<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 2000
REGISTRATION NO. 333-94973
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
WATSON WYATT & COMPANY HOLDINGS
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 6719 52-2211537
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
6707 DEMOCRACY BOULEVARD, SUITE 800
BETHESDA, MARYLAND 20817
(301) 581-4600
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
JOHN J. HALEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WATSON WYATT & COMPANY HOLDINGS
6707 DEMOCRACY BOULEVARD, SUITE 800
BETHESDA, MARYLAND 20817
(301) 581-4600
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
JONATHAN M. WAINWRIGHT, ESQ. WALTER W. BARDENWERPER, ESQ. ROBERT F. WALL, ESQ.
DIANA R. DE BRITO, ESQ. JAMES S. MINOGUE, III, ESQ. R. CABELL MORRIS, JR., ESQ.
CADWALADER, WICKERSHAM & TAFT DIANE C. SAPIR, ESQ. WINSTON & STRAWN
100 MAIDEN LANE WATSON WYATT & COMPANY HOLDINGS 35 W. WACKER DRIVE
NEW YORK, NEW YORK 10038 6707 DEMOCRACY BOULEVARD, SUITE CHICAGO, ILLINOIS 60601
(212) 504-6000 800 (312) 558-5600
BETHESDA, MARYLAND 20817
(301) 581-4600
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If the only securities being registered in this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Class A common stock, $0.01 par value
per share............................. 6,440,000 $13.50 $86,940,000.00 $22,952.16(3)
</TABLE>
(1) Includes shares of common stock subject to an option granted to the
underwriters solely to cover over-allotments, if any.
(2) Estimated under Rule 457(o) solely for the purpose of calculating the
registration fee.
(3) Previously paid.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT FILES
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
THEREAFTER SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), DETERMINES.
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<PAGE>
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAW TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE>
SUBJECT TO COMPLETION -- APRIL 18, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS
, 2000
[LOGO]
WATSON WYATT & COMPANY HOLDINGS
5,600,000 SHARES OF CLASS A COMMON STOCK
----------------------------------------------------------------------
- We are offering 2,800,000 shares of our class A common stock.
- Selling stockholders are offering an additional 2,800,000 shares of our
class A common stock. We will not receive any of the proceeds from the
sale of these shares.
- The underwriters have an option to purchase an additional 840,000 shares
of our class A common stock from selling stockholders to cover
over-allotments.
- This is our initial public offering, and no public market currently exists
for our shares. We anticipate that the initial public offering price will
be between $11.50 and $13.50 per share.
- Closing: , 2000.
- We have applied to list our common stock on the NYSE under the symbol
"WW."
<TABLE>
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PER SHARE TOTAL
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------
Public offering price: $ $
Underwriting fees:........................................
Proceeds to Watson Wyatt & Company Holdings:..............
Proceeds to selling stockholders:.........................
We have agreed with the selling stockholders to reimburse underwriting fees payable by them. The
proceeds to us and to the selling stockholders have been adjusted accordingly.
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</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. NOR
HAVE THEY MADE, NOR WILL THEY MAKE, ANY DETERMINATION AS TO WHETHER ANYONE
SHOULD BUY THESE SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
BANC OF AMERICA SECURITIES LLC
DLJDIRECT INC.
<PAGE>
(FRONT COVER OF THE GATEFOLD CONTAINS THE FOLLOWING TEXT:)
Business today is about finding and keeping the best talent.
It's about getting the most out of everyone.
It's about maximizing human capital.
(THE INSIDE SPREAD OF THE GATEFOLD INCLUDE PICTURES OF HUMAN FACES, A MAP OF
THE WORLD INDICATING THE OFFICES OF WATSON WYATT & COMPANY AND WATSON WYATT
PARTNERS, AND THE FOLLOWING TEXT:)
Human Capital Consulting
Watson Wyatt is a global human capital consulting firm. We provide services
in three closely related areas:
- - employee benefits
- - human resource technologies
- - and human capital management
We help clients solve attraction and retention problems. Help combine
workforces during mergers and acquisitions. Help develop new approaches to
pay and benefits.
eHR-TM-
Combining our deep human capital and technological expertise, we develop
web-based strategies for more efficient delivery of HR programs.
Client Relationships
We serve large corporations as well as emerging growth companies. Many of our
client relationships have existed continuously over several decades.
Research
One example of our widely cited research is our Human Capital
Index,-TM- which helps companies quantify the impact of human capital
practices on shareholder value.
Watson Wyatt & Company
Asia-Pacfic - Canada - Latin America - United States
Watson Wyatt Partners
Africa - Caribbean - Europe
Global Reach
Together with Watson Wyatt Partners, we operate globally as Watson Wyatt
Worldwide, with 86 offices in 31 countries.
Watson Wyatt Worldwide (logo)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 6
Use of Terminology................... 13
Where You Can Find More Information.. 13
Use of Proceeds...................... 14
Dividend Policy...................... 14
Capitalization....................... 15
Dilution............................. 17
Selected Consolidated Financial
Data............................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
Business............................. 31
Management........................... 45
Long Term Incentive Plan............. 52
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Transactions with Management and
Others............................. 52
Corporate Reorganization............. 52
Security Ownership of Management and
Others............................. 54
Common Stock Purchase Arrangements
Before the Public Offering......... 55
Selling Stockholders................. 56
Description of Capital Stock,
Certificate of Incorporation and
Bylaws............................. 56
Shares Eligible for Future Sale...... 61
Underwriting......................... 62
Legal Matters........................ 64
Experts.............................. 64
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with
the Securities and Exchange Commission. You should read this prospectus with the
additional information described under the heading "Where You Can Find More
Information."
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as "may," "will," "expect," "anticipate," "believe," "estimate,"
"plan," "intend," "continue" or similar words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future results of operations or of our financial
condition or state other "forward-looking" information. This prospectus also
contains third-party estimates regarding the size and growth of markets.
The sections captioned "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as any
cautionary language in this prospectus, provide examples of risks,
uncertainties, and events that may cause our actual results to differ materially
from the expectations. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. We qualify any
forward-looking statements entirely by these cautionary factors.
ii
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED BY MORE DETAILED INFORMATION APPEARING IN OTHER
SECTIONS OF THIS PROSPECTUS. THE OTHER INFORMATION IS IMPORTANT, SO PLEASE READ
THIS ENTIRE PROSPECTUS CAREFULLY.
OUR COMPANY
Founded in 1946, Watson Wyatt & Company is a global human capital consulting
firm. We help our clients enhance business performance by improving their
ability to attract, retain and motivate qualified employees. We design, develop
and implement human resources strategies and programs through our closely
related practice areas, the Benefits Consulting Group, HR Technologies Group and
the Human Capital Group. We also offer our clients web-based technologies that
transform the way they implement and deliver HR programs and improve
communications with their employees. This manner of implementing and delivering
HR programs, which we refer to as our eHR-TM- approach, combines Internet
applications and other emerging technologies with our expertise in employee
benefits and human capital consulting.
We provide human capital consulting services to many of the world's largest
corporations as well as emerging growth companies, public institutions and
non-profit organizations. Our clients include General Electric Company, General
Motors, IBM and Lockheed Martin Corporation. Many of our client relationships
have existed continuously over several decades. We generated approximately
$580 million in revenues during the twelve months ended December 31, 1999, with
net income of approximately $11.3 million during this same period.
The growing demand for employee benefits and human capital consulting
services is directly related to the size, complexity and rapid changes
associated with human resources programs. Employee salary and benefits costs
represent a significant component of worldwide corporate spending. In recent
years, several industry trends have emerged that have increased the demand for
our services, including:
- growing strategic importance of human capital;
- a technology revolution in HR programs as the Internet, intranets and
other e-business tools enable companies to manage their HR function more
efficiently and effectively;
- changing workforce demographics, such as a shortages of talented employees
and an unprecedented aging of the workforce;
- growing importance of employer-sponsored benefits programs due to limited
baby boomer retirement savings, uncertainty of government- sponsored
programs, and rising healthcare costs;
- record levels of global mergers and acquisitions that require the
integration of diverse corporate cultures and HR programs quickly and
effectively;
- continuing globalization of economies, which requires corporations to
retain human capital consultants with global resources and local
expertise; and
- complex and changing government regulation of employee benefits programs.
Historically, Watson Wyatt & Company has been an employee owned company.
Immediately following this offering, approximately 83% of the stock of Watson
Wyatt & Company Holdings will be held by our existing stockholders,
substantially all of whom are associates of Watson Wyatt & Company.
1
<PAGE>
OUR GROWTH STRATEGY
Our strategy is to expand our competitive position by providing
comprehensive, value-added human capital consulting services that help our
clients solve their human resources challenges. We plan to pursue growth by:
- expanding our relationships with existing clients by identifying and
serving their growing needs for integrated HR services throughout the
world;
- creating innovative web-based, or eHR-TM-, programs for delivering HR
services to our clients 24 hours a day, 7 days a week;
- developing new client relationships by capitalizing on our recognized
brand name, reputation for quality service, extensive and widely-cited
research studies and eHR-TM- methods for implementing HR programs; and
- pursuing strategic acquisitions that will expand our human capital
consulting capabilities and provide us with additional geographic
execution capabilities.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class A common stock offered:
By Watson Wyatt & Company Holdings......... 2,800,000 shares
By selling stockholders.................... 2,800,000 shares
Total.................................... 5,600,000 shares
Common stock to be outstanding after the
offering:(a)
Class A.................................... 5,600,000 shares
Class B-1.................................. 13,416,780 shares
Class B-2.................................. 13,416,780 shares
Total.................................... 32,433,560 shares(b)
Use of proceeds.............................. We estimate the net proceeds to us from this
offering to be approximately $29,400,000.
We expect to use these net proceeds for
working capital and other general corporate
purposes, which may include the retirement of
existing indebtedness, if any, and possible
strategic acquisitions. We will not receive
any proceeds from the sale of the class A
common stock by the selling stockholders.
Proposed NYSE symbol......................... WW
</TABLE>
UNLESS WE SPECIFICALLY STATE OTHERWISE, THE INFORMATION IN THIS PROSPECTUS
(1) ASSUMES THAT OUR CLASS A COMMON STOCK WILL BE SOLD AT $ 12.50 PER SHARE,
WHICH IS THE MIDPOINT OF THE RANGE SET FORTH ON THE COVER PAGE OF THIS
PROSPECTUS, (2) GIVES EFFECT TO OUR CORPORATE REORGANIZATION, AND (3) ASSUMES
THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
- ------------------------
(a) Our class A common stock, class B-1 common stock and class B-2 common stock
are identical except for the transfer restrictions applicable to the
class B-1 common stock and class B-2 common stock.
(b) The number of shares of common stock to be outstanding after the offering
excludes (1) options to purchase 1,600,000 shares of class A common stock to
be granted concurrent with the consummation of this offering at an exercise
price equal to the public offering price, and (2) 2,900,000 shares of
class A common stock reserved for issuance upon exercise of options that may
be granted in the future under our long term incentive plan.
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes the consolidated financial data for our
business. You should read the following summary consolidated financial data
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the related
notes beginning on page F-1 of this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------- -------------------
1997 1998 1999 1998 1999
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA (A):
Continuing operations:
Fees................................... $486,502 $ 512,660 $556,860 $274,343 $298,734
Operating expenses:
Salaries and benefits................ 252,302 268,611 298,925 148,868 160,753
SIBP (b)............................. -- -- 22,600 7,600 15,000
Non-recurring compensation charge
related to formula book value
change (c)......................... -- 69,906 -- -- --
Other operating expenses............. 212,582 217,109 211,535 99,436 106,762
-------- --------- -------- -------- --------
Income (loss) before income taxes and
minority interest.................... $ 21,618 $ (42,966) $ 23,800 $ 18,439 $ 16,219
======== ========= ======== ======== ========
Income (loss) from continuing
operations........................... $ 12,381 $ (56,212) $ 12,135 $ 9,437 $ 8,560
Discontinued operations (d)............ (11,483) (69,906) 8,678 8,678 --
-------- --------- -------- -------- --------
Net income (loss).................... $ 898 $(126,118) $ 20,813 $ 18,115 $ 8,560
======== ========= ======== ======== ========
Earnings (loss) per share, continuing
operations, basic and fully
diluted.............................. $ 0.71 $ (3.27) $ 0.80 $ 0.63 $ 0.57
Earnings (loss) per share, basic and
fully diluted........................ $ 0.05 $ (7.34) $ 1.37 $ 1.21 $ 0.57
Weighted average shares outstanding.... 17,438 17,170 15,215 14,977 15,140
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(E) AS ADJUSTED(F)
--------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 13,688 $ 13,688 $ 33,887
Net working capital................................... 8,882 8,882 38,266
Total assets.......................................... 301,024 301,024 321,223
Redeemable common stock............................... 99,398 -- --
Total stockholders' equity (deficit).................. (65,119) 34,279 63,663
</TABLE>
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(a) We believe that our income as an employee-owned company is not indicative of
the operating performance we will report as a publicly traded company due to
the significant impact of the following two non-recurring compensation
related expenses: (1) supplemental discretionary bonuses accrued under our
stock incentive bonus plan, described in more detail in footnote (b) below,
and (2) a one-time charge in fiscal year 1998 related to a change in the way
we calculated our formula book value, the price at which we sold and
repurchased our restricted common stock in transactions with our employees
prior to the public offering, described in more detail in footnote
(c) below.
We believe that our results of operations in fiscal years 1998 and 1999 and
the six month periods ended December 31, 1998 and 1999 are more comparable
to, and a better indication of, our performance as a publicly traded company
if they are analyzed excluding the stock incentive bonus
4
<PAGE>
plan and the non-recurring compensation charge described above. The
continuing operations loss before taxes and minority interest of
$43.0 million for fiscal year 1998 would have improved by $69.9 million, and
the continuing operations income before taxes and minority interest of
$23.8 million for fiscal year 1999 would have improved by $22.6 million
without these items. Income before taxes and minority interest from
continuing operations for the three years ended June 30, 1997, 1998 and 1999
would have been $21.6 million, $26.9 million and $46.4 million,
respectively. Income before taxes and minority interest from continuing
operations for the six month periods ended December 31, 1998 and 1999 would
have been $26.0 million and $31.2 million, respectively, if bonuses were
accrued under the compensation structure management will adopt as a publicly
traded company.
The proposed Watson Wyatt & Company Holdings 2000 Long Term Incentive Plan
provides for non-qualified stock options with an exercise price equal to
fair market value at the date of the grant and no uncertainties that would
require variable accounting under generally accepted accounting principles.
Therefore, grants under the stock option program will not result in
compensation expense.
In a few foreign jurisdictions where option grants are impractical, we will
grant stock appreciation rights (SARs), which will require recognition of
compensation expense over a vesting period to the extent the market price of
the stock increases. However, it is anticipated that this expense will be
immaterial.
(b) Historically, we have paid incentive bonuses to associates under a fiscal
year-end bonus program. Beginning in fiscal year 1999, in addition to annual
fiscal year-end bonuses, we provided supplemental bonus compensation to our
employee stockholders pursuant to the stock incentive bonus plan in an
amount representing all income in excess of a targeted amount. Following the
public offering, we will terminate the stock incentive bonus plan and
replace it with equity based incentives more customary to publicly traded
companies.
(c) As an employee-owned company without a public trading market, we sold and
repurchased shares of common stock in transactions with our employee
stockholders at a formula book value calculated in accordance with our
bylaws. In fiscal year 1998, we recorded a one-time non-cash compensation
charge against continuing operations of $69.9 million to reflect a change in
the method of calculating the formula book value. This change eliminated
from the calculation of formula book value the $69.9 million charge taken
for discontinued operations in fiscal year 1998 to reflect the
discontinuation of our benefits administration outsourcing business.
(d) As discussed in footnotes (a) and (c) above, in fiscal year 1998 we
discontinued our benefits administration outsourcing business and recorded a
$69.9 million charge to earnings in the discontinued operations line. The
discontinuation is more fully described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Fiscal years
1997 and 1998 also include the operating losses of the benefits
administration outsourcing business prior to its discontinuation in 1998,
which are reflected in the discontinued operations line. In fiscal year
1999, the discontinued operations credit reflects the reduction of the
expected loss on disposal of the benefits administration outsourcing
business.
(e) The "Pro Forma" column reflects the exchange of shares under our corporate
reorganization, including the reclassification of the current redeemable
common stock to permanent stockholders' equity.
(f) The "Pro Forma As Adjusted" column reflects the sale of 2,800,000 shares of
class A common stock offered by us, the automatic conversion of all shares
of class B common stock sold by selling stockholders in the offering into
shares of class A common stock, and the application of the estimated net
proceeds to us from this offering.
5
<PAGE>
RISK FACTORS
BEFORE YOU INVEST IN OUR CLASS A COMMON STOCK, YOU SHOULD UNDERSTAND THE
RISKS INVOLVED. YOU SHOULD CAREFULLY CONSIDER THESE RISK FACTORS, AS WELL AS ALL
OF THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS BEFORE YOU DECIDE TO PURCHASE SHARES OF OUR CLASS A COMMON STOCK. IF
ANY OF THE RISKS DISCUSSED IN THIS PROSPECTUS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED. AS A
RESULT, THE TRADING PRICE OF OUR CLASS A COMMON STOCK COULD DECLINE AND YOU MAY
LOSE ALL OR PART OF YOUR INVESTMENT.
WE MUST CONTINUE TO RECRUIT AND RETAIN QUALIFIED CONSULTANTS; OUR FAILURE TO
DO SO COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE SUCCESSFULLY
Our continued success and future growth depend heavily upon our ability to
attract and retain enough highly skilled and motivated consultants. We must meet
these human capital requirements if we are to deliver our sophisticated and
technical services to our clients. We compete against many companies with
greater financial resources both within our industry and in other industries to
attract these qualified individuals. Our failure to recruit and retain adequate
talent could reduce our competitive strength and lead to a deterioration of our
business.
This competition for personnel may adversely affect our profitability. We
can give no assurance that we will be able to generate sufficient revenue to
offset any additional personnel costs. We also cannot guarantee that we will be
successful in hiring enough consultants to continue our growth.
CHANGES IN OUR COMPENSATION PROGRAMS COULD IMPAIR OUR ABILITY TO RETAIN
CONSULTANTS
Historically, our compensation programs have been principally cash-based. We
plan to change our compensation programs upon completing this offering by
introducing incentive stock options and discontinuing the payment of
supplemental bonuses under our current stock incentive bonus plan. This change
could adversely affect our ability to retain our consultants if our total
compensation program is not perceived by our consultants to be competitive with
those of other firms.
WE DEPEND ON OUR ASSOCIATES; THE LOSS OF KEY CONSULTANTS AND MANAGERS COULD
DAMAGE OR RESULT IN THE LOSS OF CLIENT RELATIONSHIPS AND ADVERSELY AFFECT
OUR BUSINESS
Our success largely depends upon the business generation capabilities and
project execution skills of our consultants. In particular, our consultants'
personal relationships with our clients are a critical element of obtaining and
maintaining client engagements. Losing consultants and account managers who
manage substantial client relationships or possess substantial experience or
expertise could adversely affect our ability to secure and complete engagements,
which would adversely affect our results of operations.
In addition, if any of our key consultants were to join an existing
competitor or form a competing company, some of our clients could choose to use
the services of that competitor instead of our services. Clients or other
companies seeking to develop in-house services similar to ours also could hire
our key consultants. Such hiring would not only result in our loss of key
consultants but also could result in the loss of a client relationship or a new
business opportunity.
COMPETITION COULD RESULT IN LOSS OF OUR MARKET SHARE THAT COULD REDUCE OUR
PROFITABILITY
The markets for our principal services are highly competitive. Our
competitors currently include other human resources consulting and actuarial
firms, as well as the human resources consulting divisions of some public
accounting and consulting firms. Several of our competitors have greater
financial, technical, and marketing resources than we have, which could enhance
their ability to respond more quickly to technological changes, finance
acquisitions and fund internal growth. Also, the
6
<PAGE>
consulting practices of the large international accounting firms, or other
competitors who have a larger presence than we do in particular markets, gain
marketing advantages from their greater name recognition.
Our current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address client needs. New competitors or alliances among
competitors could emerge and gain significant market share. In addition, some of
our competitors may have or may develop a lower cost structure or superior
services that gain greater market acceptance than the services that we offer or
develop.
CLIENTS' CRITERIA FOR SELECTING CONSULTANTS MAY CHANGE
The ability to tailor services to clients' particular needs traditionally
has been a key selection criterion among buyers of consulting services in our
core businesses. However, these buyers' selection criteria may change and price
could become a more significant factor, thereby adversely affecting our
operating results.
DEMAND FOR OUR SERVICES MAY DECREASE FOR VARIOUS REASONS, INCLUDING A
DECLINE IN A CLIENT'S OR AN INDUSTRY'S FINANCIAL CONDITION OR AN
INDUSTRY-SPECIFIC ECONOMIC DOWNTURN, THAT COULD ADVERSELY AFFECT OUR
OPERATING RESULTS
We can give no assurance that the demand for our services will continue to
grow or that we will compete successfully with our existing competitors, new
competitors or our clients' internal capabilities. Some of our clients may
decide to develop or use their internal resources to satisfy their needs for
some or all of the services that we provide. Our clients' demand for our
services also may change based on their own needs and financial conditions. When
economic downturns affect particular clients or industry groups, they frequently
reduce their budgets for outside consultants, which could reduce the demand for
our services and increase price competition.
In addition, the demand for many of our core benefits services is affected
by government regulation and taxation of employee benefits plans. This
regulation and taxation drive our clients' needs for compliance-related
services. Significant changes in tax or social welfare policy or regulations
could lead some employers to discontinue their employee benefit plans, thereby
reducing the demand for our services. A simplification of regulations or tax
policy also could reduce the need for our services.
OUR CLIENTS GENERALLY MAY TERMINATE OUR SERVICES AT ANY TIME, WHICH COULD
DECREASE ASSOCIATE UTILIZATION
Our clients generally may terminate our engagements at any time. If a client
reduces the scope of or terminates the use of our services with little or no
notice, our associate utilization will decline. In such cases, we must rapidly
redeploy our associates to other engagements in order to minimize the potential
negative impact on our financial performance. In addition, because much of our
work is project based rather than recurring in nature, our associates'
utilization depends on our ability to continually secure additional engagements.
MANY OF OUR ENGAGEMENTS, PARTICULARLY LONG-STANDING RELATIONSHIPS AND
ENGAGEMENTS INVOLVING STANDARD ANNUAL ACTIVITIES, ARE NOT BASED ON WRITTEN
AGREEMENTS, WHICH COULD RESULT IN DISPUTES WITH OUR CLIENTS
Many of our engagements, including the majority of those involving
long-standing relationships or standard annual activities such as actuarial
valuations, are not based on formal written agreements. In such cases, there is
a greater risk of misunderstandings with our clients concerning the scope and
terms of our engagement and our liability for unsatisfactory performance.
Disputes could damage our client relationships and result in unanticipated costs
and loss of revenue that could adversely affect our results of operations.
7
<PAGE>
OUR FIXED FEE ENGAGEMENTS COULD HURT OUR FINANCIAL RESULTS IF NOT PROPERLY
MANAGED
We enter into some of our engagements on a negotiated fixed fee basis. If we
do not properly negotiate the price and manage the performance of these
engagements we might incur losses on individual engagements and our overall
financial results would be adversely affected.
WE ARE SUBJECT TO MALPRACTICE CLAIMS ARISING FROM OUR WORK, WHICH COULD
ADVERSELY AFFECT OUR REPUTATION AND BUSINESS
Clients and third parties who are dissatisfied with our services or who
claim to suffer damages caused by our services may bring lawsuits against us.
The nature of our work, especially our actuarial services, involves assumptions
and estimates concerning future events, the actual outcome of which we cannot
know with certainty in advance. In addition, we could make computational,
software programming, or data management errors.
Clients may seek to hold us responsible for the financial consequences of
these errors or variances. Given that we frequently work with large pension
funds, relatively small percentage errors or variances could create significant
dollar variances and claims for unfunded liabilities. In most cases, our
exposure to liability on a particular engagement is substantially greater than
the profit opportunity that the engagement generates for us. For example,
possible claims might include:
- a client's assertion that actuarial assumptions used in a pension plan
were unreasonable, leading to plan underfunding;
- a claim arising out of the use of inaccurate data, which could lead to an
underestimation of plan liabilities; and
- a claim that employee benefit plan documents were misinterpreted or plan
amendments were misstated in plan documents, leading to overpayments to
beneficiaries.
Defending lawsuits of this nature or arising out of any of our services
could require substantial amounts of management attention, which could affect
their focus on operations and could adversely affect our financial performance.
In addition to defense costs and liability exposure, malpractice claims may
produce negative publicity that could hurt our reputation and business.
OUR QUARTERLY REVENUES MAY FLUCTUATE WHILE OUR EXPENSES ARE RELATIVELY FIXED
Quarterly variations in our revenues and operating results occur as a result
of a number of factors, such as:
- the significance of client engagements commenced and completed during a
quarter;
- the seasonality of some specific types of services; in particular,
retirement revenues are more heavily weighted toward the second half of
the fiscal year when annual actuarial valuations are required to be
completed for calendar year end companies and the related services are
performed. In the Human Resources Technologies group, the distribution of
work is concentrated at the end of the first fiscal quarter and through
the second fiscal quarter as there is demand from our clients for
assistance in updating systems and programs used in the annual
re-enrollment of employees in benefit plans, such as flex plans. Much of
the remaining business is project oriented and is thus influenced more by
particular client needs and the availability of our workforce;
- the number of business days in a quarter, employee hiring and utilization
rates, the clients' ability to terminate engagements without penalty;
- the size and scope of assignments;
8
<PAGE>
- the level of vacation and holidays taken by our associates; and
- general economic conditions.
Because 70-75% of our total operating expenses are relatively fixed, a
variation in the number of client assignments or the timing of the initiation or
the completion of client assignments can cause significant variations in
quarterly operating results and could result in losses. Increases in the number
of professional personnel that are not followed by corresponding increases in
revenues could materially and adversely affect our operating results. Over the
most recent ten fiscal quarters, quarterly income from continuing operations has
fluctuated from $0.5 million to $7.3 million, excluding the effect of the
non-recurring compensation charge.
WE DEPEND ON WATSON WYATT PARTNERS FOR OUR BRAND IN THE EUROPEAN MARKET AND
COULD LOSE OUR POSITION IN EUROPE IF OUR ALLIANCE AGREEMENTS WERE TO
TERMINATE
Since 1995 we have marketed our services globally with Watson Wyatt Partners
as Watson Wyatt Worldwide. Under our alliance agreements with Watson Wyatt
Partners:
- we operate in North America, Latin America and Asia-Pacific;
- Watson Wyatt Partners operates in the United Kingdom, Ireland, Africa and
the Caribbean; and
- Watson Wyatt Holdings (Europe) Limited, of which we own a 25% minority
interest, operates in continental Europe.
The alliance agreements with Watson Wyatt Partners generally restrict each
party's ability to enter into each other's geographic markets. If the alliance
agreements were to terminate, we could lose our position in Europe, which could
interrupt our global development and impair our ability to deliver services
seamlessly to clients throughout the world.
TERMINATION OF OUR RELATIONSHIP WITH WATSON WYATT PARTNERS COULD RESULT IN A
NAME CHANGE
The alliance agreements set forth the rights we or Watson Wyatt Partners
have to buy each other out of our respective interests in each other's firm and
in Watson Wyatt Holdings (Europe) Limited in the event either of us becomes
affiliated with a competitor. A termination of our alliance with Watson Wyatt
Partners could precipitate a name change, which could result in confusion in our
markets.
OUR INTERNATIONAL OPERATIONS PRESENT SPECIAL RISKS THAT COULD NEGATIVELY
AFFECT OUR BUSINESS
We conduct a portion of our business from offices outside the United States.
This subjects us to foreign financial and business risks, which could arise in
the event of:
- unusual currency exchange rate fluctuations;
- unexpected increases in taxes;
- new regulatory requirements and/or changes in policies and local laws that
materially affect the demand for our services or directly affect our
foreign operations;
- unusual and unexpected monetary exchange controls;
- the impact of unusually severe or protracted recessions in foreign
economies; and
- civil disturbance or other catastrophic events that reduce business
activity in other parts of the world.
Any of these factors could have an adverse effect on our results of
operations.
9
<PAGE>
OPERATIONAL READINESS OF OUR GLOBAL ADMINISTRATIVE INFRASTRUCTURE MIGHT NOT
BE AS COMPLETE AS REQUIRED TO MANAGE INTERNATIONAL OPERATIONS EFFECTIVELY
The management of geographically dispersed operations requires substantial
management resources, resulting in significant ongoing expense. We have not
fully integrated all of our global operations from an administrative and
reporting standpoint. We are developing and implementing additional systems and
management reporting to help us manage our global operations, but we cannot
predict when these systems will be fully operational or how successful they will
be.
OUR BUSINESS FACES RAPID TECHNOLOGICAL CHANGE AND OUR FAILURE TO RESPOND TO
THIS CHANGE QUICKLY COULD ADVERSELY AFFECT OUR BUSINESS
Increasingly, to remain competitive in our practice areas, we must identify
and offer the most current technologies and methodologies. This is particularly
true of our HR Technologies Group in which our success largely depends upon our
ability to quickly absorb and apply technological advances in both generic
applications and, particularly, those which are specifically required to deliver
employee benefits services. In some cases, significant technology choices and
investments are required. If we do not respond correctly, quickly, or in a
cost-effective manner, our business and operating results might be harmed.
The effort to gain technological expertise and develop new technologies in
our business requires us to incur significant expenses and, in some cases, to
implement them globally. If we cannot offer new technologies as quickly or
effectively as our competitors, we could lose market share. We also could lose
market share if our competitors develop more cost-effective technologies than we
offer or develop.
OUR HR TECHNOLOGIES GROUP HAS PROJECT-RELATED RISKS THAT COULD ADVERSELY
AFFECT OUR FINANCIAL RESULTS
Our HR Technologies Group develops and implements computer software and
systems for clients. In securing or carrying out these engagements, we may
encounter inadequate project scope definitions, unforeseen technological and
systems integration problems, unanticipated costs, failures to meet contractual
performance objectives, and other business risks. If we are not successful in
defining, pricing and executing these assignments as planned, we may incur
financial losses.
LIMITED PROTECTION OF OUR PROPRIETARY EXPERTISE, METHODOLOGIES AND SOFTWARE
COULD HARM OUR BUSINESS
We cannot guarantee that trade secret, trademark, and copyright law
protections are adequate to deter misappropriation of our confidential
information. Moreover, we may be unable to detect the unauthorized use of our
intellectual property and take the necessary steps to enforce our rights. If
employees or third parties misappropriate our proprietary information, our
business could be harmed. Redressing infringements also may consume significant
management time and financial resources.
OUR ASSOCIATES WILL OWN APPROXIMATELY 83% OF OUR STOCK, AND THEIR INTERESTS
MAY DIFFER FROM THOSE OF OTHER STOCKHOLDERS
Immediately upon completion of this offering, our associates will continue
to own approximately 83% of our outstanding capital stock. As a result, our
associates will be able to elect the board of directors and generally determine
the outcome of any proposed corporate transaction or other matter submitted to
stockholders for their vote. Our associates' interests in these matters might
differ from those of our non-associate stockholders.
CHANGE IN ASSOCIATE OWNERSHIP COULD ADVERSELY AFFECT OUR FIRM CULTURE
We currently are predominantly owned by our associates. As owners, our
associates have traditionally been able to influence the direction of the firm,
which promotes an entrepreneurial spirit
10
<PAGE>
and motivates individual performance. The stock owned by our associates will
have transfer restrictions, which will expire within two years following this
offering. As these transfer restrictions expire and our associates' stock
becomes transferable, associate ownership may decline. A decline in associate
ownership and an increase in non-associate influence could lower morale which
could, in turn, adversely affect our business operations.
