United States
Securities And Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000
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: 001-16159
WATSON WYATT & COMPANY HOLDINGS
(Exact name of registrant as specified in its charter)
Delaware 52-2211537
(State or other (I.R.S. Employer
jurisdiction of Identificaton No.)
incorporation or
organization)
1717 H Street NW
Washington, Dc 20006-3900
(Address of principal executive offices, including zip code)
(202) 715-7000
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of February 6, 2001.
Class A Common Stock, $.01 Par Value 6,440,000
------------------------------------ ----------------
Class B Common Stock, $.01 Par Value 26,488,710
------------------------------------ ----------------
Class Number of Shares
WATSON WYATT & COMPANY HOLDINGS
Index To Form 10-Q
For the Three Months Ended December 31, 2000
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)........................F-1 - F-4
Consolidated Statements of Operations--Three
months and six months ended December 31,
2000 and 1999......................................F-1
Consolidated Balance Sheets--June 30, 2000
and December 31, 2000 .............................F-2
Consolidated Statements of Cash Flows--Six
months ended December 31, 2000 and 1999............F-3
Consolidated Statements of Changes in Permanent
Stockholders' Equity and Redeemable Common Stock..F-4
Notes to the Consolidated Financial Statements.......5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ...................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................18
Item 2. Changes in Securities and Use of Proceeds...............19
Item 3. Defaults Upon Senior Securities.........................20
Item 4. Submission of Matters to a Vote of Security Holders.....21
Item 5. Other Information.......................................21
Item 6. Exhibits and Reports on Form 8-K........................22
Signatures ........................................................23
WATSON WYATT & COMPANY HOLDINGS
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended December 31, Six Months Ended December 31,
-------------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Revenue $ 168,781 $ 152,411 $ 339,474 $ 298,734
------------ ------------ ------------ ------------
Costs of providing services:
Salaries and employee benefits 91,661 80,950 181,424 160,753
Stock incentive bonus plan - 9,000 - 15,000
Professional and subcontracted services 15,576 15,131 26,755 24,927
Occupancy, communications and other 26,850 24,707 53,494 46,723
General and administrative expenses 17,920 14,724 33,051 27,902
Depreciation and amortization 6,119 4,610 12,036 9,519
------------ ------------ ------------ ------------
158,126 149,122 306,760 284,822
------------ ------------ ------------ ------------
Income from operations 10,655 3,289 32,714 13,912
Other:
Interest income 847 216 1,424 1,252
Interest expense (742) (698) (1,015) (1,088)
Income from affiliates 1,162 1,155 2,178 2,143
------------ ------------ ------------ ------------
Income before income taxes and minority interest 11,922 3,962 35,301 16,219
Provision for income taxes 5,113 1,916 15,144 7,835
------------ ------------ ------------ ------------
Income before minority interest 6,809 2,046 20,157 8,384
Minority interest in net (income) loss of consolidated
subsidiaries (72) 158 (85) 176
------------ ------------ ------------ ------------
Net income $ 6,737 $ 2,204 $ 20,072 $ 8,560
============ ============ ============ ============
Basic earnings per share, net income $ 0.21 $ 0.07 $ 0.64 $ 0.28
============ ============ ============ ============
Diluted earnings per share, net income $ 0.20 $ 0.07 $ 0.64 $ 0.28
============ ============ ============ ============
Weighted average shares of Common Stock, basic 32,755 29,834 31,190 30,280
============ ============ ============ ============
Weighted average shares of Common Stock, diluted 33,146 29,834 31 386 30,280
============ ============ ============ ============
See accompanying notes
F-1
WATSON WYATT & COMPANY HOLDINGS
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF U.S. DOLLARS)
December 31, June 30,
2000 2000
------------- -------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 61,829 $ 41,410
Receivables from clients:
Billed, net of allowances of $7,888 and $2,832 96,896 76,729
Unbilled, net of allowances of $3,038 and $676 59,991 66,009
------------- ------------
156,887 142,738
Other current assets 12,315 11,705
------------- ------------
Total current assets 231,031 195,853
Investment in affiliates 16,700 16,615
Fixed assets, net of accumulated depreciation of $89,774 and $83,211 43,535 45,237
Deferred income taxes 53,355 53,355
Intangible assets, net of accumulated amortization of $16,357 and $15,288 13,503 8,721
Other assets 10,425 10,179
------------- ------------
Total Assets $ 368,549 $ 329,960
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 147,250 $ 167,803
Line of credit and book overdrafts 24 30
Income taxes payable 17,394 11,843
------------- ------------
Total current liabilities 164,668 179,676
Accrued retirement benefits 80,573 79,462
Deferred rent and accrued lease losses 4,215 5,456
Other noncurrent liabilities 23,116 23,657
Minority interest in subsidiaries 585 498
Redeemable Common Stock - $1 par value:
50,000,000 shares authorized;
14,845,145 issued and outstanding;
at redemption value 115,480
Permanent stockholders' equity:
Adjustment for redemption value less
than amounts paid in by shareholders (6,097)
Preferred Stock - No par value:
1,000,000 shares authorized;
None issued and outstanding -
Class A Common Stock - $.01 par value:
69,000,000 shares authorized;
6,440,000 issued and outstanding 64
Class B-1 Common Stock - $.01 par value:
15,000,000 shares authorized;
13,244,355 issued and outstanding 132
Class B-2 Common Stock - $.01 par value:
15,000,000 shares authorized;
13,244,355 issued and outstanding 132
Additional paid-in capital 145,007
Retained deficit (44,257) (64,223)
Cumulative translation adjustment (accumulated other comprehensive loss) (5,686) (3,949)
Commitments and contingencies
------------- -------------
Total Liabilities and Stockholders' Equity $ 368,549 $ 329,960
============= =============
See accompanying notes
F-2
WATSON WYATT & COMPANY HOLDINGS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF U.S. DOLLARS)
Six Months Ended December 31,
--------------------------------
2000 1999
------------- -------------
(Unaudited)
Cash flows from (used for) operating activities:
Net income $ 20,072 $ 8,560
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful receivables from clients 9,514 7,779
Depreciation 10,827 8,651
Non cash compensation charge 751 -
Amortization of intangible assets 1,209 866
Income from affiliates (2,178) 2,143)
Minority interest in net income (loss) of consolidated subsidiaries 85 (176)
(Increase) decrease in assets (net of discontinued operations):
Receivables from clients (23,664) (19,458)
Other current assets (610) 1,100
Other assets 1,655 634
(Decrease) increase in liabilities (net of discontinued operations):
Accounts payable and accrued liabilities (20,156) (8,550)
Income taxes payable 5,551 (8,511)
Accrued retirement benefits 1,111 (2,907)
Deferred rent and accrued lease losses (1,241) (1,642)
Other noncurrent liabilities (402) 279
Other, net 512 (584)
Discontinued operations, net (146) (637)
------------- -------------
Net cash from (used for) operating activities 2,890 (16,739)
------------- -------------
Cash flows used in investing activities:
Purchases of fixed assets (11,716) (3,636)
Proceeds from sales of fixed assets and investments 445 -
Acquisitions and contingent consideration payments (6,851) (2,800)
