase both deferred tax assets (included within
accounts receivable) and retained earnings by $21.4 million and $25.1 million
respectively. The statements of operations have been restated to increase the
taxation charge by $2.8 million for the year ended December 31, 2001 and
decrease the taxation charge by $8.4 million for the year ended December 31,
2000. The effect on the current period consolidated statement of operations
was an increase in the taxation charge of $4.3 million.
Basis of consolidation
The Group's consolidated financial statements incorporate those of the
Company and its subsidiaries based on financial statements drawn up to
December 31. Intercompany transactions and balances are eliminated on
consolidation. Interests of outside shareholders in non-wholly owned
subsidiaries are shown as minority interests. Associates, being those entities
in which the Group has a long-term equity interest and over which it exercises
significant influence, are included on the basis of the Group's proportion of
the operating profit and loss, interest expense, taxation and net assets (the
"equity method"). The results of subsidiaries and associates acquired or
disposed of during the year are included from or to the relevant dates of
acquisition or disposal.
Investments in less than 20% owned associates, where the Group does not
exert significant influence, are accounted for by the cost method. Such
investments are not publicly traded.
F-7
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 1 - 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.
Goodwill arising on acquisitions occurring after January 1, 1998 is
capitalized and amortized on a straight-line basis over its estimated useful
economic life, determined on the individual circumstances of each business
acquired but limited to a maximum period of 20 years. Goodwill on acquisitions
completed before January 1, 1998 was eliminated against retained earnings and,
as permitted by FRS 10, "Goodwill and Intangible Assets", has not been
reinstated. On disposal of a business acquired before January 1, 1998, any
goodwill which was previously eliminated against retained earnings is
reinstated and charged to the statement of operations.
Revenue recognition
Revenue includes insurance commissions, fees for services rendered, certain
commissions receivable from insurance carriers and interest income.
The Group 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 capitve management and third party administration, are recognized
over the period for which the services are rendered. The Group establishes
contract cancellation reserves where appropriate. At December 31, 2002, 2001
and 2000, 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.
Insurance brokerage receivables and payables
Insurance brokers usually act as agents in placing the insurable risks of
their clients with insurers and, as such, generally are not liable as
principals for amounts arising from such transactions. Notwithstanding the
legal relationships with clients and insurers, insurance brokers are entitled
to retain investment income on any cash flows arising from insurance brokerage
transactions; accounting standards require receivables and payables arising
from such transactions to be shown as assets and liabilities.
Debit and credit 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 the offset would survive the insolvency of that party,
in which case they are aggregated into a single net balance.
Funds held in connection with insurance brokerage transactions are generally
required to be held in regulated bank accounts subject to local operating
guidelines and are not generally available for purposes other than settling
insurance brokerage transactions.
F-8
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 1 - Accounting policies (continued)
Currency translation
Transactions in currencies other than the reporting currency of the entity
are recorded at the rate of exchange prevailing at the date of the
transaction, or, in the case of forward contracts in respect of the current
year's income, at the contracted rate. Assets and liabilities in foreign
currencies are translated into the reporting currency at the rates of exchange
ruling at the balance sheet date. All exchange differences are taken to
income.
Upon consolidation, the results of subsidiaries and associates whose
reporting currency is other than US dollars, are translated into US dollars at
the average rates of exchange and assets and liabilities are translated at
year-end rates. Translation adjustments arising are taken to retained
earnings. Exchange differences arising on foreign currency borrowings taken
out to provide a hedge against the exchange risk associated with those
investments are also taken to retained earnings.
Tangible fixed assets
Tangible fixed assets are stated at cost less accumulated depreciation.
Expenditures for improvements are capitalized; repairs and maintenance are
charged to expenses as incurred. Depreciation is calculated on a straight-line
basis at rates estimated to write down the value of assets over their expected
useful lives. Depreciation on freehold buildings and long leaseholds is
provided at 2% per annum. Other leaseholds are written off over the lesser of
the useful life of the assets or the remaining period of the lease.
Depreciation on furniture, equipment and vehicles is provided at rates between
4% and 33.3% per annum. No depreciation is provided on freehold land.
Deferred tax
Deferred tax is provided in full on timing differences which result in an
obligation at the balance sheet date to pay more or less tax, at a future
date, at rates expected to apply when they reverse based on current tax rates
and law. Timing differences arise from the inclusion of items of income and
expenditure in taxation computations in periods different from those in which
they are included in financial statements. Deferred tax is not provided on
timing differences arising from the revaluation of fixed assets where there is
no commitment to sell the asset, or on unremitted earnings of subsidiaries and
associates where there is no commitment to remit these earnings. Deferred tax
assets are recognized to the extent that it is regarded as more likely than
not that they will be recovered. Deferred tax assets and liabilities are not
discounted.
Pensions
The regular cost of providing benefits is charged to operating income over
the employees' service lives on the basis of a constant percentage of
pensionable earnings. Variations from regular cost, arising from periodic
actuarial valuations, are allocated to operating income on a systematic basis
over the expected remaining service lives of current employees.
Derivative financial instruments
The Group uses derivative financial instruments for other than trading
purposes to alter the risk profile of an existing underlying exposure.
Interest rate swaps are used to manage interest risk exposures and amounts
payable are recognized in interest income or expense on an accrual basis based
on the terms of the agreement and the interest rates prevailing at that time.
Forward foreign currency exchange contracts are used to manage currency
exposures arising from future income and gains or losses based on the
contracted rate are recognized on maturity of the contract.
F-9
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 2 - Major acquisitions and dispositions
Acquisitions
On January 1, 2002 the Group acquired a further 22% in addition to the 45%
already owned in Willis GmbH, Germany's third largest insurance broker, to
improve the Group's market position and broaden its global offering and
capabilities on behalf of its clients. Accordingly, Willis GmbH has been
accounted for as a subsidiary from January 1, 2002. A further 11% interest was
acquired on September 30, 2002. The aggregate cash purchase price for the
further 33% interest was $22.6 million, of which $5.4 million was deferred to
2003. On January 1, 2003, the Group acquired the remaining 22% interest in
Willis GmbH.
The following table provides supplemental pro forma information about the
Group's results of operations as though the business combination had been
completed as of the beginning of the reporting periods:
2002 2001
Actual Pro forma
- -------------------------------------------------- ----------- -----------
($ million, except per
share data)
Operating revenues 1,734.2 1,474.7
Income before taxation 487.4 330.6
Net income 297.5 204.4
=========== ===========
Net income per ordinary share $ 0.62 $ 0.43
================================================== =========== ===========
During 2002, the Group also acquired, or increased its investments in, a
number of other businesses. The aggregate purchase price of these acquisitions
approximated $28.3 million, inclusive of deferred payments amounting to $6.9
million.
During 2001 and 2000 the Group acquired or increased its investments in a
number of businesses. The aggregate purchase price of all acquisitions
completed during 2001 and 2000 approximated $5.3 million and $11.7 million,
respectively, inclusive of deferred payments amounting to $0.4 million and
$3.9 million, respectively.
Additional consideration of up to $4.4 million is payable in future periods
contingent upon future revenues of the acquired businesses reaching specified
thresholds.
All of these transactions were recorded using the acquisition method of
accounting. Accordingly, the results of operations of the acquired businesses
and the Group's increased share of the undistributed net income of associates
have been included in the Group's consolidated results from their respective
acquisition dates. The assets acquired and liabilities assumed were recorded
at estimated fair values.
The preliminary fair value allocations for the acquisitions are subject to
adjustment during the year following acquisition. In all of the acquisitions,
the preliminary allocation resulted in an excess of purchase price over the
fair value of net assets acquired being allocated to goodwill. Goodwill
arising on acquisitions is being amortized on a straight-line basis over 20
years.
F-10
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 2 - Major acquisitions and dispositions (continued)
The effect of acquiring subsidiaries, all of which were accounted for under
the purchase method of accounting, was as follows:
2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Net assets acquired
Tangible assets 4.8 0.6 0.8
Fixed asset investments 0.3 - 0.5
Accounts receivable 53.0 6.0 20.5
Cash and investments 30.7 1.6 5.6
Accounts payable (80.0) (7.9) (22.8)
Minority interest 0.8 (0.1) (2.6)
Goodwill 46.5 6.6 10.6
----------- ----------- -----------
Cost of Acquisitions 56.1 6.8 12.6
====================================================================================== =========== =========== ===========
Satisfied by
Cash 21.5 4.3 8.6
Preference shares in subsidiary - 2.2 -
Issue of ordinary shares 19.6 - -
Deferred consideration 13.1 0.3 4.0
Transfer from associates 1.9 - -
----------- ----------- -----------
56.1 6.8 12.6
====================================================================================== =========== =========== ===========
The difference between the book value and the fair value of acquisitions is
not material.
Included within "Cost of Acquisitions" above is $3.3 million, $1.5 million
and $2.3 million for 2002, 2001 and 2000, respectively, relating to additional
consideration for acquisitions made in prior years.
The cash outflow of $22.5 million, $5.0 million and $13.6 million shown as
"purchase of subsidiaries" in the consolidated statement of cash flows for
2002, 2001 and 2000 respectively, includes $1.0 million, $0.7 million and $5.0
million, relating to deferred consideration paid during 2002, 2001 and 2000 in
respect of acquisitions completed in prior years.
Except as described above, these acquisitions would have had no material
impact on revenues, net income, or basic and diluted net income per share for
2002, 2001 and 2000 had they been consummated at the beginning of each of the
respective years of acquisition and of the immediate preceding year.
Dispositions
In June 2002, the Group completed the sale of Willis Safety Solutions
Limited. The loss on disposal of $11.9 million included a goodwill write-off
of $11.1 million relating to reinstated goodwill previously eliminated against
reserves. In November 2002, the Group completed the sale of its Life and
Health third party administration business. The gain on disposal amounting
$14.2 million included a goodwill write-off of $3.0 million relating to
reinstated goodwill previously eliminated against reserves. Total proceeds
relating to other disposals in 2002 were not material.
F-11
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 2 - Major acquisitions and dispositions (continued)
In July 2001, the Group completed the sale of its 51% interest in Willis
National Holdings Limited. The gain on disposal amounted to $18.6 million, net
of a goodwill write-off of $3.8 million which included $3.3 million previously
eliminated against reserves and has been recorded in the statement of
operations. In December 2001, the Group 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 Group's investment in Willis Italia Holdings
S.p.A. from 50.1% to 67%. The loss on disposal of $13.3 million, included a
net goodwill write-off of $11.9 million.
In 2000, the Group developed a plan to exit certain business lines,
including the sale of the municipality business of Public Entities National
Company, part of the US wholesale operations, and the sale of certain other
non-strategic businesses. The loss on disposal/closure of operations in 2000
consisted of provisions of $4.2 million of redundancy costs and $3.5 million
of excess operating lease obligations and other closure costs relating to
these plans. The sale was completed in January 2001, giving rise to the
reinstatement of $11.2 million of goodwill previously eliminated against
reserves.
Total proceeds relating to 2000 were not material.
The effect of the above, and other dispositions, was as follows:
2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Net assets disposed of
Tangible assets 1.7 5.6 -
Fixed asset investments 0.4 0.7 -
Accounts receivable 1.9 34.1 -
Deposits and cash 8.9 21.9 -
Accounts payable (3.6) (45.4) (0.1)
----------- ----------- -----------
9.3 16.9 (0.1)
Minority interest - (8.9) -
Goodwill written off 14.8 26.9 -
Gain/(loss) on disposal 1.5 (5.9) 0.6
----------- ----------- -----------
Total Proceeds 25.6 29.0 0.5
====================================================================================== =========== =========== ===========
Satisfied by
Cash 24.2 29.0 0.2
Deferred consideration 1.4 - 0.3
----------- ----------- -----------
25.6 29.0 0.5
====================================================================================== =========== =========== ===========
The subsidiaries disposed of during the year did not have a material effect
on the Group's operating cash flow.
F-12
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 3 - Segmental analysis
Geographical analysis by location of client 2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Commissions and fees
United Kingdom 297.5 264.9 270.5
North America 859.2 732.6 656.8
Rest of the World 503.5 359.2 309.9
----------- ----------- -----------
1,660.2 1,356.7 1,237.2
====================================================================================== =========== =========== ===========
The above table analyzes commissions and fees by the address of the client
from whom the business is derived. This does not necessarily reflect the
original source or location of the business.
Geographical analysis by location of company 2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Commissions and fees
United Kingdom 637.7 515.5 478.5
North America 773.8 669.4 616.3
Rest of the World 248.7 171.8 142.4
----------- ----------- -----------
1,660.2 1,356.7 1,237.2
----------- ----------- -----------
Operating revenues
United Kingdom 686.5 561.0 522.6
North America 791.0 686.7 636.3
Rest of the World 256.7 176.0 146.5
----------- ----------- -----------
1,734.2 1,423.7 1,305.4
----------- ----------- -----------
Operating income
United Kingdom 238.4 147.1 98.6
North America 171.5 138.7 78.7
Rest of the World 59.5 34.4 19.6
----------- ----------- -----------
469.4 320.2 196.9
----------- ----------- -----------
Depreciation and amortization 41.1 37.2 40.3
----------- ----------- -----------
Capital expenditure 46.1 42.1 30.2
====================================================================================== =========== =========== ===========
F-13
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 3 - Segmental analysis (continued)
2002 2001
As restated
(Note 1)
- -------------------------------------------------- ----------- -----------
($ million)
Net assets
United Kingdom 142.7 (46.2)
North America 281.6 181.9
Rest of the World 258.8 210.3
----------- -----------
683.1 346.0
=========== ===========
Total assets
United Kingdom 5,279.2 5,178.1
North America 4,014.9 3,980.7
Rest of the World 525.4 364.9
----------- -----------
9,819.5 9,523.7
================================================== =========== ===========
Note 4 - Operating income
2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Operating income was arrived at after (crediting)/charging:
Interest receivable (62.6) (47.5) (49.2)
Investment income (11.4) (19.5) (19.0)
----------- ----------- -----------
Interest and investment income (74.0) (67.0) (68.2)
----------- ----------- -----------
Auditors' remuneration
Audit fees 1.9 1.6 1.5
Other services provided by auditors (United Kingdom only) 0.8 1.0 0.3
Depreciation and amortization on
Owned assets 41.1 37.2 40.3
Operating lease rentals
Land and buildings 58.3 51.9 55.8
Equipment 12.8 11.2 10.3
====================================================================================== =========== =========== ===========
F-14
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 5 - Employees
Salaries and associated expenses 2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Salaries 785.2 672.5 651.7
Social security costs 57.3 49.7 47.2
Other pension costs 20.7 18.7 20.3
----------- ----------- -----------
863.2 740.9 719.2
====================================================================================== =========== =========== ===========
Average for year ended December 31,
-----------------------------------------
Number of Group employees 2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
(Number)
United Kingdom 3,319 3,409 3,690
North America 3,797 3,763 3,918
Rest of the World 3,548 2,992 2,162
----------- ----------- -----------
10,664 10,164 9,770
====================================================================================== =========== =========== ===========
Note 6 - Interest income
2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Interest receivable from parent company 65.4 80.5 88.2
Other interest receivable - 3.3 -
----------- ----------- -----------
65.4 83.8 88.2
====================================================================================== =========== =========== ===========
Note 7 - Interest expense
2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Bank loans and overdrafts 60.2 77.5 84.7
Amortization of bank fees 1.5 3.2 2.0
Other 1.3 1.3 1.1
----------- ----------- -----------
63.0 82.0 87.8
====================================================================================== =========== =========== ===========
Note 8 - Income before taxation
2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
United Kingdom 284.2 215.3 150.2
North America 132.3 75.0 32.0
Rest of the World 70.9 36.2 14.4
----------- ----------- -----------
487.4 326.5 196.6
====================================================================================== =========== =========== ===========
F-15
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 9 - Taxation
2002 2001 2000
As restated As restated
Charge for the year (Note 1) (Note 1)
- ------------------------------------------- ----------- ----------- -----------
($ million)
Current Taxation
UK corporation tax charge for the year at
30% 88.2 66.1 24.9
Overseas taxation
United States 51.6 34.1 18.3
Rest of the World 25.4 12.2 14.7
Adjustments in respect of prior periods 3.5 (3.4) (1.0)
----------- ----------- -----------
Total current tax 168.7 109.0 56.9
Deferred tax
Origination and reversal of timing
differences 7.0 3.9 8.7
Adjustments to estimated recoverable
amounts arising in previous periods (3.4) (0.4) (21.8)
----------- ----------- -----------
Tax on profits on ordinary activities 172.3 112.5 43.8
Associates 5.8 3.9 3.6
----------- ----------- -----------
Charge for the year 178.1 116.4 47.4
=========================================== =========== =========== ===========
Deferred tax by location of the taxing jurisdiction for the years ended
December 31, consisted of the following:
2002 2001 2000
As restated As restated
Deferred tax (Note 1) (Note 1)
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
UK corporation tax 4.6 1.0 (4.4)
US federal tax (1.1) (0.1) (4.5)
US state and local taxes 0.4 - (1.1)
Other jurisdictions (0.3) 2.6 (3.1)
----------- ----------- -----------
Total deferred taxes 3.6 3.5 (13.1)
====================================================================================== =========== =========== ===========
Adoption of FRS 19 has required a change in the method of accounting for
deferred tax. As a result, the comparative figures for the tax on profit on
ordinary activities for 2001 and 2000 has been restated from the previously
reported amounts of $113.6 million and $55.8 million to $116.4 million and
$47.4 million, respectively. The impact of adopting FRS 19 on the 2002 results
is an increase of $4.3 million to the tax charge.