WE HAVE VARIOUS MECHANISMS IN PLACE THAT MAY PREVENT A CHANGE IN CONTROL
THAT A STOCKHOLDER MIGHT FAVOR
Our certificate of incorporation and bylaws contain provisions that might
discourage, delay or prevent a change in control that a stockholder might favor.
Our certificate of incorporation and bylaws:
- authorize the issuance of preferred stock without fixed characteristics
that could be issued by our board of directors to increase the number of
outstanding shares and deter a takeover attempt;
- classify our board of directors with staggered, three-year terms, which
may lengthen the time required to gain control of our board of directors;
- provide that only the president or our board may call a special meeting of
stockholders;
- prohibit stockholder action by written consent, which requires all actions
to be taken at a meeting of the stockholders;
- provide that vacancies on our board of directors, including new
directorships, may be filled only by the directors then in office; and
- require super-majority voting to amend the classified board and these
other provisions of our certificate of incorporation.
WE COULD ISSUE ADDITIONAL SHARES WHICH COULD HAVE A DILUTIVE EFFECT ON
STOCKHOLDERS
At the time of the offering we will have 69,000,000 authorized shares of
class A common stock. Immediately following the completion of this offering, we
expect to have approximately 63,400,000 authorized but unissued shares of
class A common stock. Additional class A common stock will be issued upon
conversion of outstanding shares of class B common stock and pursuant to
employee stock option plans, and might be issued in connection with acquisitions
or other transactions, or offered for sale in future offerings. The issuance of
additional shares of class A common stock could dilute the value of outstanding
shares, including those purchased in this offering.
YEAR 2000 ISSUES COULD ADVERSELY AFFECT OUR BUSINESS
We have provided our clients with software that we have developed and
software-related services. We also use software and information technology
extensively to deliver our consulting services to our clients and operate our
business. We cannot guarantee that we have identified all potential software
problems or that we will have successfully corrected all software problems. In
addition, some software (such as software used for open enrollment in benefit
plans) normally is modified on an annual or periodic basis. In some cases, we
have deferred performing Year 2000 remediation to coincide with the software's
next scheduled modification. We also have provided software to clients subject
to warranties regarding Year 2000 performance. If we fail to identify or correct
Year 2000 problems in our software, we may incur costs to repair or replace
affected systems. We also may incur liability or unanticipated costs as a result
of errors caused by our software that could have a material adverse effect on
the results of our operations.
11
<PAGE>
WE WILL HAVE BROAD DISCRETION REGARDING THE NET OFFERING PROCEEDS
We have not designated the anticipated net proceeds of this offering for
specific uses. We will have broad discretion regarding the use of the net
proceeds of this offering, and we may apply the proceeds differently than
investors in our stock might anticipate. Although we have no plans or agreements
regarding any material acquisitions on the date of this prospectus, we might use
a portion of the net proceeds to fund acquisitions.
ADDITIONAL SHARES BECOMING AVAILABLE FOR SALE COULD ADVERSELY AFFECT THE
PRICE OF OUR STOCK
Transfer restrictions on the class B common stock expire 12 and 24 months
following this offering. As the transfer restrictions on the class B common
stock expire, subject in the case of affiliates to the restrictions of Rule 144
under the Securities Act of 1933, those shares automatically will convert into
shares of class A common stock that will be eligible for sale in the public
market. The Class B shares will be owned largely by our current associates, and
these persons might want to sell their shares in the public market immediately
after the transfer restrictions expire. Substantial sales after the transfer
restrictions expire could adversely affect the market value of the class A
common stock and the value of your shares. In addition, we cannot guarantee that
the board of directors will not waive the Class B common stock transfer
restrictions or that the underwriters will not waive their requirement that
holders not sell any shares for 180 days following this offering.
The following chart identifies the number of additional Class A shares that
will become available for resale at the time the Class B 12 and 24 month
restrictions expire:
<TABLE>
<CAPTION>
/ /2000 / /2001 / /2002
-------- ---------- ----------
<S> <C> <C> <C>
Post Merger Shares Eligible for Resale...... 0 13,416,780 13,416,780
</TABLE>
12
<PAGE>
USE OF TERMINOLOGY
Immediately before the closing of this offering, we will effect a corporate
reorganization in order to create a holding company structure. As part of this
transaction, our current operating company, Watson Wyatt & Company, will merge
with an indirect wholly-owned subsidiary to become a wholly-owned subsidiary of
Watson Wyatt & Company Holdings. Unless the context indicates otherwise, the
information in this prospectus assumes that the corporate reorganization
transactions have been completed. References in this prospectus to "Watson
Wyatt," "we," "our" and "us" refer to both Watson Wyatt & Company and its
subsidiaries, before the merger, and to Watson Wyatt & Company Holdings and its
subsidiaries after the merger. References to "WW Holdings" refer to Watson
Wyatt & Company Holdings. We refer to our employees as associates.
Watson Wyatt Worldwide is the name of our global alliance with Watson Wyatt
Partners.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the U.S. Securities and Exchange Commission a
registration statement on Form S-3 under the Securities Act relating to the
shares of class A common stock being offered by this prospectus. This prospectus
is part of that registration statement and, as allowed by SEC rules, does not
include all of the information you can find in the registration statement or the
exhibits to the registration statement. For further information about us and the
class A common stock offered, see the registration statement and its exhibits.
We have also filed a registration statement on Form S-4 with the SEC relating to
the proposed merger of Watson Wyatt & Company with its indirect wholly-owned
subsidiary which will result in Watson Wyatt & Company becoming a wholly-owned
subsidiary of Watson Wyatt & Company Holdings.
The SEC allows us to incorporate by reference into this prospectus the
information we file with the SEC. This means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus. If we
subsequently file updating or superseding information in a document that is
incorporated by reference into this prospectus, the subsequent information will
also become part of this prospectus and will supersede the earlier information.
We are incorporating by reference the following documents that we have filed
with the SEC:
- our annual report on Form 10-K for the fiscal year ended June 30, 1999
(file no. 0-20724);
- our quarterly reports on Form 10-Q for the quarters ended September 30,
1999 and December 31, 1999; and
- our current report on Form 8-K filed with the SEC on January 27, 2000.
We also are incorporating by reference into the prospectus all of our future
filings with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange
Act until this offering is completed. You may obtain a copy of any or all of our
filings which are incorporated by reference, at no cost, by writing to or
telephoning us at the following address:
Watson Wyatt & Company Holdings
6707 Democracy Boulevard, Suite 800
Bethesda, Maryland 20817
Attention: Secretary
Telephone: (301) 581-4600
13
<PAGE>
You should rely only on the information provided in this prospectus or
incorporated by reference. We have not authorized anyone to provide you with
different information. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the first page of
the prospectus. We are offering to sell, and seeking offers to buy, the class A
common stock only in jurisdictions where such offers are permitted. We are not
making this offer of securities in any state or country in which the offer or
sale is not permitted.
Watson Wyatt & Company currently files reports and other information with
the SEC, but its common stock, which has been subject to various restrictions,
has not been publicly traded. After the offering, Watson Wyatt & Company
Holdings will continue to file annual, quarterly and special reports, proxy
statements and other information with the SEC. Watson Wyatt & Company's SEC
filings are available at the SEC's web site at http://www.sec.gov. You may read
and copy any filed document at the SEC's public reference rooms in Washington,
D.C. at Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549, and at the
SEC's regional offices in New York at 7 World Trade Center, 13(th) Floor, New
York, New York 10048, and in Chicago at Suite 400, Northwestern Atrium Center,
14(th) Floor, 500 W. Madison Street, Chicago, Illinois 60661. Please call the
SEC at 1-800-SEC-0330 for further information about the public reference rooms.
USE OF PROCEEDS
The net proceeds from the sale of the 2,800,000 shares of class A common
stock offered by us will be approximately $29.4 million, based on the midpoint
of an assumed initial public offering price of $11.50-13.50 per share and after
deducting the underwriting discounts and commissions and offering expenses. We
will not receive any proceeds from the sale of common stock by the selling
stockholders. We have agreed with the selling stockholders to reimburse
underwriting fees payable by them. This amount has been taken into account in
estimating the net proceeds.
The primary purpose of this offering is to create a public market for our
common stock, create a currency for potential acquisitions, facilitate future
access to public markets, and enhance our ability to use our common stock to
attract, retain and provide incentives to our consultants.
The proceeds from this offering will be used for working capital and other
general corporate purposes, which may include the retirement of outstanding
working capital indebtedness under our revolving credit facility, if any, at the
time of completion of this offering. Further, although we currently have no
agreements or commitments regarding any acquisitions, a portion of the offering
proceeds could be used for possible strategic acquisitions of complementary
businesses, products, or technologies.
Assuming the offering had been completed at December 31, 1999, $8.4 million
of the proceeds could have been used to reduce debt. The outstanding
indebtedness at December 31, 1999 was for cyclical working capital purposes. It
was comprised of outstanding draws on our revolving credit facility, which would
mature on June 30, 2003 when the credit facility expires, if not repaid earlier.
The indebtedness bears interest at a rate that varies with LIBOR and/or the
prime rate. The interest rate on our borrowings was 8.5% at December 31, 1999.
As we have no current specific plans for the proceeds from this offering,
any proceeds available after the repayment of outstanding indebtedness would be
invested in short-term high-grade interest-bearing securities.
DIVIDEND POLICY
We currently intend to retain our future earnings to finance the operation
and expansion of our business and we do not anticipate paying cash dividends on
our common stock in the foreseeable future. Any future determination as to the
payment of dividends will be at the discretion of our board of directors.
14
<PAGE>
CAPITALIZATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents our consolidated net cash position and total
capitalization as of December 31, 1999 on (1) an actual basis; (2) a pro forma
basis giving effect to the exchange of shares under our proposed corporate
reorganization and subsequent reclassification of the redeemable common stock to
stockholders' equity; and (3) a pro forma as adjusted basis to reflect the sale
of 2,800,000 shares of class A common stock being offered in this offering by us
at an assumed initial public offering price of $ 12.50 per share, the automatic
conversion of all class B common stock sold by the selling shareholders in the
offering to class A common stock, and the application of the estimated net
proceeds to us from the offering.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 13,688 $ 13,688 $33,887
======== ======== =======
Notes payable and book overdrafts........................... 8,401 8,401 --
======== ======== =======
Redeemable common stock ($1 par value per share, 25,000,000
shares authorized; 14,879,886 shares issued and
outstanding) (a).......................................... 99,398 -- --
======== ======== =======
Stockholders' equity:
Adjustment for redemption value less than amounts paid in
by stockholders (a)..................................... 10,547 -- --
Preferred stock (no par value per share, 1,000,000 shares
authorized; no shares issued)........................... -- -- --
Class A common stock ($0.01 par value per share,
69,000,000 shares authorized; 5,600,000 shares issued
and
outstanding) (b)(c)..................................... -- 56
Class B-1 common stock ($0.01 par value per share;
15,000,000 shares authorized; 14,879,886 shares issued
and outstanding, pro forma; 13,479,886 shares issued and
outstanding,
pro forma as adjusted) (d).............................. -- 149 135
Class B-2 common stock ($0.01 par value per share;
15,000,000 shares authorized; 14,879,886 shares issued
and outstanding, pro forma; 13,479,886 shares issued and
outstanding,
pro forma as adjusted) (d).............................. -- 149 135
Additional paid in capital (e)............................ -- 109,647 140,669
Retained deficit (f)...................................... (74,198) (74,198) (75,864)
Cumulative translation adjustment (other comprehensive
loss)................................................... (1,468) (1,468) (1,468)
-------- -------- -------
Total stockholders' (deficit) equity........................ $(65,119) $ 34,279 $63,663
======== ======== =======
Total capitalization........................................ $ 34,279 $ 34,279 $63,663
======== ======== =======
</TABLE>
- ------------------------
(a) All shares of common stock at December 31, 1999 are classified as redeemable
common stock outside of stockholders' equity due to the bylaw provision that
required stock to be repurchased by us upon an associate's termination or
retirement. The difference between the redeemable value, as determined in
accordance with Watson Wyatt & Company's bylaws, and the amounts paid in or
deemed paid in for the stock is identified as the "Adjustment for redemption
value less (greater) than amounts paid in by stockholders" and is included
in the stockholders' equity section of the historical balance sheet.
15
<PAGE>
Under the terms of the corporate reorganization, all 14,879,886 outstanding
redeemable common shares will be converted into 29,759,772 newly issued
shares of class B-1 and class B-2 common stock, without redemption features.
This is reflected in the "Pro Forma" column. In the "Pro Forma" column, the
total historical cost of the shares is now fully reflected in stockholders'
equity.
(b) The "Pro Forma As Adjusted" column reflects the issuance by us of 2,800,000
shares of class A common stock and the automatic conversion of 2,800,000
shares of class B-1 and class B-2 common stock to class A common stock upon
their sale by the selling stockholders in this offering.
(c) The "Pro Forma As Adjusted" number of shares of common stock to be
outstanding excludes (1) options to purchase approximately 1,600,000 shares
of class A common stock to be granted concurrent with the consummation of
this offering at an exercise price equal to the public offering price and
(2) approximately 2,900,000 shares of class A common stock reserved for
issuance upon exercise of options that may be granted in the future under
our stock incentive plan.
(d) In the "Pro Forma" column, the conversion of shares pursuant to the
corporate reorganization referred to in (a) above is reflected. The "Pro
Forma As Adjusted" column reflects the automatic conversion of 2,800,000
shares of class B-1 and class B-2 common stock to 2,800,000 shares of
class A common stock upon their sale by the selling stockholders.
(e) The "Pro Forma" column reflects the difference between cash paid in or
deemed paid in for the new outstanding 14,879,886 shares of the class B-1
common stock and 14,879,886 shares of class B-2 common stock and their $0.01
per share par value. The "Pro Forma As Adjusted" column adds to this amount
the issuance of shares of class A common stock in this offering, less the
$0.01 per share par value of each class.
(f) We have decided to reimburse the selling stockholders for the underwriting
commissions on the shares sold by them in connection with this offering. The
"Pro Forma as Adjusted" column reflects the resulting after-tax compensation
charge which will decrease our operating results and increase our retained
deficit in the quarter in which we complete this offering.
16
<PAGE>
DILUTION
As of December 31, 1999, after giving effect to our corporate reorganization
and the related termination of the redemption feature of our redeemable common
stock, our pro forma net tangible book value was approximately $24.8 million, or
approximately $0.83 per share. Net tangible book value per share is determined
by dividing our net tangible book value (total net tangible assets less total
liabilities) by 29,759,772 pro forma shares of common stock outstanding. After
giving effect to the sale of 2,800,000 shares of class A common stock in this
offering by us at the midpoint of an assumed initial public offering price of
$11.50-13.50 per share, and after deducting the underwriting discounts and
commissions and offering expenses, our pro forma net tangible book value as of
December 31, 1999 would have been $54.2 million, or $1.66 per share. This
represents an immediate increase in net tangible book value of $0.83 per share
to our stockholders and an immediate dilution in net tangible book value of
$10.84 per share to new investors purchasing shares in this offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 12.50
-------
Net tangible book value per share as of December 31,
1999.................................................... $ 0.83
Increase in net tangible book value per share attributable
to the offering......................................... 0.83
-------
Net tangible book value per share after this offering....... 1.66
-------
Dilution per share to new stockholders...................... $ 10.84
=======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1999, the number of shares of class A common stock purchased from us, the total
consideration paid to us and the average price per share paid to us by the
existing holders of common stock and by the new stockholders purchasing shares
of class A common stock offered by us (at an assumed initial public offering
price at the midpoint of $11.50-13.50 per share) before deducting the
underwriting discounts and commissions and offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 26,959,772 82.8% $ 99,613,000 58.7% $ 3.69
New stockholders.................... 5,600,000 17.2% 70,000,000 41.3% $12.50
----------- ----- ------------ -----
Total............................. 32,559,772 100.0% $169,613,000 100.0%
=========== ===== ============ =====
</TABLE>
The foregoing table excludes (1) options to purchase 1,600,000 shares of
class A common stock to be granted concurrent with the consummation of this
offering at an exercise price equal to the public offering price and
(2) 2,900,000 shares of class A common stock reserved for issuance upon exercise
of options that may be granted in the future under our stock option plan.
Additional sales by the selling stockholders in this offering pursuant to
the underwriters' overallotment option, if exercised in full, will reduce the
number of shares held by our existing stockholders to 26,119,772 shares, or
80.2% of the total number of shares outstanding after this offering, and will
increase the number of shares held by new investors to 6,440,000 shares or 19.8%
of the total number of shares of common stock outstanding after this offering.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data of Watson Wyatt & Company
Holdings should be read in conjunction with the consolidated financial
statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The balance sheet data as of June 30, 1998 and 1999 and the
statement of operations data for the years ended June 30, 1997, 1998 and 1999
have been derived from the consolidated financial statements for such years,
which have been audited by PricewaterhouseCoopers LLP, independent accountants.
The balance sheet data as of June 30, 1995, 1996 and 1997 and the statement of
operations data for the years ended June 30, 1995 and 1996 are derived from the
audited consolidated financial statements for such years that have been restated
to reflect our discontinued operations.
The consolidated financial data as of and for the six months ended
December 31, 1998 and 1999 have been derived from our unaudited consolidated
financial statements, which management believes include all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation.
Results for the six months ended December 31, 1999 are not necessarily
indicative of results that may be achieved for the full year.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED DEC. 31,
----------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA (A):
Continuing operations:
Fees............................................... $465,788 $475,298 $486,502 $ 512,660 $556,860 $274,343 $298,734
Operating expenses:
Salaries and benefits............................ 250,507 250,103 252,302 268,611 298,925 148,868 160,753
Stock incentive bonus plan (b)................... 22,600 7,600 15,000
Non-recurring compensation charge related to
formula book value change (c).................. -- -- -- 69,906 -- -- --
Occupancy & communications....................... 71,173 60,566 72,155(d) 62,061 62,915 29,954 30,423
Professional and subcontracted services.......... 43,613 42,450 48,827 49,907 47,863 22,052 24,927
Other............................................ 25,135 23,637 23,871 26,779 29,753 11,586 16,300
-------- -------- -------- --------- -------- -------- --------
390,428 376,756 397,155 477,264 462,056 220,060 247,403
General & administrative expenses.................. 41,313 38,656 45,696 51,759 56,578 27,852 27,902
Depreciation & amortization........................ 21,103 25,541 22,094 24,994 15,248 7,824 9,517
-------- -------- -------- --------- -------- -------- --------
452,844 440,953 464,945 554,017 533,882 255,736 284,822
-------- -------- -------- --------- -------- -------- --------
Income (loss) from operations...................... 12,944 34,345 21,557 (41,357) 22,978 18,607 13,912
Other:
Net interest income.............................. 1,343 1,441 1,462 901 944 528 1,252
Net interest (expense)........................... (1,507) (930) (1,506) (2,768) (2,646) (1,721) (1,088)
Income (loss) from affiliates.................... (576) (820) 105 258 2,524 1,025 2,143
-------- -------- -------- --------- -------- -------- --------
Income (loss) before income taxes and minority
interest......................................... 12,204 34,036 21,618 (42,966) 23,800 18,439 16,219
Income taxes....................................... 6,369 14,071 9,070 13,134 11,448 8,917 7,835
Minority interest.................................. (127) (130) (167) (112) (217) (85) 176
Cumulative effect of change in accounting for
postemployment benefits, net of tax benefit of
$1,000........................................... (800) -- -- -- -- -- --
-------- -------- -------- --------- -------- -------- --------
Income (loss) from continuing operations........... 4,908 19,835 12,381 (56,212) 12,135 9,437 8,560
Discontinued operations (e)........................ (4,059) (10,480) (11,483) (69,906) 8,678 8,678 --
-------- -------- -------- --------- -------- -------- --------
Net income (loss).................................. $ 849 $ 9,355 $ 898 $(126,118) $ 20,813 $ 18,115 $ 8,560
======== ======== ======== ========= ======== ======== ========
Earnings (loss) per share, continuing operations,
basic and fully diluted.......................... $ 0.25 $ 1.07 $ 0.71 $ (3.27) $ 0.80 $ 0.63 $ 0.57
Earnings (loss) per share, basic and fully
diluted.......................................... $ 0.05 $ 0.51 $ 0.05 $ (7.34) $ 1.37 $ 1.21 $ 0.57
Weighted average shares outstanding................ 19,248 18,516 17,438 17,170 15,215 14,977 15,140
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF
---------------------------------------------------- DECEMBER31,
1995 1996 1997 1998 1999 1999
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 11,860 $ 21,694 $ 26,257 $ 13,405 $ 35,985 $ 13,688
Net working capital..................................... 49,826 18,788 21,307 23,748 11,692 8,882
Total assets............................................ 286,622 320,819 331,778 268,310 313,960 301,024
Notes payable and book overdrafts....................... -- -- 408 11,666 248 8,401
Redeemable common stock................................. 86,275 90,214 96,091 96,296 107,631 99,398
Total stockholders' (deficit) (f)....................... (6,562) (5,832) (12,205) (84,510) (74,351) (65,119)
Shares outstanding...................................... 19,130 18,262 18,130 15,917 16,112 14,880
</TABLE>
- ------------------------------
(a) We believe that our income as an employee-owned company is not indicative of
the operating performance we will report as a publicly traded company due to
the significant impact of the following two non-recurring compensation
related expenses: (1) supplemental discretionary bonuses accrued under our
stock incentive bonus plan, described in more detail in footnote (b) below
and (2) a one-time charge in fiscal year 1998 related to a change in the way
we calculated our formula book value, the price at which we sold and
repurchased our restricted common stock in transactions with our employees
prior to the public offering, described in more detail in footnote
(c) below.
We believe that our results of operations in fiscal years 1998 and 1999 and
the six month periods ended December 31, 1998 and 1999 are more comparable
to, and a better indication of, our performance as a publicly traded company
if they are analyzed excluding the stock incentive bonus plan and the
non-recurring compensation charge described above. The continuing operations
loss before taxes and minority interest of $43.0 million for fiscal year
1998 would have improved by $69.9 million, and the continuing operations
income before taxes and minority interest of $23.8 million for fiscal year
1999 would have improved by $22.6 million without these items. Income before
taxes and minority interest from continuing operations for the three years
ended June 30, 1997, 1998 and 1999 would have been $21.6 million,
$26.9 million and $46.4 million, respectively. Income before taxes and
minority interest from continuing operations for the six month periods ended
December 31, 1998 and 1999 would have been $26.0 million and $31.2 million,
respectively, if bonuses were accrued under the compensation structure
management will adopt as a publicly traded company.
The proposed Watson Wyatt & Company Holdings 2000 Long Term Incentive Plan
provides for non-qualified stock options with an exercise price equal to
fair market value at the date of the grant and no uncertainties that would
require variable accounting under generally accepted accounting principles.
Therefore, grants under the stock option program will not result in
compensation expense.
In a few foreign jurisdictions where option grants are impractical, we will
grant stock appreciation rights (SARs) which will require recognition of
compensation expense over a vesting period to the extent the market price of
the stock increases. However, it is anticipated that this expense will be
immaterial.
(b) Historically, we have paid incentive bonuses to associates under a fiscal
year-end bonus program. Beginning in fiscal year 1999, in addition to annual
fiscal year-end bonuses, we provided supplemental bonus compensation to our
employee shareholders pursuant to the stock incentive bonus plan in an
amount representing all income in excess of a targeted amount. Following the
public offering, we will terminate the stock incentive bonus plan and
replace it with equity based incentives more customary to publicly traded
companies.
(c) As an employee-owned company without a public trading market, we sold and
repurchased shares of common stock in transactions with our employee
shareholders at a formula book value calculated in accordance with our
bylaws. In fiscal year 1998, we recorded a one-time non-cash
19
<PAGE>
compensation charge against continuing operations of $69.9 million to
reflect a change in the method of calculating the formula book value. This
change eliminated from the calculation of formula book value the
$69.9 million charge taken for discontinued operations in fiscal year 1998
to reflect the discontinuation of our benefits administration outsourcing
business.
(d) Results of operations for fiscal year 1997 were reduced by a $12.1 million
sublease loss due to the relocation of the corporate and one operating
office.
(e) As discussed in footnotes (a) and (c) above, in fiscal year 1998 we
discontinued our benefits administration outsourcing business and recorded a
$69.9 million charge to earnings in the discontinued operations line. Fiscal
years 1995 through 1998 also include the operating losses of the benefits
administration outsourcing business prior to its discontinuation in 1998,
which are reflected in the discontinued operations line. In fiscal year
1999, the discontinued operations credit reflects the reduction of the
expected loss on disposal of the benefits administration outsourcing
business.
(f) The increase in Total Stockholders' Deficit from June 30, 1997 to June 30,
1998 includes the discontinued operations charge of $69.9 million mentioned
in note (e) above.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Watson Wyatt & Company Holdings, including its subsidiaries, is a global
provider of human capital consulting services. We operate on a geographic basis
from 59 offices in 18 countries throughout North America, Asia-Pacific and Latin
America. We provide services in three principal practice areas: employee
benefits, human resources technologies and human capital consulting.
Although we operate globally as an alliance with our affiliates, our
revenues and operating expenses 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/loss
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 provided. For the most recent three fiscal years,
fees from U.S. consulting operations have comprised approximately 80% of
consolidated revenues. No single client accounted for more than 3% of our
consolidated revenues for any of the most recent three fiscal years.
Our most significant expenses are salaries and benefits costs, including
incentive bonuses, which typically comprise over 60% of total costs of providing
services. In addition to payroll and related benefits and taxes, salaries and
benefits also include incentive bonus expense, which is linked to our operating
performance. Other significant costs of providing services include office rent
and related costs, communications and professional and subcontracted services.
Historically, we have paid incentive bonuses to associates under a fiscal
year-end bonus program. Beginning in fiscal year 1999, in addition to annual
fiscal year-end bonuses, we provided supplemental bonus compensation to our
employee shareholders pursuant to the stock incentive bonus plan in an amount
representing all income in excess of a targeted amount. Following this offering,
we will terminate our stock incentive bonus plan and replace it with
equity-based incentives more customary to publicly traded companies. Our results
of operations for fiscal year 1999 and the six month period ended December 31,
1999 include expenses for supplemental bonuses accrued under the stock incentive
bonus plan of $22.6 million and $15.0 million, respectively.
In addition, as an employee-owned company without a public trading market,
we sold and repurchased shares of common stock in transactions with our employee
shareholders at a formula book value calculated in accordance with our bylaws.
In fiscal year 1998, we recorded a one-time non-cash compensation charge against
continuing operations of $69.9 million to reflect a change in the method of
calculating the formula book value. This change eliminated from the calculation
of formula book value the $69.9 million charge taken for discontinued operations
in fiscal year 1998 to reflect the discontinuation of our benefits
administration outsourcing business.
Due to the stock incentive bonus plan and non-cash compensation charge
related to the change in formula book value described above, we believe that our
income as an employee-owned company is not indicative of the operating
performance we will report as a publicly traded company. We believe that our
results of operations in fiscal years 1998 and 1999 and the six month periods
ended December 31, 1998 and 1999 are more comparable to, and a better indication
of, our performance as a publicly traded company if they are analyzed excluding
the stock incentive bonus plan and the non-recurring
21
<PAGE>
compensation charge described above, since the events giving rise to these
charges are eliminated by the change in corporate structure and anticipated
incentive compensation following this offering. The continuing operations loss
before taxes and minority interest of $43.0 million for fiscal year 1998 would
have improved by $69.9 million, and the continuing operations income before
taxes and minority interest of $23.8 million for fiscal year 1999 would have
improved by $22.6 million without these items. Income before taxes and minority
interest from continuing operations for the three years ended June 30, 1997,
1998 and 1999 would have been $21.6 million, $26.9 million and $46.4 million,
respectively. Income before taxes and minority interest from continuing
operations for the six month periods ended December 31, 1998 and 1999 would have
been $26.0 million and $31.2 million, respectively, if bonuses were accrued
under the compensation structure management will adopt as a publicly traded
enterprise.
This compensation structure is based on the proposed Watson Wyatt & Company
Holdings 2000 Long Term Incentive Plan which provides for non-qualified stock
options with an exercise price equal to fair market value at the date of the
grant and no uncertainties that would require variable accounting under
generally accepted accounting principles. Therefore, grants under the stock
option program will not result in compensation expense.
In a few foreign jurisdictions where option grants are impractical, we will
grant stock appreciation rights (SARs) which will require recognition of
compensation expense over a vesting period to the extent the market price of the
stock increases. However, it is anticipated that this expense will be
immaterial.
In connection with this offering, we have decided to reimburse the selling
stockholders for the underwriting commission on the shares sold by them in this
offering. In the fiscal quarter in which the offering is completed, our
operating results will be negatively affected by the resulting compensation
charge. We estimate that the reduction in income from operations will be
approximately $2.5 million and the reduction in net income would be
approximately $1.7 million due to this non-recurring compensation charge.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1998.
REVENUES. Fees for the six months ended December 31, 1999 were
$298.7 million, compared to $274.3 million for the six months ended
December 31, 1998, an increase of $24.4 million, or 9%. The revenue growth is
primarily due to an $11.2 million, or 11%, rise in fees generated by our U.S.
East region and a $9.0 million, or 12%, rise in fees generated by our U.S.
Central region. The fee increase in these regions can be attributed to increased
chargeable hours, accounting for approximately $7.0 million, and to the
realization of billing rate increases, accounting for approximately
$13.2 million. In addition to these amounts, our Asia-Pacific region generated
$3.8 million or 16% higher fees than in the previous six month period.
SALARIES AND EMPLOYEE BENEFITS. Salaries and employee benefit expenses for
the six months ended December 31, 1999 were $160.8 million, compared to
$148.9 million for the six months ended December 31, 1998, an increase of
$11.9 million, or 8%. The increase is due to an increase in compensation to
associates, partly the result of annual salary increases and a 3% increase in
headcount.
STOCK INCENTIVE BONUS PLAN. The accrued bonus under our stock incentive
bonus plan for the six months ended December 31, 1999 was $15.0 million,
compared to $7.6 million for the six months ended December 31, 1998, an increase
of $7.4 million, or 97%. This increase is due to higher operating results for
the six months ended December 31, 1999 compared to the operating results for the
six months ended December 31, 1998. Under the equity based compensation
structure we plan to implement as a
22
<PAGE>
publicly traded enterprise, the results of operations for the six-month periods
ended December 31, 1999 and 1998 would not have included the accrual for bonuses
under the stock incentive bonus plan.
OCCUPANCY AND COMMUNICATIONS. Occupancy and communication expenses for the
six months ended December 31, 1999 were $30.4 million, compared to
$30.0 million for the six months ended December 31, 1998, an increase of
$0.4 million, or 1%. The increase can be attributed to higher telephone expenses
and office supplies.
PROFESSIONAL AND SUBCONTRACTED SERVICES. Professional and subcontracted
services for the six months ended December 31, 1999 were $24.9 million, compared
to $22.0 million for the six months ended December 31, 1998, an increase of
$2.9 million, or 13%. The increase is due to a $1.2 million actuarial and
strategic consulting expense from a sub-contractor and $0.9 million in
non-compete payments. The remaining $0.8 million increase is due to an increase
in recruiting fees and other outside services.
OTHER. Other costs of providing services for the six months ended
December 31, 1999 were $16.3 million, compared to $11.6 million for the six
months ended December 31, 1998, an increase of $4.7 million, or 41%. The
difference is attributable to a $3.7 million gain from the sale of our defined
contribution daily record-keeping software included in the six months ended
December 31, 1998. The remainder of the difference can be attributed to a
$0.5 million increase in travel expenses and a $0.3 million increase in
expenditures for the professional development for U.S. and international
consultants.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the six
months ended December 31, 1999 were $27.9 million, unchanged from the six months
ended December 31, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the six months ended December 31, 1999 was $9.5 million, compared to
$7.8 million for the six months ended December 31, 1998, an increase of
$1.7 million, or 22%. This increase is due to a higher depreciable capital base
and higher intangibles related to the acquisition of selected units of KPMG's
consulting business late in the first fiscal quarter of fiscal year 1999.