Distributions from affiliates 1,826 594
------------- -------------
Net cash used in investing activities (16,296) (5,842)
------------- -------------
Cash flows from (used in) financing activities:
Borrowings and book overdrafts (6) 8,153
Issuances of Common Stock in the initial public offering 35,225 -
Other issuances of Redeemable Common Stock 134 -
Repurchases of Redeemable Common Stock (252) (8,656)
------------- -------------
Net cash from (used in) financing activities 35,101 (503)
------------- -------------
Effect of exchange rates on cash (1,276) 787
------------- -------------
Increase (decrease) in cash and cash equivalents 20,419 (22,297)
Cash and cash equivalents at beginning of period 41,410 35,985
------------- -------------
Cash and cash equivalents at end of period $ 61,829 $ 13,688
============= =============
See accompanying notes
F-3
WATSON WYATT & COMPANY HOLDINGS
CONSOLIDATED STATEMENTS OF CHANGE IN PERMANENT STOCKHOLDERS' EQUITY AND REDEEMABLE COMMON STOCK
(THOUSANDS OF U.S. DOLLARS)
(Unaudited)
Adjustment for
Redemption Value
Greater Than
Cumulative Amounts Par Value Par Value Par Value Additional
Redeemable Retained Translation Paid in by Class A Class B-1 Class B-2 Paid in
Common Stock Deficit Loss Stockholders Common Stock Common Stock Common Stock Capital Total
------------ ----------- ---------- ------------ ------------ ------------ ------------ ------- ---------
Balance at June 30,
2000 $ 115,480 $ (64,223)$ (3,949) $ (6,097) $(74,269)
Comprehensive Income
for the quarter ended
September 30, 2000:
Net income 13,335 13,335
Foreign currency
translation
adjustment (1,224) (1,224)
--------
Total Comprehensive
Income for the quarter
ended September 30, 2000 12,111
Effect of repurchases of
17,839 shares of
Redeemable Common Stock (146) (106) 106 -
Effect of issuance of
20,000 shares of
Redeemable Common Stock 134 -
Adjustment of redemption
value for change in
Formula Book Value per
share (118) (118)
----------- ----------- ---------- ------------ ------------- ------------ ----------- ------- ---------
Balance prior to the
reorganization 115,468 (50,994) (5,173) (6,109)$ - $ - $ - $ - (62,276)
Elimination of
redeemable feature of
Common Stock and 2-for-1
share exchange (see
Note 2) (115,468) 6,109 148 148 109,063 115,468
Reclassification for
sale of 3,118,500 shares
by existing stockholders 32 (16) (16) -
Proceeds from sales of
3,321,500 shares by
the Company, net of
offering costs 32 35,193 35,225
Non cash compensation
charge related to the
sale of 44,796 shares
of Redeemable Common
Stock prior to the initial
public offering 751 751
Comprehensive Income for the
quarter ended December 31,
2000:
Net income 6,737 6,737
Foreign currency translation
adjustment (513) (513)
--------
Comprehensive Income for the
quarter ended December 31,
2000: 6,224
----------- ---------- ---------- ------------ ------------ ------------ ------------ -------- ---------
Balance at December
31, 2000 $ - $ (44,257)$ (5,686) $ - $ 64 $ 132 $ 132 $145,007 $ 95,392
=========== ========== ========== ============ ============ ============ ============ ======== =========
See accompanying notes
F-4
WATSON WYATT & COMPANY HOLDINGS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited quarterly consolidated financial statements of
Watson Wyatt & Company Holdings and our subsidiaries, (collectively
referred to as "we," "Watson Wyatt" or the "Company"), are presented in
accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC") and do not include all of the disclosures normally
required by Generally Accepted Accounting Principles. In the opinion of
management, these statements reflect all adjustments which are necessary
for a fair presentation of the consolidated financial statements for the
interim periods. The consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K/A for the
fiscal year ended June 30, 2000, and the Company's prospectus dated
October 11, 2000, both of which are filed with the SEC and may be accessed
via EDGAR on the SEC's web site at www.sec.gov.
The results of operations for the three and six months ended December 31,
2000 are not necessarily indicative of the results that can be expected
for the entire fiscal year ending June 30, 2001. The results reflect
anticipated tax rates and bonuses ultimately accrued at the discretion of
the Company's Board of Directors. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
2. In October 2000, we completed an initial public offering ("IPO") of our
class A common stock. In conjunction with this offering, on October 16,
2000 we completed changes in our corporate structure involving the merger
of Watson Wyatt & Company with WW Merger Subsidiary, Inc., a wholly -
owned subsidiary of Watson Wyatt & Company Holdings. As a result, Watson
Wyatt & Company is now a wholly-owned subsidiary of Watson Wyatt & Company
Holdings.
At the time of the reorganization, each share of Watson Wyatt & Company's
Redeemable Common Stock was converted into one share of class B-1 common
stock and one share of class B-2 common stock of Watson Wyatt & Company
Holdings. The class B common stock is divided into two classes to
accommodate different transfer restriction periods. The class B-1 shares
are subject to a transfer restriction period of 12 months following the
public offering date, while the class B-2 shares are subject to a transfer
restriction period of 24 months following the public offering date, unless
waived by the Board of Directors. The Board of Directors waived the
transfer restrictions on a total of 1,559,250 class B-1 and 1,559,250
class B-2 shares to allow for conversion into the class A shares sold by
selling stockholders in the initial public offering described below.
Following the expiration or waiver of the respective transfer restriction
periods, the remaining class B-1 and class B-2 shares will automatically
convert into class A common stock.
In conjunction with our initial public offering, we entered into
agreements providing for additional transfer restrictions with major
stockholders, executive officers and employee directors affecting
approximately 36% of our remaining class B common stock. The agreements
restrict transfers of all shares held by such persons immediately
following the offering, and the restrictions terminate as to 25% of such
shares on each of the first, second, third and fourth anniversaries of the
consummation of the public offering.
-5-
The two-for-one share conversion, the elimination of the redeemable
feature of Watson Wyatt & Company's Redeemable Common Stock and the
reclassification of stock to permanent stockholders' equity has been
reflected in the Consolidated Balance Sheet as of December 31, 2000, and
also has been reflected in all earnings per share data on the Consolidated
Statements of Operations for the three and six months ended December 31,
2000 and 1999, as if the conversion were effective at the beginning of
each period.
A total of 5,600,000 shares of class A common stock was offered and sold
in our initial public offering at an offering price of $12.50 per share.
Of the shares included in this transaction, Watson Wyatt & Company
Holdings offered 2,800,000 newly-issued shares and the selling
stockholders offered the remaining 2,800,000 shares. On November 8, 2000,
our underwriters exercised their over-allotment option. As a result, the
underwriters purchased 840,000 shares of class A common stock from us and
from the selling stockholders at the initial public offering price of
$12.50 per share less the underwriting discount. Of the shares included in
this transaction, Watson Wyatt & Company Holdings sold 521,500
newly-issued shares and the selling stockholders sold 318,500 shares.
