Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2004

OR

For the transition period from              to             

Commission file number 000-50161

FORE HOLDINGS LLC

(Exact name of registrant as specified in its charter)

100 Half Day Road; Lincolnshire, Illinois 60069; 847-295-5000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

HEWITT HOLDINGS LLC

(Former Name, Former Address & Former Fiscal Year, if changed since last report)

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 periods as 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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

Table of Contents

FORE HOLDINGS LLC

FORM 10-Q

FOR THE PERIOD ENDED

JUNE 30, 2004

INDEX

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

FORE HOLDINGS LLC

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

The accompanying notes are an integral part of these financial statements.

3

Table of Contents

FORE HOLDINGS LLC

CONSOLIDATED STATEMENTS OF OPERATIONS (1)

(Unaudited)

(Dollars in thousands)

The accompanying notes are an integral part of these financial statements.

4

Table of Contents

FORE HOLDINGS LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

The accompanying notes are an integral part of these financial statements.

5

Table of Contents

FORE HOLDINGS LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2004 AND 2003

(Unaudited)

(Dollars in thousands)

1. Description of Business

On April 29, 2004, Hewitt Holdings LLC changed its name to FORE Holdings LLC (“FORE Holdings” or the “Company”). FORE Holdings LLC and Subsidiaries include the “Property Entities” which consist of Hewitt Properties I LLC, Hewitt Properties II LLC, Hewitt Properties III LLC, Hewitt Properties IV LLC, Hewitt Properties V LLC, Hewitt Properties VI LLC, Hewitt Properties VII LLC and The Bayview Trust. Prior to July 1, 2003, Hewitt Associates, Inc. and its subsidiaries or its predecessor, Hewitt Associates LLC and Affiliates, (“Hewitt Associates”) was the principal operating subsidiary of the Company. Hewitt Associates provides human resources outsourcing and consulting services (See below and Note 3 for additional information). After July 1, 2003, FORE Holdings is a holding company whose only business is to own, finance, lease and sell real estate assets.

FORE Holdings owns its real estate assets directly and through its Property Entities. Substantially all of the activities of the Property Entities involve assets that are leased to Hewitt Associates on terms which at inception, were intended to be comparable to those which would have been obtained in an arm’s length transaction. The investments in these properties were funded through capital contributions of FORE Holdings’ owners (individuals who own limited liability company interests of FORE Holdings) and third-party debt. The debt is a non-recourse obligation of FORE Holdings’ Property Entities and is not an obligation of, nor guaranteed by, Hewitt Associates. The properties the Company owns are located in Illinois, Florida, and Texas.

In fiscal 2002, Hewitt Associates completed its transition to a corporate structure and initial public offering. As part of that transition, FORE Holdings, received 70,819,520 shares of Hewitt Associates’ Class B common stock. On July 1, 2003, FORE Holdings distributed to its owners, the shares of Class B common stock of Hewitt Associates, with the exception of certain owners resident outside the United States who continue to hold their shares through FORE Holdings. The shares continue to be subject to the same restrictions with respect to voting, transfer and book to market phase-in as they were when the shares were held by FORE Holdings. The distribution reduced FORE Holdings’ majority interest in Hewitt Associates of approximately 72% at June 30, 2003, to a minority interest of approximately 2% at July 1, 2003 and June 30, 2004.

On August 6, 2003, Hewitt Associates completed a secondary offering of Hewitt Associates’ Class A common stock held by owners of FORE Holdings. In conjunction with the secondary offering, FORE Holdings distributed 350,431 shares of Hewitt Associates’ Class B common stock to certain owners, resident outside the United States, who had held their shares through FORE Holdings.

On January 28, 2004, Hewitt Associates’ Board of Directors authorized sales by holders of Class B and Class C common stock of up to 1 million shares per quarter, in the aggregate, pursuant to Rule 144 of the Securities Act of 1933. Since the plan was approved, 857,325 shares of stock have been converted from Hewitt Associates’ Class B and Class C common stock to Class A common stock and have been sold under Rule 144.