INTEREST INCOME. Interest income for the six months ended December 31, 1999
was $1.3 million, compared to $0.5 million for the six months ended
December 31, 1998, an increase of $0.8 million, or 160%. This increase can be
attributed to the receipt of interest of $0.5 million related to a federal tax
refund and to additional interest income of $0.3 million earned during the year
on a higher average investment balance.
INTEREST EXPENSE. Interest expense for the six months ended December 31,
1999 was $1.1 million, compared to $1.7 million for the six months ended
December 31, 1998, a decrease of $0.6 million, or 37%. The decrease can be
attributed to our borrowing less money against our revolving line of credit in
the first six months of fiscal year 2000 than in the first six months of fiscal
year 1999.
INCOME FROM AFFILIATES. Income from affiliates for the six months ended
December 31, 1999 was $2.1 million, compared to $1.0 million for the six months
ended December 31, 1998, an increase of $1.1 million, or 109%. The increase
reflects improvement in business operations by our affiliates in both
Continental Europe and the United Kingdom.
PROVISION FOR INCOME TAXES. Income taxes for the six months ended
December 31, 1999 were $7.8 million, compared to $8.9 million for the six months
ended December 31, 1998 due to lower income before income taxes and minority
interest. The effective tax rate of 48% for the six months ended December 31,
1999 remained unchanged from the comparable prior year period. Our tax rate is
affected by differing foreign tax rates in various jurisdictions. We do not
record a tax benefit on foreign net operating loss carryovers and foreign
deferred expenses unless it is more likely than not that a benefit will be
realized.
23
<PAGE>
DISCONTINUED OPERATIONS. During the six months ended December 31, 1998, we
further resolved our future obligations related to the discontinuation of our
benefits administration outsourcing business and reduced the expected loss on
disposal by $8.7 million, net of taxes. Management believes we have adequate
provisions for any remaining costs related to the discontinuation.
NET INCOME. Net income for the six months ended December 31, 1999 was
$8.6 million, compared to $18.1 million for the six months ended December 31,
1998, a decrease of $9.5 million, or 53%. The decrease is principally due to the
$8.7 million after-tax adjustment to reduce the loss on disposal of the
discontinued benefits administration outsourcing business recorded in fiscal
year 1999. Income from continuing operations for the six months ended
December 31, 1999 and 1998 also reflects the stock incentive bonus plan accruals
discussed above.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
REVENUES. Fee revenue from continuing operations reached $556.9 million in
fiscal year 1999, an increase of $44.2 million from $512.7 million in fiscal
year 1998. This represents 9% growth in revenue. This increase is attributable
to increases in various North American regions totaling $39.9 million and a
further $5.9 million, or 13%, increase in our Asia-Pacific region. The
individual regions within North America showed the following trends: U.S. East,
a $34.6 million, or 21%, increase; U.S. Central, a $15.0 million, or 10%,
increase; and, U.S. West, a $9.7 million, or 11%, decline. Within North America
the following individual lines of business, not all inclusive, showed the
following trends: Benefits Group, a $42.4 million increase, including
$11.5 million of additional revenues from the first fiscal quarter acquisition
of selected units of KPMG's benefits consulting business; HR Technologies Group,
an $18.9 million increase, despite the sale in early fiscal year 1999 of the
defined contribution recordkeeping business which had generated revenues in
fiscal year 1998 of $6.0 million; Human Capital Group, a $25.3 million decline
in revenues amid a reorganization of the practice; and, no risk and insurance
consulting revenues due to our sale of this practice in late fiscal year 1998,
which had generated $9.2 million in fiscal year 1998 revenues.
COMPENSATION AND BENEFITS. For fiscal year 1999, salaries and employee
benefits expenses were $298.9 million, an increase of $30.3 million, or 11%,
from fiscal year 1998. This increase is due primarily to a 6% increase in
headcount, and annual increases in compensation and benefits. In fiscal year
1999, we accrued, for the first time, a supplemental bonus under our stock
incentive bonus plan of $22.6 million, which amounts were paid in January 2000.
OCCUPANCY AND COMMUNICATIONS. Occupancy and communications expense
increased $0.9 million or 1% in fiscal year 1999. This low percentage increase
reflects our adoption of an office space standard as well as our success in
negotiating advantageous leases of office space.
PROFESSIONAL AND SUBCONTRACTED SERVICES. Professional and subcontracted
services were $47.9 million for fiscal year 1999, a decrease of $2.0 million, or
4%, from fiscal year 1998 due to reduced corporate expenses.
OTHER. Other costs of providing services increased $3.0 million in fiscal
year 1999, which is mainly attributable to increased travel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for fiscal
year 1999 were $56.6 million, an increase of $4.8 million, or 9%, from fiscal
year 1998. The increase was attributable to $4.8 million for providing
technology support to core consulting areas and $1.6 million for Year 2000
readiness. These increases were offset by a $1.6 million decrease in marketing
expenses for business strategy initiatives from fiscal year 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
$9.7 million in fiscal year 1999 to $15.2 million. This decrease is due to
higher amortization of internally developed software in
24
<PAGE>
fiscal year 1998 of $11.6 million, primarily due to a reevaluation and
subsequent reduction of the useful lives of the related products. Without this
item in fiscal year 1998, depreciation and amortization expense increased
$1.9 million in fiscal year 1999 related to purchases of capital assets.
INCOME FROM AFFILIATES. Income from affiliates was $2.5 million in fiscal
year 1999 compared to $0.3 million in fiscal year 1998. The increase reflects
heightened synergies and focus within our affiliated European operations as well
as improved business operations in the United Kingdom.
PROVISION (BENEFIT) FOR INCOME TAXES. Income before income taxes, minority
interest and discontinued operations was $23.8 million in fiscal year 1999,
which, considering taxes of $11.4 million, reflects an effective tax rate of
48%. Income tax expense of $13.1 million in fiscal year 1998 relates to a loss
before taxes, minority interest and discontinued operations of $43.0 million,
for an effective tax rate of (30.6%). The reason for reporting a tax expense
when we had a pretax loss and the disparity in effective tax rates is the
non-recurring compensation charge of $69.9 million in fiscal year 1998, included
in the loss before taxes of $43.0 million, which is permanently non-deductible
for tax purposes.
DISCONTINUED OPERATIONS. In fiscal year 1999, we further resolved our
future obligations related to the discontinuation of our benefits administration
outsourcing business and reduced the expected loss on disposal by $8.7 million,
net of taxes. We believe we have adequate provisions for any remaining costs
related to the discontinuation.
NET INCOME (LOSS). We generated net income in fiscal year 1999 of
$20.8 million compared to a net loss in fiscal year 1998 of $126.1 million.
Continuing operations income before income taxes and minority interest in fiscal
year 1999 of $23.8 million compares to the loss of $43.0 million in fiscal year
1998, which includes the $69.9 million non-recurring compensation charge related
to the change in formula book value for stock repurchases. The fiscal year 1999
results reflect significantly improved operating performance and the accrual of
bonuses under the stock incentive bonus plan, at the discretion of our board of
directors.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
REVENUES. Fee revenue from continuing operations reached $512.7 million in
fiscal year 1998, an increase of $26.2 million, or 5%, from $486.5 million in
fiscal year 1997. This increase is primarily attributable to an increase in
various North American regions totaling $29.9 million. The individual regions
within North America showed the following trends: a $12.0 million, or 15%, rise
in fees generated by our U.S. West consulting region, a $12.0 million, or 8%,
increase in our U.S. East region, and a $5.9 million, or 4%, rise in fees in our
U.S. Central region. The increases are due to the realization of billing rate
increases. Within North America the following individual lines of business, not
all inclusive, showed the following trends: Benefits Group, an $11.2 million
increase; Human Capital Group, a $12.0 million increase; and HR Technologies
Group, an $8.5 million increase. These North American increases were partially
offset by a decline of $5.4 million, or 11%, in our Asia-Pacific region, largely
reflecting regional economic issues.
COMPENSATION AND BENEFITS. For fiscal year 1998, salaries and employee
benefits expenses were $268.6 million, an increase of $16.3 million, or 6% from
fiscal year 1997. This is due primarily to a 2% increase in headcount and annual
salary increases.
NON-RECURRING COMPENSATION CHARGE. In fiscal year 1998, we recorded a
non-cash, non-recurring compensation charge of $69.9 million because we changed
the method of calculating the formula book value of our common stock to exclude
the effect of the discontinuance of our benefits administration outsourcing
business. There was no such charge in fiscal year 1997.
OCCUPANCY AND COMMUNICATIONS. Occupancy and communications expenses
decreased $10.1 million in fiscal year 1998. We relocated our corporate office
to a lower-cost suburban location in
25
<PAGE>
1997, recognizing sublease losses of $12.1 million. Excluding these lease
losses, occupancy and communications increased $2.0 million or 3%, with the
largest growth occurring in telecommunications expenses.
PROFESSIONAL AND SUBCONTRACTED SERVICES. Professional and subcontracted
services were $49.9 million for fiscal year 1998, an increase of $1.1 million,
or 2%, from fiscal year 1997.
OTHER. Other costs of providing services increased $2.9 million in fiscal
year 1998 due to increased travel and local office promotion expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for fiscal
year 1998 were $51.8 million, an increase of $6.1 million, or 13%, from fiscal
year 1997. The increase is due to increased spending on corporate advertising
and promotional expenses of $4.0 million and business strategy initiatives of
$2.0 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$2.9 million in fiscal year 1998 to $25.0 million. This increase is primarily
due to our decision to accelerate the amortization of internally developed
software in fiscal year 1998 by $6.8 million based upon a reevaluation and
subsequent reduction of the useful lives of the related products. Without this
acceleration, depreciation and amortization expense declined 18% due to a
decrease in the base of capital assets of $16.4 million in fiscal year 1998 from
fiscal year 1997.
PROVISION (BENEFIT) FOR INCOME TAXES. Loss before income taxes, minority
interest and discontinued operations was $43.0 million in fiscal year 1998; the
provision for taxes was $13.1 million. The resulting effective tax rate of
(30.6%) compares with an effective tax rate of 42% for fiscal year 1997. The
major reason for the difference in effective tax rates is the fiscal year 1998
non-recurring compensation charge of $69.9 million included in the loss before
taxes of $43.0 million, which is permanently non-deductible for tax purposes.
Further, the effective tax rate increased in fiscal year 1998 by
seven percentage points due to changes in various tax jurisdictions with
differing rates, particularly foreign jurisdictions, and lower tax credits.
DISCONTINUED OPERATIONS. In the early 1990's we entered the employee
benefits administration outsourcing business and we took on long-term contracts
in this area. In 1996, recognizing the significant capital requirements needed
for expansion in this area, we formed a joint venture called Wellspring
Resources with State Street Bank and Trust Company. In 1996 and 1997, Wellspring
Resources continued to require significant cash outlays and suffered development
and implementation delays. The combination of Wellspring Resources' financial
performance, which failed to meet our expectations, as well as a strategy
evaluation that concluded that benefits administration outsourcing did not
leverage our consulting strengths, led the board of directors to approve a plan
of discontinuation of the benefits administration outsourcing business in fiscal
year 1998, the financial effect of which is further described below.
NET INCOME (LOSS). Although we incurred a net loss in fiscal year 1998 of
$126.1 million compared to net income in fiscal year 1997 of $0.9 million, these
results include aggregate charges totaling $139.8 million on an after-tax basis
for the special compensation charge and the discontinued operations charge.
Fiscal year 1997 results include $11.5 million in after-tax charges for the
results of operations of the benefits administration outsourcing business, prior
to its discontinuation in fiscal year 1998.
The charges totaling $139.8 million in fiscal year 1998 were both associated
with our discontinued operations in fiscal year 1998. The discontinuation of our
benefits administration outsourcing business resulted in a $69.9 million loss
net of taxes due to the withdrawal from this line of business and is reported as
a discontinued operation. Included in this amount is the $6.8 million loss from
operations prior to discontinuance and $63.1 million for the loss upon exit. The
loss upon exit includes the
26
<PAGE>
write-off of our investment in Wellspring Resources, net capitalized software
development costs for the benefits administration outsourcing clients we did not
include in the Wellspring Resources joint venture and a provision for the
completion of any obligations to clients, vendors or our former joint venture
partner.
In connection with the discontinuation, we changed our bylaws to modify the
formula book value repurchase price of our stock to exclude the effect of the
discontinued operations from the formula book value calculation. The applicable
accounting rules required us to take a $69.9 million non-cash, non-recurring
compensation charge for this. This charge was reported as a special compensation
expense as a component of continuing operations. The charge was measured by the
difference between what the formula book value per share was at June 30, 1998
and what it would have been at that date without the modification. The non-cash
charge had no effect on our liquidity or capital resources but significantly
reduced our income from continuing operations.
LIQUIDITY AND CAPITAL RESOURCES.
Cash and cash equivalents at December 31, 1999 totaled $13.7 million,
compared to $36.0 million at June 30, 1999 and $13.4 million at June 30, 1998.
The decrease in cash from June 30, 1999 to December 31, 1999 is mainly
attributable to the timing of the payment of corporate taxes in the amount of
$17.4 million and the purchases of $3.6 million in capital assets during the
first six months of fiscal year 2000. The increase in cash from June 30, 1998 to
June 30, 1999 was the result of our stock sale during fiscal year 1999 (we held
no such sale in fiscal year 1998) and from reduced operating and close down
costs associated with the discontinuation of the benefits administration
outsourcing business. We had $3.0 million in borrowings outstanding under our
line of credit as of December 31, 1999 compared to $0 at June 30, 1999 and
$9.0 million at June 30, 1998.
CASH USED FOR / PROVIDED BY OPERATING ACTIVITIES. Cash used for operating
activities for the six months ended December 31, 1999 was $16.7 million,
compared to $6.0 million for the six months ended December 31, 1998. The
increase in cash outflows is due to the timing of corporate tax payments and
accounts payable, and benefits payments to retirees in fiscal year 2000, net of
a lower increase in receivables and lower outflows in connection with the
discontinued benefits administration outsourcing business. Further, the
allowance for doubtful accounts increased $2.7 million from June 30, 1999 to
December 31, 1999. This increase is typical of our historical patterns, where
the receivables and allowance are substantially reduced at year end from an
increased emphasis on collections. Both the receivable balances and the related
allowance increase in the first six months of the following year. The number of
months of accounts receivable outstanding was 1.7 at both December 31, 1999 and
December 31, 1998.
Net cash provided by operating activities was $54.5 million for fiscal year
1999, an increase of $33.3 million over cash provided in fiscal year 1998. The
increase was due primarily to the $43.2 million increase in accounts payable and
accrued liabilities from fiscal year 1999 operating expenses that will be paid
in fiscal year 2000. This increase was augmented by the $13.0 million decrease
in the cash needed in the closedown of discontinued operations. The increase in
receivables from clients of $14.4 million decreased cash that would have been
provided by operations. The deferred income tax asset increased $7.3 million in
fiscal year 1999 in conjunction with the increase in accounts payable and
accrued liabilities, compared with a $2.0 million increase in fiscal year 1998.
CASH USED IN INVESTING ACTIVITIES. Cash used in investing activities for
the six months ended December 31, 1999 was $5.8 million, compared to
$10.2 million for the six months ended December 31, 1998. The decrease in cash
usage was due to $3.4 million in lower contingency payments associated with 1999
acquisitions and $2.7 million in lower current year purchases of fixed assets,
partially offset by $1.7 million of lower distributions from affiliates. For
fiscal year 1999, uses of cash for investing
27
<PAGE>
activities decreased $8.7 million from fiscal year 1998, principally due to
reduced cash needs of the discontinued operations.
CASH FROM FINANCING ACTIVITIES. Cash flows used by financing activities
were $0.5 million for the six months ended December 31, 1999, compared to cash
provided by financing activities of $14.3 million for the six months ended
December 31, 1998. We borrowed $16.8 million less against our revolving line of
credit in the first six months of fiscal year 2000 than we borrowed in the first
six months of fiscal year 1999, and repurchased $1.9 million less redeemable
common stock. For full fiscal year 1999, we paid down our outstanding debt and
net stock activity had virtually no impact on cash used by financing activities
in fiscal year 1999.
We have a $120.0 million senior secured revolving credit facility that
matures on June 30, 2003. Of the $95.0 million of the credit line that is
allocated for operating needs, $89.8 million was available as of December 31,
1999, compared to $92.8 million on June 30, 1999. Further, we had borrowings
outstanding of $3.0 million as of December 31, 1999. The remaining $2.2 million
is unavailable as a result of support required for letters of credit issued
under the credit line.
We rely primarily on funds from operations and short-term borrowings for
liquidity. We believe that we have access to ample financial resources to
finance anticipated growth, meet commitments to affiliates, as well as support
ongoing operations. Anticipated commitments of funds are estimated at
$23.3 million for the remainder of fiscal year 2000, mainly for computer
hardware purchases and for office relocations and renovations. We expect
operating cash flows to provide for these cash needs. In future fiscal years, we
would expect that our capital needs would be similar in nature to what we have
incurred in the past. Capital expenditures will be required in conjunction with
office lease renewals and relocations required to support our growth strategy.
Additionally, our consultants will need to have access to hardware and software
that will support servicing our client base. In a rapidly changing technological
environment, we anticipate we will need to make investments in our knowledge
sharing and financial systems infrastructure. We would expect cash from
operations in conjunction with the anticipated net proceeds from this 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 June 30, 1999, $14.4 million of the total cash balance of
$36.0 million was held outside of North America, which we have the ability to
readily access, if necessary. There are no significant repatriation restrictions
other than local or U.S. taxes associated with repatriation. The foreign
operations in total are substantially self-sufficient for their working capital
needs.
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.
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<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly financial data for the
periods indicated. We obtained this information from unaudited quarterly
consolidated financial statements which, in our opinion, include all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the
financial results for the periods. Results of operations for any previous
quarters do not necessarily indicate results that may be achieved in any future
period.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1998 1998 1998 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Fees.................... $125,553 $127,717 $124,558 $134,832 $133,985 $140,358
Cost of providing
services:
Salaries and
benefits............ 64,207 65,460 70,293 68,651 76,398 72,470
Stock incentive bonus
plan................ -- -- -- -- 2,100 5,500
Non-recurring
compensation charge
related to formula
book value change... -- -- -- 69,906 -- --
Occupancy and
communications...... 15,219 15,588 15,422 15,832 14,521 15,433
Professional and
subcontracted
services............ 11,177 14,896 11,626 12,208 8,714 13,338
Other................. 7,000 7,624 6,666 5,489 2,846 8,740
-------- -------- -------- -------- -------- --------
97,603 103,568 104,007 172,086 104,579 115,481
General & administrative
expenses.............. 10,378 13,330 12,849 15,202 11,160 16,692
Depreciation &
amortization.......... 4,687 4,534 5,576 10,197 3,853 3,971
-------- -------- -------- -------- -------- --------
112,668 121,432 122,432 197,485 119,592 136,144
-------- -------- -------- -------- -------- --------
Income (loss) from
operations............ 12,885 6,285 2,126 (62,653) 14,393 4,214
Other:
Interest income....... 249 237 119 296 124 404
Interest expense...... (409) (1,017) (1,168) (174) (553) (1,168)
Income (loss) from
affiliates............ (99) 95 (215) 477 160 865
-------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
minority interest..... 12,626 5,600 862 (62,054) 14,124 4,315
Income taxes............ 5,811 2,672 470 4,181 6,830 2,087
-------- -------- -------- -------- -------- --------
Income (loss) before
minority interest..... 6,815 2,928 392 (66,235) 7,294 2,228
Minority interest....... (44) (97) 86 (57) -- (85)
-------- -------- -------- -------- -------- --------
Income (loss) from
continuing
operations............ 6,771 2,831 478 (66,292) 7,294 2,143
Discontinued operations,
net................... (1,630) (3,808) (73,316) 8,848 -- 8,678
-------- -------- -------- -------- -------- --------
Net income (loss)....... $ 5,141 $ (977) $(72,838) $(57,444) $ 7,294 $ 10,821
======== ======== ======== ======== ======== ========
Earnings (loss) per
share, continuing
operations, basic and
fully diluted......... $ 0.38 $ 0.16 $ 0.03 $ (4.10) $ 0.47 $ 0.15
Earnings (loss) per
share, basic and fully
diluted............... $ 0.29 $ (0.06) $ (4.30) $ (3.55) $ 0.47 $ 0.74
<CAPTION>
QUARTERS ENDED
------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Fees.................... $135,573 $146,944 $146,323 $152,411
Cost of providing
services:
Salaries and
benefits............ 70,977 79,080 79,803 80,950
Stock incentive bonus
plan................ 6,900 8,100 6,000 9,000
Non-recurring
compensation charge
related to formula
book value change... -- -- -- --
Occupancy and
communications...... 16,412 16,549 14,742 15,681
Professional and
subcontracted
services............ 11,573 14,238 9,796 15,131
Other................. 9,303 8,864 7,274 9,026
-------- -------- -------- --------
115,165 126,831 117,615 129,788
General & administrative
expenses.............. 14,194 14,532 13,178 14,724
Depreciation &
amortization.......... 3,996 3,428 4,907 4,610
-------- -------- -------- --------
133,355 144,791 135,700 149,122
-------- -------- -------- --------
Income (loss) from
operations............ 2,218 2,153 10,623 3,289
Other:
Interest income....... 127 289 1,036 216
Interest expense...... (473) (452) (390) (698)
Income (loss) from
affiliates............ 583 916 988 1,155
-------- -------- -------- --------
Income (loss) before
income taxes and
minority interest..... 2,455 2,906 12,257 3,962
Income taxes............ 1,530 1,001 5,919 1,916
-------- -------- -------- --------
Income (loss) before
minority interest..... 925 1,905 6,338 2,046
Minority interest....... 54 (186) 18 158
-------- -------- -------- --------
Income (loss) from
continuing
operations............ 979 1,719 6,356 2,204
Discontinued operations,
net................... -- -- -- --
-------- -------- -------- --------
Net income (loss)....... $ 979 $ 1,719 $ 6,356 $ 2,204
======== ======== ======== ========
Earnings (loss) per
share, continuing
operations, basic and
fully diluted......... $ 0.07 $ 0.11 $ 0.41 $ 0.15
Earnings (loss) per
share, basic and fully
diluted............... $ 0.07 $ 0.11 $ 0.41 $ 0.15
</TABLE>
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<PAGE>
YEAR 2000 ISSUE
We have substantially completed a program to address the Year 2000 issue as
it affects our business and we believe that the Year 2000 issue is not likely to
have a material adverse effect on our business, results of operations, or
financial condition. Nevertheless, since all the effects of the Year 2000 issue
are not unpredictable, we do not expect that our Year 2000 compliance program
will eliminate all risk to us associated with the Year 2000 issue.
We believe that the most significant risk facing us in connection with the
Year 2000 issue relates to software provided by us for use by, or on behalf of,
our clients. This software has been provided principally by the HR Technologies
Group, including benefit administration software and call center services, and
the retirement practice, principally spreadsheet-based benefit calculators. The
risks presented include the possibility of errors or contractual liability
caused by non-compliant software that is not identified or corrected and the
costs of replacing or repairing client systems. Testing and remediation have
been completed on approximately 80% of such systems. Virtually all of the
systems not yet repaired are used to support open enrollment in benefits plans
and any required Year 2000 remediation will be performed as a part of
modifications to such systems before they are next used.
Our cost to address Year 2000 compliance issues exceeded $4.0 million for
fiscal year 1999. Our principal expenditures were for repair and testing of
internal and client software, costs associated with managing and administering
our Year 2000 compliance program and costs of outside consultants. We expect
that our costs for Year 2000 compliance will be lower in fiscal year 2000. Funds
for costs associated with our Year 2000 compliance efforts will come from
operating cash flows for all areas of our operations and will be expensed as
incurred.
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<PAGE>
BUSINESS
INTRODUCTION
Founded in 1946, Watson Wyatt & Company is a global human capital consulting
firm. We help our clients enhance business performance by improving their
ability to attract, retain and motivate qualified employees. As leading
economies worldwide become more services oriented, human capital has become
increasingly important to companies and organizations. The heightened
competition for skilled employees, unprecedented changes in workforce
demographics and rising employee-related costs have increased the importance of
effective human capital management. We help our clients address these issues by
combining our expertise in human capital management with web-based technologies
in order to improve the design and implementation of various human resources, or
HR, programs, including compensation, retirement and healthcare plans.
The Internet is dramatically accelerating the transition of human capital
management to a more strategic role within organizations. Through the use of
web-based technologies, we help our clients transform the way they implement and
deliver HR programs and improve communications with their employees. We help our
clients develop electronic networks that provide employees and managers with
greater access to their HR programs, allowing them to obtain HR-related
information and perform HR-related functions 24 hours a day, 7 days a week. We
refer to this web-based delivery of HR information and programs as eHR.-TM-
The rapid expansion of our eHR-TM- services is a natural outgrowth of our
longstanding leadership in employee benefits and human capital consulting. We
design, develop and implement HR strategies and programs through the following
three closely interrelated practice areas:
BENEFITS CONSULTING GROUP
- Retirement plans, including pension and 401(k) plans
- Healthcare, disability and other group benefits plans
- Actuarial services
- Investment consulting services to pension plans
HR TECHNOLOGIES GROUP
- eHR-TM-: our web-based delivery of HR information and programs
- Employee self-service applications
- HR call centers
- Benefit administration systems and retirement planning tools
HUMAN CAPITAL GROUP
- Strategies to align workforces with business objectives
- Strategies for attracting, retaining and motivating employees
- Organizational effectiveness services
- Compensation plans, including executive compensation and stock option
programs
Our clients include many of the world's largest corporations as well as
emerging growth companies, public institutions and non-profit organizations. We
consult to General Electric Company, General Motors, IBM and Lockheed Martin
Corporation. Many of our client relationships have existed over several decades.
We believe that our extensive history, global presence, dedication to
long-term client relationships and recognized reputation for quality provide us
with significant competitive advantages. We focus on delivering value-added
consulting services that help our clients anticipate, identify and capitalize on
emerging opportunities in human capital management. We implement this strategy
through over 3,800 associates in 59 offices located in 18 countries. We
generated approximately $580 million in revenues during the twelve months ended
December 31, 1999, with net income of $11.3 million during this same period.
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<PAGE>
CORPORATE INFORMATION
Watson Wyatt & Company was incorporated in Delaware on February 17, 1958.
Including predecessors, we have been in business since 1946. We conducted our
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. Watson Wyatt & Company Holdings was incorporated in Delaware on
January 7, 2000.
Our web site is at http://www.watsonwyatt.com. The information contained on
our web site is not incorporated in this prospectus.
WATSON WYATT WORLDWIDE ALLIANCE
Recognizing our clients' need for a global organization to service their
needs, we established operations throughout Europe in the late 1970s 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 with R. Watson & Sons (now Watson Wyatt
Partners), a leading 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 85 offices in 31
countries and employs over 5,500 employees. Watson Wyatt & Company operates 59
offices in 18 countries in North America, Latin America and Asia-Pacific. Watson
Wyatt Partners operates 12 offices in the United Kingdom, Ireland, Africa and
the Caribbean. 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 us and 75% owned by Watson
Wyatt Partners.
To establish the Watson Wyatt Worldwide global alliance, we transferred our
United Kingdom operations to Watson Wyatt Partners in return for a 10% interest
in a defined distribution pool of the partnership. In addition, Watson Wyatt
Partners purchased 300,000 shares or approximately 2% of our common stock. The
alliance agreements contain buy/sell provisions that provide a mechanism to
maintain Watson Wyatt Partners' ownership of us at a level of between 300,000
shares and 500,000 shares. We also consolidated our individual European
operations into Watson Wyatt Holdings (Europe) Limited. Under the alliance
agreements, we generally will not operate in the United Kingdom, Ireland, Africa
or the Caribbean and Watson Wyatt Partners generally will not operate in North
America, Latin America or Asia-Pacific.
HUMAN RESOURCES CONSULTING INDUSTRY
OVERVIEW
The growing demand for employee benefits and human capital consulting
services is directly related to the size, complexity and rapid changes
associated with human resources programs. In the U.S. alone, companies spend
over $5 trillion annually on the direct costs of human capital such as
compensation and benefits, according to the U.S. Department of Commerce, Bureau
of Economic Analysis. In 1998, U.S. employers contributed over $120 billion to
pension and profit sharing plans, and the assets of U.S. retirement plans
exceeded $8 trillion.
Employers, regardless of geography or industry, are facing unprecedented
challenges involving the management of their people. Changing technology,
critical skill shortages, and an aging population in many developed countries
have increased competition for talented employees. At the same time, employees'
expectations relating to compensation, benefits and other HR services are
growing. Employers must address these challenges effectively in order to remain
competitive.
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<PAGE>
The industry in which we compete directly is comprised of four predominant
HR consulting firms, based on revenues: Watson Wyatt Worldwide, William M.
Mercer, Towers Perrin and Hewitt Associates. In addition to these firms, the
industry includes smaller benefits and compensation firms and the HR consulting
divisions of diversified professional service firms, such as the big five
accounting firms, Andersen Consulting, EDS, and Booz, Allen & Hamilton. The
global HR consulting industry is highly fragmented. There are approximately 950
firms providing HR-related consulting services, with the four major HR
consulting firms accounting for approximately 40% of total industry revenue.
INDUSTRY TRENDS
Because of our long history and reputation, as well as our experienced
consulting professionals and the services we provide in the field of human
capital consulting, we believe that we are in a position to capitalize on a
number of favorable trends that will contribute to the growth of the HR
consulting industry, including:
GROWING STRATEGIC IMPORTANCE OF HUMAN CAPITAL
In today's knowledge-based economy, businesses are increasingly recognizing
that the effective management of human capital contributes to increased
shareholder value. As a result, companies are increasingly looking to HR
consulting firms to help them align their human capital programs with their
business strategies.
TECHNOLOGY REVOLUTION IN HR PROGRAMS
The Internet, corporate intranets and other e-business tools enable
companies to deliver HR information and services to employees more efficiently
and effectively than ever before. Many companies are moving to what we call an
eHR-TM- model that uses technology to make HR processes more flexible and
employee-friendly, such as online benefits enrollment. Companies increasingly
are looking to firms with expertise in human capital and information technology
to transform their HR processes.
CHANGING WORKFORCE DEMOGRAPHICS
As human capital becomes more important to business success, companies in
many developed countries today are faced with a critical shortage of talented
employees and an unprecedented aging of the workforce. These trends, along with
the changing mobility and needs of workers, are prompting companies to engage
experienced human capital consulting firms to redesign employee compensation and
benefits plans and to fundamentally rethink their workforce strategies so that
they can effectively attract and retain employees.
GROWING IMPORTANCE OF EMPLOYER-SPONSORED BENEFITS PROGRAMS
Assets in retirement plans are growing rapidly, and the need for effective
management of these plans--in terms of structuring benefits, managing
liabilities and maximizing the plans' value in attracting and retaining
employees--has never been greater. The combined effect of limited retirement
savings of baby boom employees, concerns regarding the continuing viability of
government-sponsored retirement and healthcare programs, and rising healthcare
costs increases the importance of benefits programs to both employers and
employees.
33
<PAGE>
RECORD LEVEL OF MERGERS AND ACQUISITIONS
Mergers and acquisitions throughout the world are occurring at unprecedented
rates, prompting the need to combine corporate cultures and human resources
programs quickly and effectively. Mergers and acquisitions are becoming
increasingly complex and cross-border. Our research indicates that when business
combinations fail, it is often due to inadequate integration of human resources.