Net proceeds to the Company from these transactions were $35.2 million,
net of underwriting discounts, commissions and other offering, merger and
restructuring costs. We did not receive any proceeds from the sale of
shares by the selling stockholders. We also paid $2.7 million to selling
stockholders as reimbursement for commission payments resulting from the
sale of their shares. This amount was recorded in the salaries and
employee benefits line for the three and six month-periods ended December
31, 2000.
3. In the third quarter of fiscal year 1998, we discontinued our benefits
administration outsourcing business, including our investment in our
affiliate, Wellspring Resources, LLC ("Wellspring"). We believe we have
adequate provisions for any remaining costs associated with our
obligations related to the benefits administration outsourcing business.
All Wellspring related activity is reflected on the Statements of Cash
Flows as discontinued operations.
4. We have adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." During the second quarter of fiscal year 2001,
we changed the structure of our internal organization in a manner that
caused the composition of our reportable segments to change. In order to
better position the Company to deliver the integrated, global solutions
that have the largest impact on our growth, management consolidated our
three U.S. regions into a single region. As a result of this
consolidation, and because we also use a practice-based matrix form of
organization for our North American regions, we have changed our
reportable segments to reflect our practice-based structure. After the
change, we have five reportable segments:
(1) Benefits Group
(2) HR Technologies Group
(3) Human Capital Group
(4) International
(5) Other (including Data Services and Communications)
The Company evaluates the performance of its segments and allocates
resources to them based on net operating income. Prior and current year
data has been restated to be consistent with current classifications for
comparative purposes.
-6-
The table below presents specified information about reported segments as
of and for the three months ended December 31, 2000 (in thousands):
Benefits HR Technologies Human Capital
Group Group Group International Other Total
-------- --------------- ------------- ------------- -------- ---------
Revenue (net of
reimbursable
expenses) $ 86,004 $ 24,589 $ 14,519 $ 17,537 $ 17,646 $ 160,295
Net operating
income 16,865 7,158 2,444 1,502 1,904 29,873
Receivables 90,368 19,394 15,713 19,322 14,376 159,173
The table below presents specified information about reported segments as
of and for the three months ended December 31, 1999 (in thousands):
Benefits HR Technologies Human Capital
Group Group Group International Other Total
-------- --------------- ------------- ------------- -------- ---------
Revenue (net of
reimbursable
expenses) $ 79,275 $ 20,745 $ 12,885 $ 15,049 $ 15,787 $ 143,741
Net operating
income 14,167 5,615 1,990 1,146 583 23,501
Receivables 83,470 21,295 13,555 17,350 12,903 148,573
The table below presents specified information about reported segments as
of and for the six months ended December 31, 2000 (in thousands):
Benefits HR Technologies Human Capital
Group Group Group International Other Total
-------- --------------- ------------- ------------- -------- ---------
Revenue (net of
reimbursable
expenses) $172,921 $ 49,441 $ 28,486 $ 35,914 $ 37,183 $ 323,945
Net operating
income 38,748 15,834 5,179 5,052 5,964 70,777
Receivables 90,368 19,394 15,713 19,322 14,376 159,173
The table below presents specified information about reported segments as
of and for the six months ended December 31, 1999 (in thousands):
Benefits HR Technologies Human Capital
Group Group Group International Other Total
-------- --------------- ------------- ------------- -------- ---------
Revenue (net of
reimbursable
expenses) $158,649 $ 40,492 $ 23,601 $ 30,126 $ 30,863 $ 283,731
Net operating
income 31,999 10,572 2,514 2,446 3,303 50,834
Receivables 83,470 21,295 13,555 17,350 12,903 148,573
-7-
Information about interest income and tax expense is not presented as a
segment expense because it is not considered a responsibility of the
segments' operating management.
A reconciliation of the information reported by segment to the
consolidated amounts follow for the three and six-month periods ended
December 31, 2000 and 1999 (in thousands):
Three Months Ended December 31, Six Months Ended December 31,
------------------------------- ------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenue:
--------
Total segment revenue $ 160,295 $ 143,741 $ 323,945 $ 283,731
Reimbursable expenses not
included in total segment revenue 9,656 9,154 16,673 15,381
Other, net (1,170) (484) (1,144) (378)
---------- ---------- ---------- ----------
Consolidated revenue $ 168,781 $ 152,411 $ 339,474 $ 298,734
========== ========== ========== ==========
Net Operating Income:
---------------------
Total segment net operating income $ 29,873 $ 23,501 $ 70,777 $ 50,834
Income from affiliates 1,162 1,155 2,178 2,143
Differences in allocation methods
for depreciation, G&A and
pension costs (3,562) 726 (3,694) 2,515
Gain on sale of business units 296 - 696 -
Discretionary compensation
(including stock incentive bonus
plan during the three and six
months ended December 31, 1999
only) (14,000) (20,550) (33,100) (41,750)
IPO-related compensation charge (3,480) - (3,480) -
Other, net 1,633 (870) 1,924 2,477
----------- ---------- ---------- ----------
Consolidated pretax income from
continuing operations $ 11,922 $ 3,962 $ 35,301 $ 16,219
=========== ========== ========== ==========
Receivables:
------------
Total segment receivables - billed
and unbilled $ 159,173 $ 148,573 $ 159,173 $ 148,573
Net valuation differences (2,286) (1,028) (2,286) (1,028)
----------- ---------- ---------- ----------
Total billed and unbilled
receivables 156,887 147,545 156,887 147,545
Assets not reported by segment 211,662 153,479 211,662 153,479
----------- ---------- ---------- ----------
Consolidated assets $ 368,549 $ 301,024 $ 368,549 $ 301,024
=========== ========== ========== ==========
5. In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements," which summarizes
certain of the staff's views on revenue recognition. Our revenue
recognition policies have been and continue to be in accordance with SAB
101.
-8-
6. In June 1998, the Financial Accounting Standards Board issued Statement
("FAS") No. 133 "Accounting for Derivative Instruments and Hedging
Activities," which requires an entity to recognize all derivatives as
either assets or liabilities in the Consolidated Balance Sheets and
measure those instruments at fair value. Effective July 1, 2000, we
adopted FAS 133, and it has no impact on fair values or earnings. We do
not use derivative instruments as a hedging strategy or for any other
purpose.
7. Basic earnings per share is calculated on the basis of the weighted
average number of common shares outstanding. Diluted earnings per share is
calculated on the basis of the weighted average number of common shares
outstanding plus the effect of outstanding stock options using the
"treasury stock" method. The components of basic and diluted earnings per
share are as follows:
Three Months Ended December 31, Six Months Ended December 31,
------------------------------- -----------------------------
2000 1999 2000 1999
--------- --------- ---------- ---------
Net income $ 6,737 $ 2,204 $ 20,072 $ 8,560
--------- --------- ---------- ---------
Weighted average outstanding
shares of common stock 32,755 29,834 31,190 30,280
Dilutive effect of employee stock
options 391 - 196 -
--------- --------- ---------- ---------
Common stock and stock
equivalents 33,146 29,834 31,386 30,280
========= ========= ========== =========
Earnings per share:
Basic $ 0.21 $ 0.07 $ 0.64 $ 0.28
======== ========= ========== =========
Diluted $ 0.20 $ 0.07 $ 0.64 $ 0.28
======== ========= ========== =========
Earnings per share data for the three and six-month periods ended December
31, 2000 and 1999 have been restated to reflect the corporate
reorganization and two-for-one share conversion as if the corporate
reorganization and two-for-one share conversion were effective at the
beginning of each period. See Note 2 of the Consolidated Financial
Statements for further information regarding the initial public offering.