On April 16, 2004, Hewitt Associates filed a Registration Statement on Form S-3 with the Securities and Exchange Commission to facilitate possible future underwritten secondary offerings, block trades and other sales by the owners and the former partners of Bacon & Woodrow. The registration statement was filed, in part, to facilitate future requests under a registration rights agreement which Hewitt Associates entered into with the Company at the time of Hewitt Associates’ initial public offering. Hewitt Associates’ secondary offering during the summer of 2004 has been delayed indefinitely as a result of the pending acquisition by Hewitt Associates of Exult, Inc. (“Exult”), a leading provider of HR business process outsourcing services.

6

Table of Contents

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports on Form 10-Q. In the opinion of management, these financial statements include all adjustments necessary to present fairly the financial position, results of operations and cash flows as of June 30, 2004, and for all periods presented. All adjustments made have been of a normal and recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of the financial position or operating results for an entire year. It is suggested that these interim financial statements be read in conjunction with the audited financial statements and the notes thereto, together with management’s discussion and analysis of financial condition and results of operations, included in the Company’s Form 10-K for the fiscal year ended September 30, 2003, as filed with the Securities and Exchange Commission. Certain previously reported amounts have been reclassified to conform to the current period presentation.

The consolidated financial statements are prepared on the accrual basis of accounting. The significant accounting policies are summarized below:

Principles of Consolidation

The accompanying consolidated financial statements reflect the operations of the Company and its majority owned subsidiaries after elimination of intercompany transactions and profits.

Investments in less than 50%-owned affiliated companies over which the Company has the ability to exercise significant influence are accounted for using the equity method of accounting. The Company applies the equity method of accounting and does not consolidate its 51% interest in Overlook Associates, an Illinois partnership, as FORE Holdings does not exercise control over this partnership. Overlook Associates owns and operates commercial office buildings and develops and sells vacant land in Lincolnshire, Illinois.

On July 1, 2003, the Company distributed 67,783,937 shares of Class B common stock of Hewitt Associates then held by the Company, to its owners (the “Distribution”). The Distribution reduced FORE Holdings’ majority interest in Hewitt Associates to approximately 2% so that the Company no longer consolidated the results of Hewitt Associates, and accounted for the remaining investment in Hewitt Associates using the equity method of accounting through January 28, 2004. Prior to the Distribution, all of the assets, liabilities and earnings of Hewitt Associates and its subsidiaries were consolidated in the Company’s financial statements, and the non-affiliated investors’ Class A, Class B and Class C common stock interests in Hewitt Associates were recorded as a “Minority Interest” on the consolidated balance sheet and statement of operations for financial reporting purposes. On January 28, 2004, the shareholders of Hewitt Associates elected a majority of independent directors to its Board, at which time the Company began accounting for the remaining investment in Hewitt Associates using the cost method of accounting. The Company’s consolidated balance sheets at June 30, 2004 and September 30, 2003 do not reflect the consolidated assets, liabilities and capital of Hewitt Associates. However, the Company’s consolidated statement of operations and statement of cash flows for the three and nine months ended June 30, 2003, include the consolidated results of operations of Hewitt Associates, as these periods were prior to the Distribution.

Prior to July 1, 2003, significant eliminating entries resulting from the consolidation of Hewitt Associates included the elimination of intercompany capital leases and the reversal of intercompany rental income and expense and the recognition of depreciation and interest expense related to the real estate under capital leases. As such, on a consolidated basis, the Company’s financial statements prior to July 1, 2003, reflect the Company’s owned real estate and related third-party debt and no intercompany lease obligations and related activities between FORE Holdings and Hewitt Associates.

7

Table of Contents

Revenue Recognition

Hewitt Associates’ HR services revenues include fees generated from outsourcing contracts and from consulting services provided to Hewitt Associates’ clients. Under outsourcing contracts, which typically have a three- to five-year term, clients generally pay an implementation fee and an ongoing service fee. In accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104, Revenue Recognition, Hewitt Associates recognizes revenues for non-refundable, upfront implementation fees evenly over the period between the initiation of ongoing services through the end of the contract term (on a straight-line basis). Indirect costs of implementation are expensed as incurred. However, incremental direct costs of implementation are deferred and recognized as expense over the same period that deferred implementation fees are recognized. If a client terminates an outsourcing contract prematurely, both the deferred implementation revenues and related costs are recognized in the period in which the termination occurs.