F-16
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 9 - Taxation (continued)
The standard rate of tax for the year, based on the UK standard rate of
corporation tax, is 30%. The actual tax charge for the current and previous
years differs from the standard rate for the reasons set out in the following
reconciliation.
2002 2001 2000
As restated As restated
Reconciliation of UK statutory rate to effective rate (Note 1) (Note 1)
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Income before taxation 487.4 326.5 196.6
Less: share of operating profit of associates (14.1) (10.4) (7.0)
----------- ----------- -----------
Income before taxation excluding associates 473.3 316.1 189.6
----------- ----------- -----------
Tax charge thereon at UK corporation tax rate of 30% 142.0 94.8 56.9
Permanent differences
Expenses not deductible for tax purposes (primarily goodwill) 9.0 16.4 10.5
Unprovided deferred tax reinstated - - (21.7)
Profit on sale of fixed assets covered by capital losses - (6.1) (0.5)
Foreign tax charged at differing rates to the UK standard rate 21.5 10.4 7.5
Adjustments to tax estimate in respect of prior periods (0.2) (3.0) (1.1)
Other differences - - (7.8)
----------- ----------- -----------
30.3 17.7 (13.1)
----------- ----------- -----------
Tax charge on income before taxation excluding associates 172.3 112.5 43.8
Timing differences
Capital allowances for period in excess of depreciation (2.1) 0.3 1.0
Provisions (5.9) (11.8) (15.3)
Accrued expenses 6.2 0.3 (0.5)
Change in pension fund prepayment (5.5) 4.7 (2.3)
UK taxation on overseas income - - 1.1
Adjustments to estimated recoverable amounts arising in prior periods 3.5 0.4 21.8
Other differences 0.2 2.6 7.3
----------- ----------- -----------
Current tax charge 168.7 109.0 56.9
====================================================================================== =========== =========== ===========
Circumstances affecting current and future tax charges
Unrecognized deferred and other tax assets
In accordance with the criteria set out in FRS 19, a deferred tax asset has
not been recognized for the Group's capital losses. If the Group were to
generate capital gains to utilize such losses, it is expected that the full
tax value of those losses at current rates would be $70.7 million.
In 1998, the Group wrote off $16.1 million ((L)9.7 million) surplus advance
corporation tax ("ACT"). Under FRS 16, this continues to remain a non-
recoverable tax asset due to uncertainties regarding its possible recovery in
the immediate future. Should events occur in future causing any amounts of the
ACT to be recovered then such amounts are expected to be shown as a credit in
the tax charge in the statement of operations.
F-17
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 9 - Taxation (continued)
Deferred tax is not provided on timing differences arising on unremitted
earnings of subsidiaries and associates where there is no commitment to remit
these earnings. In particular the Group does not provide for deferred taxes on
the unremitted earnings of certain subsidiaries where, in management's
opinion, such earnings have been indefinitely reinvested in those operations,
or will be remitted either in a tax-free liquidation or 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 these investments.
Proposed changes in legislation
The Group expects the UK Government will pass legislation in 2003 granting a
statutory tax deduction for the compensation cost attributable to the
exercising of certain types of stock options and vesting of certain shares by
UK employees. Since the Group's UK employees participate in a number of option
and share-based compensation schemes that would be covered by the legislation,
it is expected that, if the legislation is enacted as currently drafted, the
Group would recognise a related tax benefit dependant on the share price of
Willis Group Holdings Limited, the Group's ultimate parent company, at the
time the options are exercised or the shares vested. Being a statutory
deduction, this benefit will constitute a permanent difference.
Note 10 - Dividends
2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
First interim - 11.6 64.0
Second interim - - 44.3
----------- ----------- -----------
- 11.6 108.3
====================================================================================== =========== =========== ===========
Note 11 - Net income per ordinary share
Net income per ordinary share has been calculated using net income and the
average number of ordinary shares in issue during the year ended December 31,
2002 of 481.7 million (2001 : 479.3 million, 2000 : 476.5 million).
Note 12 - Current asset investments
2002 2001
- -------------------------------------------------- ----------- -----------
($ million)
Listed investments at cost (market value $64.3
million (2001 : $51.2 million)) 60.7 49.9
Unlisted investments at cost 563.8 428.8
----------- -----------
624.5 478.7
================================================== =========== ===========
Listed investments mainly comprise investments that were purchased with the
intention of holding to maturity. Unlisted investments comprise commercial
paper and certificates of deposit.
F-18
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 13 - Accounts receivable, net
2002 2001
As restated
(Note 1)
- -------------------------------------------------- ----------- -----------
($ million)
Due within one year
Trade receivables 6,540.0 5,668.6
Less: provision for bad and doubtful debts (30.4) (24.9)
----------- -----------
6,509.6 5,643.7
Amounts owed by parent companies 348.0 1,086.0
Amounts owed by associates 0.2 0.2
Corporate tax 0.3 0.2
Prepayments and accrued revenue 180.6 128.0
Other receivables 46.6 42.6
----------- -----------
7,085.3 6,900.7
Due after more than one year
Trade receivables 4.8 4.7
Amounts owed by parent companies 652.8 787.2
Other receivables 33.4 44.3
Deferred tax (see Note 22) 40.3 39.4
----------- -----------
7,816.6 7,776.3
================================================== =========== ===========
The level of insurance brokerage receivables is no indication of credit
risk, since the status of the insurance broker as agent means that generally
the credit risk is borne by the principals; nor is it an indication of future
cash flows as it is normal practice for insurance brokers to settle accounts
with clients, insurers, other intermediaries and market settlement bureaux on
a net basis. The simultaneous recording of an insurance brokerage transaction
between client and insurer results in a high level of correlation between
insurance brokerage receivables and payables.
The costs charged to the consolidated statements of operations in respect of
provisions for bad and doubtful debts were $5.2 million, $9.8 million and $7.9
million in the years ended December 31, 2002, 2001, and 2000 respectively.
F-19
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 14 - Intangible assets - goodwill, net
2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Cost or valuation
January 1, 53.0 62.8 52.5
Exchange adjustments 0.1 (1.8) 0.1
Acquisitions 46.5 6.6 10.2
Transfer from associates 38.3 - -
Dispositions (0.2) (14.6) -
----------- ----------- -----------
December 31, 137.7 53.0 62.8
----------- ----------- -----------
Amortization
January 1, (8.3) (6.8) (3.6)
Exchange adjustments - 0.2 -
Provided in the year (7.2) (3.9) (3.2)
Transfer from associates (6.5) - -
Dispositions - 2.2 -
----------- ----------- -----------
December 31, (22.0) (8.3) (6.8)
----------- ----------- -----------
Net book value
December 31, 115.7 44.7 56.0
====================================================================================== =========== =========== ===========
Note 15 - Tangible assets, net
Furniture,
Land and equipment
buildings and vehicles Total
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Year ended December 31, 2002
Cost or valuation
January 1, 2002 142.4 179.4 321.8
Exchange adjustments 14.2 14.8 29.0
Additions 13.1 33.0 46.1
Disposals (2.2) (27.2) (29.4)
Arising from acquisitions - 10.5 10.5
----------- ----------- -----------
December 31, 2002 167.5 210.5 378.0
----------- ----------- -----------
Depreciation
January 1, 2002 (34.9) (101.8) (136.7)
Exchange adjustments (4.2) (9.8) (14.0)
Provided in the year (9.0) (24.9) (33.9)
Disposals 1.6 22.6 24.2
Arising from acquisitions - (5.7) (5.7)
----------- ----------- -----------
December 31, 2002 (46.5) (119.6) (166.1)
----------- ----------- -----------
Net book value
December 31, 2002 121.0 90.9 211.9
====================================================================================== =========== =========== ===========
F-20
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 15 - Tangible assets, net (continued)
Furniture,
Land and equipment
buildings and vehicles Total
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Year ended December 31, 2001
Cost or valuation
January 1, 2001 140.4 195.8 336.2
Exchange adjustments (4.5) (5.8) (10.3)
Additions 9.4 32.7 42.1
Disposals (2.9) (44.2) (47.1)
Arising from acquisitions - 0.9 0.9
----------- ----------- -----------
December 31, 2001 142.4 179.4 321.8
----------- ----------- -----------
Depreciation
January 1, 2001 (29.0) (115.2) (144.2)
Exchange adjustments 1.2 3.3 4.5
Provided in the year (8.1) (25.2) (33.3)
Disposals 1.0 35.6 36.6
Arising from acquisitions - (0.3) (0.3)
----------- ----------- -----------
December 31, 2001 (34.9) (101.8) (136.7)
----------- ----------- -----------
Net book value
December 31, 2001 107.5 77.6 185.1
====================================================================================== =========== =========== ===========
Year ended December 31, 2000
Cost or valuation
January 1, 2000 150.2 207.0 357.2
Exchange adjustments (10.1) (10.9) (21.0)
Additions 5.0 25.2 30.2
Disposals (4.7) (28.4) (33.1)
Arising from acquisitions - 2.9 2.9
----------- ----------- -----------
December 31, 2000 140.4 195.8 336.2
----------- ----------- -----------
Depreciation
January 1, 2000 (25.3) (112.1) (137.4)
Exchange adjustments 1.8 6.9 8.7
Provided in the year (7.8) (29.3) (37.1)
Disposals 2.3 21.4 23.7
Arising from acquisitions - (2.1) (2.1)
----------- ----------- -----------
December 31, 2000 (29.0) (115.2) (144.2)
----------- ----------- -----------
Net book value
December 31, 2000 111.4 80.6 192.0
====================================================================================== =========== =========== ===========
F-21
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 15 - Tangible assets, net (continued)
Net book value of land and buildings 2002 2001 2000
- ---------------------------------------------------------------------------- -------------- -------------- --------------
($ million)
Freehold : Land 27.4 24.7 27.2
Buildings 66.0 59.7 63.9
Leasehold : Short 27.6 23.1 20.3
-------------- -------------- --------------
121.0 107.5 111.4
============================================================================ ============== ============== ==============
The transitional rules of FRS 15 "Tangible fixed assets" have been adopted
for Group properties, which permit the retention of the carrying values at the
previously revalued amounts. The Group's principal properties, valued at
December 31, 1995, will not be subject to further revaluations. Other fixed
assets are shown at historical cost to the Group. Any impairment in the value
of fixed assets is charged to the statement of operations in accordance with
FRS 11 "Impairment of fixed assets and goodwill".
The Group's principal freehold properties were valued at December 31, 1995
on the basis of open market value for existing use. The carrying value of
these revalued properties, at December 31, 2002, was $92.3 million ((L)57.3
million) (2001: $83.1 million ((L)57.3 million), 2000 : $86.0 million ((L)57.3
million)) and the accumulated depreciation was $20.0 million ((L)12.4 million)
(2001 : $16.1 million ((L)11.1 million), 2000 : $13.7 million ((L)9.1
million)). On an historical cost basis these properties would be included at
cost of $91.9 million ((L)57.1 million) (2001: $82.8 million ((L)57.1
million), 2000: $85.7 million ((L)57.1 million)) less accumulated depreciation
of $44.3 million ((L)27.5 million) (2001: $37.1 million ((L)25.6 million),
2000: $35.6 million ((L)23.7 million)).
No tax would be payable on the realization of revalued properties at their
net funds value by virtue of available capital loss carryforwards.
Note 16 - Investments
Shares held Other
Associates by ESOPs(i) investments Total
------------------------------------------------------------------- ------------ ------------ ------------ ------------
($ million)
Year ended December 31, 2002
Cost
January 1, 2002 73.0 2.5 6.2 81.7
Exchange adjustments 4.1 0.2 0.3 4.6
Transfer to subsidiary undertaking (40.2) - - (40.2)
Additions - - 0.3 0.3
Disposals (0.4) (0.2) - (0.6)
Share of undistributed net income of associates 6.7 - - 6.7
------------ ------------ ------------ ------------
December 31, 2002 43.2 2.5 6.8 52.5
------------ ------------ ------------ ------------
Provisions
January 1, 2002 (7.7) (1.3) (2.0) (11.0)
Amortization (0.5) (0.3) - (0.8)
Transfer to subsidiary undertaking 6.5 - - 6.5
Disposals - 0.2 - 0.2
------------ ------------ ------------ ------------
December 31, 2002 (1.7) (1.4) (2.0) (5.1)
------------ ------------ ------------ ------------
Net book value
December 31, 2002 41.5 1.1 4.8 47.4
=================================================================== ============ ============ ============ ============
F-22
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 16 - Investments (continued)
Shares held Other
Associates by ESOPs(i) investments Total
------------------------------------------------------------------- ------------ ------------ ------------ ------------
($ million)
Year ended December 31, 2001
Cost
January 1, 2001 69.5 3.8 6.8 80.1
Exchange adjustments (1.0) (0.1) (0.3) (1.4)
Additions - - 0.3 0.3
Disposals (0.4) (1.2) (0.6) (2.2)
Share of undistributed net income of associates 4.9 - - 4.9
------------ ------------ ------------ ------------
December 31, 2001 73.0 2.5 6.2 81.7
------------ ------------ ------------ ------------
Provisions
January 1, 2001 (5.6) (1.2) (2.3) (9.1)
Exchange adjustments - (0.1) 0.1 -
Amortization (2.1) (1.2) - (3.3)
Disposals - 1.2 0.2 1.4
------------ ------------ ------------ ------------
December 31, 2001 (7.7) (1.3) (2.0) (11.0)
------------ ------------ ------------ ------------
Net book value
December 31, 2001 65.3 1.2 4.2 70.7
=================================================================== ============ ============ ============ ============
F-23
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 16 - Investments (continued)
Shares held Other
Associates by ESOPs(i) investments Total
------------------------------------------------------------------- ------------ ------------ ------------ ------------
($ million)
Year ended December 31, 2000
Cost
January 1, 2000 69.0 5.8 6.8 81.6
Exchange adjustments (1.5) - (0.6) (2.1)
Additions 1.3 - 2.3 3.6
Disposals - (2.0) (1.7) (3.7)
Share of undistributed net income of associates 0.7 - - 0.7
------------ ------------ ------------ ------------
December 31, 2000 69.5 3.8 6.8 80.1
------------ ------------ ------------ ------------
Provisions
January 1, 2000 (3.4) (1.8) - (5.2)
Provided in the year - - (2.3) (2.3)
Amortization (2.2) (1.1) - (3.3)
Disposals - 1.7 - 1.7
------------ ------------ ------------ ------------
December 31, 2000 (5.6) (1.2) (2.3) (9.1)
------------ ------------ ------------ ------------
Net book value
December 31, 2000 63.9 2.6 4.5 71.0
=================================================================== ============ ============ ============ ============
(i) The Group has Employee Stock Ownership Plans (the "ESOPs") which invest in
common shares of the Ultimate Parent Company, Willis Group Holdings Limited
("Willis Group Holdings"). The trustees of the ESOPs transferred 47,093,
424,724 and 527,495 common shares during the years ended December 31, 2002,
2001 and 2000, respectively. At December 31, 2002, 2001 and 2000, the ESOP
shares outstanding were 781,594, 828,687 and 1,253,411, respectively,
representing approximately 0.5%, 0.6% and 1.0% of the total common shares
of Willis Group Holdings. Willis Group Holdings shares are listed on the
New York Stock Exchange. The fair market value of the common shares held by
the ESOP at December 31, 2002 was $22.4 million. No dividends have been
distributed on the common shares held by the ESOPs.
Unaudited condensed financial information for associates, in the aggregate,
as of and for the years ended December 31, is presented below.