8. We are a defendant in certain lawsuits arising in the normal course of
business, some of which are in their earliest stages. Management believes
that these matters will not have a material adverse impact on our
financial statements, but claims which are possible in our business could
be material to the financial results for a particular period.
We carry substantial professional liability insurance with a self-insured
retention of $1 million per occurrence, which provides coverage for
professional liability claims including the cost of defending such claims.
We also carry employment practices liability insurance.
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
Watson Wyatt is a global provider of human capital consulting services. We
operate from 59 offices in 18 countries throughout North America, Asia-Pacific
and Latin America. We provide services in three principal practice areas:
benefits, human resources technologies and human capital consulting. Watson
Wyatt & Company, which became a wholly-owned subsidiary of Watson Wyatt &
Company Holdings as a result of our corporate reorganization, was incorporated
in Delaware on February 17, 1958. Watson Wyatt & Company Holdings was
incorporated in Delaware on January 7, 2000. Including our predecessors, we
have been in business since 1946. In 1995, we entered into an alliance
agreement with R. Watson & Sons (now Watson Wyatt Partners), a United
Kingdom-based actuarial, benefits and human resources consulting partnership
that was founded in 1878. We conducted business as The Wyatt Company until
changing our corporate name to Watson Wyatt & Company in connection with the
establishment of the Watson Wyatt Worldwide alliance. Since 1995, we have
marketed our services globally under the Watson Wyatt Worldwide brand, sharing
resources, technologies, processes and business referrals.
In October 2000, we moved our principal executive offices to 1717 H Street NW,
Washington, DC 20006, from 6707 Democracy Boulevard, Suite 800, Bethesda, MD
20817. Our web site is www.watsonwyatt.com.
Global Operations
We employ approximately 4,100 associates as follows:
Benefits Group 1,480
HR Technologies Group 380
Human Capital Group 255
International 860
Other (Including Data Services and Communications) 835
Corporate 290
-----
Total 4,100
=====
Principal Services
Within the past four fiscal years, we have divested several non-core businesses
- including benefits administration outsourcing, defined contribution
record-keeping and risk management consulting services - in order to focus on
our core consulting areas. These core areas are as follows:
Benefits Consulting: The Benefits Consulting practice provides analysis, design
and implementation of retirement programs, including actuarial services and
required reporting of plan contributions and funding levels, group health
benefit plan design and provider selection and defined contribution plan design
and related services.
-10-
HR Technologies Consulting: The HR Technologies Consulting practice develops
technology-based solutions to reduce employer costs and improve employee
service in human resources administration, including web-based applications.
Human Capital Consulting: The Human Capital Consulting practice provides
comprehensive consulting in compensation plan design, executive compensation,
salary management and organizational effectiveness consulting.
International: Our consultants, working internationally, operate on a
geographic basis from 23 offices in 16 countries and provide consulting
services in the practice areas mentioned herein.
Other: While we focus our consulting services in the areas described above,
management believes that one of our primary strengths is our ability to draw
upon consultants from our different practices to deliver integrated services to
meet the needs of our clients. Examples include:
(1) Communications: Our Communications practice provides research on
employee attitudes and communication effectiveness, conducts
communications audits, facilitates research and focus groups, provides
communications planning and implementation and assists employers in
complying with disclosure requirements.
(2) Data Services: Watson Wyatt Data Services produces custom and standard
compensation and benefits surveys and human resource reference materials
for use by global and local companies in 70 countries. Over 7,500
companies participate in our surveys and our products include over 100
compensation, benefits and employment practices references and survey
reports.
Watson Wyatt Worldwide Alliance
Recognizing that a global organization is essential to service the needs of our
clients, we established operations throughout Europe in the late 1970's by
acquiring local firms and opening new offices. Responding to the rapidly
increasing globalization of the world economy, we made a strategic decision in
1995 to strengthen our European capabilities significantly and extend our
global reach by entering into an alliance agreement with R. Watson & Sons (now
Watson Wyatt Partners), a United Kingdom-based actuarial, benefits and human
resources consulting partnership that was founded in 1878. Since 1995, we have
marketed our services globally under the Watson Wyatt Worldwide brand, sharing
resources, technologies, processes and business referrals.
The Watson Wyatt Worldwide global alliance maintains 84 offices in 30 countries
and employs over 5,800 employees. Watson Wyatt & Company operates 59 offices in
18 countries in North America, Asia-Pacific and Latin America. Watson Wyatt
Partners operates 11 offices in the United Kingdom, Ireland and Africa. The
alliance operates 14 offices in 9 continental European countries principally
through a jointly owned holding company, Watson Wyatt Holdings (Europe)
Limited, which is 25% owned by Watson Wyatt and 75% owned by Watson Wyatt
Partners.
-11-
Financial Statement Overview
Watson Wyatt's fiscal year ends June 30. The financial statements contained in
this quarterly report reflect a Consolidated Balance Sheet as of the end of the
second quarter of fiscal year 2001 (December 31, 2000), reflecting the changes
in our capital structure as a result of our reorganization and initial public
offering, a Consolidated Balance Sheet as of the end of fiscal year 2000 (June
30, 2000), Consolidated Statements of Operations for the three and six-month
periods ended December 31, 2000 and 1999, Consolidated Statements of Cash Flows
for the six-month periods ended December 31, 2000 and 1999 and a Consolidated
Statement of Changes in Permanent Stockholders' Equity and Redeemable Common
Stock for the six-month period ended December 31, 2000, reflecting the changes
in our capital structure as a result of our reorganization and initial public
offering.
Although we operate globally as an alliance with our affiliates, the revenues
and operating expenses in the Consolidated Statements of Operations reflect
solely the results of operations of Watson Wyatt & Company Holdings. Our share
of the results of our affiliates, recorded using the equity method of
accounting is reflected in the "Income from affiliates" line. Our principal
affiliates are Watson Wyatt Partners, in which we hold a 10% interest in a
defined distribution pool, and Watson Wyatt Holdings (Europe) Limited, a
holding company through which we conduct continental European operations. We
own 25% of Watson Wyatt Holdings (Europe) Limited and Watson Wyatt Partners
owns the remaining 75%.
We derive substantially all of our revenue from fees for consulting services,
which generally are billed at standard hourly rates or on a fixed-fee basis;
management believes the approximate percentages are 60% and 40%, respectively.
Clients are typically invoiced on a monthly basis with revenue recognized as
services are performed. For the most recent three fiscal years, revenue from
U.S. consulting operations have comprised approximately 80% of consolidated
revenue. No single client accounted for more than 5% of our consolidated
revenue for any of the most recent three fiscal years.
