UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission File Number: 0-20724
WATSON WYATT & COMPANY HOLDINGS
(Exact name of registrant as specified in its charter)
Delaware 53-0181291
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
1717 H Street NW
Washington, DC 20006-3900
(Address of principal executive offices, including zip code)
(202) 715-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 14, 2000.
Class A Common Stock, $.01 par value 6,440,000
------------------------------------ ----------------
Class B Common Stock, $.01 par value 26,488,710
------------------------------------ ----------------
Class Number of Shares
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY HOLDINGS
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended September 30,
--------------------------------
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Revenue $ 170,693 $ 146,323
------------ ------------
Costs of providing services:
Salaries and employee benefits 89,763 79,803
Stock incentive bonus plan - 6,000
Professional and subcontracted services 11,179 9,796
Occupancy, communications and other 26,644 22,016
General and administrative expenses 15,131 13,178
Depreciation and amortization 5,917 4,907
------------ ------------
148,634 135,700
------------ ------------
Income from operations 22,059 10,623
Other:
Interest income 577 1,036
Interest expense (273) (390)
Income from affiliates 1,016 988
------------ ------------
Income before income taxes and minority interest 23,379 12,257
Provision for income taxes 10,031 5,919
------------ ------------
Income before minority interest 13,348 6,338
Minority interest in net (income) loss of consolidated subsidiaries (13) 18
------------ ------------
Net income $ 13,335 $ 6,356
============ ============
Earnings per share, net income, basic and fully diluted $ 0.45 $ 0.21
============ ============
Weighted average shares of Common Stock, basic and fully diluted 29,617 30,662
============ ============
See accompanying notes
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY HOLDINGS
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF U.S. DOLLARS)
September 30, September 30, June 30,
2000 2000 2000
------------- ------------- -------------
Historical Pro-Forma Historical
(Unaudited) (Unaudited)
See Note 2
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 17,246 $ 17,246 $ 41,410
Receivables from clients:
Billed, net of allowances of $6,346 and $2,832 94,424 94,424 76,729
Unbilled, net of allowances of $2,229 and $676 75,097 75,097 66,009
------------- ------------- ------------
169,521 169,521 142,738
Other current assets 13,800 13,800 11,705
------------- ------------- ------------
Total current assets 200,567 200,567 195,853
Investment in affiliates 16,365 16,365 16,615
Fixed assets, net of accumulated depreciation of $87,132 and $83,211 42,787 42,787 45,237
Deferred income taxes 53,355 53,355 53,355
Intangible assets, net of accumulated amortization of $15,682 and $15,288 13,183 13,183 8,721
Other assets 11,572 11,572 10,179
------------- ------------- ------------
Total Assets $ 337,829 $ 337,829 $ 329,960
============= ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 139,295 $ 139,295 $ 167,803
Line of credit and book overdrafts 21,886 21,886 30
Income taxes payable 14,249 14,249 11,843
------------- ------------- ------------
Total current liabilities 175,430 175,430 179,676
Accrued retirement benefits 80,678 80,678 79,462
Deferred rent and accrued lease losses 4,886 4,886 5,456
Other noncurrent liabilities 23,077 23,077 23,657
Minority interest in subsidiaries 534 534 498
Redeemable Common Stock - $1 par value:
25,000,000 shares authorized;
14,807,306 and 14,805,145 issued
and outstanding; at redemption value (historical) 115,497 115,480
Permanent stockholders' equity:
Adjustment for redemption value less
than amounts paid in by shareholders (6,109) (6,097)
Preferred Stock - No par value:
1,000,000 shares authorized;
None issued and outstanding -
Class A Common Stock - $.01 par value:
69,000,000 shares authorized;
None issued and outstanding -
Class B-1 Common Stock - $.01 par value:
15,000,000 shares authorized;
14,807,306 issued and outstanding (pro-forma) 148
Class B-2 Common Stock - $.01 par value:
15,000,000 shares authorized;
14,807,306 issued and outstanding (pro-forma) 148
Additional paid-in capital 109,092
Retained deficit (50,991) (50,991) (64,223)
Cumulative translation adjustment (accumulated other comprehensive loss) (5,173) (5,173) (3,949)
Commitments and contingencies
------------- ------------- ------------
Total Liabilities and Stockholders' Equity $ 337,829 $ 337,829 $ 329,960
============= ============= ============
See accompanying notes
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY HOLDINGS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF U.S. DOLLARS)
Three Months Ended September 30,
--------------------------------
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows used for operating activities:
Net income $ 13,335 $ 6,356
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful receivables from clients 5,963 4,397
Depreciation 5,388 4,519
Amortization of intangible assets 529 388
Income from affiliates (1,016) (988)
Minority interest in net income (loss) of consolidated subsidiaries 13 (18)
(Increase) decrease in assets (net of discontinued operations):
Receivables from clients (32,746) (15,326)
Other current assets (2,095) 445
Other assets (1,393) (397)
(Decrease) increase in liabilities (net of discontinued operations):
Accounts payable and accrued liabilities (28,156) (26,978)
Income taxes payable 2,406 (9,981)
Accrued retirement benefits 1,216 (2,269)
Deferred rent and accrued lease losses (570) (192)
Other noncurrent liabilities (428) 178
Other, net 597 (72)
Discontinued operations, net (102) (637)