For convenience purposes: (i) balance sheet data has been translated to US
dollars at the relevant year-end exchange rates; and (ii) condensed statement
of operations data has been translated to US dollars at the relevant average
exchange rate.
Condensed statements of operations data
2002 2001 2000
----------------------------------------------------------------------------------- ------------ ------------ ------------
($ million)
Operating revenues 294.3 307.3 286.1
Operating income 44.2 34.9 33.2
Net income 29.5 23.7 16.9
=================================================================================== ============ ============ ============
F-24
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 16 - Investments (continued)
Condensed balance sheet data
2002 2001
- -------------------------------------------------- ----------- -----------
($ million)
Current assets 890.8 647.3
Fixed assets 125.9 94.7
----------- -----------
Total assets 1,016.7 742.0
=========== ===========
Current liabilities 863.8 630.9
Noncurrent liabilities 54.7 34.1
Shareholders' equity 98.2 77.0
----------- -----------
Total liabilities and shareholders' equity 1,016.7 742.0
================================================== =========== ===========
Associates at December 31, 2002, which principally affected the Group's
financial position and results of operations, all of which are insurance
brokers and were accounted for under the equity accounting method, were:
Percentage
ownership of
Name of associate Country common stock
- --------------------------------------------- ------------- -------------
Al-Futtaim Willis Faber (Private) Limited Dubai 49
Gras Savoye & Cie ("Gras Savoye") France 33
Willis A/S Denmark 30
Herzfeld & Levy S.A. Argentina 40
============================================= ============= =============
Note 17 - Other current liabilities
2002 2001
- --------------------------------------------- ------------- -------------
($ million)
Amounts owed to parent companies 90.0 984.2
Income tax and social security 23.2 15.4
Other payables 146.0 135.1
------------- -------------
259.2 1,134.7
============================================= ============= =============
Note 18 - Bank loans and overdrafts
Short-term bank loans and overdrafts due in less than one year at December
31, 2002 and 2001, amounted to $3.0 million and $nil, respectively.
Aggregate maturities of noncurrent bank loans for the five years subsequent
to December 31, are as follows:
Bank loans repayable in more than one year 2002 2001
- --------------------------------------------- ------------- -------------
($ million)
Between two and three years 82.8 -
Between three and four years 74.4 82.8
Between four and five years - 118.3
Thereafter - 146.9
------------- -------------
157.2 348.0
============================================= ============= =============
F-25
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 18 - Bank loans and overdrafts (continued)
Senior credit facility
During 1998, the Group entered into a credit agreement 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
tranches of the loan mature between 2005 and 2006.
Pursuant to the credit agreement, the Group makes loan repayments based on
the amortization schedule specified in the credit agreement. In addition,
during 2002, 2001 and 2000, the Group made non-mandatory early repayments
totaling $190.8 million, $59.5 million and $30.0 million, respectively. As a
consequence, the Group's next scheduled repayment under the facility is not
due until 2005. For the years ended December 31, 2002 and 2001, the weighted-
average interest rate relating to all loans under the Senior Credit Facility
ranged from 2.75% to 4.31% and 5.63% to 6.88%, respectively; net of an
interest rate swap, the ranges were 6.02% to 7.58% and 6.26% to 7.50%,
respectively.
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. At December 31, 2002 and
2001 the balance on this facility was $nil.
The Senior Credit Facility 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, 2002, the
Group was in compliance with all covenants.
9% Senior Subordinated Notes
In February 1999, Willis North America Inc. ("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 semiannually on February 1 and August 1.
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 2002 and 2001, Willis North America bought back and canceled Notes
totaling $29.0 million and $110.7 million. The difference between the market
price paid and the book value was not material.
At December 31, 2002, $408.9 million of Notes were outstanding (2001:
$436.4 million), net of debt issuance costs of $1.3 million (2001:
$2.8 million).
F-26
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 18 - Bank loans and overdrafts (continued)
If Willis North America becomes subject to a change of control, holders of
its Notes will have the right to require the Group to purchase all of their
Notes at a price equal to 101% of the aggregate principal amount of the Notes,
plus accrued and unpaid interest to the date of repurchase. In addition, under
specified circumstances, Willis North America will be required to offer to
purchase the Notes at a price equal to 100% of the principal amount of the
Notes, plus accrued and unpaid interest to the date of purchase, with the
excess proceeds of certain assets sales.
The indenture for the Notes contains covenants that, among other things,
limit the ability of Willis North America, Willis Group Limited, Willis
Partners and some of their subsidiaries to incur additional indebtedness and
issue preferred stock; pay dividends or make other distributions; repurchase
capital stock or subordinated indebtedness; create liens; enter into some
transactions with associates; sell assets and assets of subsidiaries; issue or
sell capital stock of some subsidiaries; and enter into some mergers and
acquisitions. At December 31, 2002, the Group was in compliance with all
covenants.
Note 19 - Other noncurrent liabilities
2002 2001
- -------------------------------------------------- ----------- -----------
($ million)
Trade payables 6.2 5.4
Accruals and deferred income 3.7 1.4
Other payables 41.8 45.7
----------- -----------
51.7 52.5
================================================== =========== ===========
Note 20 - Operating lease commitments
The Group leases certain land, buildings and equipment under various
operating lease arrangements. Original non-cancelable lease terms typically
are between 10 and 20 years and may contain escalation clauses, along with
options that permit early withdrawal. The total amount of the minimum rent is
expensed on a straight-line basis over the minimum lease period.
At December 31, 2002 and 2001, the aggregate future minimum rental
commitments under all non-cancelable operating lease agreements are as
follows:
Land and Buildings Other
-------------------------- --------------------------
2002 2001 2002 2001
- ----------------------------------------------------------------------- ----------- ----------- ----------- -----------
($ million)
Payments committed to be made within one year for leases expiring:
in less than one year 4.9 4.6 0.5 1.0
between one and five years 21.3 16.5 6.9 3.5
after five years 28.2 26.5 - -
----------- ----------- ----------- -----------
54.4 47.6 7.4 4.5
======================================================================= =========== =========== =========== ===========
F-27
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 20 - Operating lease commitments (continued)
As of December 31, 2002, the aggregate future minimum rental commitments
under all non-cancelable operating lease agreements are as follows:
Gross rental Rentals from Net rental
commitments subleases commitments
------------------------------------------------------------------------- --------------- --------------- ---------------
($ million)
2003 61.8 (11.1) 50.7
2004 50.1 (9.6) 40.5
2005 41.7 (8.5) 33.2
2006 34.2 (8.1) 26.1
2007 33.3 (7.6) 25.7
Thereafter 84.4 (23.5) 60.9
--------------- --------------- ---------------
305.5 (68.4) 237.1
========================================================================= =============== =============== ===============
Rental expense amounted to $71.1 million, $63.1 million and $66.1 million
for the years ended December 31, 2002, 2001 and 2000, respectively. The
Group's rental income from subleases was $8.9 million, $5.9 million and $3.9
million for the years ended December 31, 2002, 2001 and 2000, respectively.
Note 21 - Provisions for liabilities and charges
Pension Surplus Discontinued
Claims review properties operations
provisions(i) provision(ii) provisions(iii) provisions(iv) Total
- --------------------------------------- -------------- -------------- -------------- -------------- --------------
($ million)
January 1, 2000 55.9 77.3 31.1 37.4 201.7
Charged to income 14.6 - 1.1 - 15.7
Utilized in the year (14.7) (20.8) (7.6) (6.1) (49.2)
Exchange and other adjustments (3.5) (5.5) (1.5) (0.1) (10.6)
-------------- -------------- -------------- -------------- --------------
December 31, 2000 52.3 51.0 23.1 31.2 157.6
Charged to income 28.7 - 0.9 - 29.6
Utilized in the year (13.5) (18.0) (6.3) (4.2) (42.0)
Exchange and other adjustments (1.7) (1.8) (0.7) (0.9) (5.1)
-------------- -------------- -------------- -------------- --------------
December 31, 2001 65.8 31.2 17.0 26.1 140.1
Charged to income 13.4 - 1.9 (0.1) 15.2
Utilized in the year (9.0) (11.8) (4.9) (7.1) (32.8)
Exchange and other adjustments (0.2) 3.4 1.3 2.0 6.5
-------------- -------------- -------------- -------------- --------------
December 31, 2002 70.0 22.8 15.3 20.9 129.0
======================================= ============== ============== ============== ============== ==============
(i) 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 ordinary course of the Group's business.
Where some of the potential liability is recoverable under the Group'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, 2002 and 2001.
F-28
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 21 - Provisions for liabilities and charges (continued)
(ii) In common with many companies involved in selling personal pension plans
in the UK, the Group'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 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.
(iii) The surplus properties provision relates to future lease rentals of
leasehold properties which are surplus to the Group's operational
requirements. The provision amount represents the discounted contracted
lease payments less an allowance for future rental income.
(iv) The provision for discontinued operations includes estimates for future
costs of administering the run-off of the Group's former US and UK
underwriting operations. The US underwriting operation was disposed of
in 1986 and put into liquidation in 1994. In the UK, Willis Faber
(Underwriting Management) Limited ("WFUM"), a wholly-owned subsidiary of
the Group 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 Group
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.
Note 22 - Deferred tax
2002 2001
- -------------------------------------------------- ----------- -----------
($ million)
Opening balance as previously stated 18.0 18.5
Prior year adjustment at January 1 21.4 25.1
----------- -----------
Opening balance restated 39.4 43.6
Transfer from income (3.6) (0.7)
Arising on acquisition 2.6 -
Other adjustments 1.9 0.2
Prior year adjustment during year ended December
31, 2001 - (3.7)
----------- -----------
Closing balance 40.3 39.4
=========== ===========
The net deferred tax asset arises from:
Provisions 24.9 27.4
Deferred compensation 18.2 15.7
Net (prepaid)/accrued retirement benefits (7.7) 0.4
Tax leasing transactions (9.4) (11.0)
Short term timing differences 14.3 6.9
----------- -----------
40.3 39.4
================================================== =========== ===========
F-29
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 22 - Deferred tax (continued)
The adoption of FRS 19 "Deferred Tax" has required changes in the method of
accounting for deferred tax assets and liabilities. As a result of this change
in accounting policy, the comparatives have been restated as shown above.
Note 23 - Notes to consolidated statements of cash flows
Reconciliation of operating income to net cash inflow from operating activities 2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Operating income 469.4 320.2 196.9
Cash outflow on exceptional items - - (29.4)
Depreciation charges, loss on sale of tangible fixed assets and unlisted investments 34.6 33.3 39.5
Provision against unlisted investments - - 3.8
Amortization of goodwill 7.2 3.9 3.2
Increase in receivables (507.8) (1,162.7) (847.7)
Increase in payables 505.8 1,501.8 956.9
Net movement on provisions (18.4) (13.5) (10.2)
----------- ----------- -----------
Net cash inflow from operating activities 490.8 683.0 313.0
====================================================================================== =========== =========== ===========
F-30
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 23 - Notes to consolidated statements of cash flows (continued)
Cash and overdrafts Borrowings
------------------------------------ -----------------------
Due Due after
Liquid within more than
Cash Overdrafts Total resources one year one year Net funds
------------------------------------- --------- --------- --------- --------- --------- --------- ---------
($ million)
January 1, 2000 179.0 (15.1) 163.9 844.0 (51.7) - 956.2
Cash flow before management of liquid
resources and financing 237.0 1.0 238.0 - - - 238.0
Management of liquid resources (49.3) - (49.3) 49.3 - - -
Financing (121.6) - (121.6) - 121.6 - -
Issue of share capital 9.2 - 9.2 - - - 9.2
Non-cash movements - - - - (100.4) - (100.4)
Foreign exchange (11.5) 1.1 (10.4) (17.9) (65.9) - (94.2)
--------- --------- --------- --------- --------- --------- ---------
December 31, 2000 242.8 (13.0) 229.8 875.4 (96.4) - 1,008.8
Cash flow before management of liquid
resources and financing 597.3 12.4 609.7 - - - 609.7
Management of liquid resources (7.8) - (7.8) 7.8 - - -
Financing (245.9) - (245.9) - 245.9 - -
Capital contribution 0.7 - 0.7 - - - 0.7
Non-cash movements - - - - (18.7) - (18.7)
Foreign exchange (9.6) 0.6 (9.0) (13.8) (29.0) - (51.8)
--------- --------- --------- --------- --------- --------- ---------
December 31, 2001 577.5 - 577.5 869.4 101.8 - 1,548.7
Cash flow before management of liquid
resources and financing 408.6 (2.8) 405.8 - - - 405.8
Management of liquid resources (54.0) - (54.0) 54.0 - - -
Financing (301.2) - (301.2) - 215.8 85.4 -
Capital contribution 3.6 - 3.6 - - - 3.6
Non-cash movements - - - - (56.6) - (56.6)
Foreign exchange 30.4 (0.2) 30.2 39.6 (3.0) - 66.8
--------- --------- --------- --------- --------- --------- ---------
December 31, 2002 664.9 (3.0) 661.9 963.0 258.0 85.4 1,968.3
===================================== ========= ========= ========= ========= ========= ========= =========
F-31
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 23 - Notes to consolidated statements of cash flows (continued)
Analysis of cash and short-term deposits and liquid resources as shown in the balance
sheet 2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Cash
Cash and short-term deposits 1,003.4 968.2 640.6
Less: short-term deposits classified as liquid resources (338.5) (390.7) (397.8)
----------- ----------- -----------
664.9 577.5 242.8
====================================================================================== =========== =========== ===========
Liquid resources
Current asset investments 624.5 478.7 477.6
Short-term deposits 338.5 390.7 397.8
----------- ----------- -----------
963.0 869.4 875.4
====================================================================================== =========== =========== ===========
Note 24 - Financial instruments
The Group's principal financial instruments, other than derivatives,
comprise bank loans and overdrafts, amounts owed to or from the parent
companies, Senior Credit Facility and the Notes, cash, deposits and short-term
investments. The Group 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 Group's operations and its
sources of finance. The Group does not hold financial instruments for trading
purposes.
The main risks arising from the Group's financial instruments are interest
rate risk, liquidity risk and foreign currency risk. The Board reviews and
agrees policies for managing each of these risks as summarized below.
As permitted by FRS 13, "Derivatives and Other Financial Instruments:
Disclosures", short-term trade debtors and creditors have been omitted from
the following analysis.
Interest rate risk
The Group'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 Group's exposure to interest rate
fluctuations. The Group's policy is to minimize its exposure to increases in
interest rates on its borrowings. Accordingly, the majority of the Group's
floating rate borrowings are currently hedged through the use of interest rate
swaps.
Willis North America has entered into an interest rate swap agreement under
which its LIBOR-based variable rate interest payment obligations on the full
amount of the term loans have been swapped for fixed rate interest payment
obligations until the final maturity of those term loans. The swap agreement
provides for a reduction of the notional amount of the swap obligation on a
semi-annual basis, and to the extent the actual amount outstanding under the
term loans exceeds the notional amount at any time, Willis North America would
be exposed to the risk of increased interest rates on that excess.
The differential to be paid or received is recognized as an adjustment to
interest expense as incurred. The swap agreement matures on or before the
Senior Credit Facility to which it is matched.
F-32
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 24 - Financial instruments (continued)
As a result of the Group's operating activities, the Group receives cash for
premiums and claims which it deposits in short-term investments denominated in
pounds sterling, US dollars and other foreign currencies. The Group earns
interest on these funds, which is included in the Group'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 Group enters into interest rate swaps to receive a fixed rate of
interest and pay a variable rate of interest fixed in the various currencies
related to the short-term investments. The use of interest rate contracts
essentially converts groups of short-term investments to fixed rates. It is
Group policy that, for currencies with significant balances, a minimum of 25%
of forecast income arising is hedged for each of the next three years.
Liquidity risk
The Group'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 Group's
management of liquidity risk is embedded within its overall risk management
framework. Scenario analysis is continually undertaken to ensure that its
resources can comfortably meet the Group's 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 Group's objective is to maximize its cash flow in US dollars. In all
locations with the exception of the UK, the Group predominantly generates
revenues and expenses in the local currency. In the UK, however, the Group
earns revenues in a number of different currencies but expenses are almost
entirely in pounds sterling. This mismatch creates a currency exposure.
The Group's policy within the UK is to convert into sterling all revenues
arising in currencies other than US dollars together with sufficient US dollar
revenues to fund the remaining sterling expenses. Outside the UK, only those
cash flows necessary to fund mismatches between revenues and expenses are
converted into local currency; amounts remitted to the UK are generally
converted into sterling. These transactional currency exposures are
principally managed by entering into forward foreign exchange contracts.
It is Group policy to hedge at least 25% of the next 12 months' exposures in
significant currencies.
Translational exposures are not hedged.
F-33
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 24 - Financial instruments (continued)
Interest rate risk profile of financial liabilities
The interest rate profile of the financial liabilities of the Group, after
taking account of interest rate swaps is summarized below:
Floating
rate
financial Financial liabilities on
Fixed rate financial liabilities liabilities which no interest is paid Total
----------------------------------------- ----------- -------------------------- -----------
Weighted
Weighted average
average period for Weighted
interest which rate average period
Currency Amount rate is fixed Amount Amount until maturity
- -------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
($ million) (%) (years) ($ million) ($ million) (years) ($ million)
At December 31, 2002
Sterling - - - - 38.0 - 38.0
US dollar 566.1 8.28 4.7 3.0 58.2 - 627.3
----------- ----------- ----------- -----------
566.1 3.0 96.2 665.3
========================== =========== =========== =========== ===========
At December 31, 2001
Sterling - - - - 3.8 - 3.8
US dollar 764.4 8.05 5.0 20.0 985.6 - 1,770.0
Other currencies - - - - 0.2 - 0.2
----------- ----------- ----------- -----------
764.4 20.0 989.6 1,774.0
========================== =========== =========== =========== ===========
Interest rate risk profile of financial assets
The interest rate profile of the financial assets of the Group, after taking
account of interest rate swaps is summarized below:
Floating
rate
financial Financial assets on which
Fixed rate financial assets assets no interest is paid Total
----------------------------------------- ----------- -------------------------- -----------
Weighted
Weighted average
average period for Weighted
interest which rate average period
Currency Amount rate is fixed Amount Amount until maturity
- -------------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
($ million) (%) (years) ($ million) ($ million) (years) ($ million)
At December 31, 2002
Sterling 103.5 6.49 1.1 194.4 5.6 - 303.5
US dollar 966.2 7.83 3.3 654.0 347.2 - 1,967.4
Japanese yen - - - 38.5 - - 38.5
Euro 56.3 4.71 1.2 148.6 - - 204.9
Other currencies - - - 119.2 - - 119.2
----------- ----------- ----------- -----------
1,126.0 1,154.7 352.8 2,633.5
========================== =========== =========== =========== ===========
At December 31, 2001
Sterling 118.2 6.58 1.2 167.3 895.5 - 1,181.0
US dollar 1,171.6 6.75 3.2 508.1 195.2 - 1,874.9
Japanese yen - - - 35.2 - - 35.2
Euro 35.4 4.64 1.5 57.3 - - 92.7
Other currencies - - - 141.0 - - 141.0
----------- ----------- ----------- -----------
1,325.2 908.9 1,090.7 3,324.8
========================== =========== =========== =========== ===========
F-34
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 24 - Financial instruments (continued)
Currency exposure
The table below shows the Group's currency exposure after the effects of
forward contracts and other derivatives used to manage that exposure. The
amounts shown represent the net monetary assets and liabilities of the Group
that are not denominated in the functional currency of the operating unit
involved and so give rise to net currency gains and losses recognized in the
consolidated statements of operations.
Net foreign currency monetary assets/(liabilities)
--------------------------------------------------------
Functional currency of Group operation Sterling US dollar Other Total
- ----------------------------------------------------------------------- ----------- ----------- ----------- -----------
($ million)
At December 31, 2002
Sterling - (1.3) - (1.3)
US dollar 53.8 - 15.1 68.9
----------- ----------- ----------- -----------
53.8 (1.3) 15.1 67.6
======================================================================= =========== =========== =========== ===========
At December 31, 2001
Sterling - 7.0 0.3 7.3
US dollar 20.2 - 4.8 25.0
----------- ----------- ----------- -----------
20.2 7.0 5.1 32.3
======================================================================= =========== =========== =========== ===========
Maturity of financial liabilities
The maturity profile of the Group's financial liabilities at December 31, is
summarized below:
2002 2001
- -------------------------------------------------- ----------- -----------
($ million)
On demand or within one year or less 93.0 984.2
More than one year but not more than two years 6.2 5.4
More than two years but not more than five years 157.2 201.1
More than five years 408.9 583.3
----------- -----------
665.3 1,774.0
================================================== =========== ===========
Borrowing facilities
The Group had undrawn committed facilities of $152.3 million, all of which
expire in less than five years, available at December 31, 2002 (2001 : $152.1
million, all of which expires in less than five years).
F-35
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 24 - Financial instruments (continued)
Fair Value
The estimated fair value of the Group's financial instruments at December
31, is summarized below:
2002 2001
-------------------------- --------------------------
Book Estimated Book Estimated
value fair value value fair value
- ----------------------------------------------------------------------- ----------- ----------- ----------- -----------
($ million)
Primary financial instruments held or issued to finance the Group's
operations
Cash and short term deposits 1,003.4 1,003.4 968.2 968.2
Current asset investments 624.5 628.1 478.7 480.0
Trade receivables 4.8 4.8 4.7 4.7
Amounts owed by parent companies 1,000.8 1,029.6 1,873.2 1,890.8
Short-term bank loans and overdrafts (3.0) (3.0) - -
Trade payables (6.2) (6.2) (5.4) (5.4)
Amounts owed to parent companies (90.0) (90.0) (984.2) (984.2)
Long-term bank loans (157.2) (157.2) (348.0) (348.0)
Notes (408.9) (437.7) (436.4) (453.9)
----------- ----------- ----------- -----------
1,968.2 1,971.8 1,550.8 1,552.2
======================================================================= =========== =========== =========== ===========
Derivative financial instruments held to manage interest rate and
currency exposure
Interest rate swaps - assets - 53.2 - 28.0
- liabilities - (6.2) - (10.3)
Forward foreign exchange contracts - assets - 15.4 - 4.8
- liabilities - (1.6) - (3.2)
======================================================================= =========== =========== =========== ===========
Certain estimates and judgments were required to develop the fair value
amounts. The fair value amounts shown above are not necessarily indicative of
the amounts that the Group would realize upon disposition nor do they indicate
the Group's intent or ability to dispose of the financial instrument.
The following methods and assumptions were used by the Group in estimating
its fair value disclosure for financial instruments:
o Cash and short-term deposits - The estimated fair value of these financial
instruments approximates their carrying values due to their short
maturities.
o Current asset investments - The fair value of these instruments are based
on market prices.
o Trade receivables and payables - The estimated fair value of these
financial instruments approximates their carrying values due to their short
maturities.
o Amounts owed by and to parent companies - The estimated fair value of those
amounts classified as repayable in less than one year equates with their
carrying value due to their short maturities. Amounts owed by parent
company and classified as greater than one year have similar terms to the
long term bank loans and the Notes and have been discounted on a similar
basis.
o Short-term bank loans and overdrafts - The estimated fair value of these
financial instruments approximates their carrying values due to their short
maturities.
F-36
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 24 - Financial instruments (continued)
o Long-term bank loans - The fair value of these instruments approximates the
carrying value as the interest rates on such loans are variable.
o Notes - The estimated fair values of the Notes are based on current
interest rates available to the Group for debt instruments with similar
terms and remaining maturities.
o 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 Group would receive or
have to pay to terminate the agreements, taking into account the current
interest rate environment or current foreign currency forward rates.
Hedges
Gains and losses on instruments used for hedging are not recognized until
the exposure that is being hedged is itself recognized. Unrecognized gains and
losses on instruments used for hedging are as follows:
Total net
December 31, 2002 Gains Losses gains
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Unrecognized gains and losses on hedges at January 1, 2002 32.8 (13.5) 19.3
Gains and losses arising in previous years that were recognized in 2002 (2.9) 4.5 1.6
----------- ----------- -----------
Gains and losses arising before January 1, 2002 that were not recognized in 2002 29.9 (9.0) 20.9
Gains and losses arising in 2002 that were not recognized in 2002 38.7 1.2 39.9
----------- ----------- -----------
Unrecognized gains and losses on hedges at December 31, 2002 68.6 (7.8) 60.8
=========== =========== ===========
Of which:
Gains and losses expected to be recognized in 2003 21.1 (0.9) 20.2
Gains and losses expected to be recognized in 2004 or later 47.5 (6.9) 40.6
====================================================================================== =========== =========== ===========
Total net
December 31, 2001 Gains Losses gains
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Unrecognized gains and losses on hedges at January 1, 2001 19.2 (6.2) 13.0
Gains and losses arising in previous years that were recognized in 2001 (2.0) 4.5 2.5
----------- ----------- -----------
Gains and losses arising before January 1, 2001 that were not recognized in 2001 17.2 (1.7) 15.5
Gains and losses arising in 2001 that were not recognized in 2001 15.6 (11.8) 3.8
----------- ----------- -----------
Unrecognized gains and losses on hedges at December 31, 2001 32.8 (13.5) 19.3
=========== =========== ===========
Of which:
Gains and losses expected to be recognized in 2002 12.4 (2.2) 10.2
Gains and losses expected to be recognized in 2003 or later 20.4 (11.3) 9.1
====================================================================================== =========== =========== ===========
F-37
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 25 - Pensions
The Group operates two principal pension schemes, one in the UK and the
other in the US. Both schemes are of the defined benefit type and are funded
externally. The pension cost of both schemes is assessed in accordance with
the advice of professionally qualified actuaries, using the projected unit
credit method. The Group's total pension charge for the year was $20.7 million
(2001: $18.7 million).
The most recent actuarial valuation of the UK scheme was at December 31,
2001 and of the US scheme at January 1, 2002. The most recent actuarial
valuations have been reviewed and updated as at December 31, 2002 to take
account of the requirements of FRS 17 "Retirement Benefits", in order to
assess the liabilities of the schemes at December 31, 2002. Scheme assets are
stated at their market value at December 31, 2002. The following disclosure
illustrates the effect of FRS 17.
Financial assumptions UK US
- ----------------------------------------------------------------------- -------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(%)
Rate of increase in salaries 3.3 3.5 4.0 5.0
Rate of increase in pensions in payment 3.0 3.0 - -
Discount rate 5.6 5.8 6.5 7.0
Inflation assumption 2.3 2.5 3.0 4.0
======================================================================= =========== =========== =========== ===========
Fair value of assets and present value of liabilities UK US
- ----------------------------------------------------------------------- -------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
($ million)
Equities 774.9 917.7 177.6 214.9
Bonds 172.4 114.0 126.2 125.6
Other 77.3 78.0 - -
----------- ----------- ----------- -----------
Total fair value of assets 1,024.6 1,109.7 303.8 340.5
Present value of scheme liabilities (1,189.5) (971.9) (416.5) (371.3)
----------- ----------- ----------- -----------
(Deficit)/surplus (164.9) 137.8 (112.7) (30.8)
Related deferred tax 49.5 (41.3) 45.1 12.3
----------- ----------- ----------- -----------
Net pension (liability)/asset (115.4) 96.5 (67.6) (18.5)
======================================================================= =========== =========== =========== ===========
Expected rate of return UK US
- ----------------------------------------------------------------------- -------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(%)
Equities 7.8 7.6 9.3 9.3
Bonds 5.4 5.6 7.0 7.0
Other 5.8 5.8 - -
======================================================================= =========== =========== =========== ===========
The contribution rates for 2002 for the UK and US schemes were 10.0% and
3.0% of pensionable earnings and the agreed contribution rates for 2003 are
11.5% and 4.5% of pensionable earnings, respectively.
F-38
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 25 - Pensions (continued)
Amounts included within operating profit 2002
- -------------------------------------------------- --------------------------
UK US
----------- -----------
($ million)
Employer's part of current service costs 25.1 14.1
Past service costs (28.6) -
----------- -----------
Total included within operating profit (3.5) 14.1
================================================== =========== ===========
Amounts credited to net finance charges 2002
- -------------------------------------------------- --------------------------
UK US
----------- -----------
($ million)
Expected return on pension scheme assets 82.8 28.7
Interest on pension scheme liabilities (57.6) (25.0)
----------- -----------
Total net finance charges 25.2 3.7
================================================== =========== ===========
Amounts included in the statement of total
recognized gains and losses 2002
- -------------------------------------------------- --------------------------
UK US
----------- -----------
($ million)
Difference between expected and actual return on
assets (253.4) (61.9)
Gains and losses arising on the scheme
liabilities (39.0) (1.6)
Effects of changes in assumptions underlying the
present value of scheme liabilities (47.8) (20.1)
----------- -----------
Total actuarial gains and losses recognized in
the statement of total recognized gains and
losses (340.2) (83.6)
================================================== =========== ===========
Movement in scheme (deficit)/surplus during the
year UK US
- -------------------------------------------------- ----------- -----------
($ million)
At January 1, 2002 137.8 (29.6)
Current service cost (27.6) (14.1)
Contributions 17.3 10.9
Past service costs 28.6 -
Net finance income 25.2 3.7
Actuarial (loss)/gain (340.2) (83.6)
Exchange and other adjustments (6.0) -
----------- -----------
At December 31, 2002 (164.9) (112.7)
================================================== =========== ===========
2002
--------------------------
History of gains and losses UK US
- -------------------------------------------------- ----------- -----------
Difference between expected and actual return on
scheme assets:
Amount ($ million) (253.4) (61.9)
As a percentage of the scheme assets 25% 20%
Gains and losses arising on the scheme
liabilities:
Amount ($ million) (39.0) (1.6)
As a percentage of the present value of the
scheme liabilities 3% -
Total actuarial gain in the statement of total
recognized gains and losses:
Amount ($ million) (340.2) (83.6)
As a percentage of the present value of the
scheme liabilities 29% 20%
================================================== =========== ===========
F-39
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 25 - Pensions (continued)
Profit and loss reserve 2002
- ----------------------------------------------------------------- -----------
($ million)
Profit and loss reserve excluding net pension liability 317.2
Net pension liability (183.0)
-----------
Profit and loss reserve 134.2
================================================================= ===========
Note 26 - Capital commitments
Capital commitments to acquire fixed assets 2002 2001
- -------------------------------------------------- ----------- -----------
($ million)
Expenditure contracted for 3.2 2.5
================================================== =========== ===========
Note 27 - Contingent liabilities
Put and call options relating to subsidiaries and associates
For certain subsidiaries and associates, the Group 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 Group 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 Group 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 recognised in the statements of
operations.
On July 23, 1997, the Group 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 their shares to the Group possibly
increasing the Group'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 Group has the right to purchase 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 Group
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.
Based on current projections of profitability and exchange rates, the
potential amount payable in 2003 from these options is not expected to exceed
$245.6 million. Of this balance, $196.9 million relates to Gras Savoye. The
total potential amounts payable from all options, based on current projections
of profitability and exchange rates, is not expected to exceed $337.8 million
(2001: $285.5 million). Of this balance, $236.2 million relates to Gras
Savoye.
Financial commitments
The Company has undertaken to provide certain subsidiaries with financial
support to enable them to meet their future operational obligations as they
fall due. This financial support does not extend to providing finance for
liabilities arising from negligence, breach of contract, breach of trust or
any other breach of duty.
F-40
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 27 - Contingent liabilities (continued)
Assets subject to charge
The Company has entered into a debenture in favor of the JPMorgan Chase Bank
in which it has charged by way of a first fixed charge its interests in the
shares of Willis Faber Limited and, by way of a floating charge, all its
assets not otherwise effectively mortgaged, charged or assigned by the first
fixed charge.
The Company has also entered into a Pledge Agreement in favor of the
JPMorgan Chase Bank whereby it has assigned and pledged its interest in the
shares of Willis North America.
Financing obligations
The Company has guaranteed, on a joint and several basis with other
companies in the Group, the prompt and complete performance of Willis North
America in respect of credit facilities ("facilities") made available to that
company. The Company together with its affiliate Willis Partners, has
guaranteed Willis North America's obligations in respect of the Notes. At
December 31, 2002 these facilities amounted to $717.4 million (2001: $937.2
million).
Other
The Company has given guarantees to bankers and other third parties relating
principally to letters of credit amounting to $8.0 million (2001: $7.4
million). The Company has also given guarantees to bankers in respect of
commitments entered into by them to provide security for membership of Lloyd's
of certain Group employees who are not directors of the Company amounting to
$48,300 (2001: $43,500).
The Company and certain of its UK subsidiaries have given the landlords of
some of the leasehold properties occupied by the Group in the UK and the US
guarantees in respect of the performance of the lease obligations of the Group
companies holding the leases. The operating lease obligations amounted to
$140.1 million at December 31, 2002 (2001: $120.1 million).
Claims, lawsuits and proceedings
The Group 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. Similar to other corporations, the Group is also subject to a
variety of other claims, including those relating to the Group's employment
practices. Some of those claims, lawsuits and proceedings seek damages in
amounts which could, if assessed, be significant.
The Group acted as insurance 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 Group 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 Group.
F-41
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 27 - Contingent liabilities (continued)
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, the Group has established
provisions against these items which are believed to be adequate in the light
of current information and legal advice, and the Group adjusts such provisions
from time to time according to developments. On the basis of current
information, the Group does not expect that the outcome of the actual claims,
lawsuits and proceedings to which the Group is subject or potential claims,
lawsuits and proceedings, either individually or in the aggregate, will have a
material adverse effect on the Group's financial condition, results of
operations or liquidity.
Note 28 - Directors' interests in contracts
The undermentioned director who held office during each of the three years
in the period ended December 31, 2002 (except as otherwise indicated) and,
where applicable, connected persons (as defined in section 346 of the
Companies Act) was an Underwriting Member of Lloyd's:
RJS Bucknall
Insurance brokerage subsidiaries of the Company place risks with the
syndicates in which the directors or connected persons (as defined above)
participate in the normal course of their brokerage activities on the same
basis as such subsidiaries do with other Lloyd's syndicates.
The Company gave J Reeve a guarantee in respect of the performance
obligations of Willis Limited, his employing company, in respect of an
unfunded pension scheme established for him. The Company has also guaranteed
the performance obligations of Willis North America in respect of the pension
benefits for BD Johnson and KH Pinkston under the Willis North America Inc.
Executive Supplemental Retirement Plan, an unfunded pension plan.
Save as disclosed above, no director or connected person (as defined above)
had any interest either during or at the end of the financial years 2002,
2001, and 2000 in any contract which was significant in relation to the
Company's business, or in a contract, transaction or arrangement which
required disclosure under section 232 of the Companies Act.
F-42
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 29 - Related party transactions
The Group had the following balances with its parent companies at December
31:
2002 2001 Terms
-------------------------------- ------------- ------------- -------------------------------------------------------------
(million)
Amounts due from Trinity(i) - (L)614.1 Repayable on demand, non interest-bearing
$410.2 $439.2 Repayable in line with repayment of Notes, interest of 70
basis points over interest on Notes
$242.6 $348.0 Repayable in line with repayment of term loans, interest of
25 basis points over interest on term loans
Amounts due from TA I (L)0.5 (L)0.5 Repayable on demand, non interest-bearing
Amounts due from TA IV $344.6 $194.8 Repayable on demand, non interest-bearing
Amounts due from Willis Group $2.0 - Repayable after six months, interest based on the six-month
Holdings US dollar LIBOR
$0.6 - Repayable on demand, non interest-bearing
Amounts due to Trinity(i) - $(923.0) Repayable on demand, non interest-bearing
(L)(19.8) (L)(35.2) Repayable on demand, non interest-bearing
Amounts due to TA IV (L)(36.1) - Repayable on demand, non interest-bearing
Amounts due to Willis Group
Holdings - $(10.1) Repayable on demand, non interest-bearing
================================ ============= ============= =============================================================
(i) On January 1, 2002, the Company changed its reporting currency to US
dollars. As a result, the Group restructured balances owed to and from
Trinity to avoid currency exposure being generated from the pounds sterling
denominated balances.
In addition, the following material transactions occurred:
1. Dividends declared for 2002 amounted to $nil (2001: $11.6 million, of which
$11.6 million was paid before December 31, 2001).
2. Interest income for 2002 amounted to $65.4 million (2001: $80.5 million).
3. During 2001, Willis Group Holdings, the Company's ultimate parent company,
acquired a 100% interest in Richard N. Goldman & Co., a broker based in San
Francisco, California. On January 1, 2002 this interest was hived down to a
subsidiary of the Company via TA IV Limited, the Company's immediate parent
company. In consideration, the Company issued shares in the amount of $19.6
million to TAIV Limited.
During 2000, Willis North America acquired from JJ Plumeri, the Chairman and
Chief Executive Officer of Willis Group Limited, a 12 1/2% undivided interest
in a Citation V Ultra Aircraft for $693,719; at December 31, 2000 this balance
was recorded as a payable. This transaction was consummated on terms
equivalent to those that prevail in arms-length transactions.
Kohlberg Kravis Roberts & Co. L.P. and Fisher Capital Corp. LLC, a company
for which JR Fisher, a Director of Willis Group Holdings is the managing
member and majority owner, render management, consulting and certain other
services to the Company for annual fees payable quarterly in arrears. In 2002
and 2001, 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 $56,582 and $70,827
payable to Fisher Capital Corp. LLC as of December 31, 2002 and 2001,
respectively.
F-43
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States
The Group's financial statements are prepared in accordance with UK GAAP
which differ in certain respects from US GAAP.
Use of estimates
The preparation of financial statements in conformity with UK and 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
intangible assets, 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.
(a) Purchase accounting, goodwill and intangible assets
Under US GAAP, Trinity's cost of acquiring the Company should be "pushed
down", i.e., used to establish a new accounting basis in the Company's
separate financial statements. Under UK GAAP, there is no such requirement.
Under UK GAAP, goodwill (which includes expirations) arising on acquisitions
occurring after January 1, 1998 is capitalized and amortized on a straight-
line basis over its estimated useful economic life, not exceeding 20 years.
Goodwill is evaluated for impairment in the first year following acquisition
and in subsequent years when events or circumstances indicate that the
carrying value may not be recoverable. Goodwill arising on acquisitions
completed before January 1, 1998 was eliminated against retained earnings and
other reserves.
Under UK GAAP, on the disposition of a business acquired before January 1,
1998, goodwill previously eliminated against retained earnings is reinstated
and charged to income in arriving at the gain or loss on the disposition of an
entity; under US GAAP, only unamortized goodwill is charged.
Under US GAAP, for periods ended on or before December 31, 2001, goodwill
was amortized on a straight-line basis over its useful economic life, not to
exceed 40 years. Goodwill was evaluated for impairment when events or changes
in circumstances indicated that the carrying value may not have been
recoverable. Impairments of goodwill were recognized if expected undiscounted
cash flows were not sufficient to recover the carrying value of the asset. If
a material impairment was identified, the asset was written down to its
estimated fair value, determined based on the present value of expected net
cash flows to be generated, using an appropriate discount rate.
Following the adoption of Statement of Financial Accounting Standards
("SFAS") No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"), with
effect from January 1, 2002, under US GAAP goodwill is capitalized, but not
amortized. The Group reviews goodwill for impairment whenever facts or
circumstances indicate that the carrying amounts may not be recoverable. When
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.
Acquired intangible assets are being amortized on a straight-line basis over
their estimated useful life.
No goodwill impairments were recorded in 2002, 2001 and 2000.
F-44
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
Under UK GAAP, FRS 7 requires the cost of acquisition to include a
reasonable estimate of the fair value of the amounts of contingent
consideration expected to be payable in the future. Under US GAAP, such
consideration is only recognised once the conditions upon which the
contingency is based have been satisfied.
(b) Software development costs
Under UK GAAP, only incremental internal costs relating to the development
of a fixed asset should be capitalized. US GAAP (SOP 98-1) requires all
internal costs to be capitalized once the appropriate criteria are met.
(c) Pension costs
For the purposes of the reconciliation below, the Group has adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 87,
"Employers' Accounting for Pensions", ("SFAS 87") in respect of the Group's
principal UK pension plan. This standard requires that the projected benefit
obligation be matched against the market value of the underlying plan assets
and other unrecognized actuarial gains and losses in determining the pension
expense for the year. As a result, pension expense can be significantly
different from that computed under UK GAAP which requires the cost of
providing pension benefits to be expensed over the periods benefiting from the
employees' service on the basis of a constant percentage of current and
estimated future earnings.
The additional information required by SFAS 87 in respect of the principal
UK and US pension plans is given below.
(d) Derivative financial instruments
The Group enters into forward exchange contracts and other financial
instruments which, under UK GAAP, are treated as hedges of future income.
Under UK GAAP, amounts payable or receivable in respect of interest rate swaps
are recognized in interest income or operating expenses over the period of the
contract. Gains and losses in forward foreign exchange contracts are
recognized on maturity of the contract. Under US GAAP, the fair value of
derivative contracts are recorded in current and noncurrent assets and current
and noncurrent 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.
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 Group 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 accounting. The adoption of
SFAS 133, effective January 1, 2001, resulted in an increase in other
comprehensive income, net of tax, of $7.5 million reported as the cumulative
effect of adopting an accounting principle.
F-45
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
(e) Investments
Under UK GAAP, certain of the Group's investments, purchased with the
intention of holding to maturity, have been valued at amortized cost. For US
GAAP purposes, all the Group's investments have been classified as available
for sale as they do not qualify for "held-to-maturity" accounting and are
reported at fair value with unrealized gains and losses reported in other
comprehensive income.
(f) Deferred tax
Under UK GAAP, deferred tax is provided in full on timing differences which
result in an obligation at the balance sheet date to pay more or less tax, at
a future date, at rates expected to apply when they reverse based on current
tax rates and law. Under US GAAP, the Group accounts for income taxes under
the provisions of SFAS No. 109, "Accounting for Income Taxes". 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 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.
Also, under SFAS 109 there is no time limitation attributed to fair value
adjustments for deferred tax arising on acquisition. Hence, any adjustments to
deferred tax valuation allowances relating to prior acquisitions are reflected
in goodwill.
(g) Restructuring costs
Under US GAAP, surplus property must be physically segregated from property
to be retained for ongoing use within the business in order to be accrued as a
restructuring cost. At December 31, 1999, the process of segregating surplus
properties arising from the changes to business processes in the North
American operations had not been completed and, accordingly, costs accrued
under UK GAAP for surplus properties had not been so accrued under US GAAP,
this process had been completed by December 31, 2000.
(h) Stock options
Under UK GAAP, there is no requirement for a subsidiary company to account
for stock options granted to its employees by a parent company. Under US GAAP,
stock options granted by a parent company to employees of a subsidiary
company, should be accounted for in the financial statements of the subsidiary
company as if the options were granted by the subsidiary itself. Accordingly,
the Group 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 Willis Group Holdings'
common shares on the date of the grant exceeds the amount the employee must
pay to acquire the shares.
The additional information required by SFAS No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), is given below.
F-46
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
The effect on net income, comprehensive income and shareholders' equity of
applying the aforementioned differences between UK GAAP and US GAAP is
summarized as follows:
2002 2001 2000
Net income As restated(i) As restated(i)
- ---------------------------------------------------------------------------------- ----------- ----------- -----------
($ million, except per share data)
Net income as reported in the consolidated statements of operations under UK GAAP 297.5 202.9 146.9
Adjustments:
Operating expenses - performance options (h) (80.2) (158.5) -
Operating expenses - restructuring costs (g) - - (10.5)
Amortization of goodwill and other intangible assets (a) 6.8 (32.1) (32.1)
Gain on disposal of operations (a) 11.9 23.3 0.3
Gain/(loss) on derivative instruments (d) 1.0 2.2 (2.4)
Software development costs (b) 0.9 - -
Pension costs (c) 7.2 12.2 10.5
Interest on tax refund relating to prior acquisition (f) - (2.3) -
Tax refund relating to prior acquisition (f) - (2.6) -
Deferred taxes - effect of above adjustments 10.1 14.6 (9.9)
----------- ----------- -----------
Net income as adjusted to accord with US GAAP 255.2 59.7 102.8
----------- ----------- -----------
Per ordinary share (basic and diluted) as so adjusted
Net income $ 0.53 $ 0.12 $ 0.22
================================================================================== =========== =========== ===========
2002 2001 2000
Comprehensive Income As restated(i) As restated(i)
- ---------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Net income as adjusted to accord with US GAAP 255.2 59.7 102.8
Other comprehensive income, net of tax:
Foreign currency translation adjustments (7.3) (35.5) (70.8)
Minimum pension liability adjustment (c) (166.6) - -
Net gain on derivative instruments (d) 28.3 5.0 -
Unrealized holding gains (net of tax of $0.6million, $0.1million and $0.6million
respectively) (e) 1.6 0.3 2.1
Cumulative effect of accounting change (d) - 7.5 -
----------- ----------- -----------
Comprehensive income 111.2 37.0 34.1
=========== =========== ===========
Foreign currency translation adjustments
Beginning of year (158.5) (123.0) (52.2)
Arising during the year (7.3) (35.5) (70.8)
----------- ----------- -----------
End of year (165.8) (158.5) (123.0)
=========== =========== ===========
Unrealized holding gains
Beginning of year 1.0 0.7 (1.4)
Arising during the year 1.6 0.3 2.1
----------- ----------- -----------
End of year 2.6 1.0 0.7
================================================================================== =========== =========== ===========
F-47
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
2002 2001
Shareholders' equity As restated(i)
- -------------------------------------------------- ----------- -----------
($ million)
Shareholders' equity as reported in the
consolidated balance sheet 658.4 330.5
Adjustments:
Fixed Assets
Intangible assets
Goodwill - cost (a) 1,314.8 1,318.8
- amortization (a) (99.6) (106.4)
Software development costs (b) 1.0 -
Current assets
Investments (e) 3.6 1.3
Receivables - derivative instruments (d) 38.8 18.0
Pension cost asset (c) 28.0 17.4
Noncurrent assets
Receivables - derivative instruments (d) 29.8 14.5
Minimum pension liability adjustment (c) (77.3) -
Current liabilities
Payables - derivative instruments (d) (0.8) (2.5)
Deferred consideration (a) 4.4 -
Noncurrent liabilities
Pension costs liability (c) (43.0) (39.6)
Payables - derivative instruments (d) (7.0) (10.9)
Minimum pension liability adjustment (c) (165.2) -
Taxation (f) (8.8) (6.0)
Provisions for liabilities and charges
Deferred taxes - effect of above adjustments 110.5 34.9
----------- -----------
Shareholders' equity as adjusted to accord with
US GAAP 1,787.6 1,570.0
================================================== =========== ===========
(i) The adoption of FRS19 with effect from January 1, 2002 has required changes
in the method of accounting for deferred tax assets and liabilities, as
disclosed in Note 1. There has been no change in the net income,
comprehensive income and shareholders' equity reported under US GAAP at and
for the years ended December 31, 2001 and 2000, respectively.
Goodwill and other intangible assets
The Group adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"), with effect from January 1, 2002. Upon initial adoption of SFAS
142, reclassification of the carrying amounts of previously acquired
intangible assets was not required.
F-48
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
A reconciliation table is provided to exclude the effect of goodwill
amortization in accordance with the transitional disclosures relating to SFAS
142. Results for the year ended December 31, 2002 have been prepared in
accordance with SFAS 142.
2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million, except per share data)
Net income as adjusted to accord with US GAAP 255.2 59.7 102.8
Amortization of goodwill - 38.1 37.5
----------- ----------- -----------
Adjusted net income 255.2 97.8 140.3
=========== =========== ===========
Net income per ordinary share (basic and diluted), as reported $ 0.53 $ 0.12 $ 0.22
Amortization of goodwill - 0.08 0.07
----------- ----------- -----------
Adjusted net income per ordinary share (basic and diluted) $ 0.53 $ 0.20 $ 0.29
====================================================================================== =========== =========== ===========
A transitional assessment of goodwill impairment at January 1, 2002 was
completed by June 30, 2002. Management concluded that the fair value of the
Group's individual reporting units exceeded the carrying value of the net
assets including goodwill, and hence this process did not result in any
impairment being recorded on adoption of SFAS 142.
Additional information required by SFAS 87
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 Group 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
Group's 401(k) mandatory matching contributions for 2002, 2001 and 2000 were
approximately $4.7 million, $5.2 million and $5.5 million, respectively.
The pension cost for the Group's two principal pension plans computed in
accordance with the requirements of SFAS 87 comprises:
Net pension expense 2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Service cost 39.4 37.0 39.6
Interest cost 83.2 77.8 78.1
Expected return on plan assets (117.1) (109.7) (110.2)
Recognized actuarial gain (3.3) (10.9) (10.9)
----------- ----------- -----------
Net pension expense/(benefit) 2.2 (5.8) (3.4)
====================================================================================== =========== =========== ===========
F-49
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
2002 2001
- -------------------------------------------------- ----------- -----------
($ million)
Change in benefit obligation
Benefit obligation - beginning of year 1,343.6 1,283.2
Foreign currency exchange rate changes 114.7 (30.8)
Service cost 39.4 37.0
Interest cost 83.2 77.8
Benefits paid (56.5) (53.3)
Amendments (29.3) -
Actuarial gains and losses 108.2 27.7
Employee contribution 2.6 2.0
----------- -----------
Benefit obligation - end of year 1,605.9 1,343.6
================================================== =========== ===========
2002 2001
- -------------------------------------------------- ----------- -----------
($ million)
Change in plan assets
Fair value of plan assets - beginning of year 1,442.0 1,604.0
Foreign currency exchange rate changes 111.1 (42.8)
Actual return on plan assets (201.9) (87.9)
Employer contributions 25.6 20.0
Employee contributions 2.6 2.0
Benefits paid (56.5) (53.3)
----------- -----------
Fair value of plan assets - end of year 1,322.9 1,442.0
================================================== =========== ===========
2002 2001
- -------------------------------------------------- ----------- -----------
($ million)
Funded status
Plan assets at fair value 1,322.9 1,442.0
Benefit obligation (1,605.9) (1,343.6)
----------- -----------
Funded status (283.0) 98.4
Unrecognized net actuarial loss/(gain) 338.1 (103.8)
Unrecognized prior service cost (28.1) (0.2)
----------- -----------
Net asset/(liability) recognized 27.0 (5.6)
----------- -----------
Amounts recognized in the balance sheet consist
of:
Prepaid benefit cost - 45.5
Accrued benefit liability (215.9) (51.1)
Accumulated other comprehensive income 242.9 -
----------- -----------
Net asset/(liability) recognized 27.0 (5.6)
================================================== =========== ===========
The UK plan assets are invested mainly in UK fixed interest and equity
securities and non-UK equity securities. The US plan assets are invested
mainly in US fixed interest and equity securities.
F-50
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
The major assumptions used in computing the funded status were:
2002 2001
- -------------------------------------------------- ----------- -----------
(%)
UK plan
Expected long-term rate of return on plan assets 7.25 7.25
Discount rate 5.60 5.75
Expected long-term rate of earnings increases 3.30 3.50
US plan
Expected long-term rate of return on plan assets 8.50 8.50
Discount rate 6.50 7.00
Expected long-term rate of earnings increases 4.00 5.00
================================================== =========== ===========
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the Group's two principal plans are $1,605.9 million,
$1,538.8 million and $1,322.9 million, respectively, as of December 31, 2002.
Additional information required under SFAS 109
In accordance with SFAS 109, the significant components of the net US GAAP
deferred tax asset at December 31 are as follows:
2002 2001
- -------------------------------------------------- ----------- -----------
($ million)
Deferred tax assets:
Accrued expenses not currently deductible 16.4 12.5
UK capital losses 70.7 62.7
Accrued retirement benefits 90.7 19.7
Provisions 24.9 27.5
Deferred compensation 18.2 15.7
Stock options 45.2 30.4
Other 6.8 1.5
----------- -----------
Gross deferred tax assets 272.9 170.0
Less: valuation allowance (70.7) (62.7)
----------- -----------
Net deferred tax assets 202.2 107.3
----------- -----------
Deferred tax liabilities:
Financial derivative transactions (18.5) (5.5)
Tax-leasing transactions (9.4) (11.0)
Prepaid retirement benefits (13.6) (8.4)
Other (9.9) (7.1)
----------- -----------
Deferred tax liabilities (51.4) (32.0)
----------- -----------
Net deferred tax assets 150.8 75.3
================================================== =========== ===========
The main components of the tax charge attributable to operations are shown
in Note 9. A reconciliation of the tax payable at the UK standard corporation
tax rate to the charge at the Group's effective tax rate is also shown in Note
9.
F-51
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
At December 31, 2002, the Group had a valuation allowance of $70.7 million
(2001: $62.7 million) to reduce its deferred tax assets to estimated
realizable value. The valuation allowance relates to the deferred tax assets
arising from UK capital loss carryforwards which have no expiration date. UK
capital loss carryforwards can only be offset against future UK capital gains.
At December 31, 2002, the Group had deferred tax assets of $202.2 million,
net of the valuation allowance. Management believes, 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, it is more likely than not that
the Group will realize the benefits of these deductible differences, net of
the valuation allowance. However, the amount of the deferred tax asset
considered realizable could be adjusted in the future if estimates of taxable
income are revised. In the event that the valuation allowance of $70.7 million
at December 31, 2002 (2001: $62.7 million) is reduced in future years to
recognize deferred tax assets, $70.7 million (2001: $62.7 million) will be
allocated to reduce goodwill.
The Group recognizes a deferred tax liability related to the undistributed
earnings of subsidiaries when the Group expects that it will recover those
undistributed earnings in a taxable manner, such as through receipt of
dividends or sale of the investments. The Group does not, however, provide for
income taxes on the unremitted earnings of certain other subsidiaries where,
in management's opinion, such earnings have been indefinitely reinvested in
those operations, or will be remitted either in a tax free liquidation or 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 these investments.
Consolidated statements of cash flows
The Consolidated Statements of Cash Flows prepared under UK GAAP presents
substantially the same information as that required under US GAAP but may
differ with regard to classification of certain items within the statements
and as regards the definition of cash under UK GAAP and cash and cash
equivalents under US GAAP.
Under UK GAAP, cash flows are presented separately for operating activities,
returns on investments and servicing of finance, taxation, capital expenditure
and financial investment, acquisitions and disposals, equity dividends paid,
management of liquid resources and financing. US GAAP requires only three
categories of cash flow activity to be reported: operating, investing and
financing. Cash flows from taxation and returns on investments and servicing
of finance shown under UK GAAP would be included as operating activities under
US GAAP. Cash flows from capital expenditure and financial investment,
acquisitions and disposals, shown separately under UK GAAP, would be included
as part of the investing activities under US GAAP. The payment of dividends
would be included as a financing activity under US GAAP. Cash, as defined by
US GAAP, would include cash equivalents with original maturities of three
months or less and would exclude bank overdrafts.
F-52
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
The categories of cash flow activity under US GAAP can be summarized as
follows:
2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
Cash provided by operating activities 408.7 321.8 191.0
Cash used in investing activities (35.2) (13.8) (42.9)
Cash used in financing activities (297.6) (267.0) (132.1)
----------- ----------- -----------
Increase in cash and cash equivalents 75.9 41.0 16.0
Effect of foreign exchange rate changes 8.1 (4.7) (7.1)
Cash and cash equivalents at start of year 124.1 87.8 78.9
----------- ----------- -----------
Cash and cash equivalents at end of year 208.1 124.1 87.8
====================================================================================== =========== =========== ===========
Cash and cash equivalents comprise:
2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million)
As shown on balance sheet:
Cash and short-term deposits 1,003.4 968.2 640.6
Current asset investments 624.5 478.7 477.6
----------- ----------- -----------
1,627.9 1,446.9 1,118.2
Less: Investments with initial maturity of more than three months (50.8) (42.1) (40.5)
Fiduciary funds - restricted (1,369.0) (1,280.7) (989.9)
----------- ----------- -----------
Cash and cash equivalents at end of year 208.1 124.1 87.8
====================================================================================== =========== =========== ===========
Under UK GAAP, funds held in connection with insurance brokerage
transactions are included within "Cash and short-term deposits" and
"Investments" on the Consolidated Balance Sheets and the movement during the
year would be included as part of "Net cash inflow/(outflow) from operating
activities" in the Consolidated Statements of Cash Flows. Under US GAAP, such
funds would be classified as "Fiduciary funds - restricted", on the
Consolidated Balance Sheets and the change would be eliminated in arriving at
net cash provided by operations.
Financial instruments with off-balance sheet risk
Forward foreign exchange contracts and currency options
Because the Group transacts business in many different currencies, it is
exposed to the risks of foreign currency exchange rate movements. To hedge
this exposure, the Group enters into forward foreign exchange contracts and
currency options.
F-53
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
The fair value of these contracts is recorded in other current and
noncurrent assets and liabilities, with changes in the fair value of effective
cash flow 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, 2002,
the Group has recorded a gain of $7.2 million in other comprehensive income
relating to changes in the fair value on contracts which are effective cash
flow hedges as defined in SFAS 133 (2001: gain $6.4 million). For contracts
which were not designated for hedge accounting as defined in SFAS 133, the
Group has recorded a gain of $1.9 million in general and administrative
expenses representing the change in the fair value for the year ended December
31, 2002 (2001: loss $6.1 million).
The table below summarizes by major currency the contractual amounts of the
Group's forward contracts to exchange foreign currencies for pounds sterling.
Foreign currency notional amounts are reported in US dollars translated at
spot rates as at December 31.
Sell
--------------------------
2002(i) 2001
- -------------------------------------------------- ----------- -----------
US dollar 125.0 127.5
Euro 81.1 24.7
Japanese yen 29.6 20.4
================================================== =========== ===========
(i) Forward exchange contracts range in maturity from 2003 to 2005.
Interest rate agreements
In order to manage interest rate risk the Group 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 cash flow 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. The Group has
designated the interest rate swap agreement, under which Willis North
America's LIBOR-based variable rate interest obligations are swapped for fixed
rate interest obligations, as a cash flow hedge as defined by SFAS 133 with
the fair value recorded in other current liabilities on the balance sheet.
Gains of $1.0 million were recorded for the year ended December 31, 2002
(2001: loss $9.2 million). For the year ended December 31, 2002, the Group has
recorded gains of $20.0 million in other comprehensive income relating to
changes in fair value on contracts which are effective cash flow hedges as
defined by SFAS 133 (2001: $7.7 million). For contracts which were not
designed for hedge accounting as defined in SFAS 133, the Group has recorded
losses of $0.9 million in general and administrative expenses representing the
change in fair value for the year ended December 31, 2002 (2001: gain $8.3
million).
F-54
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
The Group's interest rate swaps by major currency at December 31, were:
Weighted Average
Interest Rates
-----------------------------
Notional Termination
Amounts (i) Dates Receive Pay
- -------------------- ---------------------------------------- ------------- ------------- ------------- -------------
($ million) (%) (%)
2002
US dollars Receive fixed - pay variable 878.0 2003-6 5.55 1.64
Receive variable - pay fixed 157.2 2004 1.72 5.10
Pounds sterling Receive fixed - pay variable 316.4 2003-5 5.68 4.00
Euro Receive fixed - pay variable 108.9 2003-6 4.70 3.00
2001
US dollars Receive fixed - pay variable 1,044.0 2002-6 5.91 4.15
Receive variable - pay fixed 328.0 2006 4.10 5.10
Pounds sterling Receive fixed - pay variable 299.4 2002-5 6.19 5.20
Euro Receive fixed - pay variable 89.3 2002-6 4.71 4.27
================================================================ ============= ============= ============= =============
(i) Notional amounts represent US dollar equivalents translated at the spot
rate as at December 31.
Credit risk and concentrations of credit risk
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted
and from movements in interest rates and foreign exchange rates. The Group
does not anticipate non-performance by counterparties. The Group generally
does not require collateral or other security to support financial instruments
with credit risk, however, it is the Group'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 Group to concentrations of credit risk consists
primarily of cash and cash equivalents, accounts receivable and derivatives
which are recorded at fair value. The Group 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 Group does business, as well as the dispersion across
many geographic areas. Management does not believe significant risk exists in
connection with the Group's concentrations of credit as at December 31, 2002.
Accounting and disclosure of stock-based compensation
The Group's parent has adopted the plans described below providing for the
grant of time-based options and performance-based options and various other
share-based grants of the common shares of Willis Group Holdings Limited 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 the parent.
F-55
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
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
Group. There are 30,000,000 shares available for grant under this plan
provided, however, that in no event the total number of common shares subject
to options and other equity for current and future participants exceed 25% of
the equity of the parent on a fully diluted basis. All options granted under
this plan are exercisable at (L)2 per share ($3.22 using the year-end exchange
rate of (L)1=$1.61) 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.
The fulfilment of the vesting requirements for the performance-based options
was confirmed on January 1, 2003, upon the achievement of cash flow and EBITDA
(as defined in the plan agreements) targets of the Group. Options are
generally 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 (L)2 per share ($3.22
using the year-end exchange rate of (L)1 = $1.61). 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 Group. There are 10,000,000 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
Accounting Principles Board ("APB") 25 "Accounting for Stock issued to
Employees" 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, and the exercise price on the
measurement date. All fixed plan options have been granted by the parent at an
exercise price equal to management's best estimate of the market price at the
measurement date, prior to the initial public offering of the parent, and
equal to the quoted market price, subsequent to the initial public offering of
the parent. Accordingly, pursuant to APB 25 no compensation expense has been
recognized for fixed option plans in the statements of operations.
F-56
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
Compensation expense resulting from awards under variable plans
(performance-based options) is measured as the difference between the quoted
market price and the exercise price at the date when the number of shares is
known (the date the performance conditions are satisfied). The cost is
recognized over the period the employee performs related services. Estimates
of compensation expense were recorded before the measurement date based on the
quoted market price of the shares at the intervening dates in situations where
it was probable that the performance conditions would be attained.
Management determined in the third quarter of 2001 that it was probable that
the maximum performance condition would be attained. The measurement date
under APB 25 was December 31, 2002. Accordingly, compensation expense for the
year ended December 31, 2002 of $80.2 million ($66.9 million, net of tax)
(2001: $158.5 million, ($132.1 million net of tax)) was recognized based on
the 11.1 million (2001: 11.3 million) unforfeited performance options
outstanding at that date, a quoted market price of $28.67 (2001: $23.55) and
an average elapsed performance period of 85% (2001: 68%).
Had compensation expense for such plans been determined consistent with the
fair value method prescribed by SFAS 123 using the Black-Scholes option-
pricing model, the Company's pro forma net income and net income per share
would have been:
2002 2001 2000
- -------------------------------------------------------------------------------------- ----------- ----------- -----------
($ million, except per share data)
Net income as adjusted to accord with US GAAP:
As reported 255.2 59.7 102.8
Pro forma 317.1 185.0 97.7
Net income per share:
Basic and diluted:
As reported $0.53 $0.12 $0.22
Pro forma $0.66 $0.39 $0.21
Assumptions:
Dividend yield 2% 0% 0%
Expected volatility 34% 30% 30%
Risk free interest rate 2.41% 4.15% 5.26%
Weighted-average expected life (years) 3 3 3
Weighted-average fair value of options granted $5.38 $4.04 $0.82
====================================================================================== =========== =========== ===========
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 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-57
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
Time-based stock option transactions under the plans are as follows:
2002 2001 2000
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
average average average
December 31, exercise exercise exercise
(shares in thousands) Shares price(i) Shares price(i) Shares price(i)
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, beginning of year 18,724 $4.65 17,323 $2.90 11,004 $3.00
Granted 1,112 $28.18 1,963 $16.93 7,155 $3.00
Exercised (500) $3.07 (239) $3.31 (61) $3.00
Forfeited (326) $10.05 (323) $3.07 (775) $3.00
----------- ----------- ----------- ----------- ----------- -----------
Balance, end of year 19,010 $5.98 18,724 $4.37 17,323 $3.00
=========== =========== =========== =========== =========== ===========
Options exercisable at year-end 8,225 $3.22 5,386 $2.90 2,439 $3.00
========================================= =========== =========== =========== =========== =========== ===========
(i) Certain options are exercisable at (L)2.00 per share. Year-end exchange
rates of (L)1 = $1.61, (L)1 = $1.45 and (L)1 = $1.50 have been used as of
December 31, 2002, 2001 and 2000, respectively.
A summary of time-based options outstanding and exercisable at December 31,
2002 is as follows:
Options outstanding Options exercisable
----------------------------------------- --------------------------
Weighted
average
remaining Weighted Weighted
contractual average average
Range of exercise prices Shares life exercise Shares exercise
(shares in thousands) outstanding (years) price exercisable price
- -------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
$3.22 16,132 6 $3.22 8,225 $3.22
$13.50 963 9 $13.50 - -
$16.95 - $23.32 950 9 $21.43 - -
$27.95 - $35.75 965 10 $29.39 - -
- -------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
$3.22 - $35.75 19,010 6 $5.98 8,225 $3.22
======================================================== =========== =========== =========== =========== ===========
Performance-based stock option transactions under the plans are as follows:
2002 2001 2000
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
average average average
December 31, exercise exercise exercise
(shares in thousands) Shares price(i) Shares price(i) Shares price(i)
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, beginning of year 11,275 $3.22 11,608 $2.90 11,004 $3.00
Granted - - 25 $2.90 1,379 $3.00
Forfeited (183) $3.22 (358) $2.90 (775) $3.00
----------- ----------- ----------- ----------- ----------- -----------
Balance, end of year 11,092 $3.22 11,275 $2.90 11,608 $3.00
=========== =========== =========== =========== =========== ===========
Options exercisable at year-end - - - - - -
========================================= =========== =========== =========== =========== =========== ===========
(i) All options are exercisable at (L)2.00 per share. Year-end exchange rates
of (L)1 = $1.61, (L)1 = $1.45 and (L)1 = $1.50 have been used as of
December 31, 2002, 2001 and 2000, respectively.
The weighted-average remaining contractual life of performance-based options
outstanding at December 31, 2002, was 6 years.
F-58
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
Restructuring costs
The Group recorded a restructuring charge of $18.3 million primarily for
employee termination benefits and excess operating lease obligations as a
result of restructuring plans during the year ended December 31, 2000.
In 1999, the Group 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
in the North American operations. This restructuring plan resulted in the
Group recording a charge of $10.5 million representing excess operating lease
obligations (net of expected sublease income) in 2000.
In 2000, the Group 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 of certain other
non-strategic businesses. As a result of this plan, it was expected that
approximately 250 employees would be terminated. The sale of the municipality
business of PENCO was completed in January 2001 and the sale of certain third
party administration businesses were completed during 2002. Restructuring
charges of $7.5 million were recorded by the Group in the fourth quarter of
2000, representing $4.2 million of employee termination benefits and $3.3
million of other exit costs relating to these plans. At December 31, 2002, 239
employees had been transferred or terminated.
The amounts used in the year ended December 31, 2002, were $3.5 million
(2001: $5.6 million; 2000: $9.5 million) representing employee termination
benefits of $0.2 million (2001: $2.4 million; 2000: $5.5 million) and excess
operating lease obligations and other exit costs of $3.3 million (2001: $3.2
million; 2000: $4.0 million). Consequently, at December 31, 2002, the balance
of restructuring charges was $6.1 million (2001: $9.6 million; 2000: $15.2
million), representing employee termination benefits $1.9 million (2001: $2.1
million; 2000: $4.5 million) and excess operating lease obligations and other
exit costs of $4.2 million (2001: $7.5 million; 2000: $10.7 million).
Debt and equity securities
US GAAP requires debt and equity investments to be classified into three
categories: held-to-maturity, trading and available-for-sale. All the Group's
investments have been classified as available-for-sale.
The debt securities held at December 31, 2002 comprise:
Amortized Unrealized Unrealized
cost gains losses Fair value
- ----------------------------------------------------------------------- ----------- ----------- ----------- -----------
($ million)
US Government securities 6.0 0.6 - 6.6
UK Government securities 2.0 0.1 - 2.1
Other foreign government securities 15.6 1.2 - 16.8
Corporate debt securities 27.3 1.6 - 28.9
----------- ----------- ----------- -----------
50.9 3.5 - 54.4
======================================================================= =========== =========== =========== ===========
During 2002 sales of debt securities totalled $13.7 million (2001: $14.5
million). Realised gains and losses on debt securities are included in
earnings.
F-59
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 30 - Differences between accounting principles generally accepted in the
United Kingdom and the United States (continued)
Maturities of debt securities held at December 31, 2002 are as follows:
2002 2001
- -------------------------------------------------- ----------- -----------
($ million)
after one year through five years 48.2 41.2
after five years 2.7 -
----------- -----------
50.9 41.2
================================================== =========== ===========
Segments
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 Group conducts its worldwide insurance brokerage activities through
three operating segments: North America, International and Global. 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 Group has aggregated these three operating segments into one
reportable segment.
None of the Group's customers represented more than 10% of the Group's
consolidated commissions and fees for the years ended December 31, 2002, 2001
and 2000.
The Group has not reported revenues from external customers for each product
and service or each group of similar products and services as the Group's
internal systems do not allow for the generation of such information.
Note 31 - New accounting standards
The following UK accounting standard has been recently issued:
FRS 17, "Retirement Benefits", was issued in November 2000, and was
initially fully effective for accounting periods ending on or after June 22,
2003. However, the implementation date has since been revised to January 1,
2005. Certain of the disclosure requirements are effective for periods prior
to the June 2005 deadline. Those disclosure requirements applicable for the
year ended December 31, 2002 are provided in note 25. The standard requires
that financial statements reflect at fair value the assets and liabilities
arising from an employer's retirement benefit obligations and related funding.
The operating costs of providing retirement benefits are recognized in the
period in which they are earned together with any related finance costs and
changes in the value of the related assets and liabilities. The impact of FRS
17 on the Group's financial position and results has not yet been determined
and is currently under review.
The following US accounting standards have been recently issued:
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). SFAS 145 addresses a number of different issues and
is effective at various dates during 2002 and 2003. The Company has assessed
the potential impact of the adoption of SFAS 145 and concluded that there is
no material impact to its financial position or results of operations.
F-60
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 31 - New accounting standards (continued)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)". The
provisions of SFAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
adoption of SFAS 146 at January 1, 2003 did not have a material impact on the
Company's financial position or results of operations, but that adoption
could, in future, affect the timing of when certain costs associated with exit
or disposal activities are recognized.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123" ("SFAS 148"). SFAS 148 amends SFAS 123 to provide alternative methods of
transition for a voluntary change to the fair value-based method of accounting
for stock-based employee compensation. These three alternatives are: (1) the
prospective method which recognizes fair value expense for all awards granted
in the year of adoption but not previous awards; (2) the modified prospective
method which recognizes fair value expense for the unvested portion of all
stock options granted, modified, or settled since 1994 (i.e., the unvested
portion of the prior awards or those granted in the year of adoption must be
recorded using the fair value method); or (3) retroactive restatement method
which is similar to the modified prospective method except that all prior
periods are restated. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS 148
is effective for fiscal years beginning after December 15, 2002. Management is
still assessing the impact of SFAS 148.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 specifies certain
accounting and disclosure requirements for guarantees to third parties
including indebtedness. FIN 45 is effective on a prospective basis for
guarantees issued or modified after December 31, 2002. The Company has
assessed the potential impact of the adoption of FIN 45 and concluded that
there is no material impact on the Company's financial position or results of
operations.
Note 32 - Condensed consolidating financial information
In February 1999, Willis North America (the "Issuer"), a wholly owned
subsidiary of the Company, issued the Notes. The Company and Willis Partners,
also a wholly owned subsidiary of the Company, jointly and severally, fully
and unconditionally, irrevocably guaranteed the prompt and complete
performance of Willis North America in respect of the Notes.
In connection with these guarantees, the Company is required to provide
condensed consolidating financial information for its subsidiary guarantors.
This information is presented below for: (i) the Company, on a stand alone
basis as a guarantor, (ii) Willis Partners, also as a guarantor, (iii) the
Issuer, (iv) other non-guarantor subsidiaries of the Company on a combined
basis ("Other"), (v) consolidating adjustments ("Eliminations") and (vi) total
consolidated amounts ("Consolidated"). The Company column presents investments
in all subsidiaries under the equity method.
F-61
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 32 - Condensed consolidating financial information (continued)
All financial statements are prepared according to UK GAAP and reconciled
with US GAAP.
Year ended December 31, 2002
---------------------------------------------------------------------------------
The Willis
Consolidated Statement of Operations Company Partners The Issuer Other Eliminations Consolidated
- ---------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
($ million)
Operating revenues 0.3 - 755.3 994.5 (15.9) 1,734.2
Operating expenses 2.7 - (601.9) (696.9) 31.3 (1,264.8)
---------- ---------- ---------- ---------- ---------- ----------
Operating income 3.0 - 153.4 297.6 15.4 469.4
Share of operating profit/(loss) of
associates - - - 14.6 (0.5) 14.1
Gain/(loss) on disposal/closure of operations - - 17.2 (1.4) (14.3) 1.5
Equity accounted subsidiaries 406.4 - - - (406.4) -
Interest income 66.2 - 46.0 (31.8) (15.0) 65.4
Interest expense - (30.9) (61.3) (1.7) 30.9 (63.0)
---------- ---------- ---------- ---------- ---------- ----------
Income/(loss) before taxation 475.6 (30.9) 155.3 277.3 (389.9) 487.4
Taxation (178.1) - (54.8) (86.8) 141.6 (178.1)
Equity minority interests - - - (0.6) (11.2) (11.8)
---------- ---------- ---------- ---------- ---------- ----------
Net income/(loss) 297.5 (30.9) 100.5 189.9 (259.5) 297.5
Adjustments to accord with US GAAP
Operating expenses - performance options - - (34.5) (45.7) - (80.2)
Amortization of goodwill and other intangible
assets - - - - 6.8 6.8
Gain on the disposal of operations - - - - 11.9 11.9
Gain on derivative instruments - - - 1.0 - 1.0
Capitalized software development costs - - - 0.9 - 0.9
Pension costs - - (3.4) 10.6 - 7.2
Equity accounted subsidiaries (42.3) - - - 42.3 -
Taxation - - 14.6 (3.3) (1.2) 10.1
---------- ---------- ---------- ---------- ---------- ----------
Net income/(loss) as adjusted to accord with
US GAAP 255.2 (30.9) 77.2 153.4 (199.7) 255.2
============================================== ========== ========== ========== ========== ========== ==========
F-62
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 32 - Condensed consolidating financial information (continued)
All financial statements are prepared according to UK GAAP and reconciled
with US GAAP.
Year ended December 31, 2001 - As restated (Note 1)
---------------------------------------------------------------------------------
The Willis
Consolidated Statement of Operations Company Partners The Issuer Other Eliminations Consolidated
- ---------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
($ million)
Operating revenues 4.6 - 661.1 779.0 (21.0) 1,423.7
Operating expenses (2.0) - (531.0) (565.0) (5.5) (1,103.5)
---------- ---------- ---------- ---------- ---------- ----------
Operating income/(loss) 2.6 - 130.1 214.0 (26.5) 320.2
Share of operating profit/(loss) of
associates - - - 12.4 (2.0) 10.4
Loss on disposal/closure of operations - - - (5.3) (0.6) (5.9)
Equity accounted subsidiaries 170.4 - - - (170.4) -
Interest income 146.3 - 64.0 184.9 (311.4) 83.8
Interest expense - (33.8) (78.8) (24.2) 54.8 (82.0)
---------- ---------- ---------- ---------- ---------- ----------
Income/(loss) before taxation 319.3 (33.8) 115.3 381.8 (456.1) 326.5
Taxation (116.4) - (30.4) (61.1) 91.5 (116.4)
Equity minority interests - - - (0.3) (6.9) (7.2)
---------- ---------- ---------- ---------- ---------- ----------
Net income/(loss) 202.9 (33.8) 84.9 320.4 (371.5) 202.9
Adjustments to accord with US GAAP
Operating expenses - performance options - - (69.8) (88.7) - (158.5)
Amortization of goodwill and other intangible
assets - - - - (32.1) (32.1)
Gain on the disposal of operations - - - - 23.3 23.3
Gain on derivative instruments - - - 2.2 - 2.2
Pension costs - - 4.6 7.6 - 12.2
Interest on tax refund relating to prior
acquisition - - (2.3) - - (2.3)
Tax refund relating to prior acquisition - - (2.6) - - (2.6)
Equity accounted subsidiaries (143.2) - - - 143.2 -
Taxation - - 24.9 (2.3) (8.0) 14.6
---------- ---------- ---------- ---------- ---------- ----------
Net income/(loss) as adjusted to accord with
US GAAP 59.7 (33.8) 39.7 239.2 (245.1) 59.7
============================================== ========== ========== ========== ========== ========== ==========
F-63
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 32 - Condensed consolidating financial information (continued)
Year ended December 31, 2000 - As restated (Note 1)
-------------------------------------------------------------------------------------------
Consolidated Statement of The Willis
Operations Company Partners The Issuer Other Eliminations Consolidated
- ------------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
($ million)
Operating revenues 3.3 - 614.3 710.6 (22.8) 1,305.4
Operating expenses (1.1) - (539.1) (543.1) (25.2) (1,108.5)
------------ ------------ ------------ ------------ ------------ ------------
Operating income/(loss) 2.2 - 75.2 167.5 (48.0) 196.9
Share of operating profit/(loss) of
associates - - - 9.2 (2.2) 7.0
Gain/(loss) on disposal/closure of
operations 0.3 - (7.9) 145.0 (145.1) (7.7)
Equity accounted subsidiaries 139.0 - - - (139.0) -
Interest income 52.8 - 79.4 107.3 (151.3) 88.2
Interest expense - (38.0) (84.9) (25.6) 60.7 (87.8)
------------ ------------ ------------ ------------ ------------ ------------
Income/(loss) before taxation 194.3 (38.0) 61.8 403.4 (424.9) 196.6
Taxation (47.4) - (11.6) (40.9) 52.5 (47.4)
Equity minority interests - - - (0.3) (2.0) (2.3)
------------ ------------ ------------ ------------ ------------ ------------
Net income/(loss) 146.9 (38.0) 50.2 362.2 (374.4) 146.9
Adjustments to accord with US GAAP
Operating expenses - restructuring
costs - - (10.5) - - (10.5)
Amortization of goodwill and other
intangible assets - - - - (32.1) (32.1)
Gain on the disposal of operations - - - - 0.3 0.3
Revaluation of forward exchange
contracts and other financial
instruments - - - (2.4) - (2.4)
Pension costs - - 10.8 (0.3) - 10.5
Equity accounted subsidiaries (44.1) - - - 44.1 -
Taxation - - 0.5 (0.3) (10.1) (9.9)
------------ ------------ ------------ ------------ ------------ ------------
Net income/(loss) as adjusted to
accord with US GAAP 102.8 (38.0) 51.0 359.2 (372.2) 102.8
==================================== ============ ============ ============ ============ ============ ============
F-64
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 32 - Condensed consolidating financial information (continued)
As at December 31, 2002
---------------------------------------------------------------------------------
The Willis
Consolidated Balance Sheet Company Partners The Issuer Other Eliminations Consolidated
- ---------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
($ million)
ASSETS
Current assets
Cash and short-term deposits - - 169.2 834.2 - 1,003.4
Investments - - 243.4 381.1 - 624.5
Accounts receivable 1,153.6 0.1 3,841.4 4,148.6 (1,327.1) 7,816.6
---------- ---------- ---------- ---------- ---------- ----------
Total current assets 1,153.6 0.1 4,254.0 5,363.9 (1,327.1) 9,444.5
---------- ---------- ---------- ---------- ---------- ----------
Fixed assets
Intangible assets - goodwill - - 4.0 140.2 (28.5) 115.7
Tangible assets - - 53.6 158.3 - 211.9
Investments 204.5 506.9 0.9 1,583.9 (2,248.8) 47.4
Equity accounted subsidiaries (324.3) - - - 324.3 -
---------- ---------- ---------- ---------- ---------- ----------
Total fixed assets (119.8) 506.9 58.5 1,882.4 (1,953.0) 375.0
---------- ---------- ---------- ---------- ---------- ----------
Total assets 1,033.8 507.0 4,312.5 7,246.3 (3,280.1) 9,819.5
============================================== ========== ========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable - - 2,858.3 4,866.5 - 7,724.8
Corporate tax payable 13.3 - 24.1 65.9 65.4 168.7
Accruals and deferred income 0.3 - 25.9 207.7 - 233.9
Other current liabilities 361.8 140.2 398.7 365.4 (1,003.9) 262.2
---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities 375.4 140.2 3,307.0 5,505.5 (938.5) 8,389.6
---------- ---------- ---------- ---------- ---------- ----------
Noncurrent liabilities
Bank loans and loan notes - - 566.1 - - 566.1
Other noncurrent liabilities - 400.0 39.6 12.1 (400.0) 51.7
---------- ---------- ---------- ---------- ---------- ----------
Total noncurrent liabilities - 400.0 605.7 12.1 (400.0) 617.8
---------- ---------- ---------- ---------- ---------- ----------
Provisions for liabilities and charges - - 18.1 79.9 31.0 129.0
Equity minority interests - - - 1.9 22.8 24.7
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and minority interests 375.4 540.2 3,930.8 5,599.4 (1,284.7) 9,161.1
---------- ---------- ---------- ---------- ---------- ----------
Total shareholders' equity 658.4 (33.2) 381.7 1,646.9 (1,995.4) 658.4
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders' equity 1,033.8 507.0 4,312.5 7,246.3 (3,280.1) 9,819.5
============================================== ========== ========== ========== ========== ========== ==========
F-65
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 32 - Condensed consolidating financial information (continued)
As at December 31, 2002
---------------------------------------------------------------------------------
The Willis
Consolidated Balance Sheet Company Partners The Issuer Other Eliminations Consolidated
- ---------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
($ million)
Total shareholders' equity under UK GAAP 658.4 (33.2) 381.7 1,646.9 (1,995.4) 658.4
Adjustments to accord with US GAAP
Fixed assets
Goodwill and other intangible assets - - - - 1,215.2 1,215.2
Software development costs - - - 1.0 - 1.0
Equity accounted subsidiaries 1,129.2 - - - (1,129.2) -
Current assets
Investments - - - 3.6 - 3.6
Receivables - derivative instruments - - - 38.8 - 38.8
Pension cost asset - - - 28.0 - 28.0
Noncurrent assets
Receivables - derivative instruments - - - 29.8 - 29.8
Minimum pension liability adjustment - - - (77.3) - (77.3)
Current liabilities
Payables - derivative instruments - - - (0.8) - (0.8)
Deferred consideration - - - - 4.4 4.4
Noncurrent liabilities
Pension cost liability - - (43.0) - - (43.0)
Payables - derivative instruments - - (6.1) (0.9) - (7.0)
Minimum pension liability adjustment - - (30.0) (135.2) - (165.2)
Taxation - - - - (8.8) (8.8)
Deferred taxes - effect of above adjustments - - 76.0 34.5 - 110.5
---------- ---------- ---------- ---------- ---------- ----------
Shareholders' equity as adjusted to accord
with US GAAP 1,787.6 (33.2) 378.6 1,568.4 (1,913.8) 1,787.6
============================================== ========== ========== ========== ========== ========== ==========
F-66
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 32 - Condensed consolidating financial information (continued)
As at December 31, 2001 - As restated (Note 1)
---------------------------------------------------------------------------------
The Willis
Consolidated Balance Sheet Company Partners The Issuer Other Eliminations Consolidated
- ---------------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
($ million)
ASSETS
Current assets
Cash and short-term deposits - - 61.0 907.1 0.1 968.2
Investments - - 258.7 220.0 - 478.7
Accounts receivable 1,221.1 - 3,756.3 3,861.6 (1,062.7) 7,776.3
---------- ---------- ---------- ---------- ---------- ----------
Total current assets 1,221.1 - 4,076.0 4,988.7 (1,062.6) 9,223.2
---------- ---------- ---------- ---------- ---------- ----------
Fixed assets
Intangible assets - goodwill - - 2.7 131.9 (89.9) 44.7
Tangible assets - - 51.5 133.6 - 185.1
Investments 181.2 506.9 1.2 1,406.1 (2,024.7) 70.7
Equity accounted subsidiaries (571.0) - - - 571.0 -
---------- ---------- ---------- ---------- ---------- ----------
Total fixed assets (389.8) 506.9 55.4 1,671.6 (1,543.6) 300.5
---------- ---------- ---------- ---------- ---------- ----------
Total assets 831.3 506.9 4,131.4 6,660.3 (2,606.2) 9,523.7
============================================== ========== ========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable - - 2,600.8 4,195.5 - 6,796.3
Corporate tax payable 4.5 - 8.0 56.9 39.1 108.5
Accruals and deferred income 0.4 - 29.7 131.1 - 161.2
Other current liabilities 495.9 112.4 364.6 871.0 (709.2) 1,134.7
---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities 500.8 112.4 3,003.1 5,254.5 (670.1) 8,200.7
---------- ---------- ---------- ---------- ---------- ----------
Noncurrent liabilities
Bank loans and loan notes - - 784.4 - - 784.4
Other noncurrent liabilities - 400.0 43.5 9.0 (400.0) 52.5
---------- ---------- ---------- ---------- ---------- ----------
Total noncurrent liabilities - 400.0 827.9 9.0 (400.0) 836.9
---------- ---------- ---------- ---------- ---------- ----------
Provisions for liabilities and charges - - 25.2 94.5 20.4 140.1
Equity minority interests - - - 0.6 14.9 15.5
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and minority interests 500.8 512.4 3,856.2 5,358.6 (1,034.8) 9,193.2
---------- ---------- ---------- ---------- ---------- ----------
Total shareholders' equity 330.5 (5.5) 275.2 1,301.7 (1,571.4) 330.5
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders' equity 831.3 506.9 4,131.4 6,660.3 (2,606.2) 9,523.7
============================================== ========== ========== ========== ========== ========== ==========
Total shareholders' equity under UK GAAP 330.5 (5.5) 275.2 1,301.7 (1,571.4) 330.5
Adjustments to accord with US GAAP
Fixed assets
Goodwill and other intangible assets - - - - 1,212.4 1,212.4
Equity accounted subsidiaries 1,239.5 - - - (1,239.5) -
Current assets
Investments - - - 1.3 - 1.3
Receivables - derivative instruments - - - 18.0 - 18.0
Pension cost asset - - - 17.4 - 17.4
Noncurrent assets
Receivables - derivative instruments - - - 14.5 - 14.5
Current liabilities
Payables - derivative instruments - - - (2.5) - (2.5)
Noncurrent liabilities
Pension cost liability - - (39.6) - - (39.6)
Payables - derivative instruments - - (7.8) (3.1) - (10.9)
Taxation - - - - (6.0) (6.0)
Deferred taxes - effect of above adjustments - - 48.4 (13.5) - 34.9
---------- ---------- ---------- ---------- ---------- ----------
Shareholders' equity as adjusted to accord
with US GAAP 1,570.0 (5.5) 276.2 1,333.8 (1,604.5) 1,570.0
============================================== ========== ========== ========== ========== ========== ==========
F-67
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 32 - Condensed consolidating financial information (continued)
Year ended December 31, 2002
----------------------------------------------------------------------------
The Willis The
Consolidated Statement of Cash Flows Company Partners Issuer Other Eliminations Consolidated
- --------------------------------------------------- --------- --------- --------- --------- --------- ---------
($ million)
Net cash inflow from operating activities - - 244.3 246.5 - 490.8
Dividends from associates - - - 3.0 - 3.0
Net cash inflow/(outflow) for returns on
investment and servicing of finance 27.6 (27.6) 7.5 58.1 (63.4) 2.2
Taxation 1.9 - (38.5) (33.6) - (70.2)
Net cash outflow for capital expenditure and
financial investment - - (15.0) (28.5) - (43.5)
Net cash inflow for acquisitions and disposals - - 18.2 5.3 - 23.5
Equity dividends paid - - - (63.4) 63.4 -
--------- --------- --------- --------- --------- ---------
Cash flow before management of liquid resources
and financing 29.5 (27.6) 216.5 187.4 - 405.8
Management of liquid resources - - (50.4) (3.6) - (54.0)
Net cash (outflow)/inflow from financing (29.4) 27.6 (123.7) (172.1) - (297.6)
--------- --------- --------- --------- --------- ---------
Increase in cash in the year 0.1 - 42.4 11.7 - 54.2
=================================================== ========= ========= ========= ========= ========= =========
Consolidated Statement of Cash Flows in accordance
with US GAAP
Cash provided by/(used in) operating activities 29.5 (27.6) 224.8 245.4 (63.4) 408.7
Cash used in investing activities - - (34.8) (0.4) - (35.2)
Cash (used in)/provided by financing activities (29.4) 27.6 (123.7) (235.5) 63.4 (297.6)
--------- --------- --------- --------- --------- ---------
Increase in cash and cash equivalents 0.1 - 66.3 9.5 - 75.9
Effect of foreign exchange rate changes - - - 8.1 - 8.1
Cash and cash equivalents at start of year - - 30.2 93.9 - 124.1
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end of year 0.1 - 96.5 111.5 - 208.1
=================================================== ========= ========= ========= ========= ========= =========
F-68
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 32 - Condensed consolidating financial information (continued)
Year ended December 31, 2001
----------------------------------------------------------------------------
The Willis The
Consolidated Statement of Cash Flows Company Partners Issuer Other Eliminations Consolidated
- --------------------------------------------------- --------- --------- --------- --------- --------- ---------
($ million)
Net cash inflow from operating activities - - 302.9 380.1 - 683.0
Dividends from associates - - - 3.7 - 3.7
Net cash inflow/(outflow) for returns on
investment and servicing of finance 116.2 (33.8) 11.2 186.7 (277.6) 2.7
Taxation (4.8) - (31.5) (5.0) - (41.3)
Net cash outflow for capital expenditure and
financial investment - - (24.0) (11.7) - (35.7)
Net cash (outflow)/inflow for acquisitions and
dispositions (0.7) - 3.0 16.8 - 19.1
Equity dividends paid (21.8) - - (277.6) 277.6 (21.8)
--------- --------- --------- --------- --------- ---------
Cash flow before management of liquid resources
and financing 88.9 (33.8) 261.6 293.0 - 609.7
Management of liquid resources - - (2.0) (5.8) - (7.8)
Net cash (outflow)/inflow from financing (89.2) 33.8 (218.9) 29.1 - (245.2)
--------- --------- --------- --------- --------- ---------
(Decrease)/increase in cash in the year (0.3) - 40.7 316.3 - 356.7
=================================================== ========= ========= ========= ========= ========= =========
Consolidated Statement of Cash Flows in accordance
with US GAAP
Cash provided by/(used in) operating activities 111.5 (33.8) 258.1 263.6 (277.6) 321.8
Cash (used in)/provided by investing activities (0.7) - (16.1) 3.0 - (13.8)
Cash (used in)/provided by financing activities (110.9) 33.8 (220.4) (247.1) 277.6 (267.0)
--------- --------- --------- --------- --------- ---------
(Decrease)/increase in cash and cash equivalents (0.1) - 21.6 19.5 - 41.0
Effect of foreign exchange rate changes - - - (4.7) - (4.7)
Cash and cash equivalents at start of year 0.1 - 8.6 79.1 - 87.8
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end of year - - 30.2 93.9 - 124.1
=================================================== ========= ========= ========= ========= ========= =========
F-69
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
NOTES TO THE FINANCIAL STATEMENTS (continued)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Note 32 - Condensed consolidating financial information (continued)
Year ended December 31, 2000
----------------------------------------------------------------------------
The Willis
Consolidated Statement of Cash Flows Company Partners The Issuer Other Eliminations Consolidated
- --------------------------------------------------- --------- --------- --------- --------- --------- ---------
($ million)
Net cash (outflow)/inflow from operating
activities - (0.2) 99.3 213.9 - 313.0
Dividends from associates - - - 4.9 - 4.9
Net cash inflow/(outflow) for returns on
investment and servicing of finance 41.2 (37.6) 7.7 104.0 (113.3) 2.0
Taxation (6.4) - (14.4) (6.5) - (27.3)
Net cash outflow for capital expenditure and
financial investment - - (9.1) (16.4) - (25.5)
Net cash outflow for acquisitions and disposals - - (1.4) (7.3) - (8.7)
Equity dividends paid (20.4) - - (113.3) 113.3 (20.4)
--------- --------- --------- --------- --------- ---------
Cashflow before management of liquid resources and
financing 14.4 (37.8) 82.1 179.3 - 238.0
Management of liquid resources - - (51.7) 2.4 - (49.3)
Net cash (outflow)/inflow from financing (26.7) 37.6 (42.9) (80.4) - (112.4)
--------- --------- --------- --------- --------- ---------
(Decrease)/increase in cash in the year (12.3) (0.2) (12.5) 101.3 - 76.3
=================================================== ========= ========= ========= ========= ========= =========
Consolidated Statement of Cash Flows in accordance
with US GAAP
Cash provided by/(used in) operating activities 34.9 (37.8) 53.5 253.7 (113.3) 191.0
Cash used in investing activities - - (10.5) (32.4) - (42.9)
Cash (used in)/provided by financing activities (46.5) 37.6 (43.0) (193.5) 113.3 (132.1)
--------- --------- --------- --------- --------- ---------
(Decrease)/increase in cash and cash equivalents (11.6) (0.2) - 27.8 - 16.0
Effect of foreign exchange rates (0.9) - - (6.2) - (7.1)
Cash and cash equivalents at start of year 12.6 0.2 8.6 57.5 - 78.9
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end of year 0.1 - 8.6 79.1 - 87.8
=================================================== ========= ========= ========= ========= ========= =========
Note 33 - Companies Act
These financial statements do not comprise the Company's statutory accounts
within the meaning of section 240 of the Companies Act. Statutory accounts for
the years ended December 31, 2000 and 2001 have been, and statutory accounts for
the year ended December 31, 2002 will be, delivered to the Registrar of
Companies for England and Wales. The auditors' reports on 2000 and 2001
statutory accounts were unqualified. The auditors have not yet reported on the
2002 statutory accounts.
F-70
SCHEDULE II
WILLIS GROUP LIMITED AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at charged to Foreign
beginning costs and exchange Balance at
Description of year expenses Deductions differences end of year
- -------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
($ million)
Year ended December 31, 2002
Provision for bad and doubtful debts 24.9 5.2 (1.8) 2.1 30.4
Deferred tax valuation allowance 62.7 1.0 - 7.0 70.7
----------- ----------- ----------- ----------- -----------
Year ended December 31, 2001
Provision for bad and doubtful debts 23.6 9.8 (8.1) (0.4) 24.9
Deferred tax valuation allowance 71.3 - (6.2) (2.4) 62.7
----------- ----------- ----------- ----------- -----------
Year ended December 31, 2000
Provision for bad and doubtful debts 24.8 7.9 (7.3) (1.8) 23.6
Deferred tax valuation allowance 100.4 - (22.0) (7.1) 71.3
======================================================== =========== =========== =========== =========== ===========
S-1
CERTIFICATION
I, Joseph J. Plumeri, certify that:
1. I have reviewed this annual report on Form 20-F of Willis Group Limited;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registration's other certifying officers and I are responsible for
establishing and maintaining disclosures controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
e) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ JOSEPH J. PLUMERI
Name: Joseph J. Plumeri
Title: Chairman and Chief
Executive Officer
CERTIFICATION
I, Thomas Colraine, certify that:
1. I have reviewed this annual report on Form 20-F of Willis Group Limited;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registration's other certifying officers and I are responsible for
establishing and maintaining disclosures controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
e) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ THOMAS COLRAINE
Name: Thomas Colraine
Title: Group Chief Financial
Officer
Printed by St Ives Burrups B703604/10556
London Paris Frankfurt Luxembourg New York Philadelphia Washington DC Hong
Kong Tokyo
EXHIBIT 4.10
SECOND AMENDMENT
TO THE
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
Second Amendment, dated as of January 1, 2003 to the Amended and Restated
Employment Agreement entered into by and between Willis North America Inc.
("Willis US") and Joseph J. Plumeri ("Executive") effective as of March 26, 2001
(the "Employment Agreement")
WHEREAS, the parties wish to formally amend the Employment Agreement and
reflect their mutual agreement and understanding of the modification.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and for other valuable consideration, receipt and sufficiency
of which are hereby acknowledged, the parties hereby agree as follows:
1. Section 1(b)(ii) of the Employment Agreement is hereby amended by the
substituting for the words "Fiscal Year 2002" the words "Fiscal Years
2002 and 2003" therein.
2. All other terms of the Employment Agreement, as amended, not
specifically amended or modified by this Second Amendment, shall remain
in full force and effect and unaltered by this Second Amendment.
WILLIS NORTH AMERICA, INC. EXECUTIVE
By: /s/ WILLIAM P. BOWDEN, JR. /s/ JOSEPH J. PLUMERI
--------------------- -----------------
William P. Bowden, Jr. Joseph J. Plumeri
Title General Counsel
- -------------------------------------------------------------------------------
EXHIBIT 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Willis Group Limited (the "Company")
on Form 20-F for the fiscal year ended December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report") I, Joseph
J. Plumeri, Chairman and Chief Executive Officer of the Company, pursuant to
18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of
2002, certify that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly represents, in all material
respects, the financial condition and results of operations of the Company.
/s/ JOSEPH J. PLUMERI
----------------------------------------------
Joseph J. Plumeri
Chairman and Chief Executive Officer
Date: March 31, 2003
A signed original of this written statement required by Section 906 has been
provided to Willis Group Limited and will be retained by Willis Group Limited
and furnished to the Securities and Exchange Commission or its staff upon
request.
- -------------------------------------------------------------------------------
EXHIBIT 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Willis Group Limited (the "Company")
on Form 20-F for the fiscal year ended December 31, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report") I, Thomas
Colraine, Group Chief Financial Officer of the Company, pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002,
certify that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly represents, in all material
respects, the financial condition and results of operations of the Company.
/s/ THOMAS COLRAINE
----------------------------------------------
Thomas Colraine
Group Chief Financial Officer
Date: March 31, 2003
A signed original of this written statement required by Section 906 has been
provided to Willis Group Limited and will be retained by Willis Group Limited
and furnished to the Securities and Exchange Commission or its staff upon
request.
- -------------------------------------------------------------------------------