In delivering consulting services, our principal direct expenses relate to
compensation of personnel. Salaries and employee benefits are comprised of
wages paid to associates, related taxes, benefit expenses such as pension,
medical and insurance costs and fiscal year-end incentive bonuses. In addition,
professional and subcontracted services represent fees paid to external service
providers for legal, marketing and other services, approximately 50% of which
are specifically reimbursed by our clients and included in revenue.
Occupancy, communications and other expenses represent expenses for rent,
utilities, supplies and telephone to operate office locations as well as
non-client-reimbursed travel by associates, publications and professional
development. General and administrative expenses include the operational costs
and professional fees paid by corporate management, general counsel, marketing,
human resources, finance, research and technology support.
Historically, we have paid incentive bonuses to associates under a fiscal
year-end bonus program. Beginning in fiscal year 1999 and continuing through
fiscal year 2000, in addition to annual fiscal year-end bonuses, we provided
supplemental bonus compensation to our employee stockholders pursuant to our
stock incentive bonus plan in an amount representing all income in excess of a
targeted amount. The supplemental bonus compensation pursuant to our stock
incentive bonus plan was accrued in fiscal year 1999 and fiscal year 2000. The
payment of the amount accrued in fiscal year 2000 was made in January 2001. We
terminated the stock incentive bonus plan in conjunction with our initial
public offering.
-12-
Results of Operations. The table below sets forth Consolidated Statements of
Operations data as a percentage of revenue for the periods indicated:
Three Months Ended December 31, Six Months Ended December 31,
2000 1999 2000 1999
----- ----- ----- -----
Revenue 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Costs of providing services:
Salaries and employee
benefits 54.3 53.1 53.4 53.9
Stock incentive bonus plan -- 5.9 -- 5.0
Professional and
subcontracted services 9.3 9.9 7.9 8.3
Occupancy, communications
and other 15.9 16.2 15.8 15.6
General and administrative
expenses 10.6 9.7 9.7 9.3
Depreciation and amortization 3.6 3.0 3.6 3.2
----- ----- ----- -----
93.7 97.8 90.4 95.3
----- ----- ----- -----
Income from operations 6.3 2.2 9.6 4.7
Other:
Interest income 0.5 0.1 0.4 0.4
Interest expense (0.4) (0.5) (0.3) (0.4)
Income from affiliates 0.7 0.8 0.7 0.7
----- ----- ----- -----
Income before income taxes
and minority interest 7.1 2.6 10.4 5.4
Provision for income taxes 3.1 1.2 4.5 2.5
----- ----- ----- -----
Income before minority interest 4.0 1.4 5.9 2.9
Minority interest in net
(income) loss of
consolidated subsidiaries -- -- -- --
----- ----- ----- -----
Net income 4.0% 1.4% 5.9% 2.9%
===== ===== ===== =====
-13-
Six Months Ended December 31, 2000 Compared to Six Months Ended December 31,
1999 and Three Months Ended December 31, 2000 Compared to Three Months Ended
December 31, 1999
Revenue. Revenue from continuing operations was $339.5 million for the first
six months of fiscal year 2001, compared to $298.7 million for the first six
months of fiscal year 2000, an increase of $40.8 million, or 14%. This revenue
growth was comprised of a $14.3 million, or 9% increase in our Benefits Group,
an $8.9 million, or 22% increase in our HR Technologies Group, a $4.9 million,
or 21% increase in our Human Capital Group, a $5.8 million, or 19% increase in
International and a $6.3 million, or 20% increase in Other practice areas in
North America. The revenue increase for the North American practices was due
primarily to the realization of net rate increases, accounting for
approximately $24.8 million, increased chargeable hours, accounting for $6.1
million and improved management of the scope of projects, resulting in $3.6
million additional revenue. Revenue for the second quarter of fiscal year 2001
was $168.8 million, compared to $152.4 million for the second quarter of fiscal
year 2000, an increase of $16.4 million, or 11%. The revenue increase was
comprised of a $6.7 million, or 8% increase in our Benefits Group, a $3.9
million, or 19% increase in our HR Technologies Group, a $1.6 million, or 12%
increase in our Human Capital Group, a $2.5 million, or 17% increase in
International and a $1.8 million, or 11% increase in Other practice areas in
North America. The revenue increase for the North American practices was due
primarily to the realization of net rate increases, accounting for
approximately $11.4 million and increased chargeable hours, accounting for $2.4
million higher revenue.
Salaries and Employee Benefits. Salaries and employee benefit expenses for the
first six months of fiscal year 2001 were $181.4 million, compared to $160.8
million for the first six months of fiscal year 2000, an increase of $20.6
million, or 13%. Salaries and employee benefit expenses for the current period
include the $3.5 million compensation charge the Company incurred resulting
from agreements with our employee stockholders related to our initial public
offering. The remaining increase was mainly due to a $16.4 million increase in
compensation, which is partly the result of annual salary increases averaging
6% coupled with a 6% increase in headcount and a $0.6 million increase in
expenses associated with employee savings plans. As a percentage of revenue,
salaries and employee benefits decreased to 53.4% from 53.9%. The $3.5 million
compensation charge mentioned above accounted for 1.0% of revenue for the
six-month period ended December 31, 2000. Salaries and employee benefit
expenses for the second quarter of fiscal year 2001 were $91.7 million,
compared to $81.0 million for the second quarter of fiscal year 2000, an
increase of $10.7 million, or 13%. Salaries and employee benefit expenses for
the current quarter include the $3.5 million compensation charge mentioned
above. The remaining increase was mainly due to a $7.1 million increase in
compensation, which is partly the result of annual salary increases averaging
6% coupled with a 7% increase in headcount and a $0.3 million increase in
expenses associated with employee savings plans. As a percentage of revenue,
salaries and employee benefits increased to 54.3% from 53.1%. The $3.5 million
compensation charge mentioned above accounted for 2.1% of revenue for the
three-month period ended December 31, 2000.
Stock Incentive Bonus Plan. The stock incentive bonus plan was discontinued in
conjunction with our initial public offering. Accordingly, there was no accrued
bonus under this plan for the three or six months ended December 31, 2000.
Professional and Subcontracted Services. Professional and subcontracted
services used in consulting operations were $26.8 million for the first six
months of fiscal year 2001, compared to $24.9 million for the first six months
of fiscal year 2000, an increase of $1.9 million, or 8%. Professional and
subcontracted services used in consulting operations were $15.6 million for the
second quarter of fiscal year 2001, compared to $15.1 million for the second
quarter of fiscal year 2000, an increase of $0.5 million, or 3%. The variance
in both periods is primarily due to an increase in our consulting offices use
of resources from our national practice groups. As a percentage of revenue,
professional and subcontracted services decreased to 7.9% from 8.3% for the
year and to 9.3% from 9.9% for the quarter, as we leveraged these expenses over
a larger revenue base.
-14-
Occupancy, Communications and Other. Occupancy, communications and other
expenses were $53.5 million for the first six months of fiscal year 2001,
compared to $46.7 million for the first six months of fiscal year 2000, an
increase of $6.8 million, or 15%. The increase was mainly due to a $3.2 million
increase in rent expense, attributable to an increase in the amount of space
required to support our expanding operations and higher real estate tax and
operating expenses, a $1.8 million increase in travel expenses incurred in the
first quarter of fiscal year 2001 relative to our annual leadership conference
held in Europe this year, a $1.0 million investment in a strategic relationship
and a $0.7 million increase in general office expenses, which are evenly spread
throughout our consulting offices. As a percentage of revenue, occupancy,
communications and other expenses increased slightly to 15.8% from 15.6%.