HR services revenues related to ongoing service fees and to services provided outside the scope of outsourcing contracts are recognized when persuasive evidence of an arrangement exists, services have been rendered, our fee is determinable and collectibility of our fee is reasonably assured. Ongoing service fees are typically billed and recognized on a monthly basis, typically based on the number of plan participants or services and often with a minimum monthly fee. Services provided outside the scope of outsourcing contracts are billed and recognized on a time-and-material or fixed fee basis.

Hewitt Associates’ clients typically pay for consulting services either on a time-and-materials or on a fixed-fee basis. Revenues are recognized under time-and-material based arrangements as services are provided. On fixed-fee engagements, revenues are recognized either as services are provided using the proportional performance method and estimates of overall profitability and stages of project completion, or at the completion of a project, based on the facts and circumstances of the client arrangement.

Losses on outsourcing or consulting arrangements are recognized during the period in which a loss becomes probable and the amount of the loss is reasonably estimable. Contract or project losses are determined to be the amount by which the estimated direct and a portion of indirect costs exceed the estimated total revenues that will be generated by the arrangement. Estimates are continuously monitored during the term of the arrangement and any changes to estimates are recorded in the current period and can result in either increases or decreases to income.

Revenues earned in excess of billings are recorded as unbilled work in process. Billings in excess of revenues earned are recorded as advanced billings to clients, a deferred revenue liability, until services are rendered.

The Company considers the criteria established by Emerging Issues Task Force (“EITF”) Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, in determining whether revenue should be recognized on a gross versus a net basis. In consideration of these criteria, the Company recognizes revenue primarily on a gross basis. Factors considered in determining if gross or net recognition is appropriate include whether Hewitt Associates is primarily responsible to the client for the services, changes the delivered product, performs part of the service delivered, has discretion on vendor selection, or bears credit risk. In accordance with EITF Issue No. 01-14, Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred, reimbursements received for out-of–pocket expenses incurred are characterized as revenues and are shown as a separate component of total revenues. Similarly, related reimbursable expenses are also shown separately within operating expenses.

The Company leases its real estate properties pursuant to operating leases. The Company records rental income for the full term of each lease on a straight-line basis. Generally, the leases provide for lessee occupancy during periods for which no rent is due or where minimum rent payments increase during the term of the lease. Accordingly, a receivable is recorded from lessees for the current difference between the straight-line rent and the rent that is contractually due from the lessee. During the three and nine months ended June 30, 2004, 100% of the Company’s rental income was derived from leases with Hewitt Associates. Prior to the Distribution on July 1, 2003, all rental income and related receivables from Hewitt Associates were eliminated in the consolidation of Hewitt Associates.

8

Table of Contents

Deferred Contract Costs and Deferred Contract Revenues

For new outsourcing services, upfront implementation efforts are required to set up a client and their human resource or benefit programs on Hewitt Associates’ systems. The direct implementation or “set up” costs and any upfront set up fees are deferred and recognized into earnings over the life of the outsourcing agreement. Specific, incremental and direct costs of implementation are deferred and recognized as primarily compensation and related expenses evenly over the period between the initiation of ongoing services through the end of the contract term. Implementation fees may be received either upfront or over the ongoing services period in the fee per participant. By deferring the upfront set up fees over the ongoing services period, all set up revenues are recognized evenly over the contract term along with the corresponding deferred contract costs.

Performance-Based Compensation

Hewitt Associates’ compensation program includes a performance-based component that is determined by Hewitt Associates’ management. Performance-based compensation is discretionary and is based on individual, team and Hewitt Associates’ performance. Performance-based compensation is paid once per fiscal year after Hewitt Associates’ annual operating results are finalized. The amount of expense for performance-based compensation recognized at interim and annual reporting dates involves judgment, is based on quarterly and annual results as compared to internal targets, and takes into account other factors, including industry trends and the general economic environment. Annual performance-based compensation levels may vary from current expectations as a result of changes in the actual performance of Hewitt Associates, team or individual. As such, accrued amounts are subject to change in future periods if actual future performance varies from performance levels anticipated in prior interim periods.

Use of Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting for contract and project loss reserves, performance-based compensation, the allowance for doubtful accounts, depreciation and amortization, asset impairment, taxes, and any contingencies. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates.