As a result, companies are expected to increasingly use human capital
consultants to assist them with pre-merger planning and post-merger integration.
CONTINUING GLOBALIZATION OF ECONOMIES
As business becomes more global, corporations are seeking human capital
consultants with global resources and local expertise on benefits and human
resources issues. These companies are looking to HR consulting firms to help
them develop and implement global benefits and HR policies and establish
consistency in worldwide reporting and quality control.
COMPLEX AND CHANGING REGULATORY ENVIRONMENT
Employee benefits programs in most industrialized countries are subject to
complex government regulations. These regulations change as governments address
social and economic policy issues and as private employers implement changes in
plan designs. Employers throughout the world are increasingly seeking human
capital consultants to assist them with plan design, compliance and regulatory
advice.
COMPETITIVE STRENGTHS
Unlike several of our direct competitors that also have large benefits
administration operations or unrelated consulting practice lines, we focus
exclusively on providing human capital consulting services. We believe that our
competitive strengths include:
REPUTATION FOR QUALITY
We are recognized as one of the world's highest quality consulting firms.
For example, in a recent management consulting survey conducted by THE WALL
STREET JOURNAL of its subscribers and published in January 1999, we placed first
in the consulting industry in terms of delivering value to clients and first
among our human resources consulting peers for overall quality of reputation.
LONG-STANDING RELATIONSHIPS WITH BLUE-CHIP CLIENTS
We have built long-term relationships with many of our clients. In many
cases these relationships have existed continuously for several decades. We
provide the actuarial consulting services for the three largest corporate
defined benefits pension plans in the United States.
TECHNOLOGY-BASED SERVICES
Using our eHR-TM- approach, we design systems for clients that enable them
to offer cost-effective delivery of HR services to employees, such as web-based
self-service and call centers. Over the past decade, we have invested
extensively in proprietary technology to help solve our clients' human resources
needs.
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<PAGE>
GLOBAL REACH AND SCALE
We believe that our global presence through the Watson Wyatt Worldwide
alliance is among the most extensive in the human capital consulting business,
spanning 85 offices in 31 countries. We have a strong presence in major markets
across the United States, and the Watson Wyatt Worldwide alliance provides us
with significant depth in Europe. We have operated in Asia since 1979 and
currently have 15 offices in Asia-Pacific. We were named HR Consultancy of the
Year in Hong Kong for 1998 and 1999 by China Staff magazine. We were the first
international human capital consulting firm to open a wholly-owned operation in
China, and we are building scale in other markets in order to meet the growing
demands of our local and multinational clients.
EXTENSIVE AND WIDELY-CITED RESEARCH
Our research is extensive and widely-cited and is a core part of our brand
identity, account penetration strategy and consulting process. Our research on
changing demographics in major economies is helping companies prepare for the
impact of these changes on costs, productivity and the ability to attract and
retain talented workers. We operate research and information centers in Bethesda
and Toronto that are staffed with more than 80 economists, analysts and
attorneys who conduct research and inform clients on legislative and regulatory
developments. We also produce proprietary studies and groundbreaking white
papers on topics such as executive pay, healthcare quality and costs, integrated
disability management, employee communications and workplace attitudes.
HIGHLY EDUCATED AND ACCREDITED CONSULTING STAFF
Watson Wyatt consultants are trusted advisors and experts in their fields.
Our consultants include over 400 accredited actuaries, as well as professionals
with M.B.A.s, Ph.D.s and law degrees. Our consultants frequently testify before
government and regulatory agencies, are regularly quoted in the business press
and have authored many HR-related books. Recent books by our consultants include
THE REAL DEAL: THE HISTORY AND FUTURE OF SOCIAL SECURITY, HEALTH OF NATIONS: AN
INTERNATIONAL PERSPECTIVE ON U.S. HEALTH CARE REFORM, THE COMPLETE GUIDE TO
MERGERS & ACQUISITIONS, HEALTHCARE.COM: RX FOR REFORM, CEO PAY AND SHAREHOLDER
VALUE, and FUNDAMENTALS OF PRIVATE PENSIONS.
GROWTH STRATEGY
In an environment that is characterized by changing workforce demographics,
rapid advances in technology and growing recognition of the importance of human
capital, our strategy is to expand our competitive position by providing
comprehensive, value-added human capital consulting services that help our
clients solve their human capital challenges. We plan to pursue growth by:
EXPANDING OUR RELATIONSHIPS WITH EXISTING CLIENTS
We believe there is significant opportunity to increase our share of our
clients' consulting expenditures by leveraging our recurring engagements. We
utilize dedicated account managers to identify and refer additional consulting
opportunities, and we believe that our ability to provide integrated services
will enable us to secure additional business from our existing client base.
CREATING EHR-TM- SYSTEMS
Our clients are increasingly demanding integrated, flexible approaches to
provide HR benefits information and access to their employees 24 hours a day,
7 days a week. By combining our human capital and technical expertise, we help
clients implement web-based systems in order to transform the way they deliver
HR services to managers and employees. Our eHR-TM- approach connects multiple
35
<PAGE>
software applications and databases around web technologies. Through
user-friendly interfaces that run on company intranets, employees can access
their HR information directly and perform tasks ranging from enrolling in
benefits plans, to modeling 401(k) investments, to participating in online
career training.
LEVERAGING OUR GLOBAL CAPABILITIES
Multinational corporations increasingly require a total services capability,
regardless of where they operate. By drawing upon our global resources and local
execution capabilities, we are well positioned to serve our clients' growing
needs for integrated human resources services throughout the world.
DEVELOPING NEW CLIENT RELATIONSHIPS
Our recognized brand name and global reputation for quality service and
extensive and widely-cited research enable us to promote our consulting services
effectively to new clients. We also believe that there are significant
opportunities to develop new relationships by proposing innovative, high-value
projects, such as our eHR-TM- systems, to corporations and other major
employers.
PURSUING STRATEGIC ACQUISITIONS
We will continue to explore strategic opportunities to expand our human
capital consulting capabilities and to expand geographically. Our recent
acquisition of selected units of KPMG's benefits consulting business provided us
with additional senior consultants in New York, Boston, Dallas and Cleveland, as
well as additional Fortune 500 clients.
PROMOTING OUR ENTREPRENEURIAL CULTURE
We seek associates who strive to be innovators and to add value to their
clients' businesses through effective human capital programs and technologies.
Our training and compensation programs are aimed toward developing in our
consultants the specialized skills to advance our clients' interests.
CONSULTING SERVICES
We focus our consulting services into three practice groups: Benefits
Consulting, HR Technologies and Human Capital.
BENEFITS CONSULTING GROUP
Our Benefits Consulting Group is our largest and most established practice,
with a franchise dating to 1946. This group consists of over 1,600 consultants
and works with clients to create cost-effective benefits programs that help
attract, retain and motivate a talented workforce. We strive to provide tailored
benefits programs for our clients, and we base our recommendations on extensive
research. Our Benefits Consulting Group, which consists of Retirement
Consulting, Investment Consulting, and Group & Health Care Consulting, accounted
for approximately 66% of our North American consulting revenue in fiscal year
1999.
RETIREMENT CONSULTING
We believe we are one of the world's most respected advisers on retirement
plans, and we provide actuarial and consulting services for large defined
benefit and defined contribution retirement plans. Our consultants work with
clients to provide realistic assessments of the impact that the change in
workforce demographics will have on their retirement plans, corporate cash flow
requirements, and retiree benefits adequacy and security.
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In North America, and increasingly throughout much of the developed world,
retirement security is provided through funded pension plans, most of which are
either defined benefit or defined contribution plans. A typical defined benefit
plan is characterized by employer contributions and a specified future benefit
to the employee. These plans typically involve large asset pools, complex
calculations to determine employer costs and funding requirements and
sophisticated analysis to match liabilities and assets over long periods of
time. These plans are commonly referred to as pension plans. A typical defined
contribution retirement plan is characterized by employee contributions,
possible employer matching contributions and an unspecified future benefit paid
to the employee which will ultimately be based on investment returns. In the
United States, the most common example of a defined contribution plan is a
401(k) plan.
Our target market for defined benefit plans consists of plans with more than
1,000 participants. Our consultants provide actuarial services to many of the
world's largest retirement plans, including the three largest
corporate-sponsored defined benefit plans in the United States. Our defined
benefit services include:
<TABLE>
<S> <C>
- STRATEGIC PLAN DESIGN - FINANCIAL REPORTING
- ACTUARIAL SERVICES - VALUATION AND DIAGNOSTIC SOFTWARE AND SYSTEMS
- FUNDING RECOMMENDATIONS - ASSISTANCE WITH MERGING, DIVESTING AND ACQUIRING
PLANS
- MULTINATIONAL ASSET POOLING CONSULTING
</TABLE>
We also help companies design and implement defined contribution plans,
especially 401(k) plans in the United States. We assist clients with the
selection of asset managers and administrators and in communicating with their
employees concerning enrollment, plan provisions and investment alternatives.
In both the defined benefit and defined contribution areas, we emphasize
research-based consulting to design retirement programs that align our clients'
workforces with their business strategies. Examples of our products and services
include:
- PENSION EQUITY PLAN--an alternative retirement plan that combines the lump
sum portability of defined contribution and cash balance plans desired by
younger workers with a benefits formula based on the final few years of
earnings, providing benefits security typical to a traditional defined
benefit plan that older and long-service employees seek;
- FLEX PENSION PLUS-TM---a tax-effective Canadian supplemental retirement
plan for attracting and retaining key employees;
- PREPARE!-TM---a web-based tool that enables employees to model different
savings and retirement income scenarios;
- WATSON WYATT 401(K) VALUE INDEX-TM---a tool that looks beyond cost to
identify the total value that employers and their employees derive from
their 401(k) plans;
- PHASED RETIREMENT PROGRAMS--a combination of programs that help clients
attract and retain older workers by enabling them to balance work/life
needs through a gradual transition to retirement;
- CLIENTSITE-TM---a relationship management tool that allows web-based
communication between our clients and associates that can be updated
globally and instantaneously; and
- ELECTRONIC ACTUARY/ELECTRA-TM---a tool that performs immediate "what if"
scenarios so that different plan designs can be modeled and priced
interactively with clients.
To support our retirement consulting services, we invest heavily in
state-of-the-art technology, software, and systems to ensure seamless
consistency and efficiency of service delivery in all our offices
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worldwide. We also maintain extensive proprietary databases, COMPARISON-TM- and
BenTRACK,-TM- that enable our clients to track and benchmark benefits plan
provisions in the United States and throughout the world, respectively.
INVESTMENT CONSULTING
Together with our retirement consulting services, we offer investment
consulting services that help private and public sector clients throughout the
world maximize the return on their retirement plan assets, develop governance
policies and strategies, and design investment structures to successfully manage
financial liabilities within the context of their overall business objectives.
Our services include:
- asset/liability modeling and asset allocation studies;
- governance and investment policy development;
- investment structure analysis;
- investment manager selection and evaluation; and
- performance evaluation and monitoring.
GROUP AND HEALTH CARE CONSULTING
Health care premiums paid by US. employers are rising annually at
approximately 10%. In this environment, we help our clients with the design,
financing, administration and communication of medical, disability and other
group benefits plans. Clients seek our services to assist them in an environment
that is characterized by escalating costs, employee dissatisfaction with health
care programs and multiple vendor relationships. Our primary objective is to
establish a link between each element of an employers' benefits programs and its
desired cost, employee satisfaction and productivity goals. Our services
include:
- plan design;
- actuarial services;
- vendor management services;
- on- and off-shore funding analysis;
- benefits pricing;
- assistance with plan changes relating to mergers, acquisitions and
divestitures; and
- integrated disability management.
Our approach to group benefits consulting is research-based and makes use of
sophisticated consulting tools such as:
- PREVIEW-TM---a medical benefits modeling system which accurately and
quickly models medical claims under alternative plan designs, covered
populations and managed care delivery systems;
- HEALTH PLAN VALUE LIBRARY-TM---software tools and a database of
information on the cost, quality and accessibility of health plans that
are used to screen and evaluate health plans; and
- AUTO-RFP-TM---a powerful software application that organizes and eases the
administrative process of gathering and evaluating the responses from
health care vendors to requests for proposals.
HR TECHNOLOGIES GROUP
Our HR Technologies Group helps clients select and implement technologies
that enhance the delivery of benefits and related information to employees. Our
HR Technologies Group consists of approximately 350 consultants and represented
approximately 14% of our North American consulting revenue in fiscal year 1999.
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As human resources programs become more complex and important for recruiting
and retaining employees, organizations are seeking flexible, adaptable and
cost-effective ways to provide benefits information to their employees. We are
well-positioned to help clients address these challenges because of our eHR-TM-
approach, which integrates HR-related data, computer systems and transactions in
a single employee accessible network. We help organizations that have adopted
Internet applications for external business strategies to employ similar
advanced technologies for internal applications such as HR. Our services include
assisting clients to implement employee self-service applications, retirement
plan administration systems, benefits enrollment, training programs, time and
attendance systems and applicant tracking systems.
Using our proprietary consulting methodology of "Discover, Invent and
Deliver," our consultants work with clients to evaluate existing HR
infrastructure and business strategy, identify the best sources of people,
process and technology, and design and implement tailored approaches. Our
consulting work frequently involves the development of web-based employee
self-service applications, the implementation of interactive call centers and
the integration of existing legacy systems. We also offer hosting services for
companies who prefer to access applications from our servers rather than host on
their own intranets. In addition, we deliver state-of-the-art applications in
health and welfare enrollment, pension administration, compensation planning and
retirement planning.
HUMAN CAPITAL GROUP
Our Human Capital Group, which consists of over 300 consultants, helps
clients achieve competitive advantage by aligning their workforce with their
business strategy. This includes helping clients develop and implement
strategies for attracting, retaining and motivating their employees to maximize
the return on their investment in human capital. Our Human Capital Group
represented approximately 9% of our North American consulting revenue in fiscal
year 1999. Our Human Capital Group focuses in three principal areas:
STRATEGIC REWARDS
We help align an organization's rewards--including compensation, stock
programs, incentives, recognition programs and flexible work arrangements--with
its business strategies, cultural values, work design and human resources
strategy. We work together with our Benefits Consulting Group to develop optimal
total compensation programs for our clients.
ORGANIZATION EFFECTIVENESS
We help clients build high-performance organizations by working with them to
clarify and implement business strategy, recognizing the impact of employee
attitudes and commitment, as well as effective team and leadership development,
on business success. We provide a wide array of organization diagnostic
services--employee and customer surveys, human capital audits and cultural
assessments--as well as leadership development services that include assessment,
coaching, workshops and team building. We also provide process management
services to help organizations achieve their desired vision, strategy and
culture.
EXECUTIVE COMPENSATION
We counsel executives and boards of directors on executive pay programs,
including cash compensation, stock options and stock purchase plans, and on ways
to align pay-for-performance plans throughout the organization in order to
increase shareholder value.
We have developed the WATSON WYATT HUMAN CAPITAL INDEX,-TM- a proprietary
tool for demonstrating the relationship between the effectiveness of an
organization's human capital practices and the creation of superior shareholder
returns. In support of our human capital consulting we also maintain databases
of employee attitudes for client organization comparison. Our
WorkUSA-Registered Trademark-/WorkCanada-TM- database is
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regarded as the most up-to-date survey in existence on the attitudes of North
American workers. It includes the opinions of 10,000 employees surveyed
independently, reflecting a large cross-section of jobs and industry types. Our
clients compare their own employee survey results against these norms to
identify workplace perceptions and satisfaction and commitment levels. Through
our People Management Resources division, we also provide an online best
practices database of more than 300 in-depth case studies covering key people
practices, such as culture development, staffing and selection, leadership
development, and employee communication.
OTHER CONSULTING SERVICES
While we focus our consulting services in the three areas described above,
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:
MERGER & ACQUISITION SERVICES
Recognizing that many business combinations fail because of "people
problems," we help clients achieve better transactional success by assisting
with faster integration, cost containment, increased customer focus and greater
productivity. We assemble multi-disciplinary teams to provide key services that
include due diligence of pension and benefits plans, company cultures and human
resources strategies; integration of human resources processes and practices;
and enterprise-wide project management.
EMPLOYEE COMMUNICATIONS CONSULTING
We also have one of the most respected communications consulting groups in
the human resources consulting industry--a team that has won numerous awards for
innovative and effective communications. Our consultants combine strong creative
skills with technical excellence on human resources issues and solid research on
employee attitudes and communication effectiveness. We conduct communications
audits, research and focus groups, and provide communications planning and
implementation. In addition, our consultants assist employers in complying with
disclosure requirements.
WATSON WYATT DATA SERVICES
Watson Wyatt Data Services provides a comprehensive array of global
compensation, benefits and employment practices information that is often
studied and cited by many of our clients and competitors. In the United States,
we publish and market an extensive library of reports on human resources issues,
and more than 5,000 organizations participate in one or more of our annual
surveys. Our databases contain compensation information for more than one
million employees in virtually every industry sector and major metropolitan
area. Outside of the United States, our worldwide alliance offers more than 70
remuneration, benefits and employment practice references guides, covering more
than 50 countries and 6 continents. In addition to our annual survey references,
we also offer many reference works intended to assist practitioners in creating
or maintaining programs in a variety of subject areas such as variable pay,
performance management, and personnel policies.
EXAMPLES OF REPRESENTATIVE CLIENT ENGAGEMENTS
Some recent examples of our work with clients are described below:
EHR-TM- RE-ENGINEERING
- ENGAGEMENT: Assist a global oil field services company on a five-year,
multi-phased approach to transform a traditional personnel department into
a comprehensive eHR-TM- business unit.
- CHALLENGE: Our client's personnel function in North America was hindered
by decentralized administration practices, different benefits and payroll
systems for each product line and
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location, manual procedures for processing benefits and services, and
limited use of technology in delivering services to employees. As a
result, personnel managers and employees expended significant time and
effort contacting benefits managers and obtaining benefits data,
retirement and loan projections, and performing benefits related
transactions.
- APPROACH: We formulated a strategy to develop web-based, employee
self-service systems to deliver HR services, transactions, and
communications via desktop computers and kiosks.
- RESULTS: Our client successfully migrated 98% of its U.S. employees to
web-based benefits enrollment. Today, 16,000 U.S. employees have
self-service access to real-time data, records, and transactions on their
profit sharing plan, pension and 401(k) plans. Through this system
employees can access daily account balances, model loans, and estimate
retirement income. This system also provides for health & welfare
enrollment, administration, and plan documentation. Additional launches
are planned to expand the eHR-TM- approach to regions outside North
America.
MERGER & ACQUISITION INTEGRATION AND DUE DILIGENCE
- ENGAGEMENT: Assist a global industrial company to complete cultural,
benefits and human capital due diligence on several target companies in
Asia-Pacific, including an evaluation of the future financial obligations
of the target's benefits plans, staff retention challenges, and ongoing
employee communications needs.
- CHALLENGE: Our client faced several key issues in evaluating potential
acquisitions, including staff retention, pension liabilities arising from
unfunded pension plans, transformation of the organizational cultures, and
the lack of uniform HR processes and systems.
- APPROACH: We conducted a post-transaction audit and review of the
competitiveness of the target companies' compensation and benefits
programs. We then identified position requirements, matched employees
having the desired backgrounds, defined job classifications and developed
salary structures that were consistent with our client's existing system.
We also developed comprehensive communication plans and materials and
designed cross-cultural training for expatriates.
- RESULTS: In addition to assuring a positive reception by the target
companies' employees, we limited potential liabilities, installed formal
HR programs and systems, and maintained compensation and benefits levels
during the ongoing review.
INTEGRATED DISABILITY MANAGEMENT
- ENGAGEMENT: Assist a computer hardware manufacturer to design and
implement a more flexible and comprehensive disability management program.
- CHALLENGE: Our client regularly had difficulty fulfilling customers orders
at year end. Our client employed a "just-in-time" inventory system, and
required a full staff to fill its orders, but seemed to suffer from
chronic shortages of product supply. However, an apparent production issue
was determined to be a benefits design issue. The design and reporting
system of the company's paid time off and disability programs were
encouraging employees to take time off at the end of the year.
- APPROACH: After benchmarking other firms in our client's industry, we
devised a more competitive plan design, established a tracking system for
data collection and identified best practices for better connecting all
components of the paid time-off program. We also installed a new data
collection system with the ability to track workplace absences for faster
and more efficient resolution.
- RESULTS: The first year of implementation resulted in total savings of
$800,000. A year later, our client acquired two manufacturing companies.
With the best practice processes already in place,
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the merging of the three programs went smoothly, and as a result, our
client reported savings of approximately $11 million in direct and
indirect costs.
RETIREMENT PLAN ADMINISTRATION
- ENGAGEMENT: Assist a large high-tech company whose pension administration
outsourcing provider was exiting the business.
- CHALLENGE: Our client needed to assess the options of entering into
another outsourcing agreement or moving the pension administration
function to their North American HR service center. After evaluating
alternatives, our client selected a blended approach, expanding their own
internal call center capabilities through our expertise in pension
technology.
- APPROACH: We designed and built a retirement benefits administration
system that is an integral part of the client's North American HR service
center. The system is located at our site and accessed by the
organization's service center representatives. Employees can also access
the system for numerous self-service functions, including retirement plan
modeling.
- RESULTS: The new technology-based delivery model improved the productivity
of the benefits administrative staff. The perception of our client's HR
department's role in the organization was also enhanced. The new system
rollout was highly successful, achieving a customer satisfaction rating of
well over 90%.
SALES AND MARKETING
Our growth strategy starts with ensuring the satisfaction of current clients
through our Account Management program. We have approximately 125 account
managers who focus on the effective delivery of services to clients and on
expanding our relationships across service lines, geographic boundaries and
divisions within client companies. A key element of this program is an approach
we call CLIENTFIRST.-TM- Using proprietary processes and tools, ranging from
interview guides to satisfaction checklists to planning templates, we work with
clients to define their needs and expectations before an engagement begins and
then continually measure our performance according to the agreed upon standards.
We also pursue new clients using cross-disciplinary teams of consultants as
well as dedicated business developers to initiate relationships with carefully
selected companies. Our client expansion and new client acquisition efforts are
supported by market research, comprehensive sales training programs, and
extensive marketing databases.
Our sales efforts are also supported by a full array of marketing programs
designed to raise awareness of the Watson Wyatt Worldwide brand and our
reputation within our target markets. These programs promote our thought
leadership on key human resources issues and establish us as a preferred human
capital consulting firm to many of the world's largest companies.
CLIENTS
We work with major corporations, emerging growth companies, government
agencies and not-for-profit institutions in North America, Latin America and
Asia-Pacific across a wide variety of industries. Our client base is broad and
geographically diverse. In fiscal year 1999, our ten largest clients accounted
for approximately 12% of our consolidated revenues and no individual client
represented more than 3% of our consolidated revenues. Representative clients
include:
Asea Brown Boveri (ABB)
Canada Post
General Electric Company
General Motors
IBM
ICI Americas
Ingersoll-Rand
Lockheed Martin Corporation
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COMPETITION
The human capital consulting business is highly competitive. We believe that
there are several barriers to entry, such as the need to assemble specialized
intellectual capital to provide expertise on a global scale, and that we have
developed significant competitive advantages in providing human resources
consulting services. However, we face intense competition from several
difference sources.
Our current and anticipated competitors include:
- major human resources consulting firms, such as William M. Mercer and
Towers Perrin and the administration/consulting firm Hewitt Associates;
- smaller benefits and compensation consulting firms, such as Buck
Consultants, The Segal Company and Hay Group;
- the human resources consulting practices of public accounting and
consulting firms, such as PricewaterhouseCoopers and Booz, Allen &
Hamilton;
- information technology consulting firms, such as Andersen Consulting and
Internet/intranet development firms; and
- boutique consulting firms comprised primarily of professionals formerly
associated with the firms mentioned above.
Watson Wyatt is ranked fourth or fifth among the top HR consulting
companies, based on revenues, according to surveys of HR consulting companies
from the 1998 Kennedy Information Research Group report, June 1999 Consultants
News and December 1999 Business Insurance rankings.
The market for our services is subject to change as a result of regulatory,
legislative, competitive and technological developments and to increased
competition from established and new competitors. We believe that the primary
determinants of selecting a human resources consulting firm include reputation,
ability to provide measurable increases to shareholder value, global scale,
service quality, and the ability to tailor services to a clients' unique needs.
We believe we compete favorably with respect to these factors.
EMPLOYEES
Watson Wyatt & Company employs approximately 3,800 associates. None of our
associates is subject to collective bargaining agreements. We believe relations
with associates are good.
FACILITIES
Our principal executive offices are located at 6707 Democracy Boulevard,
Suite 800, Bethesda, Maryland 20817. We plan to move our principal executive
offices to 1717 H Street NW, Washington DC later this year.
We operate in 59 offices in principal markets throughout the world.
Operations are carried out in leased offices under operating leases that
normally do not exceed 10 years in length. We do not anticipate difficulty in
meeting our space needs at lease expiration or if additional space is required
earlier. We also evaluate office relocation on an ongoing basis to meet changing
needs in our markets while minimizing our occupancy expense.
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 four matters summarized below involve the most
significant pending or potential claims against us. We believe, 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
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condition, but claims which are possible in our business could be material to
our financial results for a particular period, depending, in part, upon the
operating results for that period.
REGINA, SASKATCHEWAN POLICE. The Administrative Board of the Regina Police
Superannuation and Benefit Plan filed an action against us and three individual
employees in 1994 alleging errors in valuation methods, assumptions and
calculations for the plan during the course of work provided for the Plan since
the 1970s. Discovery is concluded and the exchange of expert reports is
anticipated during 2000. The Administrative Board seeks approximately
$26 million in damages, plus interest.
CITY OF MILWAUKEE, WISCONSIN. The City of Milwaukee Employees Retirement
Board notified us of a potential claim involving an erroneously calculated cost
of living adjustment that was based on a formula provided by the staff of the
Employees Retirement Board. In response to the notice of claim, we filed a
declaratory judgment action against the City of Milwaukee and the Employees
Retirement Board in the U.S. District Court in Chicago. By mutual consent, the
parties agreed to dismiss the claim with leave to reinstate, pending settlement
discussions among other parties.
CONNECTICUT CARPENTERS PENSION FUND. The Connecticut Carpenters Pension
Fund has filed an action against us claiming errors in valuations from 1991
through 1998 that allegedly resulted in understated liabilities. The plaintiffs
are seeking damages of approximately $65 million, including punitive damages.
The case is in discovery.
CLAIM AGAINST WATSON WYATT PARTNERS. A law firm representing a client based
in Europe has notified Watson Wyatt Partners, our European alliance partner, of
a claim involving alleged errors in the design of a global employee stock option
plan which may include work performed by present or former subsidiaries of
Watson Wyatt & Company. The parties are informally exchanging information
pursuant to English legal procedures.
We carry substantial professional liability insurance with a self-insured
retention of $1 million per occurrence which provides coverage for professional
liability claims. We also carry employment practices liability insurance.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of our
directors and executive officers as of the date of this prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
John J. Haley........................ 50 President, Chief Executive Officer and Director
Walter W. Bardenwerper............... 49 Vice President, General Counsel and Secretary
Thomas W. Barratt.................... 57 Vice President, Regional Manager (U.S. Central) and
Director
Jorge V. Bou......................... 57 Vice President, Regional Manager (Latin America)
Paula A. DeLisle..................... 46 Vice President and Director
David B. Friend, M.D................. 43 Vice President, Regional Manager (U.S. East) and
Director
James A. Gargiulo.................... 40 Vice President, Human Resources
Ira T. Kay........................... 49 Vice President, N. America Practice Director -- Human
Capital Group and Director
Brian E. Kennedy..................... 56 Vice President, Regional Manager (Canada) and Director
Eric P. Lofgren...................... 49 Vice President, Global Director -- Benefits Consulting
Group and Director
David P. Marini...................... 43 Vice President, Global Director -- H.R. Technologies
Group
Carl D. Mautz........................ 52 Vice President, Chief Financial Officer
Gail E. McKee........................ 40 Vice President and Director
Kevin L. Meehan...................... 55 Vice President and Director
J.P. Orbeta.......................... 38 Vice President, Global Director -- Human Capital Group
Sylvester J. Schieber................ 53 Vice President, Director of Research and Information
John A. Steinbrunner................. 49 Vice President and Director
A. Grahame Stott..................... 45 Vice President, Regional Manager (Asia-Pacific) and
Director
Charles P. Wood, Jr.................. 55 Vice President, Regional Manager (U.S. West) and
Director
John J. Gabarro...................... 60 Director
Robert D. Masding.................... 56 Director
R. Michael McCullough................ 61 Director
Gilbert T. Ray....................... 56 Director
</TABLE>
JOHN J. HALEY has served as President and Chief Executive Officer since
January 1, 1999 and as a Director since 1992, and is a member of the Partnership
Board of Watson Wyatt Partners. Mr. Haley joined Watson Wyatt in 1977. Prior to
becoming President and Chief Executive Officer, he was the Global Director of
the Benefits Consulting Group. Mr. Haley is a Fellow of the Society of Actuaries
and is a co-author oF FUNDAMENTALS OF PRIVATE PENSIONS (University of
Pennsylvania Press). He has an A.B. in Mathematics from Rutgers College and
studied under a Fellowship at the Graduate School of Mathematics at Yale
University.
WALTER W. BARDENWERPER has served as Vice President and General Counsel
since joining Watson Wyatt in 1987 and has served as Secretary since 1992.
Mr. Bardenwerper was a Director of Watson Wyatt from 1992 to 1997. He serves as
chairman of the Global Quality Committee of Watson Wyatt Worldwide, and is
President and a director of Professional Consultants Insurance Company. He has a
B.A. in Economics from the University of Virginia and a J.D. from the University
of Virginia Law School.
THOMAS W. BARRATT has served as Vice President and Regional Manager (U.S.
Central) since 1997 and has served as a Director since 1998. Mr. Barratt
rejoined Watson Wyatt in 1994 after serving as the Managing Consultant of the
Detroit office of Towers Perrin, a competing human resources consulting firm,
from 1987 through 1993. He began his career with Watson Wyatt in 1976 and was a
consultant with the Company through 1986. He has a B.B.A. from Western Michigan
University and was graduated from Northwestern University's National Trust
School in 1966.
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JORGE V. BOU has served as Vice President since 1998 and Regional Manager
(Latin America) since 1994. Prior to joining Watson Wyatt in 1986, Mr. Bou was a
Vice President with the Martin E. Segal Company, an actuarial and benefits
consulting firm, and was previously with the American International Group, an
insurance organization. He has been providing consulting services to various
clients in Latin America since 1969. Mr. Bou is an Associate of the Society of
Actuaries. He has a B.S. in Mathematics from Georgia State University.
PAULA A. DELISLE has served as Vice President and as a Director since 1997.
Ms. DeLisle joined Watson Wyatt in 1982 and is the Managing Consultant of our
Hong Kong office. Ms. DeLisle is responsible for Watson Wyatt's China
operations, for the Asia-Pacific operations of Watson Wyatt Data Services, and
is a frequent speaker at international conferences on human resources issues in
the Asia-Pacific region. She is the Vice-Chairman of the American Chamber of
Commerce in Hong Kong and is the Hong Kong representative to the Pacific
Economic Cooperation Council's Human Resources Development Task Force. She has a
B.A. from Saint Mary's College and a Master's degree from Loyola University of
Chicago.
DAVID B. FRIEND, M.D. has served as Vice President and Regional Manager
(U.S. East) since 1997 and has served as a Director since 1997. He formerly was
the Practice Director of Watson Wyatt's Group and Health Care Practice. Prior to
joining Watson Wyatt in 1995, Dr. Friend served on the medical staff at Malden
Hospital in Malden, Massachusetts. Prior to attending medical school,
Dr. Friend was an Executive Vice President with High Voltage Engineering, a
specialty industrial manufacturing conglomerate. Dr. Friend is the author of
HEALTHCARE.COM: RX FOR REFORM (St. Lucie Press), and also serves on the Advisory
Board of the Schneider Institute for Health Policy at Brandeis University. He
has an A.B. in Economics from Brandeis University, an M.D. from the University
of Connecticut and an M.B.A. from The Wharton School of the University of
Pennsylvania.
JAMES A. GARGIULO has served as Vice President, Human Resources since 1999.
Mr. Gargiulo has been an Account Manager in the Eastern Region for the past two
years. Prior to joining Watson Wyatt in 1997, he was the Regional Director for
the Compensation practice at Aon Corporation, an insurance and consulting
organization, and has held various human resources positions for the investment
banking firm of Salomon Brothers, The Gap, retailer, and Banque Paribas.
Mr. Gargiulo has a B.A. in Business Administration from Bernard Baruch College
in New York.
IRA T. KAY has served as Vice President and North America Practice Director
of the Human Capital Group since 1998 and as a Director since 1996. Prior to
joining Watson Wyatt in 1993, Mr. Kay was a Managing Director and served on the
Partnership Management Committee of The Hay Group, a competing human resources
consulting firm, and prior to that, he was a Managing Director in the Human
Resources Department of the investment banking firm Kidder Peabody. Mr. Kay is
the author of CEO PAY AND SHAREHOLDER VALUE (St. Lucie Press). Mr. Kay has a
B.S. in Industrial and Labor Relations from Cornell University and a Ph.D. in
Economics from Wayne State University.
BRIAN E. KENNEDY has served as Vice President and Regional Manager (Canada)
since 1995 and as a Director since 1996. Prior to joining Watson Wyatt in 1995,
Mr. Kennedy spent 18 years with the Alexander Consulting Group, an insurance and
benefits consulting firm, most recently as Chairman and Chief Executive Officer
of Alexander Clay, their U.K. and European operations.
ERIC P. LOFGREN has served as Vice President, Global Director--Benefits
Consulting Group and as a Director since 1998. Prior to joining Watson Wyatt in
1989, Mr. Lofgren spent seven years with William M. Mercer, a competing human
resources consulting firm, and seven years at The Mutual of New York Insurance
Company. Mr. Lofgren is a recognized authority in the areas of retirement plan
design, the effects of demographics on benefit systems and asset liability
management. He is widely credited with developing the Pension Equity Plan (PEP),
one of the three primary families of defined benefit pension design.
Mr. Lofgren is a Fellow of the Society of Actuaries, and holds a B.A. in
Mathematics from New College in Sarasota, Florida and studied at the Graduate
School of Logic at the University of California at Berkeley.
46
<PAGE>
DAVID P. MARINI has served as Vice President since 1998 and Global
Director--HR Technologies Group since 1997. Prior to assuming his current
responsibilities, he led several of the firm's technology projects involving
reengineering administrative client services. Prior to joining Watson Wyatt in
1994, Mr. Marini spent 13 years at the insurance company CIGNA Corporation, most
recently as the President of the Iowa division of Trilog Inc., a wholly-owned
401(k) recordkeeping subsidiary, and he was previously a CPA with the accounting
firm Coopers & Lybrand. He has a B.S. in business administration from Western
New England College.
CARL D. MAUTZ has served as Vice President and Chief Financial Officer since
February 1999 and previously served as Controller. Prior to joining Watson Wyatt
in 1997, Mr. Mautz served as the Controller for Tactical Defense Systems, Loral
Corporation, which merged into defense contractor Lockheed Martin Corporation.
From 1990 to 1994, Mr. Mautz held operating and corporate finance positions at
the computer firm Unisys Corporation and from 1972 to 1984 was a CPA with the
accounting firm of KPMG Peat Marwick. Mr. Mautz has a B.S. and an M.A.S. in
accounting from the University of Illinois.
GAIL E. MCKEE has served as Vice President and as a Director since 1997.
Prior to joining Watson Wyatt in 1992, Ms. McKee was with the Walt Disney
Company, an entertainment conglomerate, where she served as the Manager of
International Compensation and Benefits from 1991 to 1992. From 1982 to 1990,
she was an Account Manager with Hewitt Associates, a competing human resources
consulting firm, in New York and Los Angeles. She has a B.A. from the University
of Washington.
KEVIN L. MEEHAN has served as Vice President since 1994 and as a Director
since 1999. Mr. Meehan joined Watson Wyatt in 1983, and has been instrumental in
developing our flexible benefits operations, our Human Resources Technologies
Group and our Account Management system. Mr. Meehan is a frequent speaker on
employee benefits tax and legal issues, and regularly testifies before the IRS,
the Department of Labor and Committees of Congress on employee benefit plan
issues. Mr. Meehan has a B.A. from the College of the Holy Cross and a J.D. from
St. John's University Law School.
J.P. ORBETA has served as Vice President since 1998 and as Global Practice
Leader--Human Capital Group since 1998. Prior to joining Watson Wyatt in
April 1986, Mr. Orbeta was a faculty member of the Mathematics Department and
director of Computer Education and Services at the Ateneo de Manila University.
Mr. Orbeta is a member and Certified Compensation Professional (CCP) of the
American Compensation Association and is the first practitioner in the
Philippines to have earned this designation. He is a member of the Industrial
Relations Committees of the American Chamber of Commerce of the Philippines, the
Personnel Management Association of the Philippines and is currently the
President of the Compensation Management Society of the Philippines. Mr. Orbeta
has a B.S. in Economics from Ateneo de Manila University in the Philippines.
SYLVESTER J. SCHIEBER has served as Vice President and Director of the
Watson Wyatt Research and Information Center (RIC) since 1983, and as a director
of Watson Wyatt from 1989 to 1996. Mr. Schieber joined Watson Wyatt in 1983 as
Director of RIC, and from 1994-1996, he served on the Advisory Council on Social
Security for the Clinton Administration. He is currently serving a six-year term
on the Social Security Advisory Board, for which he was appointed by the U.S.
Senate Majority Leader. Mr. Schieber has served on the Board of the Pension
Research Council of the Wharton School, University of Pennsylvania since 1985.
He has authored or co-authored four books on retirement issues, including
FUNDAMENTALS OF PRIVATE PENSIONS (University of Pennsylvania Press), THE REAL
DEAL: THE HISTORY AND FUTURE OF SOCIAL SECURITY (Yale University Press, 1999),
and he has co-edited four other volumes on a broad range of human resources
issues. Mr. Schieber is a frequent speaker on pension and Social Security policy
issues throughout the world. He has a Ph.D. in Economics from the University of
Notre Dame.
JOHN A. STEINBRUNNER has served as Vice President since 1996 and a Director
since 1996. Mr. Steinbrunner joined Watson Wyatt in 1974 and was formerly the
Retirement Practice Director of
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<PAGE>
the Benefits Consulting Group. Mr. Steinbrunner continues to consult with major
corporate clients on a variety of strategic benefits issues. He is a Fellow of
the Society of Actuaries and has an M.S. in Mathematics from Case Western
Reserve University.
A. GRAHAME STOTT has served as Vice President since 1995 and Regional
Manager (Asia-Pacific) since 1995 and as a Director since 1995. Mr. Stott joined
Watson Wyatt in 1982 and is a member of the Hang Seng Index Advisory Committee,
a past President of the Actuarial Association of Hong Kong and has been a member
of a number of Hong Kong Government working parties in the areas of Social
Security and pension legislation. Mr. Stott, a Fellow of the Faculty of
Actuaries, has a B.Sc. in Mathematics from the University of Manchester
Institute of Science and Technology.
CHARLES P. WOOD, JR. has served as Vice President and Regional Manager (U.S.
West) since 1998 and as a Director since 1999. Mr. Wood joined Watson Wyatt in
1975 and is a specialist in matters relating to Retirement, Group and Health
Care, and Compensation consulting. Mr. Wood, a Fellow of the Society of
Actuaries and the Casualty Actuarial Society, has a B.S. in Engineering Science
and Mathematics from the U.S. Air Force Academy and an S.M. in Applied
Mathematics from Harvard University.
JOHN J. GABARRO has served as a Director since 1999 and was previously a
director from 1995 to 1998. Mr. Gabarro has been a professor at the Harvard
Business School since 1972. Mr. Gabarro is the UPS Foundation Professor of Human
Resource Management at the Harvard Business School, where he has taught in
Harvard's M.B.A., Advanced Management, and Owner-President Management Programs.
He has also served as faculty chairman of Harvard's International Senior
Management Program and as chairman of its Organization Behavior and Human
Resource Management faculty. Mr. Gabarro is the author of six books, the most
recent of which include BREAKING THROUGH: THE MAKING OF MINORITY EXECUTIVES IN
CORPORATE AMERICA (Harvard, 1999), MANAGING PEOPLE IN ORGANIZATIONS (Harvard,
1992) and THE DYNAMICS OF TAKING CHARGE (Harvard, 1987), which won the 1988 New
Directions in Leadership Award and was named one of the best business books of
the year by THE WALL STREET JOURNAL. Mr. Gabarro is also a recipient of the 1980
McKinsey Foundation Prize, the 1986 Center for Creative Leadership Distinguished
Scholar Colloquium and the 1988 Johnson Smith and Knisely Award for research on
leadership. Mr. Gabarro has an M.B.A. and a Ph.D. from Harvard University.
ROBERT D. MASDING has served as the Senior Partner of Watson Wyatt Partners,
our global alliance partner, since 1995 and as a Director since 1995 upon the
establishment of the global alliance. He joined the predecessor firm to Watson
Wyatt Partners in 1969 and became a partner in 1972. Mr. Masding is a former
Chairman of the International Association of Consulting Actuaries and is a
member of the Professional Affairs Board of the Institute of Actuaries.
Mr. Masding, a Fellow of the Institute of Actuaries, has an M.A. in Mathematics
from Cambridge University.
R. MICHAEL MCCULLOUGH has served as a Director since 1996. Mr. McCullough is
the retired Chairman of the management consulting firm of Booz, Allen &
Hamilton. He joined Booz, Allen & Hamilton in 1965 as a consultant, was elected
a Partner in the firm in 1971, became Managing Partner of the firm's Technology
Center and was elected to the position of Chairman in 1984. Mr. McCullough is a
member of the Boards of Capital Auto Real Estate Investment Trust, an automobile
property real estate investment trust, Charles E. Smith Residential Real Estate
Trust, a residential property real estate investment trust and is Chairman of
Ecutel, Inc., a private Internet communications products and services firm.
GILBERT T. RAY was appointed a Director in March, 2000. Mr. Ray is senior
counsel of the law firm O'Melveny & Myers LLP. He joined O'Melveny & Myers in
1972, and was named a partner in 1981. After practicing corporate law for over
28 years, Mr. Ray retired from active practice in January, 2000. Mr. Ray is a
member of the boards of Host Marriott Services Corporation, a concessions
provider, Automobile Club of Southern California, a provider of emergency road
and travel services and insurance, and is chair of the board of Sierra
Monolithics, Inc. a high speed communications systems company. Mr. Ray is also
the recipient of the Fred Snowden Humanitarian Award--Greater Los
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Angeles African American Chamber of Commerce, the Outstanding Alumni
Award--Ashland University, the NAACP Legal Defense Fund--Civil Rights Advocate
of the Year, and the Central City Association--Leadership and Achievement Award.
BOARD OF DIRECTORS
Prior to the proposed corporate reorganization, Watson Wyatt & Company
directors were elected at each annual stockholders' meeting for a one-year term.
Of the 16 seats, 12 are filled by current employees of Watson Wyatt & Company,
three are filled by outside directors, and one by the Senior Partner of Watson
Wyatt Partners. Watson Wyatt anticipates increasing the number of outside
directors, probably by one, during 2000. Under the Watson Wyatt & Company
bylaws, an employee stockholder is qualified to hold a directorship only during
the term of his or her employment.
Under the Watson Wyatt & Company Holdings certificate of incorporation, the
16 directorships are to be divided into three classes. At the regularly
scheduled stockholders' meeting in 2000, stockholders will elect three classes
of directors. The directorships in the first class will expire as of the
stockholders meeting in 2001 and every three years thereafter, the directorships
in the second class will expire as of the stockholders meeting in 2002 and every
three years thereafter, and the directorships in the third class will expire as
of the stockholders meeting in 2003 and every three years thereafter. Pursuant
to the Watson Wyatt & Company Holdings certificate of incorporation and bylaws,
each employee director automatically ceases to be a director upon termination of
his or her employment.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Audit Committee assesses and monitors the control of
financial transactions and oversees financial reporting to shareholders and
others. It also reviews (in cooperation with our internal auditors, independent
accountants and management) our internal accounting procedures and controls, and
the adequacy of the accounting services provided by our Finance and
Administration office. The members of the Audit Committee are John Gabarro and
Michael McCullough.
COMPENSATION COMMITTEE. The Compensation Committee oversees executive
compensation policies and practices and makes recommendations and decisions
regarding the administration of common stock transactions. The Compensation
Committee members are John Gabarro and Michael McCullough.
EXECUTIVE COMMITTEE. The Executive Committee oversees and reviews our
long-range corporate and strategic planning. Additionally, it meets throughout
the year between meetings of the board of directors to review, consider and make
decisions affecting general management policies of our company, to approve
significant business decisions not requiring full board approval and to make
recommendations to the executive officers and the board. The members of the
Executive Committee are John Haley, Brian Kennedy, Ira Kay, Eric Lofgren and
Grahame Stott.
FINANCE COMMITTEE. The Finance Committee reviews and considers issues
relating to our capital structure. This includes strategic determinations
regarding the financing of our future growth and development. The members of the
Finance Committee are David Friend, Elizabeth Caflisch, Carl Mautz, John
Steinbrunner, Charles Wood and Grahame Stott.
Members of these committees may, but will not necessarily, change after the
next annual stockholders' meeting.
COMPENSATION OF DIRECTORS
Directors who are employees of Watson Wyatt & Company are not compensated
separately for their services as directors or as members of any committee of the
board. Outside directors in fiscal year 1999 were paid a quarterly retainer of
$6,250 plus $1,500 per day for board meetings, $1,000 per day
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<PAGE>
for regular committee meetings, $750 if held in conjunction with a board
meeting, and $2,000 per day for committee meetings if the outside director
chaired that committee, $1,000 if held in conjunction with a board meeting.
Telephone meetings of less than four hours duration were compensated at 50% of
the applicable per day fee. These fees have been paid in shares of Watson
Wyatt & Company common stock (up to 7,500 shares), and the balance paid in cash.
We established the Voluntary Deferred Compensation Plan to enable outside
directors, at their election, to defer receipt of any or all of their director's
fees until they are no longer serving as a director of the company. We intend to
continue to compensate outside directors for services rendered.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of our Compensation and Stock Committee, predecessor to the
current Compensation Committee, for the last completed fiscal year were: Thomas
W. Barratt, Paula A. DeLisle, Ira T. Kay, Kevin L. Meehan and John A.
Steinbrunner. All are officers of the company. The committee members did not
participate in decisions regarding their own compensation. No interlocking
relationship exists between our board of directors or our Compensation Committee
and any member of any other company's board of directors or their compensation
committee, nor has any interlocking relationship existed in the past.
EXECUTIVE COMPENSATION
For the fiscal year ended June 30, 1999, the compensation of the executive
officers, and all other associates eligible to receive a bonus, was comprised
primarily of three elements: base salary, fiscal year-end bonus, and stock
incentive bonus plan payment. The compensation system establishes target bonuses
for all associates eligible to receive a bonus, based on their compensation band
level. Target bonuses range from 5% of base salary for more junior associates to
70% of base salary for the Chief Executive Officer. After the end of each fiscal
year, the board of directors determines the funding of the fiscal year-end bonus
pool, which may be more or less than 100% of target bonuses, and associates
eligible to receive a bonus are awarded bonuses based on individual, practice,
region and company performance.
In January 2000 we paid stock incentive bonus plan bonuses to eligible
associates based on the stock incentive bonus plan funding level approved by the
board, an individual's actual fiscal year bonus and their actual stock ownership
as compared to their target stock ownership. We will terminate the stock
incentive bonus plan following the completion of this offering. The following
table sets forth annual compensation for the President, Chief Executive Officer
and the other four most highly compensated executive officers for the fiscal
years ended June 30, 1999, 1998 and 1997 by those persons who were, on June 30,
1999:
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FISCAL TOTAL SALARY/ OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SIBP(A) BONUS/SIBP COMPENSATION(B) COMPENSATION(C)
<S> <C> <C> <C> <C> <C> <C> <C>
John J. Haley.................... 1999 $543,750 $422,625 $491,000 $1,457,375 -$- $ 25,255
President, 1998 440,000 320,000 -- 760,000 -- 19,300
Chief Executive 1997 403,790 215,000 -- 618,790 -- 17,350
Officer and Director
A.W. Smith, Jr................... 1999 635,000 380,800 432,970 1,448,770 -- 220,120
Chairman and 1998 615,000 375,000 -- 990,000 -- 28,300
Director (retired) 1997 591,230 330,000 -- 921,230 -- 23,950
Eric P. Lofgren.................. 1999 390,000 290,000 260,960 940,960 -- 19,170
Vice President, 1998 331,500 250,000 -- 581,500 -- 15,035
Global Director, 1997 314,500 180,000 -- 494,500 7,500 11,250
Benefits Consulting
Group and Director
Kevin L. Meehan.................. 1999 326,250 300,000 290,425 916,675 -- 17,690
Vice President and 1998 280,150 250,000 -- 530,150 -- 5,110
Director 1997 263,670 180,000 -- 443,670 3,000 10,470
David B. Friend, M.D............. 1999 415,000 315,000 175,270 905,270 -- 21,380
Vice President, 1998 387,500 270,000 -- 657,500 -- 17,125
Eastern Regional 1997 314,167 200,000 -- 514,170 12,000 6,000
Manager and
Director
</TABLE>
(a) In 1996, Watson Wyatt & Company adopted a supplemental bonus plan called the
stock incentive bonus plan. Following this offering, we will terminate the
stock incentive bonus plan and replace it with equity based incentives more
customary to publicly traded companies.
(b) "Other Annual Compensation" consists of a cash bonus of $0.50 per share for
each share purchased in 1997 under the Stock Purchase Plan. This bonus was
also available to all participating associates. There were no stock
purchases under the Stock Purchase Plan in 1998. Messrs. Friend, Meehan and
Lofgren were the only named executive officers purchasing shares in 1997
since all others are above the 200,000 share maximum.
(c) "All Other Compensation" consists of the following: (1) for fiscal year 1997
only, a one-time non-compete bonus equal to 5% of each named executive's
fiscal year 1996 bonus; (2) company matching contributions of 50% of the
first 6% of total compensation contributed to our 401(k) plan as a 401(k)
salary deferral by the named executive up to the IRS maximum; (3) an
additional company matching contribution to a non-qualified savings plan of
3% of total compensation above the IRS compensation limit of $160,000 if
individual 401(k) contributions equal the IRS maximum; and (4) for fiscal
year 1999 for Mr. Smith, a payment of $188,140 for accrued, but unused, paid
time-off.
Concurrent with this offering we will grant options to our associates
pursuant to a new stock option plan to purchase approximately 1,600,000 shares
of class A common stock at an exercise price equal to the public offering price.
As part of this grant, Messrs. Haley, Lofgren, Meehan and Friend will be granted
options to purchase , , , and
shares, respectively.
PENSION ARRANGEMENTS WITH NAMED EXECUTIVE OFFICER
Watson Wyatt & Company has an agreement with Dr. Friend to provide a
supplemental pension benefit if he remains continuously employed by the company
until June 15, 2000. At the time of his retirement, Dr. Friend will receive an
additional service credit (for the purposes of calculating benefits only) so
that his total service credit will be calculated as follows: (actual years of
service + 1) multiplied by 1.5. In addition, if, before the date on which
Dr. Friend would be entitled to receive an early retirement benefit, there is a
change in control of the company and Dr. Friend leaves the employ of the company
within six months of the change in control, his pension will be calculated as if
he had reached early retirement.
GENERAL EMPLOYMENT ARRANGEMENTS
Generally, executive officers are not parties to employment agreements with
us. Non-employee directors are paid pursuant to a compensation plan approved on
an annual basis. Executives and other associates in salary bands 4, 5, 6 and
higher are required to sign non-competition and confidentiality agreements to
protect our proprietary information.
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<PAGE>
LONG TERM INCENTIVE PLAN
Under the terms of the 2000 Long Term Incentive Plan, which was approved by
our stockholders on , 2000 and subject to consummation of this
public offering, Watson Wyatt & Company Holdings is permitted to grant options
to employees and directors allowing them to purchase shares of class A common
stock at fair market value on the date of grant. Options to purchase an
aggregate of 4,500,000 shares are authorized under the plan. Immediately before
this offering, we intend to grant options to all associates to purchase shares
of class A common stock with an aggregate fair market value on the date of grant
equal to % of their target bonus amounts subject to a minimum grant of
options. These options will be valid for seven years, subject to early
termination in specified circumstances, and will vest on a pro-rata over five
years.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
On April 1, 1995 we transferred our United Kingdom operations to R. Watson &
Sons, subsequently renamed Watson Wyatt Partners, and received a beneficial
interest and a 10% interest in a defined profit pool of the partnership. We also
transferred our Continental Europe operations to a newly formed holding company
owned by our company and Watson Wyatt Partners in exchange for 50.1% of its
share. Effective July 1, 1999, we sold one-half of our investment in the holding
company to Watson Wyatt Partners. Mr. Robert D. Masding, a senior partner of
Watson Wyatt Partners, is a member of our board of directors, and Mr. Haley is a
member of the Watson Wyatt Partners Partnership Board. Watson Wyatt Partners and
Watson Wyatt & Company provide various services to and on behalf of each other
in the ordinary course of business.
CORPORATE REORGANIZATION
GENERAL
We are offering shares of our class A common stock pursuant to this
prospectus. This offering is conditioned upon completion of the merger, which is
described below.
THE MERGER
Before this offering, Watson Wyatt & Company Holdings will be a wholly-owned
subsidiary of Watson Wyatt & Company. Immediately before this offering, a
wholly-owned subsidiary of Watson Wyatt & Company Holdings will merge with and
into Watson Wyatt & Company. At the time of such merger, each outstanding share
of common stock of Watson Wyatt & Company automatically will convert into one
share of Watson Wyatt & Company Holdings class B-1 common stock and one share of
Watson Wyatt & Company Holdings class B-2 common stock. Watson Wyatt & Company
will then return to capital the one share of Watson Wyatt & Company Holdings
previously owned by it. As a result of all these actions, existing Watson
Wyatt & Company stockholders automatically will become Watson Wyatt & Company
Holdings stockholders, and Watson Wyatt & Company Holdings then will own all of
Watson Wyatt & Company's outstanding common stock.
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<PAGE>
The following charts illustrate the holding company structure before and
after the planned merger.
BEFORE MERGER
[CHART]
AFTER MERGER
[CHART]
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<PAGE>
Shares of class B-1 common stock and class B-2 common stock are not
transferable or otherwise convertible into shares of class A common stock, until
the relevant transfer restriction period expires or is otherwise waived by the
board of directors. The board has not yet determined the conditions under which
it would waive these transfer restrictions, except that the stockholders
participating in this offering may exchange an equal number of shares of
class B-1 and class B-2 common stock into the shares of class A common stock to
be offered. Pursuant to the terms of the underwriting agreement, Watson Wyatt &
Company Holdings has agreed that for a period of 180 days from the date of this
prospectus, the board will not waive the stock transfer restriction without the
prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
The class B transfer restriction periods, provided in our certificate of
incorporation, will expire 12 months after this offering for shares of
class B-1 common stock and 24 months after this offering for shares of
class B-2 common stock. Once these transfer restrictions expire or are waived by
our board, the shares of class B common stock automatically will convert into
shares of class A common stock. The shares of class A common stock by their
terms can be freely transferred, subject to any other applicable restrictions on
transfer imposed by law. Except for the transfer restrictions placed on shares
of class B common stock, all shares of common stock of Watson Wyatt & Company
Holdings will be identical.
After the merger and this offering, shares of class B-1 common stock and
class B-2 common stock will constitute about 83 % of our total outstanding
common stock. Shares of class A common stock will constitute about 17% of our
total outstanding common stock.
We will not complete this offering unless the merger is approved by the
stockholders. We will complete the merger only if the holders of a majority of
the outstanding shares of Watson Wyatt & Company common stock (and holders of
80% of the shares actually voting for or against the merger, if greater) approve
the merger. However, even if the merger is approved by our existing
stockholders, the merger will not be consummated if we do not determine to
proceed with this offering.
As described above, current Watson Wyatt & Company stockholders are entitled
to participate in this offering. The board of directors has announced that it
will waive the transfer restrictions on a portion of the class B common stock
and permit the conversion of class B common stock to class A common stock for
resale in this offering. Following the conversion of Watson Wyatt & Company
stock for Watson Wyatt & Company Holdings class B-1 and class B-2 stock, each
selling stockholder will be allowed to sell in this offering the equivalent of
500 Watson Wyatt & Company shares, on a pre-conversion basis, or 500 class B-1
shares and 500 class B-2 shares, on a post-conversion basis, plus up to 10% of
the selling stockholder's remaining stockholdings. An even number of shares of
Watson Wyatt & Company Holdings class B-1 and class B-2 common stock will be
converted to shares of class A common stock and sold in this offering.
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS
The following table sets forth information known to us with respect to
beneficial ownership of common stock as of March 1, 2000, without giving effect
to our corporate reorganization, of all directors, named officers and directors
and executive officers as a group:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OFFERING OWNED AFTER OFFERING
------------------------ -----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
<S> <C> <C> <C> <C>
John J. Haley....................................... 227,749 1.5%
Charles P. Wood, Jr................................. 200,934 1.4
A. Grahame Stott.................................... 134,000 *
Eric P. Lofgren..................................... 109,365 *
John A. Steinbrunner................................ 103,191 *
Kevin L. Meehan..................................... 100,011 *
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OFFERING OWNED AFTER OFFERING
------------------------ -----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
<S> <C> <C> <C> <C>
Thomas W. Barratt................................... 89,000 *
Ira T. Kay.......................................... 80,525 *
David B. Friend, M.D................................ 71,000 *
Paula A. DeLisle.................................... 53,900 *
Brian E. Kennedy.................................... 50,000 *
Gail E. McKee....................................... 27,375 *
John J. Gabarro..................................... 7,500 *
R. Michael McCullough............................... 7,500 *
Robert D. Masding................................... 363,000(a) 2.4%
A.W. Smith, Jr...................................... 0(b) *
All current directors and executive officers as a
group (23)........................................ 2,023,492 13.7%
</TABLE>
- ------------------------
* Beneficial ownership of 1% or less of all of the outstanding common stock is
indicated with an asterisk.
(a) Watson Wyatt Partners, in which Mr. Masding is Senior Partner, beneficially
owns 363,000 shares (2.4%) of our common stock. Mr. Masding does not own any
shares in his individual capacity and disclaims beneficial ownership of
these shares. Pursuant to our alliance agreement, if Watson Wyatt Partners
holds more than 400,000 shares of our common stock, it has an option to sell
to us any number of shares that exceed 300,000. We, in turn, have an option
to purchase from Watson Wyatt Partners any number of shares of our common
stock in excess of 400,000 shares if Watson Wyatt Partners holds more than
500,000 shares of our common stock.
(b) Mr. Smith's shares were repurchased in connection with his retirement in
June 1999 in accordance with our bylaws.
COMMON STOCK PURCHASE ARRANGEMENTS BEFORE PUBLIC OFFERING
To encourage ownership of common stock by associates, we had historically
maintained a stock purchase plan. Under the stock purchase plan, we regularly
sold common stock to associates on or about March 1 of each year, except in
1998. Historically, ownership of the common stock has been spread widely among
associates, with no individual stockholder owning more than 2% of the total
number of shares outstanding. Before 1996, it was our policy not to sell shares
to stockholders who, as a result of such sales, would have purchased more than
300,000 shares under the stock purchase plan. In 1996, we reduced this number to
200,000. The stock purchase plan will be terminated upon completion of this
offering.
The stock purchase plan permitted associates to borrow up to the full amount
of the purchase price of the common stock from our lenders, and we guaranteed
repayment of all such loans. The loans provided for full recourse to the
individual borrower and were secured by a pledge of the stock purchased.
Officers, directors and executive officers had access to this credit facility on
the same basis as other associates. As of March 1, 2000, 3,370,536 shares of
common stock were pledged to our lenders to secure loans to stockholders,
representing approximately 24% of the outstanding shares of common stock. As of
the same date, the aggregate amount of outstanding loans was approximately
$14.5 million. This loan program will continue in effect to accommodate the
amortization of existing loans after the offering, but will be amended and will
not be used to create new loans.
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SELLING STOCKHOLDERS
The following table sets forth information furnished by each selling
stockholder with respect to the total number of shares of common stock held by
such selling stockholder.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
OWNED IMMEDIATELY NUMBER OF SHARES SHARES OWNED
POSITION, OFFICE, OR PRIOR TO NUMBER OF SHARES OWNED AFTER THIS AFTER THIS
NAME MATERIAL RELATIONSHIP THIS OFFERING TO BE SOLD OFFERING OFFERING
- --------------------- --------------------- ----------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Additional selling
stockholders*
</TABLE>
- ------------------------
(*) Represents associates who are participating in this offering as
selling stockholders and whose holdings in the aggregate represent less than
one percent (1%) of our outstanding common stock.
After the offering, we expect that approximately 17% of the outstanding
common stock will be held by the public and that approximately 83% of the
remaining common stock will be held by officers, directors and existing
stockholders.
DESCRIPTION OF CAPITAL STOCK, CERTIFICATE OF INCORPORATION AND BYLAWS
COMMON STOCK
After the merger, we will be authorized to issue up to 99,000,000 shares of
common stock, par value $0.01 per share. 69,000,000 of these shares will be
class A common stock, 15,000,000 of these shares will be class B-1 common stock
and 15,000,000 of these shares will be class B-2 common stock. Upon completion
of this offering, approximately 5,600,000 shares of the class A common stock
will be outstanding (assuming the over-allotment option is not exercised), and
13,416,780 shares of class B-1 common stock and 13,416,780 shares of class B-2
common stock will be outstanding.
Each stockholder is entitled to one vote for each share of common stock held
on all matters submitted to a vote of stockholders. Subject to the preferences
of any series of preferred stock that may at times be outstanding, if any,
holders of outstanding shares of common stock are entitled to receive dividends
when, as, and if declared by our board of directors out of funds legally
available for dividends and, if we liquidate, dissolve or wind up, are entitled
to share ratably in all assets remaining after payment of liabilities and
payment of accrued dividends and liquidation preferences on the preferred stock,
if any. Holders of common stock have no preemptive rights and have no rights to
convert their common stock into any other securities. All shares of common stock
outstanding upon completion of this offering are validly authorized and issued,
fully paid and nonassessable.
The class A common stock will be entitled to one vote for each share of
common stock held on all matters submitted to a vote of stockholders. The shares
will be freely transferable (except for shares purchased by affiliates). We have
applied to list the class A shares on the New York Stock Exchange.
Each of the class B-1 common stock and class B-2 common stock will be
entitled to one vote for each share of common stock held on all matters
submitted to a vote of stockholders. The class B-1 shares will be restricted for
the 12 months following this offering, and the class B-2 shares will be
restricted for the 24 months following this offering, unless waived by the board
of directors. Following the expiration or waiver of each respective restriction
period, the class B-1 and class B-2 shares will automatically convert into
class A common stock.
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<PAGE>
Class B-1 common stock and the class B-2 common stock will be transferable
to permitted transferees from the time of issuance in accordance with our
bylaws. Permitted transferees are (A) a revocable trust created to hold shares
of the company for the benefit of a stockholder where the stockholder has
control over disposition and voting with regard to the trust, or, (B) an
irrevocable trust over which the stockholder has voting and dispositive control
that was created for the benefit of the stockholder or the spouse or descendent
of the stockholder, or, (C) any entity controlled by the stockholder, other than
a corporation, whose interests are owned by the stockholder and/or his/her
spouse and/or descendants, or, (D) a corporation that is wholly-owned by the
stockholder and/or one of the entities described in (A), (B) or (C) above.
Pursuant to the terms of the underwriting agreement, we have agreed that for
a period of 180 days from the date of this prospectus, our board will not waive
the stock transfer restrictions without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. We have no understanding or
arrangement with the underwriters to consent to any proposed future sale, but
they may do so in their sole discretion.
PREFERRED STOCK
Our certificate of incorporation authorizes the issuance of up to 1,000,000
shares of preferred stock. Our board of directors has the authority to issue
shares of preferred stock from time to time on terms that it may determine, to
divide preferred stock into one or more classes or series, and to fix the
designations, voting powers, preferences and relative participating, optional or
other special rights of each class or series, and the qualifications,
limitations or restrictions of each class or series, to the fullest extent
permitted by Delaware law. The issuance of preferred stock could have the effect
of decreasing the market price of our stock, impeding or delaying a possible
takeover and adversely affecting the voting and other rights of the holders of
class A common stock and class B common stock.
POTENTIAL ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF DELAWARE LAW AND OUR
CERTIFICATE OF
INCORPORATION AND BYLAWS
ANTI-TAKEOVER PROVISIONS GENERALLY
The provisions of our certificate of incorporation and bylaws described
below were put into place to help ensure that our board of directors plays a
role in attempts to acquire control of our company. In this way, the board can
further and protect the interests of the company and its stockholders as
appropriate under the circumstances. If the board determines that a sale of
control is in their best interests, having the board involved enhances its
ability to maximize the value to be received by the stockholders upon such a
sale.
Although our board believes these provisions, referred to as anti-takeover
provisions, are beneficial to stockholders, their existence also may tend to
discourage open market purchases by a potential acquirer and some takeover bids.
As a result, our stockholders may be deprived of opportunities to sell some or
all of their shares at prices that are higher than prevailing market prices. The
provisions in theory may decrease the market price of our common stock by making
the stock less attractive to persons who invest in securities in anticipation of
price increases from potential acquisition attempts. On the other hand,
defeating undesirable acquisition offers can be a very expensive and
time-consuming process. To the extent the provisions discourage undesirable
proposals, we may be able to avoid those expenditures of time and money.
The anti-takeover provisions may make it more difficult and time consuming
for a potential acquirer and existing stockholders to obtain control of the
company through replacing our board of directors and management. This is the
case even if a majority of the stockholders believes such
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<PAGE>
replacement is in the best interests of the company. As a result, these
provisions may tend to perpetuate the incumbent board of directors and
management.
DELAWARE ANTI-TAKEOVER STATUTE
We are now, and after the merger will be, subject to Section 203 of the
Delaware General Corporation Law. Subject to specific exceptions, Section 203
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless:
- the "business combination," or the transaction in which the stockholder
became an "interested stockholder" is approved by the board of directors
prior to the date the "interested stockholder" attained that status;
- upon consummation of the transaction that resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding those shares owned by persons
who are directors and also officers, and employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer); or
- on or subsequent to the date a person became an "interested stockholder,"
the "business combination" is approved by the board of directors and
authorized at an annual or special meeting of stockholders by the
affirmative vote of at least two-thirds of the outstanding voting stock
that is not owned by the "interested stockholder."
"Business combinations" include mergers, asset sales and other transactions
resulting in a financial benefit to the "interested stockholder." Subject to
various exceptions, an "interested stockholder" is a person who, together with
his or her affiliates and associates, owns, or within three years did own, 15%
or more of the corporation's outstanding voting stock. These restrictions could
prohibit or delay the accomplishment of mergers or other takeover or
change-in-control attempts with respect to us and, therefore, may discourage
acquisition attempts.
The following are various provisions of our certificate of incorporation and
bylaws that may be deemed to have an anti-takeover effect.
AUTHORIZED CAPITAL STOCK
Our certificate of incorporation authorizes the issuance of up to 99,000,000
shares of our common stock. After the merger and this offering, our board of
directors may authorize the issuance of additional shares of our common stock
without further action by our stockholders, unless such action is required in a
particular case by applicable laws or regulations or by any stock exchange upon
which our capital stock may be listed. Our certificate of incorporation does not
provide preemptive rights to our stockholders.
The authority to issue additional shares of our common stock provides us
with the flexibility necessary to meet our future needs without the delay
resulting from seeking stockholder approval. The authorized but unissued shares
of common stock will be issuable from time to time for any corporate purposes,
including, without limitation, stock splits, stock dividends, employee benefit
and compensation plans, acquisitions, and public or private sales for cash as a
means of raising capital. Such shares could be used to dilute the stock
ownership of persons seeking to obtain control of our company. In addition, the
sale of a substantial number of shares of our common stock to persons who have
an understanding with us concerning the voting of such shares, or the
distribution or declaration of a dividend of shares of our common stock to
stockholders, may have the effect of discouraging or increasing the cost of
58
<PAGE>
unsolicited attempts to acquire control of our company. The certificate of
incorporation does not provide preemptive rights to our stockholders.
Watson Wyatt & Company's authorized capital stock currently consists of
25,000,000 shares of common stock. 14,816,780 of such shares were issued and
outstanding as of March 1, 2000.
All of these shares will be exchanged for class B common stock in the
merger.
CLASSIFIED BOARD OF DIRECTORS AND ABSENCE OF CUMULATIVE VOTING
Our certificate of incorporation provides that our board of directors is
divided into three classes, with each class to be as nearly equal in number as
possible. The directors in each class serve three-year terms of office.
The effect of our having a classified board of directors is that only
approximately one-third of the members of the board are elected each year.
Consequently, two annual meetings are effectively required for our stockholders
to change a majority of the members of the board.
Pursuant to our certificate of incorporation, each stockholder generally is
entitled to one vote for each share of our common stock held and is not entitled
to cumulative voting rights in the election of directors. With cumulative
voting, a stockholder would have the right to cast a number of votes equal to
the total number of such holders' shares multiplied by the number of directors
to be elected. The stockholder would have the right to cast all of such holder's
votes in favor of one candidate or to distribute such holder's votes in any
manner among any number of candidates. Directors are elected by a plurality of
the total votes cast by all stockholders. With cumulative voting, it may be
possible for minority stockholders to obtain representation on the board of
directors. Without cumulative voting, the holders of more than 50% of the shares
of our common stock generally have the ability to elect 100% of the directors.
As a result, the holders of the remaining common stock effectively may not be
able to elect any person to the board of directors. The absence of cumulative
voting, therefore, could make it more difficult for a stockholder who acquires
less than a majority of the shares of our common stock to obtain representation
on our board of directors.
REMOVAL OF DIRECTORS
Under our certificate of incorporation, any director or the entire board of
directors may be removed only for cause and only by the affirmative vote of the
holders of at least 67% of our voting stock. Also, under our bylaws, employee
directors must resign as directors upon termination of their employment.
SPECIAL MEETINGS OF STOCKHOLDERS
Our certificate of incorporation and bylaws provide that special meetings of
stockholders may be called at any time, but only by the board of directors or
the president. This provision, combined with other provisions of our certificate
of incorporation and the restriction on the removal of directors, would prevent
a substantial stockholder from compelling stockholder consideration of any
proposal (such as a proposal for a business combination) over the opposition of
our board of directors. Therefore, such stockholder would not be able to call a
special meeting of stockholders to replace the entire board with nominees who
were in favor of such proposal.
ACTIONS BY STOCKHOLDERS WITHOUT A MEETING
Our certificate of incorporation provides that any action required or
permitted to be taken by our stockholders must be effected at a duly called
meeting of stockholders and may not be effected by any written consent by the
stockholders. These provisions would prevent stockholders from taking action,
including action on a business combination, except at an annual meeting or
special meeting called by
59
<PAGE>
the board of directors or the president, even if a majority of the stockholders
were in favor of such action.
LIMITATION ON DIRECTORS LIABILITY
Our certificate of incorporation provides that a director will have no
personal liability to the company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability for any of the
following:
- any breach of the director's duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law; and
- under Section 174 of the Delaware General Corporations Law, the payment of
unlawful dividends and the making of unlawful stock purchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
INDEMNIFICATION
Our certificate of incorporation and bylaws provide that we will indemnify
our officers, directors, employees, and agents to the full extent permitted by
the Delaware General Corporation Law, subject to very limited exceptions. Under
Section 145 of the Delaware General Corporation Law as currently in effect,
other than in actions brought by or in the right of the company, such
indemnification would apply if it were determined in the specific case that the
proposed indemnitee acted in good faith and in a manner such person reasonably
believed to be in or not opposed to our best interests and, with respect to any
criminal proceeding, if such person had no reasonable cause to believe that the
conduct was unlawful. In actions brought by or in the right of the company, such
indemnification probably would be limited to reasonable expenses (including
attorneys' fees) and would apply if it were determined in the specific case that
the proposed indemnitee acted in good faith and in a manner such person
reasonably believed to be in or not opposed to our best interests, except that
no indemnification may be made with respect to any matter as to which such
person is adjudged liable to us, unless, and only to the extent that, the court
determines upon application that, in view of all the circumstances of the case,
the proposed indemnitee is fairly and reasonably entitled to indemnification for
such expenses as the court deems proper. To the extent that any director,
officer, employee, or agent of the company has been successful on the merits or
otherwise in defense of any action, suit, or proceedings, as discussed herein,
whether civil, criminal, administrative, or investigative, such person must be
indemnified against reasonable expenses incurred by such person in connection
therewith.
We are also expressly authorized to carry directors' and officers' insurance
providing indemnification for our directors, officers and certain employees for
some liabilities. We believe that these indemnification provisions and insurance
are necessary to attract and retain qualified directors and executive officers.
AMENDING THE CERTIFICATE OF INCORPORATION AND BYLAWS
The Delaware General Corporation Law generally provides that the approval of
a corporation's board of directors and the affirmative vote of a majority of
(1) all shares entitled to vote and (2) the shares of any class of stock
entitled to vote as a class, is required to amend a corporation's certificate of
incorporation, unless the certificate specifies a greater voting requirement.
Our certificate of incorporation states that each of the following provisions in
the certificate of incorporation may be amended only by a vote of 67% of the
outstanding shares:
- classification and removal of directors;
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<PAGE>
- the prohibition on stockholder action by written consent; and
- the ability to call a special meetings of stockholders being vested solely
in our board of directors and the president.
Our certificate of incorporation also provides that the board of directors
has the power to adopt, amend, or repeal the bylaws. Stockholders also have the
power to adopt, amend or repeal bylaws, by a vote of 67% of the outstanding
shares.
RIGHTS PLAN
The board of directors has approved implementing a rights plan, although the
specific terms of the plan have not been determined. It is likely that under
such a plan stockholders will be issued rights to purchase shares of preferred
stock upon the occurrence of specified events such as the acquisition by a
person of 15% of our outstanding shares. The purpose of this plan is to ensure
that our board of directors has the opportunity to negotiate with persons
contemplating significant transactions with our company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is First Union
National Bank, and its address is 1525 West W.T. Harris Boulevard, Charlotte,
North Carolina 28262-1153.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock after this offering could
adversely affect the market price of the common stock and could impair our
future ability to raise capital through the sale of our equity securities. Upon
the consummation of this offering, we will have outstanding 5,600,000 shares of
class A common stock (assuming no exercise of the underwriters' over-allotment
option), 13,416,780 shares of class B-1 common stock and 13,416,780 shares of
class B-2 common stock. All of the shares of class A common stock sold in the
offering will be freely tradable under the Securities Act, unless purchased by
our "affiliates" as that term is defined under the Securities Act. The
class B-1 and class B-2 common stock is subject to transfer restrictions for
periods extending 12 months and 24 months, respectively, after this offering,
unless earlier waived by the board of directors. Pursuant to the terms of the
underwriting agreement, we have agreed that for a period of 180 days from the
date of the prospectus, the board will not waive the stock transfer restrictions
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. Upon the expiration of transfer restriction periods in the
class B-1 and class B-2 common stock, all of the shares of class B-1 and
class B-2 common stock will convert automatically to class A common stock and
become eligible for sale, subject to compliance with Rule 144 by persons deemed
our affiliates.
Because the shares of class B-1 and class B-2 common stock are being issued
pursuant to a registration statement on form S-4, they will be freely tradable
without restriction under the Securities Act following the expiration or waiver
of the transfer restriction periods included in our certificate of incorporation
except for any such shares acquired by an affiliate, which shares will remain
subject to the resale limitations of Rule 144.
Generally, Rule 144 provides that an affiliate who has beneficially owned
shares for at least one year may sell his or her shares on the open market in
brokers' transactions within any three-month period a number of shares that does
not exceed the greater of:
- 1% of the then outstanding shares of common stock; and
- the average weekly trading volume in the common stock on the open market
during the four calendar weeks preceding the sale.
Sales under Rule 144 will also be subject to post-sale notice requirements
and the availability of current public information about us.
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<PAGE>
UNDERWRITING
Under the terms and conditions contained in an underwriting agreement dated
, 2000, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Banc of America Securities
LLC and DLJDIRECT Inc., have severally agreed to purchase from us and the
selling stockholders the number of shares of class A common stock set forth
opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation
Banc of America Securities LLC
DLJDIRECT Inc.............................................
-------
Total...................................................
=======
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of class A common
stock in this offering are subject to approval by their counsel of legal matters
concerning this offering and to conditions precedent that must be satisfied by
us. The underwriters are obligated to purchase and accept delivery of all the
shares of common stock in this offering, other than those shares covered by the
over-allotment option described below.
The underwriters initially propose to offer some of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page of this prospectus and some of the shares to dealers at the
initial public offering price less a concession not in excess of $ per
share. The underwriters may allow, and those dealers may re-allow, a concession
not in excess of $ per share on sales to other dealers. After the initial
offering of the class A common stock to the public, the representatives may
change the public offering price and concessions. The underwriters do not intend
to confirm sales to any accounts over which they exercise discretionary
authority.
The following table shows the underwriting fees to be paid by us and the
selling stockholders in connection with this offering. The underwriting fee is
equal to the public offering price per share of class A common stock less the
amount paid by the underwriters to us or the selling stockholders, as the case
may be, per share of class A common stock. It is currently anticipated that the
underwriting fee will be 7.0% of the public offering price. Offering expenses
are expenses incurred by us in connection with this offering and include SEC and
NASD filing fees, New York Stock Exchange listing fees, printing expenses and
legal and accounting expenses. This information is presented assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares of our class A common stock.
<TABLE>
<CAPTION>
PAID BY THE SELLING
PAID BY US STOCKHOLDERS
--------------------------- ---------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
<S> <C> <C> <C> <C>
Underwriting fees per share.... $ $ $ $
Total underwriting fees........ $ $ $ $
Offering expenses per share.... $ $ $ $
Total offering expenses........ $ $ $ $
</TABLE>
We will pay all of the offering expenses, including reimbursing those due
from the selling stockholders.
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A number of the selling stockholders have granted to the underwriters an
option, exercisable for 30 days after the date of this prospectus, to purchase
up to 840,000 additional shares of class A common stock at the initial public
offering price less the underwriting discounts and commissions PRO RATA based on
participation. The underwriters may exercise this option solely to cover
over-allotments, if any, made in connection with this offering. To the extent
the underwriters exercise this option, each underwriter will be obligated,
subject to specified conditions, to purchase a number of additional shares
approximately proportionate to that underwriter's initial purchase commitments.
We, together (in limited circumstances) with the selling stockholders, have
agreed to indemnify the underwriters against liabilities, including liabilities
under the Securities Act, or to contribute to payments that the underwriters may
be required to make for these liabilities, if any.
For a period ending 180 days from the date of this prospectus, we have
agreed not to, without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation:
- offer, pledge, sell, contract to sell or sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend or otherwise transfer or dispose of, directly
or indirectly, any shares of class A common stock or any securities
convertible into or exercisable or exchangeable for class A common stock;
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any class A
common stock, whether any such transaction described above is to be
settled by delivery of common stock or other securities, in cash or
otherwise; or
- waive the applicability of any transfer restriction applicable to the
class B common stock.
In addition, during such lock-up period, we have also agreed not to file any
registration statement with respect to, and each of our executive officers and
directors have agreed not to make any demand for, or exercise any right with
respect to, the registration of any shares of class A common stock or any
securities convertible into or exercisable or exchangeable for class A common
stock without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation.
Prior to this offering, no public market has existed for our common stock.
We will negotiate the initial public offering price for our class A common stock
with the underwriters' representatives, but the price may not reflect the market
price for our class A common stock after this offering. The factors considered
in determining the initial public offering price include:
- the history of and prospects for our industry in which we compete;
- our past and present operations;
- our historical results of operations;
- our prospects for future operations results;
- the recent market prices of securities of generally comparable companies;
and
- the general conditions of the securities market at the time of this
offering.
We have applied to have our class A common stock listed for trading on the
NYSE under the symbol "WW." Listing is subject to our satisfying all applicable
listing criteria.
Other than in the United States, no action has been taken by us, the selling
stockholders or the underwriters that would permit a public offering of the
shares of class A common stock included in this offering in any jurisdiction
where action for that purpose is required. The shares included in this offering
may not be offered or sold, directly or indirectly, nor may this prospectus or
any other offering material or advertisements in connection with the offer and
sale of any shares of class A common stock
63
<PAGE>
be distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rules and regulations of such
jurisdiction. Persons who receive this prospectus are advised to inform
themselves about and to observe any restrictions relating to this offering and
the distribution of this prospectus. This prospectus is not an offer to sell or
a solicitation of an offer to buy any shares of class A common stock in any
jurisdiction where that would not be permitted or legal.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
class A common stock. Specifically, the underwriters may over-allot this
offering, creating a syndicate short position. The underwriters may bid for and
purchase shares of our class A common stock in the open market to cover such
syndicate short positions or to stabilize the price of our class A common stock.
In addition, the underwriting syndicate may reclaim selling concessions from
syndicate members and selected dealers if they repurchase previously distributed
class A common stock in syndicate covering transactions, in stabilizing
transactions or otherwise, or if Donaldson, Lufkin & Jenrette Securities
Corporation receives a report which indicates that the clients of such syndicate
members have "flipped" our class A common stock. These activities may stabilize
or maintain the market price of the class A common stock above independent
market levels. The underwriters are not required to engage in these activities
and may end any of these activities at any time.
We currently maintain a senior secured revolving credit facility with an
affiliate of Banc of America Securities LLC.
LEGAL MATTERS
The validity of the issuance of the shares of class A common stock offered
by the prospectus will be passed upon for us by Cadwalader, Wickersham & Taft.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Winston & Strawn.
EXPERTS
The consolidated financial statements of Watson Wyatt & Company as of
June 30, 1999, and 1998 and for each of the three years in the period ended
June 30, 1999, included in and incorporated by reference in this prospectus have
been so included or incorporated by reference in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
such firm as experts in accounting and auditing. The financial statements for
Wellspring Resources LLC as of June 30, 1997, and 1996 and for the year ended
June 30, 1997 and the three months ended June 30, 1996 appearing in Watson
Wyatt & Company Annual Report on Form 10-K for the year ended June 30, 1999 have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report incorporated therein and incorporated herein by reference. Such financial
statements are incorporated herein by reference in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Consolidated Financial Statements of Watson Wyatt & Company
Report of Independent Accountants......................... F-2
Financial Statements:
Consolidated Statements of Operations for each of the
three years
ended June 30, 1999................................... F-3
Consolidated Balance Sheets at June 30, 1999 and 1998... F-4
Consolidated Statements of Cash Flows for each of the
three years
ended June 30, 1999................................... F-5
Consolidated Statements of Changes in Permanent
Shareholders' Equity for each of the three years ended
June 30, 1999......................................... F-6
Notes to the Consolidated Financial Statements.......... F-7 to F-26
Valuation and Qualifying Accounts and Reserves (Schedule
II)..................................................... F-27
Consolidated Statements of Operations for the six month
periods ended December 31, 1999 and December 31, 1998
(unaudited)........................................... F-28
Consolidated Balance Sheets at December 31, 1999
(unaudited) and June 30, 1999......................... F-29
Consolidated Statements of Cash Flows for the six month
periods
ended December 31, 1999 and December 31, 1998
(unaudited)........................................... F-30
Consolidated Statements of Changes in Permanent
Shareholders' Equity for
the six month period ended December 31, 1999
(unaudited)........................................... F-31
Notes to the Consolidated Financial Statements
(unaudited)........................................... F-32 to F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Watson Wyatt & Company
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Watson
Wyatt & Company and its subsidiaries at June 30, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1999, in conformity with the accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information, set forth therein when read in
connection with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Washington, D.C.
September 8, 1999, except as to the
information presented in Notes 5 and 6,
for which the date is December 9, 1999.
F-2
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Fees........................................................ $556,860 $ 512,660 $486,502
Costs of providing services:
Salaries and employee benefits............................ 298,915 268,611 252,302
Stock incentive bonus..................................... 22,610 -- --
Non-recurring compensation charge (see Note 12)........... -- 69,906 --
Occupancy and communications.............................. 62,915 62,061 72,155
Professional and subcontracted services................... 47,863 49,907 48,827
Other..................................................... 29,753 26,779 23,871
-------- --------- --------
462,056 477,264 397,155
General and administrative expenses......................... 56,578 51,759 45,696
Depreciation and amortization............................... 15,248 24,994 22,094
-------- --------- --------
533,882 554,017 464,945
Income (loss) from operations (see Note 12)................. 22,978 (41,357) 21,557
Other:
Interest income........................................... 944 901 1,462
Interest expense.......................................... (2,646) (2,768) (1,506)
Income from affiliates...................................... 2,524 258 105
-------- --------- --------
Income (loss) before income taxes and minority interest
(see Note 12)............................................. 23,800 (42,966) 21,618
Provision for (benefit from) income taxes:
Current................................................... 18,744 15,116 12,627
Deferred.................................................. (7,296) (1,982) (3,557)
-------- --------- --------
11,448 13,134 9,070
-------- --------- --------
Income (loss) before minority interest (see Note 12)........ 12,352 (56,100) 12,548
Minority interest in net (income) loss of consolidated
subsidiaries.............................................. (217) (112) (167)
-------- --------- --------
Income (loss) from continuing operations (see Note 12)...... 12,135 (56,212) 12,381
Discontinued operations:
Loss from operations of discontinued Outsourcing Business
(less applicable income tax benefit of $0, $5,053 and
$8,181 respectively)...................................... -- (6,821) (11,483)
Adjustment (loss) on disposal of discontinued Outsourcing
Business (1999 adjustment is net of applicable income tax
expense of $6,322; 1998 loss is net of applicable income
tax benefit of $46,715)................................... 8,678 (63,085) --
-------- --------- --------
Net income (loss) (see Note 12)............................. $ 20,813 $(126,118) $ 898
======== ========= ========
Earnings (loss) per share, continuing operations, basic and
fully diluted............................................. $ 0.80 $ (3.27) $ 0.71
======== ========= ========
Earnings (loss) per share, discontinued operations, basic
and fully diluted......................................... $ 0.57 $ (4.07) $ (0.66)
======== ========= ========
Earnings (loss) per share, net income (loss), basic and
fully diluted............................................. $ 1.37 $ (7.34) $ 0.05
======== ========= ========
</TABLE>
See accompanying notes
F-3
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 35,985 $ 13,405
Receivables from clients:
Billed, net of allowances of $3,701 and $2,142............ 72,798 69,671
Unbilled.................................................. 63,068 59,725
-------- --------
135,866 129,396
Income taxes receivable..................................... -- 2,216
Other current assets........................................ 10,834 6,945
-------- --------
Total current assets...................................... 182,685 151,962
Investment in affiliates.................................... 15,306 17,666
Fixed assets................................................ 42,797 37,368
Deferred income taxes....................................... 56,206 48,911
Intangible assets........................................... 7,455 2,412
Other assets................................................ 9,511 9,991
-------- --------
$313,960 $268,310
======== ========
LIABILITIES, REDEEMABLE COMMON STOCK, AND PERMANENT SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $152,371 $116,548
Note payable and book overdrafts............................ 248 11,666
Income taxes payable........................................ 18,374 --
-------- --------
Total current liabilities................................. 170,993 128,214
Accrued retirement benefits................................. 77,140 82,528
Deferred rent and accrued lease losses...................... 9,270 12,676
Other noncurrent liabilities................................ 22,608 32,784
Minority interest in subsidiaries........................... 669 322
Redeemable Common Stock--$1 par value: 25,000,000 shares
authorized; 16,112,416 and 15,916,757 issued and
outstanding; at redemption value.......................... 107,631 96,296
Permanent shareholders' equity:
Adjustment for redemption value less than amounts paid in by
shareholders.............................................. 11,420 25,240
Retained deficit............................................ (83,209) (106,834)
Cumulative translation adjustment (accumulated other
comprehensive loss)....................................... (2,562) (2,916)
Commitments and contingencies...............................
-------- --------
$313,960 $268,310
======== ========
</TABLE>
See accompanying notes
F-4
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Cash flows from (used for) operating activities:
Net income (loss)......................................... $ 20,813 $(126,118) $ 898
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Non-cash non-recurring compensation charge.............. -- 69,906 --
Net (adjustment) loss from Discontinued Operations...... (8,678) 69,906 11,483
Provision for doubtful receivables from clients......... 9,503 5,613 6,853
Depreciation............................................ 13,680 12,849 13,816
Amortization of deferred software and development costs
and other intangible assets........................... 1,568 12,143 8,277
Provision for deferred income taxes..................... (7,295) (1,982) (3,557)
Income from affiliates.................................. (2,524) (258) (105)
Minority interest in net income of consolidated
subsidiaries.......................................... 217 112 167
(Increase) decrease in assets (net of discontinued
operations):
Receivables from clients.............................. (25,488) (11,115) (2,794)
Income taxes receivable............................... 2,216 4,558 3,327
Other current assets.................................. (3,889) 342 (351)
Other assets.......................................... 480 76 (1,930)
Increase (decrease) in liabilities (net of discontinued
operations):
Accounts payable and accrued liabilities.............. 54,567 11,318 1,300
Income taxes payable.................................. 12,052 (3,563) (7,799)
Accrued retirement benefits........................... (5,388) (4,169) 5,556
Deferred rent and accrued lease losses................ (3,406) (2,262) 5,034
Other noncurrent liabilities.......................... 1,132 840 687
Other, net.............................................. 514 1,603 656
Discontinued operations, net............................ (5,537) (18,554) 7,530
-------- --------- --------
Net cash provided by operating activities............... 54,537 21,245 49,048
======== ========= ========
Cash flows (used in) from investing activities:
Purchases of fixed assets................................. (19,684) (16,034) (15,548)
Proceeds from sales of fixed assets and investments....... 237 623 446
Acquisitions.............................................. (6,207) -- (1,169)
Investment in software and development costs.............. -- (3,000) (4,554)
Investment in affiliates.................................. 4,220 3,076 (1,385)
Discontinued operations................................... -- (14,750) (20,062)
-------- --------- --------
Net cash used in investing activities................... (21,434) (30,085) (42,272)
-------- --------- --------
Cash flows (used by) from financing activities:
Borrowings and bank overdrafts............................ (11,418) 11,258 --
Issuances of Redeemable Common Stock...................... 15,451 1,005 15,414
Repurchases of Redeemable Common Stock.................... (15,124) (13,141) (16,604)
-------- --------- --------
Net cash used by financing activities................... (11,091) (878) (1,190)
-------- --------- --------
Effect of exchange rates on cash............................ 568 (3,134) (1,023)
-------- --------- --------
Increase (decrease) in cash and cash equivalents............ 22,580 (12,852) 4,563
Cash and cash equivalents at beginning of period............ 13,405 26,257 21,694
-------- --------- --------
Cash and cash equivalents at end of period.................. $ 35,985 $ 13,405 $ 26,257
======== ========= ========
</TABLE>
See accompanying notes
F-5
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN PERMANENT SHAREHOLDERS' EQUITY
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
ADJUSTMENT FOR
REDEMPTION
VALUE
CUMULATIVE (GREATER) LESS
RETAINED TRANSLATION THAN AMOUNTS
EARNINGS GAIN PAID IN BY
(DEFICIT) (LOSS) SHAREHOLDERS TOTAL
--------- ----------- -------------- --------
<S> <C> <C> <C> <C>
Balance at June 30, 1996...................... $ 30,677 $ 1,040 $(37,549) $ (5,832)
Comprehensive income:
Net income.................................. 898 -- -- 898
Foreign currency translation adjustment..... -- (204) -- (204)
--------- ------- -------- --------
Total comprehensive income.................... 898 (204) -- 694
Effect of repurchases of 3,258,203 shares of
common stock (various prices per share)..... (6,942) -- 6,942 --
Adjustment of redemption value for change in
formula book value per share................ -- -- (7,067) (7,067)
--------- ------- -------- --------
Balance at June 30, 1997...................... $ 24,633 $ 836 $(37,674) $(12,205)
Comprehensive loss:
Net loss.................................... (126,118) -- -- (126,118)
Foreign currency translation adjustment..... -- (3,752) -- (3,752)
--------- ------- -------- --------
Total comprehensive loss...................... (126,118) (3,752) -- (129,870)
Effect of repurchases of 2,410,425 shares of
common stock (various prices per share)..... (5,349) -- 5,349 --
Adjustment of redemption value for change in
formula book value per share................ -- -- (12,341) (12,341)
Adjustment of redemption value for
non-recurring compensation charge (see Note
12)......................................... -- -- 69,906 69,906
--------- ------- -------- --------
Balance at June 30, 1998...................... $(106,834) $(2,916) $ 25,240 (84,510)
Comprehensive income:
Net income.................................. 20,813 -- -- 20,813
Foreign currency translation adjustment..... -- 354 -- 354
--------- ------- -------- --------
Total comprehensive income.................... 20,813 354 -- 21,167
Effect of repurchases of 2,361,542 shares of
common stock (various prices per share)..... 2,812 -- (2,812) --
Adjustment of redemption value for change in
formula book value per share................ -- -- (11,008) (11,008)
--------- ------- -------- --------
Balance at June 30, 1999...................... $ (83,209) $(2,562) $ 11,420 $(74,351)
========= ======= ======== ========
</TABLE>
See accompanying notes
F-6
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS--Watson Wyatt & Company ("Watson Wyatt" or the
"Company"), together with its subsidiaries, is an international company engaged
in the business of providing professional consultative services on a fee basis,
primarily in the human resource areas of employee benefits and compensation, but
also in other areas of specialization such as human capital consulting and human
resource related technology consulting. Substantially all of the Company's stock
is held by or for the benefit of employees. On July 1, 1996, The Wyatt Company
changed its name to Watson Wyatt & Company.
In 1998, the Company discontinued its Benefits Administration Outsourcing
Business as further described in Note 16. The Consolidated Statements of
Operations in 1999 and 1998 reflect the charges recorded for that
discontinuation as well as for the operating results of the discontinued
operations in 1998 and 1997.
USE OF ESTIMATES--Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used when accounting for revenue, allowances for uncollectible receivables,
investments in affiliates, depreciation and amortization, profits on long-term
contracts, asset write-downs, employee benefit plans, taxes, discontinued
operations and Year 2000 costs.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements of the
Company include the accounts of the Company and its majority-owned and
controlled subsidiaries after elimination of inter-company accounts and
transactions. Investments in affiliated companies over which the Company has the
ability to exercise significant influence are accounted for using the equity
method.
RECLASSIFICATIONS--Certain amounts previously presented have been
reclassified to conform to the current presentation.
CASH AND CASH EQUIVALENTS--The Company considers short-term, highly liquid
investments with original maturities of 90 days or less to be cash equivalents.
Such investments were $21,700,000 at June 30, 1999.
RECEIVABLES FROM CLIENTS--Billed receivables from clients are presented at
their billed amount less an allowance for doubtful accounts. Services rendered
are generally billed on a monthly basis using fee arrangements defined at the
inception of the project. Unbilled receivables are stated at their estimated net
realizable value.
REVENUE RECOGNITION--For consulting services, fees from clients are recorded
as services are performed and are presented net of write-offs and uncollectible
amounts. Revenues from long-term contracts are recognized on the percentage of
completion basis. Anticipated contract losses are recognized as they become
known. Fees for administrative and recordkeeping operations are recognized as
earned by the Company.
INTANGIBLE ASSETS--Intangible assets consist primarily of goodwill related
to the excess cost over net assets of purchased companies. Goodwill is generally
amortized on a straight-line basis over seven to fifteen years. The Company
regularly assesses the recoverability of unamortized goodwill and other
F-7
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
long-lived assets by comparing the probable undiscounted future cash flows with
the net book value of the underlying assets. Losses so identified are then
measured as the difference between the net book value of the asset and the
discounted present value of the cash flows and are recorded as identified.
EMPLOYEE RECEIVABLES--The Company had outstanding employee receivables
included in other current and noncurrent assets of $2,440,000 and $3,165,000 at
June 30, 1999 and June 30, 1998, respectively, related primarily to employee
relocations.
FOREIGN CURRENCY TRANSLATION--Gains and losses on foreign currency
transactions are recognized currently in the consolidated statements of
operations. Assets and liabilities of the Company's subsidiaries outside the
United States are translated into the reporting currency, the U.S. dollar, based
on exchange rates at the balance sheet date. Revenue and expenses of the
Company's subsidiaries outside the United States are translated into U.S.
dollars at the average exchange rates during the year. Gains and losses on
translation of the Company's equity interests in its subsidiaries outside the
United States are not included in the consolidated statements of operations but
are reported separately and accumulated as the cumulative translation gain or
loss within permanent shareholders' equity in the consolidated balance sheets.
Foreign currency translation gains or losses on inter-company receivables and
payables are generally not recognized because such amounts are usually
considered to be permanent and are not expected to be liquidated.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amount of the Company's
cash and cash equivalents, short-term investments, receivables from clients and
notes and accounts payable and accrued liabilities approximates fair value
because of the short maturity and ready liquidity of those instruments. At
June 30, 1999, the outstanding balance under its revolving credit agreement was
zero, while at June 30, 1998 the Company had $9,000,000 outstanding. The Company
knows of no event of default that would require it to satisfy the guarantees
described in Notes 9 and 15 other than as reflected in the Consolidated
Financial Statements.
CONCENTRATION OF CREDIT RISK--Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
certain cash and cash equivalents, short-term investments and receivables from
clients. The Company invests its excess cash with high-credit quality financial
institutions. Concentrations of credit risk with respect to receivables from
clients are limited due to the Company's large number of customers and their
dispersion across many industries and geographic regions.
EARNINGS PER SHARE--The computation of earnings per share is based upon the
weighted average number of shares of Redeemable Common Stock outstanding. The
number of shares (in thousands) used in the computation is 15,215 in fiscal year
1999, 17,170 in fiscal year 1998, and 17,438 in fiscal year 1997 (see Note 10).
COMPREHENSIVE INCOME--In fiscal year 1999, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income." Comprehensive income includes net income and changes in the cumulative
foreign currency translation gain or loss. For the years ended June 30, 1999,
1998 and 1997, comprehensive income (loss) totaled $21,167,000, $(129,870,000),
and $694,000, respectively.
F-8
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 2--CASH FLOW INFORMATION
Net cash provided by operating activities in the consolidated statements of
cash flows includes cash payments for:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest expense.................................. $1,889 $ 2,639 $ 1,506
Income taxes paid................................. $5,462 $18,679 $11,947
</TABLE>
NOTE 3--INVESTMENTS IN AFFILIATES
Entities accounted for under the equity method are:
<TABLE>
<CAPTION>
JUNE 30
OWNERSHIP -------------------
INTEREST 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Watson Wyatt Partners........................... 10.0% $ 9,265 $11,040
Watson Wyatt Holdings (Europe) Limited.......... 25.0% 6,041 6,626
Professional Consultants Insurance Company,
Inc........................................... 27.4% -- --
------- -------
Total Investment in Affiliates.................. $15,306 $17,666
======= =======
</TABLE>
On April 1, 1995, the Company transferred its United Kingdom ("U.K.")
operations to Watson Wyatt Partners, formerly R. Watson & Sons ("Watsons"), an
actuarial partnership based in the U.K., and received a beneficial interest in
Watsons and a 10% interest in a defined profit pool of Watsons. The Company also
transferred its Continental European operations to a newly-formed holding
company, Watson Wyatt Holdings (Europe) Limited ("WWHE"), jointly owned and
controlled by the Company and Watsons, in exchange for 50.1% of its shares. The
Company's historical basis in the assets and liabilities carried over. Effective
July 1, 1998, the Company sold one half of its investment in WWHE to Watsons; no
gain or loss was recognized on the transaction.
The Company accounts for its interest in Watsons using the equity method of
accounting because it is an investment in a general partnership. The Company
accounts for its interest in WWHE using the equity method of accounting because
it has the ability to exercise significant influence over the operations of the
entity.
At June 30, 1999, the Company's investment in WWHE and Watsons exceeded the
Company's share of the underlying net assets by $2,257,000 due primarily to the
capitalization of external transaction costs incurred by the Company. This basis
differential is being amortized over periods of 10 to 15 years.
F-9
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 3--INVESTMENTS IN AFFILIATES (CONTINUED)
The Company's pre-tax income from affiliates includes the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Equity investment income............................. $2,760 $724 $1,019
Amortization of basis differential................... (236) (466) (914)
------ ---- ------
Income from affiliates............................... $2,524 $258 $ 105
====== ==== ======
</TABLE>
Combined summarized balance sheet information at June 30 for the Company's
affiliates follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Current assets.......................................... $117,717 $118,116
Noncurrent assets....................................... 17,286 10,886
-------- --------
Total assets............................................ $135,003 $129,002
======== ========
Current liabilities..................................... $ 65,171 $ 54,278
Noncurrent liabilities.................................. 30,810 39,344
Shareholders' equity.................................... 39,022 35,380
-------- --------
Total liabilities & shareholders' equity................ $135,003 $129,002
======== ========
</TABLE>
The Company's operating results include its proportionate share of income
from equity investments from the dates of investment. Combined summarized
operating results for the years ended June 30, reported by the affiliates
follow:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue....................................... $206,463 $173,012 $166,851
Operating expenses............................ 155,330 135,577 126,338
-------- -------- --------
Income before tax............................. $ 51,133 $ 37,435 $ 40,513
======== ======== ========
Net income.................................... $ 51,116 $ 38,176 $ 39,996
======== ======== ========
</TABLE>
NOTE 4--FIXED ASSETS
Furniture, fixtures, equipment, and leasehold improvements are recorded at
cost, and presented net of accumulated depreciation or amortization. Furniture,
fixtures and equipment are depreciated using straight-line and accelerated
methods over lives ranging from three to seven years. Leasehold improvements are
amortized on a straight-line basis over the shorter of the assets' lives or
lease terms.
F-10
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 4--FIXED ASSETS (CONTINUED)
The components of fixed assets are:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Furniture, fixtures and equipment....................... $ 96,096 $ 90,727
Leasehold improvements.................................. 27,069 22,294
-------- --------
123,165 113,021
Less: accumulated depreciation and amortization......... (80,368) (75,653)
-------- --------
Net fixed assets........................................ $ 42,797 $ 37,368
======== ========
</TABLE>
NOTE 5--PENSION AND SAVINGS PLANS
In fiscal year 1999, the Company adopted the revised disclosure requirements
of SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS 132 standardized the disclosure of pensions and other
postretirement benefits but did not change the accounting for these benefits.
Prior years' information has been reclassified to conform to the 1999 disclosure
format.
The noncurrent portions of accrued costs related to the Company's principal
retirement plans are:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Defined benefit retirement plans.......................... $28,149 $35,263
Canadian Separation Allowance Plan........................ 5,953 6,264
Postretirement benefits other than pensions............... 43,038 41,001
------- -------
Accrued retirement benefits............................... $77,140 $82,528
======= =======
</TABLE>
DEFINED BENEFIT PLANS
The Company sponsors both qualified and non-qualified non-contributory
defined benefit pension plans covering substantially all of its associates.
Under the Company's principal plans (U.S., Canada, and Hong Kong), benefits are
based on the number of years of service and the associate's compensation during
the three highest paid consecutive years of service.
Contributions are limited to amounts that are currently deductible for tax
purposes, and the excess of expense over such contributions and direct payments
under non-qualified plan provisions is accrued. As of January 1, 1997, changes
were made to the U.S. pension program. The pension plan definition of
compensation was revised to include overtime and annual bonuses. The pension
benefit formula was changed to integrate with Social Security benefits on a
step-rate basis. The total years of service included in the benefit calculation
were reduced from 28 1/3 years to 25 years.
F-11
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 5--PENSION AND SAVINGS PLANS (CONTINUED)
Net periodic pension cost consists of the following components:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost..................................... $22,976 $18,340 $16,962
Interest cost.................................... 23,909 22,302 19,651
Expected return on plan assets................... (37,437) (31,910) (26,828)
Amortization of transition obligation............ 201 201 199
Amortization of net unrecognized gains........... (5,979) (6,316) (4,740)
Amortization of prior service cost............... 1,841 1,794 1,352
------- ------- -------
Net periodic pension cost........................ 5,511 4,411 6,596
Settlement loss.................................. -- -- 708
------- ------- -------
Net periodic pension cost including
settlements.................................... $ 5,511 $ 4,411 $ 7,304
======= ======= =======
</TABLE>
During fiscal year 1999, the Company acquired a portion of KPMG's actuarial
consulting services. In connection with this transaction, the Company recognized
additional pension expense of $665,000.
The following tables set forth the changes in the projected pension benefit
obligation and fair value of the pension plan assets:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Benefit obligation at beginning of year................. $353,658 $295,245
Service cost............................................ 22,976 18,340
Interest cost........................................... 23,909 22,302
Participant contributions............................... 54 --
Actuarial losses gains.................................. (8,503) 34,610
Benefit payments........................................ (14,593) (16,042)
Plan amendments......................................... -- 647
Foreign currency adjustment............................. (94) (1,444)
-------- --------
Benefit obligation at end of year....................... $377,407 $353,658
======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Fair value of plan assets at beginning of year.......... $381,398 $322,533
Actual return on plan assets............................ 36,473 67,275
Company contributions................................... 7,889 9,311
Participant contributions............................... 54 --
Benefit payments........................................ (14,593) (16,042)
Foreign currency adjustment............................. (119) (1,679)
-------- --------
Fair value of plan assets at end of year................ $411,102 $381,398
======== ========
</TABLE>
F-12
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 5--PENSION AND SAVINGS PLANS (CONTINUED)
The following table sets forth selected information for plans with
accumulated benefit obligations in excess of plan assets:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Projected benefit obligation.............................. $86,703 $78,519
Accumulated benefit obligation............................ 42,740 38,474
Fair value of plan assets................................. -- --
</TABLE>
The accrued pension benefit cost recognized in our consolidated balance
sheets is computed as follows:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Funded status at end of year............................ $ 33,695 $ 27,740
Unrecognized prior service cost......................... 9,255 11,101
Unrecognized net gain................................... (75,579) (74,030)
Unrecognized transition obligation...................... 793 993
-------- --------
Net accrued pension liability........................... $(31,836) $(34,196)
======== ========
Prepaid pension benefit cost............................ $ 26,691 $ 13,778
Accrued pension benefit liability....................... (58,527) (47,974)
Intangible assets....................................... -- --
Accumulated other comprehensive income.................. -- --
-------- --------
Net accrued pension liability........................... $(31,836) $(34,196)
======== ========
</TABLE>
Assumptions used in the valuation for the U.S. plan, which comprises the
majority of the principal defined benefit pension plans, include:
<TABLE>
<CAPTION>
JUNE 30
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Discount rate, projected benefit obligation............... 7.0% 6.8% 7.5%
Discount rate, net periodic pension cost.................. 6.8% 7.5% 7.5%
Expected long-term rate of return on assets............... 10.0% 10.0% 10.0%
Rate of increase in compensation levels................... 5.3% 5.8% 5.8%
</TABLE>
DEFINED CONTRIBUTION PLANS
The Company sponsors a savings plan which provides benefits to substantially
all U.S. associates and under which the Company matches employee contributions
at 50% of the first 6% of total pay, which includes base salary, overtime and
annual performance-based bonuses. Vesting of the Company match occurs after
three years for new employees and is 100% for all employees hired before
January 1, 1997. The expense in fiscal years 1999, 1998 and 1997 for the match
was $4.5 million,
F-13
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 5--PENSION AND SAVINGS PLANS (CONTINUED)
$5.1 million and $2.0 million, respectively. Under the plan, the Company also
has the ability to make discretionary profit-sharing contributions. The Company
made no profit sharing contributions during fiscal years 1999, 1998 or 1997. The
Company also sponsors a Canadian Separation Allowance Plan (CSAP) which provides
benefits to substantially all Canadian associates. The CSAP is an unfunded book
reserve arrangement; as such, the amounts due to associates are recorded as a
liability in the consolidated balance sheets of the Company. CSAP expense for
fiscal years 1999, 1998 and 1997 amounted to $377,000, $293,000 and $414,000,
respectively.
NOTE 6--BENEFITS OTHER THAN PENSIONS
HEALTH CARE BENEFITS
The Company sponsors a contributory health care plan that provides
hospitalization, medical and dental benefits to substantially all U.S.
associates. The Company accrues a liability for estimated incurred but
unreported claims based on projected use of the plan as well as paid claims of
prior periods. The liability totaled $2,495,000 at June 30, 1999 and 1998, and
is included in accounts payable and accrued liabilities in the consolidated
balance sheets.
POSTRETIREMENT BENEFITS
The Company provides certain health care and life insurance benefits for
retired associates. The principal plans cover associates in the U.S. and Canada
who have met certain eligibility requirements. The Company's principal plans are
unfunded.
Effective January 1, 1997, premiums paid on the retiree medical plan are
tied to the retiree's years of service. The Company contribution is capped at
200% of 1997 per capita claims cost. Benefits have been redefined to ensure a
retiree benefit comparable to the Watson Wyatt Plan for active employees.
Net periodic postretirement benefit cost consists of the following
components:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost........................................ $1,898 $1,848 $1,891
Interest cost....................................... 2,178 2,133 1,987
Amortization of transition obligation............... 46 46 50
Amortization of net unrecognized gains.............. (488) (584) (559)
Amortization of prior service cost.................. (127) (127) (126)
------ ------ ------
Net periodic postretirement benefit cost............ $3,507 $3,316 $3,243
====== ====== ======
</TABLE>
F-14
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 6--BENEFITS OTHER THAN PENSIONS (CONTINUED)
The following tables set forth the changes in the accumulated postretirement
benefit obligation, company contributions and benefit payments:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Benefit obligation at beginning of year................... $32,326 $30,031
Service cost.............................................. 1,898 1,848
Interest cost............................................. 2,178 2,133
Participant contributions................................. 175 189
Actuarial losses/(gains).................................. (563) (883)
Acquisitions/(divestitures)............................... 245 --
Benefit payments.......................................... (1,267) (849)
Foreign currency adjustment............................... (11) (143)
------- -------
Benefit obligation at end of year......................... $34,981 $32,326
======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Fair value of plan assets at beginning of year.............. $ -- $ --
Company contributions....................................... 1,092 660
Participant contributions................................... 175 189
Benefit payments............................................ (1,267) (849)
------- -----
Fair value of plan assets at end of year.................... $ -- $ --
======= =====
</TABLE>
The accrued other postretirement benefit cost recognized in our consolidated
balance sheets is computed as follows:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Funded status at end of year............................ $(34,981) $(32,326)
Unrecognized prior service cost......................... (1,325) (1,451)
Unrecognized net gain................................... (8,763) (8,664)
Unrecognized transition obligation...................... 650 698
-------- --------
Net accrued postretirement liability.................... $(44,419) $(41,743)
======== ========
Prepaid pension benefit cost............................ $ -- $ --
Accrued postretirement benefit liability................ (44,419) (41,743)
Intangible assets....................................... -- --
Accumulated other comprehensive income.................. -- --
-------- --------
Net accrued postretirement liability.................... $(44,419) $(41,743)
======== ========
</TABLE>
F-15
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 6--BENEFITS OTHER THAN PENSIONS (CONTINUED)
Assumptions used in the valuation for the U.S. plan, which comprises the
majority of the principal postretirement plans, include:
<TABLE>
<CAPTION>
JUNE 30
-------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Health care cost trend, accumulated benefit
obligation:
Pre-65 benefits
(decreasing to 5.0% for 2004 and thereafter)..... 7.7% 8.4% 9.1%
Post-65 benefits
(decreasing to 5.0% for 2007 and thereafter)..... 7.1% 7.7% 8.3%
Discount rate, accumulated benefit obligation
postretirement benefit........................... 7.0% 6.8% 7.5%
Discount rate, net periodic cost................... 7.0% 6.8% 7.5%
</TABLE>
A one percentage point change in the assumed health care cost trend rates
would have the following effect:
<TABLE>
<CAPTION>
1% INCREASE 1% DECREASE
----------- -----------
<S> <C> <C>
Effect on net periodic postretirement benefit cost in
fiscal 1999......................................... $ 233 $ (283)
Effect on accumulated postretirement benefit
obligation as of June 30, 1999...................... 1,925 (2,189)
</TABLE>
NOTE 7--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Accounts payable and accrued liabilities................ $ 53,586 $ 55,865
Accrued salaries and bonuses............................ 68,405 37,567
Current portion of defined benefit retirement plans and
postretirement benefits other than pensions........... 9,948 4,191
Accrued vacation........................................ 13,578 13,300
Advance billings........................................ 6,854 5,625
-------- --------
Total accounts payable and accrued liabilities.......... $152,371 $116,548
======== ========
</TABLE>
NOTE 8--LEASES
The Company leases office space and various computer equipment under
operating lease agreements with terms generally ranging from one to ten years.
The Company has entered into sublease agreements for some of its leased space.
The rental expense was $43,631,000, $43,133,000 and $42,079,000 for fiscal years
1999, 1998 and 1997, respectively. Sublease income was $4,208,000, $3,905,000
and $1,702,000 for fiscal years 1999, 1998 and 1997, respectively.
F-16
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 8--LEASES (CONTINUED)
Future cash outlays for operating lease commitments and cash inflows for
sublease income are:
<TABLE>
<CAPTION>
LEASE SUBLEASE
COMMITMENTS INCOME
----------- --------
<S> <C> <C>
2000................................................... $ 43,771 $3,388
2001................................................... 38,709 3,315
2002................................................... 30,614 2,963
2003................................................... 18,074 115
2004................................................... 14,043 --
thereafter............................................. 25,770 --
-------- ------
$170,981 $9,781
======== ======
</TABLE>
As a result of relocations and the subleasing of excess office space, the
Company recognized lease termination losses of $341,000, $790,000 and
$12,107,000 in fiscal years 1999, 1998 and 1997, respectively.
NOTE 9--NOTE PAYABLE
The Company has a $120,000,000 credit facility with a group of banks at an
interest rate that varies with LIBOR and/or the Prime Rate, plus an annual
commitment fee that varies with the Company's financial leverage and is paid on
the unused portion of the credit facility. No amounts were outstanding under the
revolving portion of the credit facility as of June 30, 1999; $9,000,000 was
outstanding at June 30, 1998. The credit facility requires the Company to
observe certain covenants (including requirements as to minimum net worth and
other financial and restrictive covenants) and is secured by a blanket lien on
all assets. At June 30, 1999 the Company was in compliance with all covenants
under the credit facility. The revolving portion of the credit facility is
scheduled to mature on June 30, 2003.
Of the total credit line, $95,000,000 is available to the Company as
revolving credit for operating needs. The remaining $25,000,000 is available to
secure loans to associates for the purchase of Redeemable Common Stock made
available under the Company's Stock Purchase Program. The Company guarantees
these loans to its shareholders, the aggregate outstanding balances of which
totaled $20,316,000 and $15,617,000 at June 30, 1999 and 1998, respectively.
Shares totaling 4,735,000 and 4,897,000 of the Company's Redeemable Common Stock
were pledged by shareholders to secure these loans at June 30, 1999 and 1998,
respectively.
NOTE 10--REDEEMABLE COMMON STOCK
Substantially all of the Company's Redeemable Common Stock is held by or for
the benefit of its employees and, pursuant to the Company's bylaws, is subject
to certain restrictions. In connection with these restrictions, the Company has
the following rights and obligations regarding purchases and sales of its common
stock:
a) The Company has the first option to purchase, or to designate associates who
are eligible to purchase, any shares offered for sale by a shareholder.
Shares not purchased by the Company or
F-17
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 10--REDEEMABLE COMMON STOCK (CONTINUED)
its designees may be sold to identified transferees, subject to the
restrictions contained in the bylaws.
b) Upon the termination of employment, bankruptcy of a shareholder, or the
imposition of a lien or attachment on any stock, the shares held by the
shareholder or subject to attachment are considered to be offered for sale.
In these circumstances, the Company is obligated to purchase any such
shares.
Pursuant to the Company's bylaws, the price for all sales by the Company of
Redeemable Common Stock is the Formula Book Value per share (defined in the
bylaws as "Formula Book Value") of such stock as of the last day of the
preceding year. Amounts paid by the Company to repurchase Redeemable Common
Stock are equal to the Formula Book Value as of the prior year end, adjusted to
reflect the pro rata appreciation in the Formula Book Value per share from the
last day of the preceding year to the end of the current year and pro rata
dividends paid during the year.
Formula Book Value as used herein means the Net Book Value of the Company's
Redeemable Common Stock as of June 30, 1996, increased or decreased by net
income or losses, and all other Generally Accepted Accounting Principals
("GAAP") basis increases or decreases to Net Book Value occurring after
June 30, 1996, adjusted to (i) spread the economic impact of certain real estate
sublease losses over the remaining life of the sublease, (ii) eliminate annual
changes in the Currency Translation Adjustment occurring after June 30, 1996,
and (iii) eliminate the after tax increases or decreases in Net Book Value
recorded in accordance with GAAP as a result of the discontinuation of the
Benefits Administration Outsourcing Business. The Formula Book Value was $6.68
at June 30, 1999 and $6.05 at June 30, 1998.
The following schedule computes the Formula Book Value per share at
June 30:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Consolidated net worth[1]................................... $ 36,882 $15,742
Adjustment for the compensation survey items:
50% of consolidated income received from compensation
survey business........................................... 5,915 5,915
Add: Adjustment for after-tax effect of discontinuation of
Benefits Administration Outsourcing Business.............. 61,228 69,906
Add: Adjustment for after-tax effect of lease losses........ 3,606 4,733
-------- -------
Formula Book Value of Redeemable Common Stock............... $107,631 $96,296
======== =======
Number of shares of Redeemable Common Stock outstanding..... 16,112 15,917
======== =======
Formula Book Value per share of Redeemable Common Stock..... $ 6.68 $ 6.05
======== =======
</TABLE>
- ------------------------
[1] After adjusting for currency translation as specified in the Company's
bylaws of $3,602 in 1999 and $3,956 in 1998.
In view of the Company's obligation to repurchase its Redeemable Common
Stock, the Securities and Exchange Commission requires that the redemption value
of outstanding shares be classified as Redeemable Common Stock and not be
portrayed as permanent capital. The amount presented as
F-18
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 10--REDEEMABLE COMMON STOCK (CONTINUED)
Redeemable Common Stock outside the permanent shareholders' equity section is
stated at the amount at which the Company would be required to repurchase the
shares, or the most recent fiscal year end Formula Book Value per share. In the
permanent shareholders' equity section, the "adjustment for redemption value
less (greater) than amounts paid/deemed paid in by shareholders" represents the
amount that the Redeemable Value is less than (exceeds) the cost of the stock.
<TABLE>
<CAPTION>
NUMBER OF REDEEMABLE
SHARES COMMON STOCK
---------- ------------
<S> <C> <C>
Balance at June 30, 1996.................................... 18,261,963 $ 90,214
Redemption of shares........................................ (3,258,203) (16,604)
Issuance of shares.......................................... 3,126,670 15,414
Adjustment of redemption value for
change in Formula Book Value per share.................... -- 7,067
---------- --------
Balance at June 30, 1997.................................... 18,130,430 $ 96,091
Redemption of shares........................................ (2,410,425) (13,141)
Issuance of shares.......................................... 196,752 1,005
Adjustment of redemption value for
change in Formula Book Value per share.................... -- 12,341
---------- --------
Balance at June 30, 1998.................................... 15,916,757 $ 96,296
Redemption of shares........................................ (2,361,542) (15,124)
Issuance of shares.......................................... 2,557,201 15,451
Adjustment of redemption value for
change in Formula Book Value per share.................... -- 11,008
---------- --------
Balance at June 30, 1999.................................... 16,112,416 $107,631
========== ========
</TABLE>
The Company sponsors a Stock Purchase Plan ("SPP") which allows virtually
all associates to become shareholders. During 1999, the Company received
$15,451,000 from the sale of 2,557,201 shares of stock under the SPP. There was
no formal stock sale in fiscal year 1998, although for the fiscal year ended
June 30, 1998, the Company received $1,005,000 from the sale of 196,752 shares
of stock outside of the SPP. During fiscal year 1997, the Company received
$15,414,000 from the sale of 3,126,670 shares of stock under the SPP. During
1997, the Company paid each associate purchasing stock $0.50 per share,
resulting in expense of $1,300,000.
NOTE 11--INCOME TAXES
The provision for income taxes is based upon reported income before income
taxes and includes deferred income taxes resulting from differences between
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for income tax purposes. The Company measures deferred taxes
by applying currently enacted tax laws, recognizes deferred tax assets if it is
more likely than not that a benefit will be realized, and provides a valuation
allowance on deferred tax assets to the extent that it is more likely than not
that a benefit will not be realized.
F-19
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 11--INCOME TAXES (CONTINUED)
The components of the continuing operations income tax provision before
minority interest and discontinued operations include:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current tax expense:
U.S....................................................... $10,817 $ 9,972 $ 8,370
State and local........................................... 4,050 3,324 2,773
Foreign................................................... 3,877 1,820 1,484
------- ------- -------
18,744 15,116 12,627
------- ------- -------
Deferred tax (benefit) expense:
U.S....................................................... (5,776) (337) (4,188)
State and local........................................... (1,407) (1,706) (1,507)
Foreign................................................... (113) 61 2,138
------- ------- -------
(7,296) (1,982) (3,557)
------- ------- -------
Total provision for income taxes............................ $11,448 $13,134 $ 9,070
======= ======= =======
</TABLE>
Deferred income tax assets (liabilities) included in the consolidated
balance sheets at June 30, 1999 and June 30, 1998 are comprised of the
following:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Cash method of accounting for U.S. income tax purposes...... $ -- $(15,561)
Difference between book and tax depreciation................ -- (1,987)
Foreign temporary difference................................ (2,595) (914)
------- --------
Gross deferred tax liabilities............................ (2,595) (18,462)
Cash method of accounting for U.S. income tax purposes...... 3,744 --
Difference between book and tax depreciation................ 3,202 --
Accrued retirement benefits................................. 37,137 39,255
Amortization of deferred rent............................... 5,697 6,794
Foreign temporary difference................................ 6,367 3,092
Foreign net operating loss carryforwards.................... 1,989 4,942
Discontinued operations exit costs.......................... 7,230 19,559
Other....................................................... 317 2
------- --------
Gross deferred tax assets................................. 65,683 73,644
------- --------
Deferred tax assets valuation allowance................... (6,882) (6,271)
------- --------
Net deferred tax asset.................................... $56,206 $ 48,911
======= ========
</TABLE>
The Company has foreign tax credit carryforwards for U.S. tax purposes of
$305,000. At June 30, 1999, the Company has unused loss carryforwards for tax
purposes in various jurisdictions outside the
F-20
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 11--INCOME TAXES (CONTINUED)
U.S. amounting to $6,352,000, of which $4,350,000 can be indefinitely carried
forward under local statutes. The majority of the remaining loss carryforwards
will expire, if unused, after the end of fiscal year 2002. The valuation
allowance applies to the tax effect of the foreign net operating loss
carryforwards ($1,944,000), the tax effect of certain foreign temporary expenses
($4,563,000) and foreign tax credit carryforwards and other items ($375,000) for
which realizability is considered uncertain.
The net change in the valuation allowance of $611,000 in fiscal year 1999
and $2,569,000 in fiscal year 1998 is due primarily to the tax effect of the
change in realizable foreign net operating losses, foreign tax credits and
non-deductible foreign expenses.
Domestic and foreign components of income before taxes, minority interest
and discontinued operations for each of the three years ended June 30 are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Domestic........................................ $15,203 $(47,435) $14,861
Foreign......................................... 8,597 4,469 6,757
------- -------- -------
$23,800 $(42,966) $21,618
======= ======== =======
</TABLE>
The reported income tax provision for continuing operations differs from the
amounts that would have resulted had the reported income before income taxes
been taxed at the U.S. federal statutory rate. The principal reasons for the
differences between the actual amounts provided and those which would have
resulted from the application of the U.S. federal statutory tax rate are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Calculated income tax provision at U.S. federal statutory
tax rate of 35%........................................... $ 8,330 $(15,038) $7,507
Increase (reduction) resulting from:
Non-deductible compensation expense....................... -- 24,467 --
Results of non-U.S. affiliates taxed at other than
statutory rates......................................... (377) (324) (463)
Losses of non-U.S. affiliates for which no current benefit
is available............................................ 881 852 599
State income taxes, net of federal tax benefit............ 1,207 1,618 1,266
Non-deductible amortization and other expenses............ 849 758 700
Tax credits............................................... -- (353) (888)
Other..................................................... 558 1,154 349
------- -------- ------
Income tax provision........................................ $11,448 $ 13,134 $9,070
======= ======== ======
</TABLE>
NOTE 12--NON-RECURRING COMPENSATION CHARGE
In accordance with generally accepted accounting principles, the Company has
recorded a charge against operating results of $69,906,000 in 1998 as
compensation expense. This charge arises because the Company changed the method
of calculation of its Formula Book Value during 1998, through a shareholder
vote, to eliminate from the Formula Book Value calculation the effect of the
charge taken
F-21
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 12--NON-RECURRING COMPENSATION CHARGE (CONTINUED)
for discontinued operations resulting from the discontinuation of the Company's
Benefits Administration Outsourcing Business.
The non-recurring compensation charge does not represent a call against
Company resources and will not recur unless the Company modifies its Formula
Book Value calculation again. The Company has separately disclosed in the
Statement of Operations the amount of the charge so that readers of the
financial statements may consider its effect on earnings and infrequent nature.
NOTE 13--SEGMENT INFORMATION
In fiscal year 1999, the Company adopted SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." The Company is primarily
organized geographically and has seven reportable segments:
(1) U.S. East
(2) U.S. Central
(3) U.S. West
(4) Asia/Pacific
(5) Canada
(6) Latin America
(7) Data Services
The Company evaluates the performance of its segments and allocates
resources to them based on net operating income. Prior year data has been
restated to be consistent with current year classifications for comparative
purposes.
The table below presents specified information about reported segments as of
and for the year ended June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. U.S. ASIA/ LATIN DATA
EAST CENTRAL WEST PACIFIC CANADA AMERICA SERVICES TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External fees............... $150,959 $130,568 $54,496 $44,404 $36,515 $5,691 $12,796 $435,429
Intersegment fees........... 37,738 24,369 18,957 4,284 5,010 1,424 329 92,111
Net operating income........ 45,287 27,087 1,236 7,085 3,488 223 3,736 88,142
Interest expense............ 1,158 856 471 17 300 98 5 2,905
Depreciation &
amortization.............. 5,950 4,414 3,351 1,281 1,186 143 185 16,510
Receivables................. 47,198 39,905 18,730 12,729 12,491 2,527 -- 133,580
Income from affiliates...... -- -- -- -- -- -- -- 2,524
</TABLE>
F-22
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 13--SEGMENT INFORMATION (CONTINUED)
The table below presents specified information about reported segments as of
and for the year ended June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. U.S. ASIA/ LATIN DATA
EAST CENTRAL WEST PACIFIC CANADA AMERICA SERVICES TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External fees............... $129,337 $125,639 $68,076 $38,429 $36,221 $6,062 $13,004 $416,768
Intersegment fees........... 28,187 15,296 14,210 3,945 4,443 1,153 249 67,483
Net operating income........ 28,286 25,127 10,476 65 4,315 574 3,742 72,585
Interest expense............ 963 710 494 33 314 68 14 2,596
Depreciation &
amortization.............. 5,801 3,758 2,822 1,458 1,077 149 166 15,231
Receivables................. 36,044 33,113 21,375 11,719 11,992 2,097 -- 116,340
Income from affiliates...... -- -- -- -- -- -- -- 258
</TABLE>
The table below presents specified information about reported segments as of
and for the year ended June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. U.S. ASIA/ LATIN DATA
EAST CENTRAL WEST PACIFIC CANADA AMERICA SERVICES TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External fees............... $126,077 $121,613 $63,989 $45,468 $34,743 $5,024 $12,062 $408,976
Intersegment fees........... 17,518 12,739 8,002 2,851 2,789 784 573 45,256
Net operating income........ 18,169 26,797 11,595 5,162 2,595 225 3,146 67,689
Interest expense............ 1,165 799 322 10 262 35 17 2,610
Depreciation &
amortization.............. 5,838 3,555 2,353 1,599 1,006 132 193 14,676
Receivables................. 34,042 32,416 15,134 17,821 10,812 2,345 -- 112,570
Income from affiliates...... -- -- -- -- -- -- -- 105
</TABLE>
F-23
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 13--SEGMENT INFORMATION (CONTINUED)
Information about interest income and tax expense is not presented as it is
not produced internally.
A reconciliation of the information reported by segment to the consolidated
amounts follows for the years ended June 30:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
FEES:
Total segment external and intersegment fees................ $527,540 $484,251 $454,232
Reimbursable expenses not included in segment fees.......... 30,426 28,686 30,091
Other, net.................................................. (1,106) (277) 2,179
-------- -------- --------
Consolidated fees........................................... $556,860 $512,660 $486,502
======== ======== ========
NET OPERATING INCOME:
Total segment income........................................ $ 88,142 $ 72,585 $ 67,689
Non-recurring compensation charge........................... -- (69,906) --
Sublease loss............................................... (341) (790) (12,107)
Income from affiliates...................................... 2,524 258 105
Differences in allocation methods for depreciation, G&A and
pension costs............................................. 1,277 (6,208) 3,913
Gain on sale of business units.............................. 2,723 3,093 --
Discretionary payments...................................... (67,194) (37,400) (34,703)
Other, net.................................................. (3,331) (4,598) (3,279)
-------- -------- --------
Consolidated pretax income (loss) from continuing
operations................................................ $ 23,800 $(42,966) $ 21,618
======== ======== ========
INTEREST EXPENSE:
Total segment expense....................................... $ 2,905 $ 2,596 $ 2,610
Differences in allocation method............................ (259) 172 (1,104)
-------- -------- --------
Consolidated interest expense............................... $ 2,646 $ 2,768 $ 1,506
======== ======== ========
DEPRECIATION & AMORTIZATION:
Total segment expense....................................... $ 16,510 $ 15,231 $ 14,676
Capitalized software amortization, not allocated to
segments.................................................. -- 12,267 9,451
Goodwill amortization, not allocated to segments............ 1,568 549 695
Differences in allocation method and other.................. (2,830) (3,053) (2,728)
-------- -------- --------
Consolidated depreciation and amortization expense.......... $ 15,248 $ 24,994 $ 22,094
======== ======== ========
RECEIVABLES:
Total segment receivables................................... $133,580 $116,340 $112,570
Net valuation differences and receivables of discontinued
operations................................................ 2,286 13,056 11,191
-------- -------- --------
Total billed and unbilled receivables....................... 135,866 129,396 123,761
Assets not reported by segment.............................. 178,094 138,914 208,017
-------- -------- --------
Consolidated assets......................................... $313,960 $268,310 $331,778
======== ======== ========
</TABLE>
F-24
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 13--SEGMENT INFORMATION (CONTINUED)
The following represents total fees and long lived assets information by
geographic area as of and for the years ended June 30:
<TABLE>
<CAPTION>
FEES LONG LIVED ASSETS
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
United States.......................... $464,521 $424,246 $395,351 $105,481 $ 95,617 $156,692
Foreign................................ 92,339 88,414 91,151 25,794 20,731 17,781
-------- -------- -------- -------- -------- --------
$556,860 $512,660 $486,502 $131,275 $116,348 $174,473
======== ======== ======== ======== ======== ========
</TABLE>
Fee revenue is based on the country of domicile for the legal entity which
originated the fees. Exclusive of the United States, fees from no single country
constituted more than 10% of consolidated revenues. Fees from no single customer
constituted more than 10% of consolidated revenues.
NOTE 14--RELATED PARTY TRANSACTIONS
In connection with the contractual servicing of the Retained Clients (as
defined in Note 16 of this report) which continued through September 1998,
Wellspring provided the services to those clients on behalf of the Company.
Expenses charged to the Company by Wellspring for such services for fiscal 1999,
1998 and 1997 were $11,600,000, $41,811,000 and $40,313,000, respectively. The
Company's obligation to service the Retained Clients ceased in fiscal year 1999
and there were no amounts due to Wellspring at June 30, 1999, compared with
$1,186,000 at June 30, 1998.
NOTE 15--COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a defendant in certain lawsuits arising in the normal course
of business, some of which are in their earliest stages. Management currently
foresees no material liability to the Company resulting from such litigation,
and management believes that the Company carries adequate insurance, above
reasonable deductibles, or has appropriately accrued against any foreseeable
outcome of such litigation.
As of June 30, 1999, the Company and its affiliates had outstanding letters
of credit of $2,225,000.
The Company continues to guarantee certain leases for office premises and
equipment for Wellspring. Minimum remaining payments guaranteed under these
leases at June 30, 1999 total $59,800,000, 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. The estimated loss from the
potential exercise of these guarantees has been included in the loss on disposal
of the Benefits Administration Outsourcing Business.
Anticipated commitments of funds for fiscal year 2000 are estimated at
$30,100,000, which includes expected purchases of fixed assets and an
installment payment during the fiscal year related to the purchase of one
consulting operation. The Company expects operating cash flows to provide for
the Company's cash needs.
F-25
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 16--DISCONTINUED OPERATIONS
During the third quarter of fiscal year 1998, the Company discontinued its
Benefits Administration Outsourcing Business, including its investment in its
affiliate Wellspring Resources LLC ("Wellspring"), pursuant to a Redemption,
Restructuring, and Indemnity Agreement ("the Restructuring Agreement") by which
Wellspring redeemed the Company's 50% interest in Wellspring effective April 1,
1998. The restructuring effected, pursuant to the Restructuring Agreement, the
implementation of a discontinuation plan approved by the Company's Board of
Directors on February 18, 1998. Under the Restructuring Agreement, certain
outsourcing contracts retained by the Company when Wellspring was initially
formed in 1996 ("Retained Clients") would continue to be performed until their
respective contract expirations.
In connection with the restructuring, the Company agreed to indemnify
Wellspring for certain costs and losses as a result of services provided by
Wellspring on the Company's behalf. Further, the Company was released from
certain liabilities relating to the Wellspring business in connection with the
redemption.
In 1998, the Company recorded a pre-tax loss on discontinuation of
$109,800,000, which included the $45,200,000 write-off of its investment in
Wellspring, a $14,000,000 write-off of net capitalized software development
costs for the Retained Clients and a $50,600,000 provision for completion of any
obligations to clients, vendors or its former venture partner.
In October 1998, the Company consummated agreements with the remaining
Retained Clients, Wellspring, and its former venture partner to transfer
operating responsibility for these clients to Wellspring, clarifying the
remaining future obligations and costs related to the discontinuation.
Management believes that savings of $25,000,000 compared with initial estimates
made in the third quarter of fiscal 1998 and $15,000,000 from the amount
provided at June 30, 1998 will be realized from these events. The Company
reduced the amount of its provision for losses from disposal of the Benefits
Administration Outsourcing Business in the second quarter of fiscal year 1999. A
credit to income of $15,000,000, less the associated tax expense of $6,322,000,
is reflected in the Consolidated Statement of Operations for fiscal year 1999 in
the line "Adjustment (loss) on disposal of discontinued Outsourcing Business".
F-26
<PAGE>
WATSON WYATT & COMPANY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING ADDITIONS CHARGED ADDITIONS CHARGED END OF
DESCRIPTION OF YEAR AGAINST FEES TO OTHER ACCOUNTS DEDUCTIONS YEAR
- ----------- ---------- ----------------- ----------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1999
----------------------------------------------------------------------------
Allowance for doubtful
accounts..................... $2,142 $9,503 $ -- $(7,944) $3,701
Valuation allowance for
deferred tax assets.......... 6,271 -- 611(1) -- 6,882
YEAR ENDED JUNE 30, 1998
----------------------------------------------------------------------------
Allowance for doubtful
accounts..................... $2,525 $5,613 $ -- $(5,996) $2,142
Valuation allowance for
deferred tax assets.......... 3,702 -- 2,569(1) -- 6,271
YEAR ENDED JUNE 30, 1997
----------------------------------------------------------------------------
Allowance for doubtful
accounts..................... $5,161 $6,853 $ -- $(9,489) $2,525
Valuation allowance for
deferred tax assets.......... 3,331 -- 371(1) -- 3,702
</TABLE>
- ------------------------
(1) Represents current year net operating loss carryforwards and the
nondeductible foreign expenses for which realizability is considered
uncertain.
F-27
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Fees........................................................ $298,734 $274,343
-------- --------
Costs of providing services:
Salaries and employee benefits............................ 160,753 148,868
Stock incentive bonus plan................................ 15,000 7,600
Occupancy and communications.............................. 30,423 29,954
Professional and subcontracted services................... 24,927 22,052
Other..................................................... 16,300 11,586
-------- --------
247,403 220,060
General and administrative expenses......................... 27,902 27,852
Depreciation and amortization............................... 9,517 7,824
-------- --------
284,822 255,736
-------- --------
Income from operations...................................... 13,912 18,607
Other:
Interest income........................................... 1,252 528
Interest expense.......................................... (1,088) (1,721)
Income from affiliates...................................... 2,143 1,025
-------- --------
Income before income taxes and minority interest............ 16,219 18,439
Provision for income taxes.................................. 7,835 8,917
Income before minority interest............................. 8,384 9,522
Minority interest in net loss/(income) of consolidated
subsidiaries.............................................. 176 (85)
-------- --------
Income from continuing operations........................... 8,560 9,437
Discontinued operations:
Adjustment to reduce loss on disposal of discontinued
Outsourcing Business [less applicable income tax expense
of $0, $6,322, $0 and $6,322 respectively]................ -- 8,678
-------- --------
Net income.................................................. $ 8,560 $ 18,115
======== ========
Earnings per share, continuing operations, basic and fully
diluted................................................... $ 0.57 $ 0.63
======== ========
Earnings per share, discontinued operations, basic and fully
diluted................................................... $ -- $ 0.58
======== ========
Earnings per share, net income, basic and fully diluted..... $ 0.57 $ 1.21
======== ========
Weighted average shares of Redeemable Common Stock, basic
and fully diluted......................................... 15,140 14,977
======== ========
</TABLE>
See accompanying notes
F-28
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 13,688 $ 35,985
Receivables from clients:
Billed, net of allowances of $6,436 and $3,701............ 82,838 72,798
Unbilled.................................................. 64,707 63,068
-------- --------
147,545 135,866
Other current assets........................................ 9,734 10,834
-------- --------
Total current assets...................................... 170,967 182,685
Investment in affiliates.................................... 17,109 15,306
Fixed assets, net........................................... 38,381 42,797
Deferred income taxes....................................... 56,206 56,206
Intangible assets, net...................................... 9,484 7,455
Other assets................................................ 8,877 9,511
-------- --------
$301,024 $313,960
======== ========
LIABILITIES, REDEEMABLE COMMON STOCK AND PERMANENT SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $143,821 $152,371
Note payable and book overdrafts............................ 8,401 248
Income taxes payable........................................ 9,863 18,374
-------- --------
Total current liabilities................................. 162,085 170,993
Accrued retirement benefits................................. 74,233 77,140
Deferred rent and accrued lease losses...................... 7,628 9,270
Other noncurrent liabilities................................ 22,249 22,608
Minority interest in subsidiaries........................... 550 669
Redeemable Common Stock--$1 par value:
25,000,000 shares authorized; 14,879,886 and 16,112,416
issued and outstanding; at redemption value............. 99,398 107,631
Permanent shareholders' equity:
Adjustment for redemption value less than amounts paid in by
shareholders.............................................. 10,547 11,420
Retained deficit............................................ (74,198) (83,209)
Cumulative translation adjustment (accumulated other
comprehensive loss)....................................... (1,468) (2,562)
Commitments and contingencies...............................
-------- --------
$301,024 $313,960
======== ========
</TABLE>
See accompanying notes
F-29
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from (used for) operating activities:
Net income................................................ $ 8,560 $ 18,115
Adjustments to reconcile net income to net cash provided
by operating activities:
Adjustment to reduce loss on discontinued operations.... -- (8,678)
Provision for doubtful receivables from clients......... 6,203 6,423
Depreciation............................................ 8,651 7,184
Amortization of intangible assets....................... 866 641
Income from affiliates.................................. (2,143) (1,025)
Minority interest in net (loss) income of consolidated
subsidiaries.......................................... (176) 85
(Increase) decrease in assets (net of discontinued
operations):
Receivables from clients.............................. (17,882) (27,822)
Income taxes receivable............................... -- 2,216
Other current assets.................................. 1,100 (1,900)
Other assets.......................................... 634 1,133
(Decrease) increase in liabilities (net of discontinued
operations):
Accounts payable and accrued liabilities.............. (8,550) (4,093)
Income taxes payable.................................. (8,511) 5,177
Accrued retirement benefits........................... (2,907) 1,783
Deferred rent and accrued lease losses................ (1,642) (1,498)
Other noncurrent liabilities.......................... 279 870
Other, net.............................................. (584) (138)
Discontinued operations, net............................ (637) (4,466)
-------- --------
Net cash used for operating activities.................. (16,739) (5,993)
-------- --------
Cash flows from (used in) investing activities:
Purchases of fixed assets................................. (3,636) (6,297)
Acquisitions.............................................. (2,800) (6,158)
Investment in affiliates.................................. 594 2,257
-------- --------
Net cash used in investing activities................... (5,842) (10,198)
-------- --------
Cash flows from (used by) financing activities:
Net borrowings and book overdrafts........................ 8,153 24,906
Issuances of Redeemable Common Stock...................... -- --
Repurchases of Redeemable Common Stock.................... (8,656) (10,584)
-------- --------
Net cash (used by) from financing activities............ (503) 14,322
-------- --------
Effect of exchange rates on cash............................ 787 283
-------- --------
Decrease in cash and cash equivalents....................... (22,297) (1,586)
Cash and cash equivalents at beginning of period............ 35,985 13,405
-------- --------
Cash and cash equivalents at end of period.................. $ 13,688 $ 11,819
======== ========
</TABLE>
See accompanying notes
F-30
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN PERMANENT SHAREHOLDERS' EQUITY
(THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENT FOR
REDEMPTION VALUE
CUMULATIVE LESS THAN AMOUNTS
RETAINED TRANSLATION PAID IN BY
DEFICIT LOSS SHAREHOLDERS TOTAL
-------- ----------- ----------------- --------
<S> <C> <C> <C> <C>
Balance at June 30, 1999..................... $(83,209) $(2,562) $11,420 $(74,351)
Comprehensive Income:
Net income................................. 8,560 -- -- 8,560
Foreign currency translation adjustment.... -- 1,094 -- 1,094
-------- ------- ------- --------
Total Comprehensive Income................... 8,560 1,094 -- 9,654
Effect of repurchases of 1,232,530 shares of
common stock............................... 451 -- (451) --
Adjustment of redemption value for change in
Formula Book Value per share............... -- -- (422) (422)
-------- ------- ------- --------
Balance at December 31, 1999................. $(74,198) $(1,468) $10,547 $(65,119)
======== ======= ======= ========
</TABLE>
See accompanying notes
F-31
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited consolidated financial statements of Watson
Wyatt & Company and its subsidiaries, (collectively, "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,
consisting only of normal recurring 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 for the fiscal year
ended June 30, 1999.
The results of operations for the six months ended December 31, 1999 are not
necessarily indicative of the results that can be expected for the entire
fiscal year ending June 30, 2000. The results reflect prorata growth in
share value, anticipated tax rates and potential distributions at the
discretion of the Company's Board of Directors. Certain prior year amounts
have been reclassified to conform to the current year presentation.
2. On January 19, 2000, the Company filed registration statements on Form S-3
and Form S-4 with the Securities and Exchange Commission to offer its common
stock to the public through a corporate reorganization and Initial Public
Offering ("IPO"). As a part of this proposed transaction, the current
operating company, Watson Wyatt & Company, will merge with an indirect
wholly-owned subsidiary to become a wholly-owned subsidiary of Watson
Wyatt & Company Holdings.
3. Under the Company's current Bylaws, the Company is obligated to repurchase
its Redeemable Common Stock, except in certain circumstances. Accordingly,
the redemption value of outstanding shares is classified as Redeemable
Common Stock and not as permanent shareholders' equity. Redeemable Common
Stock is equal to the number of shares outstanding multiplied by the Formula
Book Value per share, which was $6.68 per share at December 31, 1999 and
June 30, 1999. Permanent shareholders' equity includes an adjustment for the
difference between the redemption value of the Redeemable Common Stock and
the amounts actually paid or deemed paid by shareholders for the shares.
4. During the six months ended December 31, 1999, the Company repurchased
1,232,530 shares of Redeemable Common Stock. The computation of earnings per
share, basic and fully diluted, is based upon the weighted average number of
shares of Redeemable Common Stock outstanding during the period. The number
of shares (in thousands) used in the computation is 15,140 and 14,977 for
the six months ended December 31, 1999 and 1998, respectively.
5. In the third quarter of fiscal year 1998, the Company discontinued its
Benefits Administration Outsourcing Business, including its investment in
its affiliate Wellspring Resources, LLC ("Wellspring") and recorded an
after-tax loss of $69.9 million related thereto. In October 1998, the
Company consummated agreements with certain clients, Wellspring, and its
former venture partner to transfer operating responsibility for these
clients to Wellspring, clarifying the remaining future obligations and costs
related to the discontinuation. The Company reduced the amount of its
provision for losses from disposal of the Outsourcing Business in the second
quarter of fiscal year 1999 by $8.7 million, net of tax, and believes it has
adequate provisions for any remaining costs.
F-32
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. Subsequent to the end of its second fiscal quarter, the Company approved an
anticipated restructuring plan for its Canadian operations. Costs for the
plan will be included in subsequent operating results.
7. The Company has adopted SFAS No. 130 "Reporting Comprehensive Income."
Comprehensive Income includes net income and changes in the cumulative
translation gain or loss. For the six months ended December 31, 1999 and
1998, Comprehensive Income totaled $9.7 million and $18.5 million,
respectively.
8. In fiscal year 1999, the Company adopted SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." The Company is primarily
organized geographically and has seven reportable segments:
(1) U.S. East
(2) U.S. Central
(3) U.S. West
(4) Asia/Pacific
(5) Canada
(6) Latin America
(7) Data Services
The Company evaluates the performance of its segments and allocates
resources to them based on net operating income. Prior year and first quarter
fiscal year 2000 data have been restated to be consistent with current
classifications for comparative purposes.
The table below presents specified information about reported segments as of
and for the six months ended December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. U.S. ASIA/ LATIN DATA
EAST CENTRAL WEST PACIFIC CANADA AMERICA SERVICES TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fees.......................... $104,658 $83,184 $39,192 $26,838 $19,668 $3,288 $6,903 $283,731
Net operating income/(loss)... 27,995 14,205 4,029 2,960 (784) (514) 2,943 50,834
Receivables................... 57,480 45,724 18,338 14,141 10,661 2,229 -- 148,573
</TABLE>
The table below presents specified information about reported segments as of
and for the six months ended December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. U.S. ASIA/ LATIN DATA
EAST CENTRAL WEST PACIFIC CANADA AMERICA SERVICES TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fees........................... $93,565 $74,113 $40,299 $23,635 $19,672 $2,699 $7,971 $261,954
Net operating income/(loss).... 25,396 12,367 4,866 2,562 491 (710) 3,206 48,178
Receivables.................... 48,795 44,439 21,708 12,436 11,896 1,718 -- 140,992
</TABLE>
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.
F-33
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
A reconciliation of the information reported by segment to the consolidated
amounts follows for the six month periods ended December 31:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Fees:
Total segment fees.......................................... $283,731 $261,954
Reimbursable expenses not included in total segment fees.... 15,381 14,284
Other, net.................................................. (378) (1,895)
-------- --------
Consolidated fees........................................... $298,734 $274,343
======== ========
Net Operating Income:
Total segment net operating income.......................... $ 50,834 $ 48,178
Income from affiliates...................................... 2,143 1,025
Differences in allocation methods for depreciation, G&A and
pension costs............................................. 2,515 (1,396)
Gain on sale of business units.............................. -- 3,822
Discretionary bonuses and SIBP.............................. (41,750) (31,548)
Other, net.................................................. 2,477 (1,642)
-------- --------
Consolidated pretax income from continuing operations....... $ 16,219 $ 18,439
======== ========
Receivables:
Total segment receivables--billed and unbilled.............. $148,573 $140,992
Net valuation differences and receivables of discontinued
operations................................................ (1,028) 1,406
-------- --------
Total billed and unbilled receivables....................... 147,545 142,398
Assets not reported by segment.............................. 153,479 139,621
-------- --------
Consolidated assets......................................... $301,024 $282,019
======== ========
</TABLE>
9. In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" (SAB 101) which summarizes certain of
the staff's views on revenue recognition. The Company's revenue recognition
policies have been and continue to be in accordance with SAB 101.
F-34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 2000
[LOGO]
WATSON WYATT & COMPANY HOLDINGS
5,600,000 SHARES OF CLASS A COMMON STOCK
--------------
PROSPECTUS
-----------------
DONALDSON, LUFKIN & JENRETTE
BANC OF AMERICA SECURITIES LLC
DLJDIRECT INC.
----------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO
MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY ON UNAUTHORIZED
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE THAT
WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALES MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THE AFFAIRS OF WATSON WYATT
HAVE NOT CHANGED SINCE THE DATE HEREOF.
UNTIL , 2000, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATIONS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts, other than SEC, NASD and
NYSE fees, are estimates.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 21,120
NASD filing fee............................................. 5,100
NYSE listing fee............................................ 182,600
Printing and engraving expenses............................. 100,000
Legal fees and expenses..................................... 500,000
Accounting fees and expenses................................ 400,000
Blue sky fees and expenses.................................. 10,000
Transfer agent and registrar fees and expenses.............. 1,500
Miscellaneous fees and expenses............................. 279,680
----------
Total..................................................... $1,500,000
==========
</TABLE>
Watson Wyatt & Company Holdings will bear all of the expenses shown above.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection (a) of Section 145 of the Delaware General Corporation Law
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or complete action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no cause
to believe his conduct was unlawful.
Subsection (b) of Section 145 of the Delaware General Corporation Law
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person acted in any of the capacities set forth
above, against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification may be made in respect to any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action
or suit was brought shall determine that despite the adjudication of liability
such person is fairly and reasonably entitled to indemnity for such expenses
which the court shall deem proper.
Section 145 of the Delaware General Corporation Law further provides that to
the extent a director, officer, employee or agent of a corporation has been
successful in the defense of any action, suit or proceeding referred to in
subsections (a) and (b) or in the defense of any claim, issue or matter
II-1
<PAGE>
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith; that
indemnification or advancement of expenses provided for by Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and empowers the corporation to purchase and maintain insurance on
behalf of a director, officer, employee or agent of the corporation against any
liability asserted against him or incurred by him in any such capacity or
arising out of his status as such whether or not the corporation would have the
power to indemnify him against such liabilities under Section 145.
- Our certificate of incorporation provides that no director, or person
serving on a committee of the Board of Directors, shall be personally
liable to Watson Wyatt & Company Holdings or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability:
for any breach of that director's duty of loyalty to Watson Wyatt &
Company Holdings or its stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation provides that we must indemnify our
directors, officers and employees against any liability incurred in connection
with any proceeding in which they may be involved as a party or otherwise, by
reason of the fact that he or she is or was a director, officer, employee, or
agent of Watson Wyatt & Company Holdings or is or was serving at the request of
Watson Wyatt & Company Holdings as a director, officer, employee, agent,
fiduciary or trustee of another corporation, partnership, joint venture, trust,
employee benefit plan, or other entity or enterprise, except:
- to the extent that such indemnification against a particular liability is
expressly prohibited by applicable law;
- for a breach of such person's duty of loyalty to Watson Wyatt & Company
Holdings or its stockholders;
- for acts or omission not in good faith;
- for intentional misconduct or a knowing violation of law; or
- for any transaction resulting in receipt by such person of an improper
personal benefit.
Such indemnification may include advances of expenses prior to the final
disposition of such proceeding.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1.1 ** Form of Underwriting Agreement
2.1 * Form of Agreement and Plan of Merger, among Watson Wyatt &
Company, Watson Wyatt & Company Holdings and WW Merger
Subsidiary, Inc.
3.1 * Form of Amended and Restated Certificate of Incorporation of
Watson Wyatt & Company Holdings
3.2 * Form of Amended and Restated By-laws of Watson Wyatt &
Company Holdings
4.1 * Specimen Certificate for Watson Wyatt & Company Holdings'
class A common stock
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
5.1 * Opinion of Cadwalader, Wickersham & Taft
10.1 * Amended and Restated Credit Agreement, between Watson Wyatt
& Company and NationsBank, N.A., dated June 30, 1998,
incorporated by reference to Watson Wyatt & Company's annual
report on Form 10-K for its fiscal year ended June 30, 1998
(File No. 0-20724)
10.2 * Agreement with David B. Friend, M.D., dated October 22, 1999
10.3 * Lease between Watson Wyatt & Company and Marvin M.
Robertson, et al., dated January 9, 1998.
21.1 * Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ernst & Young LLP
23.3 * Consent of Cadwalader, Wickersham & Taft (included in
Exhibit 5.1)
24.1 * Power of Attorney
27.1 * Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed
** To be filed by amendment
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 2 to Registration Statement (No. 333-94973) to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Bethesda, State of
Maryland, on April 18, 2000.
<TABLE>
<S> <C> <C>
WATSON WYATT & COMPANY HOLDINGS
BY: /s/ John J. Haley*
--------------------------------------
NAME: JOHN J. HALEY
--------------------------------------
TITLE: President and Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to Registration Statement (No. 333-94973) has been signed by the
following persons in the capacities and on the dates indicated below:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ John J. Haley* President and Chief Executive April 18, 2000
- ------------------------------------------- Officer
Name: JOHN J. HALEY
/s/ Carl D. Mautz* Chief Financial Officer April 18, 2000
- ------------------------------------------- (Principal Financial Officer
Name: CARL D. MAUTZ and Principal Accounting
Officer)
/s/ Thomas W. Barratt* Director April 18, 2000
- -------------------------------------------
Name: THOMAS W. BARRATT
/s/ Paula A. DeLisle* Director April 18, 2000
- -------------------------------------------
Name: PAULA A. DELISLE
/s/ David B. Friend, M.D.* Director April 18, 2000
- -------------------------------------------
Name: DAVID B. FRIEND, M.D.
/s/ John J. Gabarro* Director April 18, 2000
- -------------------------------------------
Name: JOHN J. GABARRO
/s/ Ira T. Kay* Director April 18, 2000
- -------------------------------------------
Name: IRA T. KAY
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Brian E. Kennedy* Director April 18, 2000
- -------------------------------------------
Name: BRIAN E. KENNEDY
/s/ Eric P. Lofgren* Director April 18, 2000
- -------------------------------------------
Name: ERIC P. LOFGREN
/s/ Robert D. Masding* Director April 18, 2000
- -------------------------------------------
Name: ROBERT D. MASDING
/s/ R. Michael McCullough* Director April 18, 2000
- -------------------------------------------
Name: R. MICHAEL MCCULLOUGH
/s/ Gail E. McKee* Director April 18, 2000
- -------------------------------------------
Name: GAIL E. MCKEE
/s/ Kevin L. Meehan* Director April 18, 2000
- -------------------------------------------
Name: KEVIN L. MEEHAN
Director
- -------------------------------------------
Name: GILBERT T. RAY
/s/ John A. Steinbrunner* Director April 18, 2000
- -------------------------------------------
Name: JOHN A. STEINBRUNNER
/s/ A. Grahame Stott* Director April 18, 2000
- -------------------------------------------
Name: A. GRAHAME STOTT
/s/ Charles P. Wood, Jr.* Director April 18, 2000
- -------------------------------------------
Name: CHARLES P. WOOD, JR.
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ Walter W. Bardenwerper
--------------------------------------
WALTER W. BARDENWERPER
Attorney-in-fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1.1** Form of Underwriting Agreement
2.1* Form of Agreement and Plan of Merger, among Watson Wyatt &
Company, Watson Wyatt & Company Holdings and WW Merger
Subsidiary, Inc.
3.1* Form of Amended and Restated Certificate of Incorporation of
Watson Wyatt & Company Holdings
3.2* Form of Amended and Restated Bylaws of Watson Wyatt &
Company Holdings
4.1* Specimen Certificate for Watson Wyatt & Company Holdings'
class A common stock
5.1* Opinion of Cadwalader, Wickersham & Taft
10.1* Amended and Restated Credit Agreement between Watson Wyatt &
Company and NationsBank, N.A., dated June 30, 1998,
incorporated by reference to Watson Wyatt & Company's annual
report on Form 10K for its fiscal year ended June 30, 1998
(File No. 0-20724)
10.2* Agreement with David B. Friend, M.D., dated October 22, 1999
10.3* Lease between Watson Wyatt & Company and Marvin M.
Robertson, et al., dated January 9, 1998.
21.1* Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ernst & Young LLP
23.3* Consent of Cadwalader, Wickersham & Taft (included in
Exhibit 5.1)
24.1* Power of Attorney
27.1* Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed
** To be filed by amendment
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-3 of
our report dated September 8, 1999, except as to the information presented in
Notes 5 and 6, for which the date is December 9, 1999, relating to the
financial statements and financial statement schedule of Watson Wyatt and
Company, which appear in such Registration Statement. We also consent to the
references to us under the headings "Experts" and "Selected Financial Data"
in such Registration Statement.
PricewaterhouseCoopers LLP
Washington, D.C.
April 18, 2000
<PAGE>
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 2 to the Registration Statement (Form S-3 No. 333-94973) and
related Prospectus of Watson Wyatt & Company Holdings pertaining to the
registration of its Class A Common Stock and to the incorporation by
reference therein of our report dated July 18, 1997, with respect to the
financial statements of Wellspring Resources LLC included in Form 10-K of
Watson Wyatt & Company for the year ended June 30, 1999, filed with the
Securities and Exchange Commission.
Ernst & Young LLP
Jacksonville, Florida
April 18, 2000