------------- -------------
Net cash used for operating activities (37,059) (40,575)
------------- -------------
Cash flows used in investing activities:
Purchases of fixed assets (3,109) (2,645)
Acquisitions (5,908) (2,700)
Distributions from affiliates 907 297
------------- -------------
Net cash used in investing activities (8,110) (5,048)
------------- -------------
Cash flows from financing activities:
Borrowings and book overdrafts 21,856 31,314
Issuances of Common Stock 134 -
Repurchases of Common Stock (232) (7,771)
------------- -------------
Net cash from financing activities 21,758 23,543
------------- -------------
Effect of exchange rates on cash (753) (70)
------------- -------------
Decrease in cash and cash equivalents (24,164) 22,150)
Cash and cash equivalents at beginning of period 41,410 35,985
------------- -------------
Cash and cash equivalents at end of period $ 17,246 $ 13,835
============= =============
See accompanying notes
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY HOLDINGS
CONSOLIDATED STATEMENTS OF CHANGE IN PERMANENT STOCKHOLDERS' EQUITY
(THOUSANDS OF U.S. DOLLARS)
(Unaudited)
Adjustment for
Redemption Value
Cumulative Less Than Amounts
Retained Translation Paid in by
Deficit Loss Stockholders Total
------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
Balance at June 30, 2000 $ (64,223) $ (3,949) $ (6,097) $ (74,269)
Comprehensive Income:
Net income 13,335 - - 13,335
Foreign currency translation adjustment - (1,224) - (1,224)
---------
Total Comprehensive Income 12,111
Effect of repurchases of 17,839 shares of
redeemble common stock (103) - 103 -
Adjustment of redemption value for change
in Formula Book Value per share - - (115) (115)
------------ ---------- ---------- ---------
Balance at September 30, 2000 $ (50,991) $ (5,173) $ (6,109) $ (62,273)
============ ========== ========== =========
See accompanying notes
F-5
</TABLE>
<PAGE>
WATSON WYATT & COMPANY HOLDINGS
Notes to the Consolidated Financial Statements
(Unaudited)
1. The accompanying unaudited quarterly consolidated financial statements
of Watson Wyatt & Company Holdings and our subsidiaries, (collectively
referred to as "we", "Watson Wyatt" or the "Company"), are presented in
accordance with the rules and regulations of the Securities and Exchange
Commission ("SEC") and do not include all of the disclosures normally
required by Generally Accepted Accounting Principles. In the opinion of
management, these statements reflect all adjustments, 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/A for the fiscal year ended June
30, 2000.
The results of operations for the three months ended September 30, 2000
are not necessarily indicative of the results that can be expected for
the entire fiscal year ending June 30, 2001. The results reflect
anticipated tax rates and bonuses paid at the discretion of the Company's
Board of Directors. Certain prior year amounts have been reclassified to
conform to the current year's presentation.
2. In October 2000, we commenced an initial public offering of our class
A common stock. In conjunction with this offering, on October 16, 2000 we
completed changes in our corporate structure involving the merger of
Watson Wyatt & Company with WW Merger Subsidiary, Inc., a wholly owned
subsidiary of Watson Wyatt & Company Holdings. As a result, Watson Wyatt
& Company is now a wholly owned subsidiary of Watson Wyatt & Company
Holdings.
At the time of the reorganization, each share of Watson Wyatt & Company's
Redeemable Common Stock was converted into one share of class B-1 common
stock and one share of class B-2 common stock of Watson Wyatt & Company
Holdings. The class B common stock is divided into two classes to
accommodate two different transfer restriction periods. The class B-1
shares are subject to a transfer restriction period of 12 months
following the public offering date, while the class B-2 shares are
subject to a transfer restriction period of 24 months following the
public offering date, unless waived by the Board of Directors. The Board
of Directors waived the transfer restrictions on a total of 1,559,250
class B-1 and 1,559,250 class B-2 shares to allow for conversion into the
class A shares sold by selling stockholders in the initial public
offering described below. Following the expiration or waiver of the
respective transfer restriction periods, the remaining class B-1 and
class B-2 shares will automatically convert into class A common stock.
The two-for-one share conversion, the elimination of the redeemable
feature of Watson Wyatt & Company's Redeemable Common Stock and the
reclassification of stock to permanent stockholders' equity has been
reflected in the Pro-Forma column of the Consolidated Balance Sheets as
of September 30, 2000, as if the conversion was effected on that date,
and also has been reflected in all earnings per share data on the
Consolidated Statements of Operations for the three months ended
September 30, 2000 and 1999, as if the conversion were effective at the
beginning of each period.
A total of 5,600,000 shares of class A common stock were offered and sold
in our initial public offering at an offering price of $12.50 per share.
Of the shares included in this transaction, Watson Wyatt & Company
Holdings offered 2,800,000 newly-issued shares and the selling
stockholders offered the remaining 2,800,000 shares. On November 8, 2000,
our underwriters exercised their over-allotment option. As a result, the
underwriters purchased 840,000 shares of class A common stock from us and
-6-
<PAGE>
from the selling stockholders at the initial public offering price of
$12.50 per share less the underwriting discount. Of the shares included
in this transaction, Watson Wyatt & Company Holdings sold 521,500
newly-issued shares and the selling stockholders sold 318,500 shares.