Stock-Based Compensation

The Company accounts for Hewitt Associates’ stock-based compensation plans under Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, which allows companies to apply the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and provides pro forma net income and net income per share disclosures for Hewitt Associates’ employee stock option grants as if the fair value method defined in SFAS No. 123 had been applied.

Hewitt Associates’ restricted stock awards, including restricted stock and restricted stock units, are measured using the fair market value of the stock as of the grant date and are initially recorded as unearned compensation on the balance sheet. As the restricted stock awards vest, the unearned compensation is amortized to compensation expense on a straight-line basis. Employer payroll taxes are also recorded as expense when they become due over the vesting period. The shares are subject to forfeiture and restrictions on sale or transfer for four years from the grant date.

Hewitt Associates also grants nonqualified stock options at an exercise price equal to the fair market value of Hewitt Associates’ stock on the grant date. Since the stock options have no intrinsic value on the grant date, no compensation expense is recorded in connection with the stock option grants. Generally, Hewitt Associates’ stock options vest 25 percent on each anniversary of the grant date, are fully vested four years from the grant date and have a term of ten years.

9

Table of Contents

For purposes of pro forma disclosures, the estimated fair value of the Hewitt Associates stock options is amortized to compensation expense over the stock options’ vesting period. The Company’s pro forma income after taxes and minority interest and before owner distributions for the three and nine months ended June 30, 2003, would have been as follows:

3. Distribution of Hewitt Associates Shares

On July 1, 2003, the Company distributed to its owners, 67,783,937 shares of Hewitt Associates’ Class B common stock that it held on behalf of the owners (the “Distribution”). The Distribution reduced FORE Holdings’ majority interest in Hewitt Associates to approximately 2% so that the Company no longer consolidated the results of Hewitt Associates, but accounted for the remaining investment in Hewitt Associates using the equity method of accounting through January 28, 2004. On January 28, 2004, the shareholders of Hewitt Associates elected a majority of independent directors to its Board, at which time the Company began accounting for the remaining investment in Hewitt Associates using the cost method of accounting. As a result, the Company’s consolidated balance sheets at June 30, 2004 and September 30, 2003 do not reflect the consolidated assets, liabilities and capital of Hewitt Associates and the Company’s statements of operations and cash flows for the three and nine months ended June 30, 2004 do not reflect the operations of Hewitt Associates. However, the Company’s statements of operations and cash flows for the three and nine months ended June 30, 2003, do include the operations of Hewitt Associates as these periods were prior to the Distribution. Had the Company accounted for the investment in Hewitt Associates under the cost method of accounting for the entire three and nine months ended June 30, 2004, income (loss) before owner distributions would have been $535 and $2,052, respectively.

The following unaudited pro forma results give effect to the de-consolidation as if it had occurred on October 1, 2002, the beginning of fiscal 2003, account for the Company’s remaining investment in Hewitt Associates using the cost method of accounting, and exclude any non-recurring adjustments, to facilitate comparability. The Hewitt Associates historical results in the following pro forma consolidated income statements reflect Hewitt Associates’ results for the three and nine months ended June 30, 2003. The information presented is not necessarily indicative of the results of operations that might have occurred had the events described above actually taken place as of the dates specified. The pro forma adjustments are based upon available information and assumptions that management believes are reasonable. This information and the accompanying notes should also be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report and the Annual Report on Form 10-K for the year ended September 30, 2003.

10

Table of Contents

FORE Holdings LLC

Pro Forma Consolidated Income Statements

(unaudited)

11

Table of Contents

FORE Holdings LLC

Pro Forma Consolidated Income Statements

(unaudited)

12

Table of Contents

4. Client Receivables and Unbilled Work in Process

At September 30, 2003, client receivables and unbilled work in process, net of allowances, were $563 and $181, respectively, or $744 in total.

5. Deferred Loan Costs and Other Intangible Assets

At June 30, 2004 and September 30, 2003, intangible assets with definite useful lives include deferred loan costs with an estimated useful life of 20 years.

The Company tests intangible assets for impairment whenever indicators of impairment arise. During the nine months ended June 30, 2004 and for the year ended September 30, 2003, no impairments on intangible assets were recognized.