Occupancy, communications and other expenses were $26.9 million for the second
quarter of fiscal year 2001, compared to $24.7 million for the second quarter
of fiscal year 2000, an increase of $2.2 million, or 9%. The increase was
mainly due to higher rent expense, attributable to an increase in the amount
of space required to support our expanding operations and higher real estate
tax and operating expenses. As a percentage of revenue, occupancy,
communications and other expenses decreased to 15.9% from 16.2%.
General and Administrative Expenses. General and administrative expenses for
the first six months of fiscal year 2001 were $33.1 million, compared to $27.9
million for the first six months of fiscal year 2000, an increase of $5.2
million, or 19%. The increase was mainly due to higher compensation of $2.4
million and higher professional services of $1.4 million, both of which are due
to the planning and implementation of corporate initiatives involving our
knowledge sharing and systems infrastructure. The remainder of the increase can
be attributed to higher travel and hotel costs of $0.6 million, which is mainly
due to higher costs related to our annual client conference, increased rent of
$0.4 million and increased insurance of $0.4 million. As a percentage of
revenue, general and administrative expenses increased to 9.7% from 9.3%.
General and administrative expenses for the second quarter of fiscal year 2001
were $17.9 million, compared to $14.7 million for the second quarter of fiscal
year 2000, an increase of $3.2 million, or 22%. The increase was mainly due to
higher compensation of $0.9 million and professional services of $0.9 million,
both of which are due to the planning and implementation of corporate
initiatives involving our knowledge sharing and systems infrastructure. The
remainder of the increase can be attributed to higher travel and hotel costs of
$0.6 million, which is mainly due to higher costs related to our annual client
conference, increased rent of $0.2 million and increased insurance of $0.2
million. As a percentage of revenue, general and administrative expenses
increased to 10.6% from 9.7%.
Depreciation and Amortization. Depreciation and amortization expense for the
first six months of fiscal year 2001 was $12.0 million, compared to $9.5
million for the first six months of fiscal year 2000, an increase of $2.5
million, or 26%. Depreciation and amortization expense for the second quarter
of fiscal year 2001 was $6.1 million, compared to $4.6 million for the second
quarter of fiscal year 2000, an increase of $1.5 million, or 33%. The variance
in both periods is primarily due to increased additions to our capital base and
an increase in amortization of intangibles, which is mainly due to recent
acquisitions. As a percentage of revenue, depreciation and amortization
expenses increased to 3.6% from 3.2% for the year and to 3.6% from 3.0% for the
second quarter.
Interest Income. Interest income for the first six months of fiscal year 2001
was $1.4 million, compared to $1.3 million for the first six months of fiscal
year 2000, an increase of $0.1 million, or 8%. The increase was attributable to
interest earned on a higher investment balance during the first six months of
fiscal year 2001, partially offset by the receipt of interest of $0.5 million
related to a federal tax refund received during the first quarter of fiscal
year 2000. Interest income for the second quarter of fiscal year 2001 was $0.8
million, compared to $0.2 million for the second quarter of fiscal year 2000,
an increase of $0.6 million, or 300%. The increase is due to interest earned on
a higher investment balance during the quarter. The higher investment balance
can be attributed to proceeds received from the initial public offering.
-15-
Interest Expense. Interest expense for the first six months of fiscal year 2001
was $1.0 million, compared to $1.1 million for the first six months of fiscal
year 2000, a decrease of $0.1 million, or 9%. The decrease is mainly due to
lower borrowings against our line of credit, partially offset by fees
associated with the amendment to our Line of Credit Agreement due to our
initial public offering. Interest expense for the second quarter of fiscal year
2001 was $0.7 million, unchanged from the prior year.
Income from Affiliates. Income from affiliates for the first six months of
fiscal year 2001 was $2.2 million, compared to $2.1 million for the first six
months of fiscal year 2000, an increase of $0.1 million, or 5%. Income from
affiliates for the second quarter of fiscal year 2001 was $1.2 million,
unchanged from the prior year.
Provision for Income Taxes. Income taxes for the first six months of fiscal
year 2001 were $15.1 million, compared to $7.8 million for the first six months
of fiscal year 2000. Our effective tax rate was 42.9% for the second quarter of
fiscal year 2001, compared to 48.3% for the second quarter of fiscal year 2000.
The change was due to a decrease in operating losses of certain foreign
affiliates, a decrease in non-deductible expenses and higher pre-tax earnings.
Our effective tax rate was also affected by differing foreign tax rates in
various jurisdictions. We record a tax benefit on foreign net operating loss
carryovers and foreign deferred expenses only if it is more likely than not
that a benefit will be realized.
Net Income. Net income for the first six months of fiscal year 2001 was $20.1
million, compared to $8.6 million for the first six months of fiscal year 2000,
an increase of $11.5 million, or 134%. As a percentage of revenue, net income
increased to 5.9% from 2.9%. Net income for the second quarter of fiscal year
2001 was $6.7 million, compared to $2.2 million for the second quarter of
fiscal year 2000, an increase of $4.5 million, or 205%. As a percentage of
revenue, net income increased to 4.0% from 1.4% for the quarter. The increase
in both periods is mainly due to our revenue growth and the absence of the
stock incentive bonus plan accrual in fiscal year 2001. Net income for the
three and six-month periods ended December 31, 2000 also include the $3.5
million charge the Company incurred resulting from agreements with our employee
stockholders related to our initial public offering.
Liquidity and Capital Resources
Our cash and cash equivalents at December 31, 2000 totaled $61.8 million,
compared to $41.4 million at June 30, 2000. The $20.4 million increase in cash
from June 30, 2000 to December 31, 2000 was mainly attributable to $66.5
million in cash generated from our ongoing operations, before bonuses, taxes
and stockholder reimbursements, and $35.2 million of net proceeds from the
initial public offering, partially offset by fiscal year end bonus payments of
$51.3 million, $18.6 million spent for acquisitions and fixed assets, $8.2
million of corporate tax payments and the $2.7 million that we paid to selling
stockholders as reimbursement for commission payments resulting from the sale
of their shares.
-16-
Cash From (Used for) Operating Activities. Cash from operating activities for
the first six months of fiscal year 2001 was $2.9 million, compared to cash
used for operating activities of $16.7 million for the first six months of
fiscal year 2000. The variance is primarily due to $9.0 million in lower
corporate tax payments, $5.1 million in higher tax accruals and net accrued
retirement benefits of $4.0 million.
The allowance for doubtful accounts increased $5.1 million and the allowance
for work in process increased $2.4 million from June 30, 2000 to December 31,
2000. The number of days of accounts receivable and work in process outstanding
was 89 at December 31, 2000 and 94 at December 31, 1999. Typically, our
receivables, work in process and related allowances are substantially reduced
at year end from an increased emphasis on billings and collections. The
receivable and work in process balances and the related allowances usually
decrease in the last three months of the fiscal year.
Cash Used in Investing Activities. Cash used in investing activities for the
first six months of fiscal year 2001 was $16.3 million, compared to $5.8
million for the first six months of fiscal year 2000. The increase in cash
usage can be attributed to higher fixed asset purchases of $8.1 million and
higher acquisition costs of $4.1 million compared to the prior period. The
higher acquisition costs are mainly due to higher contingent consideration
payments associated with recent acquisitions and a strategic investment made in
conjunction with our business initiative targeted towards emerging growth
companies, partially offset by higher distributions from affiliates of $1.2
million.
Cash From (Used for) Financing Activities. Cash from financing activities was
$35.1 million for the first six months of fiscal year 2001, compared to $0.5
million used for financing activities for the first six months of fiscal year
2000. This change reflects the sale of stock in our initial public offering.
We have a $109.3 million senior secured credit facility, of which $95 million
is revolving for working capital needs, and the remainder of which is available
for stockholder loans. Of the $95.0 million of the credit line that is
allocated for operating needs, $3.0 million is unavailable as a result of
support required for letters of credit issued under the credit line. The credit
facility was amended on October 6, 2000 to reflect changes due to the initial
public offering. There were no borrowings outstanding at December 31, 2000 or
June 30, 2000.
Anticipated commitments of funds for capital expenditures are estimated at
$26.8 million for the remainder of fiscal year 2001, mainly for computer
hardware purchases, office relocations and renovations, development and upgrade
of financial and knowledge management systems, and acquisition - related
payments. Capital expenditures will be required in conjunction with office
lease renewals and relocations required to support our growth strategy.
Additionally, our consultants require access to hardware and software that will
support servicing our clients. In a rapidly changing technological environment,
management anticipates we will need to make continued investments in our
knowledge sharing and financial systems infrastructure. We expect cash from
operations in conjunction with the net proceeds from our initial public
offering and our existing credit facility to adequately provide for these cash
needs.
Our foreign operations do not materially impact liquidity or capital resources.
At December 31, 2000, $17.5 million of the total cash balance of $61.8 million
was held outside of North America, which we have the ability to readily
utilize, if necessary. There are no significant repatriation restrictions other
than local or U.S. taxes associated with repatriation. Our foreign operations
in total are substantially self-sufficient for their working capital needs.
-17-
The Company continues to guarantee certain leases for office premises and
equipment for Wellspring. Minimum remaining payments guaranteed under these
leases at December 31, 2000 total $44.1 million, not including sublease income,
which expire at various dates through 2007. These leases are also jointly and
severally guaranteed by the Company's former partner in Wellspring, State
Street Bank and Trust Company. The estimated loss from the potential exercise
of these guarantees was included in the fiscal year 1998 loss on disposal of
the benefits administration outsourcing business.
Disclaimer Regarding Forward-Looking Statements
This filing contains certain statements that are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including, but not limited to the following: Note 2 on pages 5 and 6; Note 3 on
page 6; Note 8 on page 9; Financial Statement Overview on page 12; the seventh
paragraph under Liquidity and Capital Resources on page 17; the first paragraph
of Part II, Item 1 "Legal Proceedings" on page 18 and 19; and Part II, Item 2
"Changes in Securities and Use of Proceeds" on pages 19 and 20. In some
cases, you can identify these statements and other forward-looking statements
in this filing by words such as "may," "will," "expect," "anticipate,"
"believe," "estimate," "plan," "intend," "continue," or similar words. You
should read these statements carefully because they contain projections of our
future results of operations or financial condition, or state other
"forward-looking" information. A number of risks and uncertainties exist which
could cause actual results to differ materially from the results reflected in
these forward-looking statements. Such factors include, but are not limited to
our continued ability to recruit and retain highly qualified associates,
outcomes of litigation, a significant decrease in the demand for the consulting
services we offer as a result of changing economic conditions or other factors,
actions by competitors offering human resources consulting services, including
public accounting and consulting firms, technology consulting firms and
internet/intranet development firms, regulatory, legislative and technological
developments that may affect the demand for or costs of our services and other
factors discussed under "risk factors" in our prospectus dated October 11,
2000, which is filed with the SEC and may be accessed via EDGAR on the SEC's
web site at www.sec.gov. These statements are based on assumptions that may not
come true. All forward-looking disclosure is speculative by its nature. The
Company undertakes no obligation to update any of the forward-looking
information included in this release, whether as a result of new information,
future events, changed expectations or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the ordinary course of business. These risks
include interest rate risk and foreign currency exchange risk. We have examined
our exposure to these risks and concluded that none of our exposures in these
areas are material to fair values, cash flows or earnings.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are a party to various lawsuits, arbitrations or
mediations that arise in the ordinary course of business. These disputes
typically involve claims relating to employment matters or the rendering of
professional services. The five matters reported on below involve the most
significant pending or potential claims against us. We are incorporating, by
reference, the descriptions of the legal proceedings that appear under the
caption "Legal Proceedings" beginning on page 17 of the Quarterly Report on
Form 10-Q of the Company for the period ended September 30, 2000. Management
believes, based on currently available information, that the results of all
such proceedings, in the aggregate, will not have a material adverse effect on
our financial condition, but claims which are possible in our business could be
material to the financial results for a particular period.
-18-
Regina, Saskatchewan Police. The trial in this case began on January 8, 2001,
and is continuing.
City of Milwaukee, Wisconsin. In November 2000, the Circuit Court in Milwaukee
County approved a settlement among other parties to the underlying dispute. No
proceedings are pending against the Company.
Connecticut Carpenters Pension Fund. Plaintiff's punitive damages claim, which
was previously dismissed, was reinstated; punitive damages in Connecticut are
limited to litigation costs (including attorney's fees). A jury trial began on
January 30, 2001.
Societe Internationale de Telecommunications Aeronautique S.C. (SITA). Suit was
filed on November 15, 2000, in the High Court of Justice Chancery Division
against Watson Wyatt Partners and The Wyatt Company (UK) Limited, one of our
subsidiaries. SITA's specific damage claim is indeterminate, but could be in
the $90 million range. With our respective insurers, we and Watson Wyatt
Partners have entered into a joint defense agreement. The case is in its
earliest stages; we will be filing our statement of defense on or about
February 7, 2001.
Pacific Group Medical Association. In connection with the insolvency and
liquidation of the Pacific Group Medical Association (PGMA), a provider of
health care insurance benefits and a former group and health care practice
client, the Insurance Commissioner of the State of Hawaii has brought claims
against the former officers, directors, accountants, attorneys and other
service providers of PGMA. Late in 2000, a lawsuit by the Insurance
Commissioner against Watson Wyatt and others was consolidated with an earlier
lawsuit brought by the Insurance Commissioner against the PGMA officers and
directors. The Insurance Commissioner has alleged that PGMA's liabilities
exceeded its assets by approximately $15 million when it was shut down in 1997
and is seeking to recover damages from all of the defendants. Discovery is
proceeding and a trial is scheduled for February 2002.
We carry substantial professional liability insurance with a self-insured
retention of $1 million per occurrence, which provides coverage for
professional liability claims including the cost of defending such claims. We
also carry employment practices liability insurance.
Item 2. Changes in Securities and Use of Proceeds
On October 10, 2000, our Registration Statement on Form S-3 (File No.
333-94973), registering for sale up to 6,440,000 shares of class A common stock
at $12.50 per share to be issued in connection with our initial public
offering, was declared effective. On October 16, 2000, we completed changes in
our corporate structure in conjunction with the initial public offering. The
changes in corporate structure involved the merger of Watson Wyatt & Company
with WW Merger Subsidiary, Inc., a wholly owned subsidiary of Watson Wyatt &
Company Holdings. Watson Wyatt & Company is now a wholly owned subsidiary of
Watson Wyatt & Company Holdings.
-19-
At the time of the reorganization, each share of Watson Wyatt & Company's
Redeemable Common Stock was converted into one share of class B-1 common stock
and one share of class B-2 common stock of Watson Wyatt & Company Holdings. The
class B common stock is divided into two classes to accommodate different
transfer restriction periods. The class B-1 shares are subject to a transfer
restriction period of 12 months following the public offering date, while the
class B-2 shares are subject to a transfer restriction period of 24 months
following the public offering date, unless waived by the Board of Directors.
The Company waived the transfer restrictions on a total of 1,559,250 class B-1
and 1,559,250 class B-2 shares to allow for conversion into the class A shares
sold by selling stockholders in the initial public offering described below.
Following the expiration or waiver of the respective transfer restriction
periods, the remaining class B-1 and class B-2 shares will automatically
convert into class A common stock.
In conjunction with our initial public offering, we entered into agreements
providing for additional transfer restrictions with major stockholders,
executive officers and employee directors affecting approximately 36% of our
remaining class B common stock. The agreements restrict transfers of all shares
held by such persons immediately following the offering, and the restrictions
terminate as to 25% of such shares on each of the first, second, third and
fourth anniversaries of the consummation of the public offering.
A total of 5,600,000 shares of class A common stock were offered and sold in
our initial public offering at an offering price of $12.50 per share, for an
aggregate offering price of $70.0 million. Of the shares included in this
transaction, Watson Wyatt & Company Holdings offered 2,800,000 newly-issued
shares and the selling stockholders offered the remaining 2,800,000 shares. On
November 8, 2000, our underwriters exercised their over-allotment option. As a
result, the underwriters purchased 840,000 shares of class A common stock from
us and from the selling stockholders at the initial public offering price of
$12.50 per share less the underwriting discount, for an aggregate offering
price of $10.5 million. Of the shares included in this transaction, Watson
Wyatt & Company Holdings sold 521,500 newly-issued shares and the selling
stockholders sold 318,500 shares. The managing underwriters of the offering
were Deutsche Banc Alex. Brown, Banc of America Securities LLC, and Robert W.
Baird & Co.
As a result of these transactions and upon completion of the offering, we
received gross proceeds of $41.5 million, and the selling stockholders received
gross proceeds of $39.0 million. Net proceeds to the Company were $35.2
million, which is net of $6.3 million in underwriting discounts, commissions
and other offering costs. Also, we paid $2.7 million to selling stockholders as
reimbursement for commission payments resulting from the sale of their shares.
From the time of receipt through December 31, 2000, proceeds from the offering
of $17.7 million were applied to the repayment of short-term debt and a $0.8
million installment payment was made for an acquisition related to our HR
Technologies practice. The remainder of the net proceeds is invested in
high-grade interest-bearing securities. The Company intends to use the
remainder of the net proceeds for capital expenditures, working capital and
other general corporate purposes. In addition, a portion of the proceeds could
be used for future strategic acquisitions of complementary businesses.
Item 3. Defaults Upon Senior Securities
None.
-20-
Item 4. Submission of Matters to a Vote of Security Holders
Our first annual meeting of stockholders following our corporate reorganization
and our initial public offering was held on December 18, 2000. At the annual
meeting, the stockholders elected sixteen (16) nominees to the Board of
Directors. Pursuant to the Company's Certificate of Incorporation, the
directors are divided into three classes, Class I, Class II and Class III. The
initial term of office of Class I directors will expire as of the annual
stockholders' meeting in 2001 and every three years thereafter. The initial
term of office of Class II directors will expire as of the annual stockholders'
meeting in 2002 and every three years thereafter. The initial term of office of
Class III directors will expire as of the annual stockholders' meeting in 2003
and every three years thereafter. As the initial terms of each of the classes
of directors expire, directors of the Company will be elected to serve for a
three-year period and until their respective successors have been duly elected
and qualified.
Proxies representing 22,027,782 shares were received (total shares outstanding
as of the Record Date were 32,928,710) and the results of the meeting were as
follows:
Nominees for Class I Directors For Withheld
------------------------------ ---------- ---------
Paula A. DeLisle 21,725,646 302,136
David B. Friend, M.D. 19,790,013 2,237,769
R. Michael McCullough 21,712,583 315,199
Gail E. McKee 21,281,769 746,013
Paul N. Thornton 21,961,799 65,983
Nominees for Class II Directors For Withheld
------------------------------- ---------- ---------
Thomas W. Barratt 20,826,995 1,200,787
John J. Gabarro 21,454,309 573,473
John J. Haley 21,949,131 78,651
Eric P. Lofgren 21,182,199 845,583
Kevin L. Meehan 21,558,449 469,333
Charles P. Wood, Jr. 21,417,019 610,763
Nominees for Class III Directors For Withheld
-------------------------------- ---------- ---------
Elizabeth M. Caflisch 21,246,593 781,189
Barbara Hackman Franklin 21,811,795 215,987
David P. Marini 20,659,635 1,368,147
J. P. Orbeta 21,515,403 512,379
Gilbert T. Ray 21,932,285 95,497
Item 5. Other Information
None.
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Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
3.1 Amended and Restated Certificate of Incorporation of Watson Wyatt
& Company Holdings1
3.2 Amended and Restated Bylaws of Watson Wyatt & Company Holdings1
4 Form of Certificate Representing Common Stock1
10.1 Amended Credit Agreement Among Bank of America, N.A. and Others
dated October 6, 20002
10.2 Form of agreement among Watson Wyatt & Company, Watson Wyatt &
Company Holdings and employee directors, executive officers and
significant stockholders restricting the transfer of shares1
22 Definitive Proxy Statement on Schedule 14A, filed on November 17,
20003
b. Reports on Form 8-K
None.
--------
1 Incorporated by reference from Registrant's Form S-3, Amendment No. 5
(File No. 33-394973), filed on September 14, 2000
2 Incorporated by reference from Registrant's Form 10-Q, filed
on November 14, 2000
3 Incorporated by reference from Registrant's Form DEF 14A, filed on
November 17, 2000
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Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Watson Wyatt & Company Holdings
(Registrant)
/S/ John J. Haley February 6, 2001
----------------- ----------------
Name: John J. Haley Date
Title: President and Chief
Executive Officer
/S/ Carl D. Mautz February 6, 2001
----------------- ----------------
Name: Carl D. Mautz Date
Title: Vice President and Chief
Financial Officer
/S/ Peter L. Childs February 6, 2001
------------------- ----------------
Name: Peter L. Childs Date
Title: Controller
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