Net proceeds to the Company from these transactions were $33.5 million,
net of underwriting discounts, commissions and other offering, merger and
restructuring costs. We did not receive any proceeds from the sale of
shares by the selling stockholders.
3. In the third quarter of fiscal year 1998, we discontinued our benefits
administration outsourcing business, including our investment in our
affiliate, Wellspring Resources, LLC ("Wellspring"). We believe we have
adequate provisions for any remaining costs associated with our
obligations related to the benefits administration outsourcing business.
All Wellspring related activity is reflected on the Statement of Cash
Flows as discontinued operations.
4. We have 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 and current year data has been
restated to be consistent with current classifications for comparative
purposes.
-7-
<PAGE>
The table below presents specified information about reported segments as of
and for the three months ended September 30, 2000 (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>
Revenue (net of
reimbursable
expenses) $ 57,510 $ 49,800 $ 22,420 $ 16,684 $ 11,365 $ 1,950 $ 3,921 $ 163,650
Net operating
income 16,872 13,505 4,066 3,559 834 30 2,038 40,904
Receivables 60,741 54,462 19,809 16,867 13,898 2,943 - 168,720
</TABLE>
<TABLE>
<CAPTION>
The table below presents specified information about reported segments as of
and for the three months ended September 30, 1999 (in thousands):
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>
Revenue (net of
reimbursable
expenses) $ 51,788 $ 40,346 $ 19,514 $ 13,425 $ 9,726 $ 1,565 $ 3,626 $ 139,990
Net operating
income/(loss) 15,027 6,978 2,354 1,598 (208) (298) 1,882 27,333
Receivables 58,459 44,369 18,398 13,552 11,386 2,639 - 148,803
</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.
-8-
<PAGE>
A reconciliation of the information reported by segment to the consolidated
amounts follow for the three month period ended September 30:
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
2000 1999
---- ----
<S> <C> <C>
Revenue:
--------
Total segment revenue $ 163,650 $ 139,990
Reimbursable expenses not included in total segment revenue 7,017 6,227
Other, net 26 106
---------- ----------
Consolidated revenue $ 170,693 $ 146,323
========== ==========
Net Operating Income:
---------------------
Total segment net operating income $ 40,904 $ 27,333
Income from affiliates 1,016 988
Differences in allocation methods for depreciation, G&A and
pension costs (132) 1,789
Gain on sale of business units 400 -
Discretionary compensation (including stock incentive bonus plan
during the three months ended September 30, 1999 only) (19,100) (21,200)
Other, net 291 3,347
---------- ----------
Consolidated pretax income from continuing operations $ 23,379 $ 12,257
========== ==========
Receivables:
------------
Total segment receivables - billed and unbilled $ 168,720 $ 148,803
Net valuation differences and receivables of discontinued
operations
801 (2,007)
---------- ----------
Total billed and unbilled receivables 169,521 146,796
Assets not reported by segment 168,308 157,590
---------- ----------
Consolidated assets $ 337,829 $ 304,386
========== ==========
</TABLE>
5. In December 1999, the SEC issued Staff Accounting Bulletin ("SAB")
No. 101, "Revenue Recognition in Financial Statements" which summarizes
certain of the staff's views on revenue recognition. Our revenue
recognition policies have been and continue to be in accordance with
SAB 101.
6. On October 10, 2000, we granted ,720,000 stock options to associates at
an exercise price equal to the public offering price. The granting of
these options includes no uncertainties that would require variable
accounting under Generally Accepted Accounting Principles.
7. In October 2000, we incurred a non-recurring charge of $3.7 million
resulting from agreements with our employee stockholders related to our
initial public offering. This expense will be recognized in the second
quarter.
Item 2. MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Watson Wyatt & Company Holdings, including our subsidiaries, (collectively
referred to as "we", "Watson Wyatt" or the "Company") is a global provider of
human capital consulting services. We operate on a geographic basis from 60
offices in 18 countries throughout North America, Asia-Pacific and Latin
-9-
<PAGE>
America. We provide services in three principal practice areas: employee
benefits, human resources technologies and human capital consulting. Watson
Wyatt & Company was incorporated in Delaware on February 17, 1958. Watson
Wyatt & Company Holdings was incorporated in Delaware on January 7, 2000.
Including our predecessors, we have been in business since 1946. In 1995, we
entered into an alliance agreement with R. Watson & Sons (now Watson Wyatt
Partners), a United Kingdom-based actuarial, benefits and human resources
consulting partnership that was founded in 1878. We conducted business as The
Wyatt Company until changing our corporate name to Watson Wyatt & Company in
connection with the establishment of the Watson Wyatt Worldwide alliance.
Since 1995, we have marketed our services globally under the Watson Wyatt
Worldwide brand, sharing resources, technologies, processes and business
referrals.
In October 2000, we moved our principal executive offices to 1717 H Street NW,
Washington, DC 20006, from 6707 Democracy Boulevard, Suite 800, Bethesda, MD
20817. Our web site is www.watsonwyatt.com.
GLOBAL OPERATIONS
We are primarily organized based on the following geographic regions: U.S.