Amortization expense related to definite-lived intangible assets for the three and nine months ended June 30, 2004 and 2003, are as follows:

Estimated amortization expense related to intangible assets at September 30, 2003, is $62 in each of the five years that end September 30, 2008 and $595 thereafter.

13

Table of Contents

6. Related Party Transactions

The Company entered into real estate operating leases with Hewitt Associates and its subsidiaries on terms which at inception, were intended to be comparable to those which would have been obtained in an arm’s length transaction. The investments in the properties were funded through capital contributions by FORE Holdings’ owners and third-party debt. The debt is reflected on the Company’s balance sheet and is not an obligation of, nor guaranteed by, Hewitt Associates.

Generally, the leases provide for lessee occupancy during periods for which no rent is due or where minimum rent payments increase during the term of the lease. The Company records rental income for the full term of each lease on a straight-line basis. Accordingly, a receivable is recorded for the current difference between the straight-line rent and the rent that is contractually due from the lessee. As of June 30, 2004 and September 30, 2003, the deferred rent receivable with Hewitt Associates was $3,744 and $3,928, respectively.

In June 2002, Hewitt Associates entered into a 15-year capital lease with The Bayview Trust to lease office space in Newport Beach, California. On March 7, 2003, The Bayview Trust sold the property in Newport Beach, California, and Hewitt Associates’ lease was assigned to the third-party purchaser of the building.

From May 31, 2002, through September 30, 2007, Hewitt Associates LLC, a subsidiary of Hewitt Associates will provide certain support services to FORE Holdings, primarily in the financial, real estate and legal departments, as may be requested by FORE Holdings from time to time. FORE Holdings will pay Hewitt Associates LLC an annual fee of $50 for basic services. Hewitt Associates LLC may charge FORE Holdings separately for additional services on a time and materials basis. Through June 30, 2004, fees for all services Hewitt Associates LLC has provided under the services agreement, totaling $87 for the nine months ended June 30, 2004 and $382 for the comparable prior year period, have been paid by FORE Holdings.

7. Stock-Based Compensation Plans

Hewitt Associates sponsors its a Global Stock and Incentive Compensation Plan (the “Plan”) for its employees and directors. The Plan is administered by the Compensation and Leadership Committee of the Board of Directors of the Company (the “Committee”). Under the Plan, employees and directors may receive awards of nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, and cash-based awards, and employees can also receive incentive stock options. A total of 25,000,000 shares of Class A common stock have been reserved for issuance under the Plan. Through the Distribution date, only restricted stock and restricted stock units and nonqualified stock options had been granted.

In connection with its initial public offering in June 2002, Hewitt Associates granted 5,789,908 shares of Class A restricted stock and restricted stock units to employees. The restricted stock and restricted stock units have substantially the same terms, except the holders of restricted stock units do not have voting rights. The one-time initial public offering-related awards were valued at $110,141 on the June 27, 2002, grant date (a weighted price of $19.02 per share) and 37% were amortized on a straight-line basis as non-cash compensation expense from the grant date until December 31, 2002 and 63% are being amortized on a straight-line basis as non-cash compensation expense over four years following the grant date. As a result of the Distribution and subsequent de-consolidation of Hewitt Associates, the Company did not recognize any compensation expense for the initial public offering restricted stock awards in the three and nine months ended June 30, 2004. For the three and nine months ended June 30, 2003, compensation expense for the initial public offering restricted stock awards was $5,649 and $35,193, respectively, representing amortization and applicable payroll taxes for the period.

14

Table of Contents

8. Legal Proceedings

The Company is occasionally subject to lawsuits and claims arising in the normal conduct of business. Management does not expect the outcome of any pending claim to have a material adverse affect on the business, financial condition or results of operations of the Company.

Hewitt Associates provides indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of its products or receipt of its services. The Company evaluates estimated losses for such indemnifications under SFAS 5, Accounting for Contingencies, as interpreted by FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. Management considers such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. As of June 30, 2004, the Company had no outstanding claims and was not subject to any pending litigation alleging that Hewitt Associates’ products or services infringe the intellectual property rights of any third parties.

9. Other Comprehensive Income

The following table presents the after-tax components of the Company’s other comprehensive income for the periods presented: