UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
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
(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)
6707 DEMOCRACY BOULEVARD
SUITE 800
BETHESDA, MD 20817
(Address of principal executive offices, including zip code)
(301) 581-4600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of February 14, 2000.
Common Stock, $1.00 par value 14,835,083
- ------------------------------ ----------------
Class Number of Shares
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended December 31, Six Months Ended December 31,
------------------------------- -----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Fees $ 152,411 $ 140,358 $ 298,734 $ 274,343
---------- ---------- ---------- ----------
Costs of providing services:
Salaries and employee benefits 80,950 72,470 160,753 148,968
Stock incentive bonus plan 9,000 5,500 15,000 7,500
Occupancy and communications 15,681 15,433 30,423 29,954
Professional and subcontracted services 15,131 13,338 24,927 22,052
Other 9,026 8,740 16,300 11,586
---------- ---------- ---------- ----------
129,788 115,481 247,403 220,060
General and administrative expenses 14,724 16,692 27,902 27,852
Depreciation and amortization 4,610 3,971 9,517 7,824
---------- ---------- ---------- ----------
149,122 136,144 284,822 255,736
---------- ---------- ---------- ----------
Income from operations 3,289 4,214 13,912 18,607
Other:
Interest income 216 404 1,252 528
Interest expense (698) (1,168) (1,088) (1,721)
Income from affiliates 1,155 865 2,143 1,025
---------- ---------- ---------- ----------
Income before income taxes and minority interest 3,962 4,315 16,219 18,439
Provision for income taxes 1,916 2,087 7,835 8,917
---------- ---------- ---------- ----------
Income before minority interest 2,046 2,228 8,384 9,522
Minority interest in net loss/(income) of
consolidated subsidiaries 158 (85) 176 (85)
---------- ---------- ---------- ----------
Income from continuing operations 2,204 2,143 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 - 8,678
---------- ---------- ---------- ----------
Net income $ 2,204 $ 10,821 $ 8,560 $ 18,115
========== ========== ========== ==========
Earnings per share, continuing operations, basic
and fully diluted $ 0.15 $ 0.15 $ 0.57 $ 0.63
========= ========== ========== ==========
Earnings per share, discontinued operations, basic
and fully diluted $ - $ 0.59 $ - $ 0.58
========= ========== ========== ==========
Earnings per share, net income, basic
and fully diluted $ 0.15 $ 0.74 $ 0.57 $ 1.21
========= ========== ========== ==========
Weighted average shares of Redeemable Common Stock, 14,917 14,587 15,140 14,977
basic and fully diluted ========= ========== ========== ==========
See accompanying notes
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF U.S. DOLLARS)
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
============= =============
See accompanying notes
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF U.S. DOLLARS)
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
========== ==========
See accompanying notes
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN PERMANENT SHAREHOLDERS' EQUITY
(THOUSANDS OF U.S. DOLLARS)
(Unaudited)
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)
============ ========== ========== =========
See accompanying notes
F-5
</TABLE>
<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 14,917 and
14,587 for the three months ended December 31, 1999 and 1998,
respectively, and 15,140 and 14,977 for the six months ended December 31,
1999 and 1998, respectively.
-6-
<PAGE>
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.
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 three months ended December 31, 1999,
Comprehensive Income totaled $3.3 million, compared with $11.2 million for
the three months ended December 31, 1998. 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 three 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 $ 52,870 $ 42,838 $ 19,678 $ 13,413 $ 9,942 $ 1,723 $ 3,277 $ 143,741
Net operating
income/(loss) 12,968 7,227 1,675 1,362 (576) (216) 1,061 23,501
Receivables 57,480 45,724 18,338 14,141 10,661 2,229 - 148,573
</TABLE>
-7-
<PAGE>
The table below presents specified information about reported segments as of
and for the three 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 $ 49,509 $ 37,848 $ 18,283 $ 11,807 $10,014 $ 1,235 $ 3,975 $ 132,671
Net operating
income/(loss) 13,210 5,823 1,128 954 193 (570) 1,463 22,201
Receivables 48,795 44,439 21,708 12,436 11,896 1,718 - 140,992
</TABLE>
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.