East, U.S. Central, U.S. West, Asia-Pacific, Canada and Latin America. We
employ approximately 4,100 associates as follows:
U.S. East 1,020
U.S. Central 1,000
U.S. West 450
Asia-Pacific 740
Canada 470
Latin America 70
Data Services 50
Corporate/Other 300
------
4,100
======
On a worldwide basis, we are primarily managed through the geographic regions
listed above. Like many professional services firms, we also use a
practice-based matrix form of organization within some regions. We are
developing and implementing systems and management reporting to improve
practice-specific information on a company-wide basis.
PRINCIPAL SERVICES
Within the past three fiscal years, we have divested several non-core
businesses - including benefits administration outsourcing, defined
contribution record-keeping and risk management consulting services - in order
to focus on our core consulting areas. These core areas are as follows:
BENEFITS CONSULTING: The Benefits Consulting practice provides analysis,
design and implementation of retirement programs, including actuarial services
and required reporting of plan contributions and funding levels, group health
benefit plan design and provider selection and defined contribution plan
design and related services.
HR TECHNOLOGIES CONSULTING: The HR Technologies Consulting practice develops
technology-based solutions to reduce employer costs and improve employee
service in human resources administration, including web-based applications.
-10-
<PAGE>
HUMAN CAPITAL CONSULTING: The Human Capital Consulting practice provides
comprehensive consulting in compensation plan design, executive compensation,
salary management and organizational effectiveness consulting.
DATA SERVICES: We also produce custom and standard compensation, benefits and
best practices surveys and reference works to clients throughout the world.
Over 5,000 companies participate in our surveys and our services include over
70 remuneration, benefits and employment practices references utilized by
global and local companies in 50 countries.
While we group services into functional categories, management believes our
primary strength is the ability to deliver services without boundaries to meet
the requirements of our clients.
WATSON WYATT WORLDWIDE ALLIANCE
Recognizing that a global organization is essential to service the needs of
our clients, we established operations throughout Europe in the late 1970's by
acquiring local firms and opening new offices. Responding to the rapidly
increasing globalization of the world economy, we made a strategic decision in
1995 to strengthen our European capabilities significantly and extend our
global reach by entering into an alliance agreement with R. Watson & Sons (now
Watson Wyatt Partners), a United Kingdom-based actuarial, benefits and human
resources consulting partnership that was founded in 1878. Since 1995, we have
marketed our services globally under the Watson Wyatt Worldwide brand, sharing
resources, technologies, processes and business referrals.
The Watson Wyatt Worldwide global alliance maintains 85 offices in 30
countries and employs over 5,800 employees. Watson Wyatt & Company Holdings
operates 60 offices in 18 countries in North America, Asia-Pacific and Latin
America. Watson Wyatt Partners operates 11 offices in the United Kingdom,
Ireland and Africa. The alliance operates 14 offices in 9 continental European
countries principally through a jointly owned holding company, Watson Wyatt
Holdings (Europe) Limited, which is 25% owned by Watson Wyatt and 75% owned by
Watson Wyatt Partners.
FINANCIAL STATEMENT OVERVIEW
Watson Wyatt's fiscal year ends June 30. The financial statements contained in
this quarterly report reflect a Consolidated Balance Sheet as of the end of
the first quarter of fiscal year 2001 (September 30, 2000), a pro-forma
Consolidated Balance Sheet as of September 30, 2000 to reflect the changes in
our capital structure as a result of our reorganization (but not the issuance
of additional shares in the initial public offering), a Consolidated Balance
Sheet as of the end of fiscal year 2000 (June 30, 2000), Consolidated
Statements of Operations for the three month periods ended September 30, 2000
and 1999, Consolidated Statements of Cash Flows for the three month periods
ended September 30, 2000 and 1999 and Consolidated Statements of Changes in
Permanent Stockholders' Equity for the three month period ended September 30,
2000.
Although we operate globally as an alliance with our affiliates, the revenues
and operating expenses in the Consolidated Statements of Operations reflect
solely the results of operations of Watson Wyatt & Company Holdings. Our share
of the results of our affiliates, recorded using the equity method of
accounting is reflected in the "Income from affiliates" line. Our principal
affiliates are Watson Wyatt Partners, in which we hold a 10% interest in a
defined distribution pool, and Watson Wyatt Holdings (Europe) Limited, a
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<PAGE>
holding company through which we conduct continental European operations. We
own 25% of Watson Wyatt Holdings (Europe) Limited and Watson Wyatt Partners
owns the remaining 75%.
We derive substantially all of our revenue from fees for consulting services,
which generally are billed at standard hourly rates or on a fixed-fee basis;
management believes the approximate percentages are 60% and 40%, respectively.
Clients are typically invoiced on a monthly basis with revenue recognized as
services are performed. For the most recent three fiscal years, revenue from
U.S. consulting operations have comprised approximately 80% of consolidated
revenue. No single client accounted for more than 4% of our consolidated
revenue for any of the most recent three fiscal years.
In delivering consulting services, our principal direct expenses relate to
compensation of personnel. Salaries and employee benefits are comprised of
wages paid to associates, related taxes, benefit expenses such as pension,
medical and insurance costs and fiscal year-end incentive bonuses. In
addition, professional and subcontracted services represent fees paid to
external service providers for legal, marketing and other services,
approximately 50% of which are specifically reimbursed by our clients and
included in revenue.
Occupancy, communications and other expenses represent expenses for rent,
utilities, supplies and telephone to operate office locations as well as
non-client-reimbursed travel by associates, publications and professional
development. General and administrative expenses include the operational costs
and professional fees paid by corporate management, general counsel,
marketing, human resources, finance, research and technology support.
Historically, we have paid incentive bonuses to associates under a fiscal
year-end bonus program. Beginning in fiscal year 1999 and continuing through
fiscal year 2000, in addition to annual fiscal year-end bonuses, we have
provided supplemental bonus compensation to our employee shareholders pursuant
to our stock incentive bonus plan in an amount representing all income in
excess of a targeted amount. These bonuses were accrued in fiscal year 1999
and fiscal year 2000. The payment of the amount accrued in fiscal year 2000
will be made in January 2001. Following the initial public offering, we
terminated the stock incentive bonus plan.
In October 2000, we incurred a non-recurring charge of $3.7 million resulting
resulting from agreements with our employee stockholders related to our
initial public offering. This expense will be recognized in the second quarter.
See Note 2 of the Consolidated Financial Statements for further information
regarding the initial public offering.
-12-
<PAGE>
Results of Operations. The table below sets forth Consolidated Statement of
of Operations data as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Revenue 100.0% 100.0%
Costs of providing services:
Salaries and employee benefits 52.6 54.5
Stock incentive bonus plan -- 4.1
Professional and subcontracted services 6.5 6.7
Occupancy, communications and other 15.6 15.0
General and administrative expenses 8.9 9.0
Depreciation and amortization 3.5 3.4
----- -----
87.1 92.7
----- -----
Income from operations 12.9 7.3
Other:
Interest income 0.3 0.7
Interest expense (0.1) (0.3)
Income from affiliates 0.6 0.7
----- -----
Income before income taxes and minority interest 13.7 8.4
Provision for income taxes 5.9 4.1
----- -----
Income before minority interest 7.8 4.3
Minority interest in net income of consolidated
subsidiaries -- --
----- -----
Net income 7.8% 4.3%
===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
REVENUE. Revenue from continuing operations was $170.7 million for the first
three months of fiscal year 2001, compared to $146.3 million for the first
three months of fiscal year 2000, an increase of $24.4 million, or 17%. This
revenue growth was primarily due to a $9.5 million, or 24% increase in revenue
generated by our U.S. Central region, a $5.7 million, or 11% increase in
revenue generated by our U.S. East region, a $2.9 million, or 15% increase in
our U.S. West region, a $1.7 million, or 18% increase in revenue generated by
our Canadian region, and a $0.3 million, or 8% increase in revenue generated
by Data Services. The revenue increase in the North American regions was due
primarily to the realization of net rate increases, due to robust demand,
particularly in high-end assignments, accounting for approximately $13.1
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<PAGE>
million, increased chargeable hours accounting for $3.6 million and improved
management of the scope of projects, resulting in $3.3 million. In addition,
our Asia-Pacific region generated $3.3 million, or 25% higher revenue than in
the first quarter of fiscal year 2000 and our Latin American region generated
$0.4 million, or 25% higher revenue than in the first quarter of fiscal year
2000. Within North America the following individual practice areas, not all
inclusive, showed the following trends: revenue for our Benefits Group was
$87.0 million for the first three months of fiscal year 2001, compared to
$79.3 million in the first quarter of fiscal year 2000, an increase of $7.7
million, or 10%; revenue for our HR Technologies Group was $24.9 million for
the first three months of fiscal year 2001, compared to $19.7 million in the
first quarter of fiscal year 2000, an increase of $5.2 million, or 26%; and
revenue for our Human Capital Group was $14.0 million in the first quarter of
fiscal year 2001, compared to $10.7 million in the first quarter of fiscal
year 2000, an increase of $3.3 million, or 30%.
SALARIES AND EMPLOYEE BENEFITS. Salaries and employee benefit expenses for the
first quarter of fiscal year 2001 were $89.8 million, compared to $79.8
million for the first quarter of fiscal year 2000, an increase of $10.0
million, or 13%. The increase was mainly due to a $9.3 million increase in
compensation, which is partly the result of annual salary increases averaging
5% and a 7% increase in headcount. The remainder of the difference was
attributable to a $0.3 million increase in pension expenses and a $0.3 million
increase in wage taxes. As a percentage of revenue, salaries and employee
benefits decreased to 52.6% from 54.5%. The improvements in margins resulted
from increases in realized rates and better leveraging of our operating
personnel.
STOCK INCENTIVE BONUS PLAN. The stock incentive bonus plan was discontinued in
conjunction with our initial public offering. Accordingly, there was no
accrued bonus under this plan for the quarter ended September 30, 2000.
PROFESSIONAL AND SUBCONTRACTED SERVICES. Professional and subcontracted
services used in consulting operations were $11.2 million for the first three
months of fiscal year 2001, compared to $9.8 million for the first quarter of
fiscal year 2000, an increase of $1.4 million, or 14%. The increase is
primarily due to an increase in client chargeable work performed by our
national practice groups. As a percentage of revenue, professional and
subcontracted services decreased to 6.5% from 6.7%, as we leveraged these
expenses over a higher revenue base.
OCCUPANCY, COMMUNICATIONS AND OTHER. Occupancy, communications and other
expenses were $26.6 million for the first quarter of fiscal year 2001,
compared to $22.0 million for the first quarter of fiscal year 2000, an
increase of $4.6 million, or 21%. The increase was mainly attributable to a
$1.8 million increase in travel expenses, which was mainly due to higher
expenses incurred for our annual leadership conference held in Europe for the
first time, a $1.2 million increase in rent, attributable to an increase in
the amount of space required to support our expanding operations and higher
real estate tax and operating expenses, a $1.0 million investment in a
strategic relationship, a $0.3 million increase in duplicating expenses, and a
$0.3 million increase in furniture and equipment rentals. As a percentage of
revenue, occupancy, communications and other expenses increased to 15.6% from
15.0%.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the first quarter of fiscal year 2001 were $15.1 million, compared to $13.2
million for the first quarter of fiscal year 2000, an increase of $1.9
million, or 14%. The increase was mainly due to higher compensation of $1.9
million, which is primarily the result of a 23% increase in headcount. One
third of this increase can be attributed to the reorganization of staff from
our consulting offices to general and administrative offices. The remainder of
the increase can be attributed to the hiring of corporate staff in our Human
Resource, Marketing and Knowledge Management departments mainly to carry out
corporate initiatives involving our knowledge sharing and financial systems
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infrastructure. As a percentage of revenue, general and administrative
expenses decreased to 8.9% from 9.0%.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for the
first three months of fiscal year 2001 was $5.9 million, compared to $4.9
million for the first three months of fiscal year 2000, an increase of $1.0
million, or 20%. The variance is primarily due to increased additions to our
capital base. As a percentage of revenue, depreciation and amortization
expenses increased slightly to 3.5% from 3.4%.
INTEREST INCOME. Interest income for the first three months of fiscal year
2001 was $0.6 million, compared to $1.0 million for the first three months of
fiscal year 2000, a decrease of $0.4 million, or 40%. The decrease was
attributable to the receipt of interest of $0.5 million related to a federal
tax refund received during the first quarter of fiscal year 2000, partially
offset by increased interest earned on a higher average investment balance
during the first quarter of fiscal year 2001.
INTEREST EXPENSE. Interest expense for the first quarter of fiscal year 2001
was $0.3 million, compared to $0.4 million for the first quarter of fiscal
year 2000, a decrease of $0.1 million, or 25%.
INCOME FROM AFFILIATES. Income from affiliates for the first quarter of fiscal
year 2001 was $1.0 million, unchanged from the prior year.
PROVISION FOR INCOME TAXES. Income taxes for the first three months of fiscal
year 2001 were $10.3 million, compared to $5.9 million for the first three
months of fiscal year 2000. Our effective tax rate was 42.9% for the first
quarter of fiscal year 2001, compared to 48.3% for the first quarter of fiscal
year 2000. The change was due to the utilization of federal and state tax
credits, a decrease in operating losses of certain foreign affiliates and
higher pre-tax earnings. Our effective tax rate was also affected by differing
foreign tax rates in various jurisdictions. We record a tax benefit on foreign
net operating loss carryovers and foreign deferred expenses only if it is more
likely than not that a benefit will be realized.
NET INCOME. Net income for the first three months of fiscal year 2001 was
$13.3 million, compared to $6.4 million for the first quarter of fiscal year
2000, an increase of $6.9 million, or 108%. As a percentage of revenue, net
income increased to 7.8% from 4.3%. The increase is mainly due to our revenue
growth, improved margins and the absence of the stock incentive bonus plan
accrual in fiscal year 2001.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents at September 30, 2000 totaled $17.2 million,
compared to $41.4 million at June 30, 2000. The $24.2 million decrease in cash
from June 30, 2000 to September 30, 2000 was mainly attributable to the fiscal
year end bonus payment of $51.3 million, $7.1 million spent for acquisitions
and fixed assets, corporate tax payments of $6.7 million and payments to
retirees of $0.4 million, partially offset by borrowings against our credit
line of $21.9 million and $20.3 million of cash received as a result of our
operations.
CASH USED FOR OPERATING ACTIVITIES. Cash used for operating activities for the
first quarter of fiscal year 2001 was $37.1 million, compared to cash used for
operating activities of $40.6 million for the first three months of fiscal
year 2000. The variance is due to $12.4 million in lower corporate tax
payments net of accruals and higher net income of $7.0 million, partially
offset by higher receivables of $17.4 million. The allowance for doubtful
accounts increased $3.5 million and the allowance for work in process
increased $1.5 million from June 30, 2000 to September 30, 2000. This increase
is typical of our historical patterns, where our receivables, work in process
and related allowances are substantially reduced at year end from an increased
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emphasis on collections and timely billings. The receivable and work in
process balances and the related allowances usually decrease in the last three
months of the fiscal year. The number of months of accounts receivable and
work in process outstanding was 3.0 at September 30, 2000 and 3.2 at September
30, 1999.
CASH USED IN INVESTING ACTIVITIES. Cash used in investing activities for the
first quarter of fiscal year 2001 was $8.1 million, compared to $5.0 million
for the first three months of fiscal year 2000. The increase in cash usage can
be attributed to higher acquisition costs of $3.2 million, which is mainly due
to the acquisition of two of KPMG's Canadian consulting practices and an
investment made in conjunction with our business initiative targeted towards
emerging growth companies.
CASH FROM FINANCING ACTIVITIES. Cash from financing activities was $21.8
million for the first quarter of fiscal year 2001, compared to $23.5 million
for the first quarter of fiscal year 2000. This change reflects lower
borrowings and book overdrafts of $9.4 million and lower repurchases of our
common stock of $7.6 million.
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, $3.0 million is unavailable as a result of support
required for letters of credit issued under the credit line. The credit
facility was amended on October 6, 2000 to reflect changes due to the initial
public offering. We had borrowings outstanding at September 30, 2000 of $5.0
million. There were no borrowings outstanding at June 30, 2000.
Anticipated commitments of funds for capital expenditures are estimated at
$41.0 million for the remainder of fiscal year 2001, mainly for computer
hardware purchases, office relocations and renovations, development and
upgrade of financial and knowledge management systems, and acquisition related
payments. Capital expenditures will be required in conjunction with office
lease renewals and relocations required to support management's growth
strategy. Additionally, our consultants will require access to hardware and
software that will support servicing our clients. In a rapidly changing
technological environment, management anticipates we will need to make
continued investments in our knowledge sharing and financial systems
infrastructure. We expect cash from operations in conjunction with the net
proceeds from our initial public offering and our existing credit facility
to adequately provide for these cash needs.
Our foreign operations do not materially impact liquidity or capital
resources. At June 30, 2000, $16.1 million of the total cash balance of $17.2
million was held outside of North America, which we have the ability to
readily utilize, if necessary. There are no significant repatriation
restrictions other than local or U.S. taxes associated with repatriation. Our
foreign operations in total are substantially self-sufficient for their
working capital needs.
The Company continues to guarantee certain leases for office premises and
equipment for Wellspring. Minimum remaining payments guaranteed under these
leases at September 30, 2000 total $46.7 million, which expire at various
dates through 2007. These leases are also jointly and severally guaranteed by
the Company's former partner in Wellspring, State Street Bank & Trust Company.
The estimated loss from the potential exercise of these guarantees has been
included in the fiscal year 1998 loss on disposal of the benefits
administration outsourcing business.
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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.
DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS
Forward-looking statements regarding substantial risks and uncertainties are
contained in the following sections of this report: In Note 2 on page 6; Note
3 on page 7; Note 7 on page 9; Financial Statement Overview on pages 11 and
12; the sixth paragraph under Liquidity and Capital Resources on page 16; the
first paragraph of Part II, Item 1 ("Legal Proceedings") on page 17; and Part
II, Item 2 ("Changes in Securities and Use of Proceeds") on page 18 and 19.
You can identify these statements and other forward-looking statements in this
filing by words such as "may," "will," "expect," "anticipate," "believe,"
"estimate," "plan," "intend," "continue" or similar words. You should read
these statements carefully because they contain projections of our future
results of operations or financial condition, or state other "forward-looking"
information. A number of risks and uncertainties exist which could cause
actual results to differ materially from the results reflected in these
forward-looking statements. Such factors include, but are not limited to our
continued ability to recruit and retain highly qualified associates, outcomes
of litigation, no significant decrease in the demand for the consulting
services we offer, actions by competitors offering human resources consulting
services, including public accounting and consulting firms, technology
consulting firms and internet/intranet development firms, regulatory,
legislative and technological developments that may affect the demand for or
costs of our services and other factors discussed under "risk factors" in our
prospectus dated October 11, 2000, which is on file with the Securities and
Exchange Commission. These statements are based on assumptions that may no
come true. All forward-looking disclosure is speculative by its nature. The
Company undertakes no obligation to update any of the forward-looking
information included in this release, whether as a result of new information,
future events, changed expectations or otherwise.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are a party to various lawsuits, arbitrations or
mediations that arise in the ordinary course of business. These disputes
typically involve claims relating to employment matters or the rendering of
professional services. The four matters summarized below involve the most
significant pending or potential claims against us. Management believes, based
on currently available information, that the results of all such proceedings,
in the aggregate, will not have a material adverse effect on our financial
condition, but claims which are possible in our business could be material to
the financial results for a particular period.
REGINA, SASKATCHEWAN POLICE. The Administrative Board of the Regina Police
Superannuation and Benefit Plan filed an action against us and three
individual employees in June 1994, in the Queen's Bench Judicial Center of
Regina, 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 expert reports have been exchanged. Unless settled
earlier, trial is scheduled to begin in January 2001. The Administrative Board
seeks approximately $26 million in damages, plus interest.
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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
filed an action against the Company. In April 1999, the matter was removed to
the United States District Court, District of Connecticut. The action claims
that errors in valuations from 1991 through 1998 allegedly resulted in
understated liabilities. The plaintiffs are seeking damages of approximately
$65 million; a punitive damage claim has been dismissed. In the event that the
claim is not settled, trial is anticipated to begin in January 2001.
SOCIETE INTERNATIONALE DE TELECOMMUNICATIONS AERONAUTIQUE S.C. (SITA). In
1999, a law firm representing SITA, a French-based cooperative, notified
Watson Wyatt Partners, our European alliance partner, of a claim involving
alleged errors in the design of a global employee stock plan which includes
work performed by a former subsidiary that is now owned by Watson Wyatt
Holdings (Europe) Limited. The claim alleges damages that could exceed $75
million. Formal proceedings have yet to be commenced and the parties have
informally exchanged information pursuant to English legal procedures. Unless
a settlement is reached, proceedings might be commenced later this year
against Watson Wyatt Partners and/or The Wyatt Company (UK) Limited, one of
our subsidiaries.
We carry substantial professional liability insurance with a self-insured
retention of $1 million per occurrence which provides coverage for
professional liability claims including the cost of defending such claims. We
also carry employment practices liability insurance.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 10, 2000, our Registration Statement on Form S-3 (File No.
333-94973), covering up to 6,440,000 shares of class A common stock at $12.50
per share to be issued in connection with our initial public offering, was
declared effective. On October 16, 2000, we completed changes in our corporate
structure in conjunction with the initial public offering. The changes in
corporate structure involved the merger of Watson Wyatt & Company with WW
Merger Subsidiary, Inc., a wholly owned subsidiary of Watson Wyatt & Company
Holdings. Watson Wyatt & Company is now a wholly owned subsidiary of Watson
Wyatt & Company Holdings.
At the time of the reorganization, each share of Watson Wyatt & Company's
Redeemable Common Stock was converted into one share of class B-1 common stock
and one share of class B-2 common stock of Watson Wyatt & Company Holdings.
The class B common stock is divided into two classes to accommodate two
different transfer restriction periods. The class B-1 shares are subject to a
transfer restriction period of 12 months following the public offering date,
while the class B-2 shares are subject to a transfer restriction period of 24
months following the public offering date, unless waived by the Board of
Directors. The Company waived the transfer restrictions on a total of
1,559,250 class B-1 and 1,559,250 class B-2 shares to allow for conversion
into the class A shares sold by selling stockholders in the initial public
offering described below. Following the expiration or waiver of the respective
transfer restriction periods, the remaining class B-1 and class B-2 shares
will automatically convert into class A common stock.
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A total of 5,600,000 shares of class A common stock were offered and sold in
our initial public offering at an offering price of $12.50 per share, for an
aggregate offering price of $70.0 million. Of the shares included in this
transaction, Watson Wyatt & Company Holdings offered 2,800,000 newly-issued
shares and the selling stockholders offered the remaining 2,800,000 shares. On
November 8, 2000, our underwriters exercised their over-allotment option. As a
result, the underwriters purchased 840,000 shares of class A common stock from
us and from the selling stockholders at the initial public offering price of
$12.50 per share less the underwriting discount, for an aggregate offering
price of $10.5 million. Of the shares included in this transaction, Watson
Wyatt & Company Holdings sold 521,500 newly-issued shares and the selling
stockholders sold 318,500 shares. The managing underwriters of the offering
were Deutsche Banc Alex. Brown, Banc of America Securities LLC, and Robert W.
Baird & Co.
As a result of the these transactions and upon completion of the offering, we
received gross proceeds of $41.5 million, and the selling stockholders
received gross proceeds of $39.0 million. Net proceeds to the Company were
$33.5 million, which is net of $5.3 million in underwriting discounts,
commissions and other offering costs, as well as $2.7 million that the Company
paid to selling shareholders as reimbursement for commission payments
resulting from the sale of their shares.
From the time of receipt through November 14, 2000, proceeds from the offering
of $17.7 million were applied to the repayment of short-term debt and a $0.8
million installment payment was made for an acquisition related to our HR
Technologies Consulting practice. The remainder of the net proceeds is
invested in high-grade interest-bearing securities. The Company intends to use
the remainder of the net proceeds for capital expenditures, working capital
and other general corporate purposes. In addition, a portion of the proceeds
could be used for strategic acquisitions of complementary businesses.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1 Amended and Restated Certificate of Incorporation of Watson Wyatt
& Company Holdings1
3.2 Amended and Restated Bylaws of Watson Wyatt & Company Holdings1
4 Form of Certificate Representing Common Stock1
10.1 Amended Credit Agreement Among Bank of America, N.A. and Others
dated October 6, 2000
10.2 Form of agreement among Watson Wyatt & Company, Watson Wyatt &
Company Holdings and employee directors, executive officers and
significant stockholders restricting the transfer of shares1
b. Reports on Form 8-K
None.
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1 Incorporated by reference from Registrant's Form S-3, Amendment No. 5
(File No. 33-394973), filed on September 14, 2000
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Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Watson Wyatt & Company Holdings
(Registrant)
/S/ John J. Haley November 14, 2000
----------------- -----------------
Name: John J. Haley Date
Title: President and Chief
Executive Officer
/S/ Carl D. Mautz November 14, 2000
----------------- -----------------
Name: Carl D. Mautz Date
Title: Vice President and
Chief Financial Officer
/S/ Peter L. Childs November 14, 2000
------------------- -----------------
Name: Peter L. Childs Date
Title: Controller
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