-8-
<PAGE>
A reconciliation of the information reported by segment to the consolidated
amounts follows for the three month and six month periods ended December 31:
<TABLE>
<CAPTION>
Three Months Ended December 31, Six Months Ended December 31,
------------------------------- -----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fees:
- -----
Total segment fees $ 143,741 $ 132,671 $ 283,731 $ 261,954
Reimbursable expenses not included in total
segment fees 9,154 8,283 15,381 14,284
Other, net (484) (596) (378) (1,895)
---------- ---------- ---------- ----------
Consolidated fees $ 152,411 $ 140,358 $ 298,734 $ 274,343
========== ========== ========== ==========
Net Operating Income:
- ---------------------
Total segment net operating income $ 23,501 $ 22,201 $ 50,834 $ 48,178
Income from affiliates 1,155 865 2,143 1,025
Differences in allocation methods for
depreciation, G&A and pension costs 726 (3,311) 2,515 (1,396)
Gain on sale of business units - - - 3,822
Discretionary bonuses and SIBP (20,550) (15,774) (41,750) (31,548)
Other, net (870) 334 2,477 (1,642)
---------- ---------- ---------- ----------
Consolidated pretax income from
continuing operations $ 3,962 $ 4,315 $ 16,219 $ 18,439
========== ========== ========== ==========
Receivables:
- ------------
Total segment receivables -
billed and unbilled $ 148,573 $ 140,992 $ 148,573 $ 140,992
Net valuation differences and
receivables of discontinued operations (1,028) 1,406 (1,028) 1,406
---------- ---------- ---------- ----------
Total billed and unbilled receivables 147,545 142,398 147,545 142,398
Assets not reported by segment 153,479 139,621 153,479 139,621
---------- ---------- ---------- ----------
Consolidated assets $ 301,024 $ 282,019 $ 301,024 $ 282,019
========== ========== ========== ==========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CORPORATE INFORMATION
Watson Wyatt & Company, together with its affiliates and consolidated
subsidiaries, (collectively, "Watson Wyatt" or the "Company"), provides
employee benefits, human resources and human resources systems technology
consulting to major employers throughout the world. The Company implements its
strategy through over 3,800 associates in 60 offices located in 18 countries.
-9-
<PAGE>
Watson Wyatt & Company was incorporated in Delaware on February 17, 1958.
Including predecessors, the Company has been in business since 1946. The
Company conducted business as The Wyatt Company until changing its corporate
name to Watson Wyatt & Company in connection with the establishment of the
Watson Wyatt Worldwide alliance. In 1995, the Company entered 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, the Company has marketed its services
globally under the Watson Wyatt Worldwide brand, sharing resources,
technologies, processes and business referrals.
Although the Company operates globally as an alliance, its revenues and
operating expenses reflect solely the results of operations of Watson Wyatt &
Company. The Company's share of the results of operations of its affiliates,
recorded using the equity method of accounting, is reflected in "Income from
affiliates". Watson Wyatt & Company's principal affiliates are Watson Wyatt
Partners and Watson Wyatt Holdings (Europe) Limited. The Company owns 25% of
Watson Wyatt Holdings (Europe) Limited and Watson Wyatt Partners owns the
remaining 75%.
Watson Wyatt's principal executive offices are located at 6707 Democracy
Boulevard, Suite 800, Bethesda, Maryland, 20817. The Company's telephone number
is (301) 581-4600.
FINANCIAL STATEMENT OVERVIEW
Watson Wyatt's fiscal year ends June 30. The financial statements contained in
this quarterly report reflect Consolidated Balance Sheets as of the end of the
second quarter of fiscal year 2000 (December 31, 1999) and as of the end of
fiscal year 1999 (June 30, 1999), Consolidated Statements of Operations for the
three and six month periods ended December 31, 1999 and 1998, Consolidated
Statements of Cash Flows for the six month periods ended December 31, 1999 and
1998 and Consolidated Statements of Changes in Permanent Shareholders' Equity
for the six month period ended December 31, 1999.
The Company derives substantially all of its revenue from fees for consulting
services, which generally are billed at standard hourly rates or on a fixed-fee
basis. 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 the
Company's consolidated revenues for the fiscal years ended June 30, 1999, 1998,
and 1997.
The Company's most significant expenses are salaries and benefits costs
(including 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
the Company's operating performance. Other significant costs of providing
services include office rent and related costs, communications and professional
and subcontracted services.
-10-
<PAGE>
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%. Fees for the three months ended December 31,
1999 were $152.4, compared to $140.4 for the three months ended December 31,
1998, an increase of $12.1 million, or 9%. The revenue growth in both periods
is due to improved performance in the Company's U.S. East and U.S. Central
Regions, primarily from increased billable hours in the Benefits Consulting
Group.
SALARIES AND EMPLOYEE BENEFITS. Salaries and employee benefit expenses for the
six months ended December 31, 1999 were $160.8 million, compared to $149.0
million for the six months ended December 31, 1998, an increase of $11.8
million, or 8%. Salaries and employee benefit expenses for the second quarter
of fiscal year 2000 were $81.0 million, compared to $72.5 million for the
second quarter of fiscal year 1999, an increase of $8.5 million, or 12%. The
increase in both periods 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 the Stock Incentive Bonus
Plan ("SIBP") for the six months ended December 31, 1999 was $15.0 million,
compared to $7.5 million for the six months ended December 31, 1998, an
increase of $7.5 million, or 100%. The SIBP expense for the three months ended
December 31, 1999 was $9.0 million, compared to $5.5 million for the three
months ended December 31, 1998, an increase of $3.5 million, or 64%. The
accruals were calculated in accordance with the Company's current practice of
distributing all income in excess of a targeted amount.
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. Occupancy and communication expenses for the three months ended
December 31, 1999 were $15.7 million, compared to $15.4 million for the three
months ended December 31, 1998, an increase of $0.3 million, or 2%. The
increase is due to higher equipment rental, repairs and maintenance, and
telephone expenses.
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. Professional and
subcontracted services for the three months ended December 31, 1999 were $15.1
million, compared to $13.3 million for the three months ended December 31,
1998, an increase of $1.8 million, or 13%. This increase is attributable to the
$1.2 million and $0.9 million expenses mentioned above.
-11-
<PAGE>
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 the Company's 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 the Company's U.S. and international
consultants. Other costs of providing services for the three months ended
December 31, 1999 were $9.0 million, compared to $8.7 million for the three
months ended December 31, 1998, an increase of $0.3 million, or 3%.
GENERAL AND ADMINISTRATIVE. General and administrative ("G&A") expenses for the
six months ended December 31, 1999 were $27.9 million, unchanged from the six
months ended December 31, 1998. G&A expenses for the three months ended
December 31, 1999 were $14.7 million, compared to $16.7 million for the three
months ended December 31, 1998, a decrease of $2.0 million, or 11%. The
decrease is mainly due to a concentrated $2.1 million media ad campaign which
occurred in the three 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%. Depreciation and amortization expense for the three months ended December
31, 1999 was $4.6 million, compared to $4.0 million for the three months ended
December 31, 1998, an increase of $0.6 million, or 16%. This increase in both
periods is due to a higher depreciable capital base and higher intangibles
related to prior year acquisitions.
INTEREST INCOME. Interest income for the six months ended December 31, 1999 was
$1.3 million, compared to $0.5 million for the first 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 for the first quarter of fiscal year 2000.
Interest income for the three months ended December 31, 1999 was $0.4 million,
compared to $0.2 million for the three months ended December 31, 1998, a
decrease of $0.2 million, or 47%. The decrease can be attributed to a lower
average investment balance for the three months ended December 31, 1999.
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%. Interest expense for the three
months ended December 31, 1999 was $0.7 million, compared to $1.2 million for
the three months ended December 31, 1998, a decrease of $0.5 million, or 40%.
The Company borrowed less money against its 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%. Income from
affiliates for the three months ended December 31, 1999 was $1.2 million,
compared to $0.9 million for the three months ended December 31, 1998, an
increase of $0.3 million, or 34%. The increase in both periods reflect
improvement in business operations by the Company's affiliates in both
Continental Europe and the United Kingdom.
-12-
<PAGE>
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 Company's effective tax rate of 48% for the six months ended
December 31, 1999 remained unchanged from the comparable prior year period. The
Company's tax rate is affected by differing foreign tax rates in various
jurisdictions. The Company does not record a tax benefit on certain foreign net
operating loss carryovers and foreign deferred expenses unless it is more
likely than not that a benefit will be realized.
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%. Net income for the three months ended
December 31, 1999 was $2.2 million, compared to $10.8 million for the three
months ended December 31, 1998, a decrease of $8.6 million, or 80%. The
decrease in both periods 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 three and six months ended December 31, 1999 and
1998 also reflect increased levels of SIBP accruals discussed above.
DISCONTINUED OPERATIONS. During the six months ended December 31, 1998, the
Company further resolved its future obligations related to the discontinuation
of its Benefits Administration Outsourcing Business and reduced the expected
loss on disposal by $8.7 million, net of taxes. Management believes the Company
has adequate provisions for any remaining costs related to the discontinuation.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at December 31, 1999 totaled $13.7
million, compared to $36.0 million at June 30, 1999. The Company had borrowings
outstanding under its line of credit of $3.0 million as of December 31, 1999,
and no borrowings as of June 30, 1999. Sources and uses of cash are explained
below.
CASH USED FOR 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 the Company's 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.
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 lower contingency payments associated with 1999 acquisitions and lower
current year purchases of fixed assets, partially offset by lower distributions
from affiliates to the Company.
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. The Company expects operating cash flows to
provide for these cash needs.
-13-
<PAGE>
CASH USED BY 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. The Company borrowed less money against its revolving line
of credit in the first six months of fiscal year 2000 than in the first six
months of fiscal year 1999, and had lower repurchases of Redeemable Common
Stock.
The Company's $120.0 million revolving credit line 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, the Company 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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion of Year 2000, Note 6 on page 7, the last sentence of
"Provision for Income Taxes" and the last sentence of "Discontinued
Operations", both on page 12, and the second paragraph of "Cash Used in
Investing Activities" on page 13 contain forward-looking statements that
involve substantial risks and uncertainties. These statements can be identified
by forward-looking words such as "may," "will," "expect," "anticipate,"
"believe," "estimate," "plan," "intend," "continue" or similar words.
Statements that contain these words should be read carefully because they
discuss the Company's future expectations, contain projections of the Company's
future results of operations or financial condition or state other
"forward-looking" information.
Undue reliance should not be placed on these forward-looking statements. There
are risks, uncertainties, and events that may cause the Company's actual
results to differ materially from the expectations. Although management
believes that the expectations reflected in the forward-looking statements are
reasonable, management cannot guarantee future results, levels of activity,
performance or achievements. Moreover, neither the Company, its management nor
any other person assumes responsibility for the accuracy and completeness of
the forward-looking statements. The Company and management are under no duty to
update any of the forward-looking statements after the date of this filing or
to conform these statements to actual results or to changes in management's
expectations.
YEAR 2000 ISSUE
The Company has substantially completed a program to address the Year 2000
issue as it affects its business and management believes that the Year 2000
issue is not likely to have a material adverse effect on the Company's
business, results of operations, or financial condition. Nevertheless, since
the effects of the Year 2000 issue are likely to be unpredictable, management
does not expect that the Year 2000 compliance program will eliminate all risk
to the Company associated with the Year 2000 issue.
-14-
<PAGE>
Management believes that the most significant risk facing the Company in
connection with the Year 2000 issue relates to software provided by the Company
for use by, or on behalf of, its 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.
The cost to address Year 2000 compliance issues exceeded $4.0 million for
fiscal year 1999. The principal expenditures were for repair and testing of
internal and client software, costs associated with the Company's Year 2000
compliance program and costs of outside consultants. Management expects that
the costs for the Company's Year 2000 compliance program will be lower in
fiscal year 2000. Funds for costs associated with the Company's Year 2000
compliance efforts will come from operating cash flows for all areas of its
operations and will be expensed as incurred.
-15-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is 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 the Company. 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
the Company's financial condition, but claims which are possible in its
business could be material to the 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 the Company 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
("ERB") notified the Company of a potential claim involving an erroneously
calculated cost of living adjustment that was based on a formula provided by
the staff of the ERB. In response to the notice of claim, the Company filed a
declaratory judgment action against the City of Milwaukee and the ERB 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 the Company claiming errors in valuations from 1991
through 1998 that allegedly resulted in understated liabilities. The plaintiffs
are seeking damages of approximately $45 million. The case is in discovery.
Claim against Watson Wyatt Partners. A law firm representing a client based in
Europe has notified Watson Wyatt Partners, The Company's 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 Company carries substantial professional liability insurance with a
self-insured retention of $1 million per occurrence which provides coverage for
professional liability claims. The Company also carries employment practices
liability insurance.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
-16-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the fifty-third annual meeting of shareholders of the Company, held on
November 17, 1999, the shareholders elected fourteen (14) nominees to the
Board. Proxies representing 11,244,963 shares were received (total shares
outstanding as of the Record Date were 14,897,639) and the results of the
voting were as follows:
NOMINEES TO THE BOARD FOR WITHHOLD
-----------------------------------------------
Thomas W. Barratt 10,907,879 337,084
Paula A. DeLisle 10,907,723 337,240
David B. Friend 9,715,850 1,529,113
John J. Haley 11,165,021 79,942
Ira T. Kay 10,385,836 859,127
Brian E. Kennedy 10,591,560 653,403
Eric P. Lofgren 10,928,628 316,335
Robert D. Masding 10,697,175 547,788
R. Michael McCullough 10,900,215 344,748
Gail E. McKee 10,346,633 898,330
Kevin L. Meehan 11,113,114 131,849
Charles P. Wood, Jr. 11,113,244 131,719
John A. Steinbrunner 10,915,585 329,378
A. Grahame Stott 11,034,114 210,849
ITEM 5. OTHER INFORMATION
On January 27, 2000 the Company filed a Current Report on Form 8-K announcing
the filing of Registration Statements on Form S-3 and S-4 to affect a corporate
reorganization in order to create a holding company structure, and a subsequent
public offering by the holding company.
There is no assurance that the proposed reorganization or initial public
offering will be consummated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1 Restated Certificate of Incorporation of Watson Wyatt & Company2
3.2 Restated Bylaws (as amended through November 19, 1998)3
4 Form of Certificate Representing Common Stock1
10 Credit Agreement Among NationsBank, N.A. and Others dated June
30, 19984
b. Reports on Form 8-K
None.
- --------
1 Incorporated by reference from Registrant's Initial Statement on Form 10
(File No. 0-20724), filed on October 13, 1992
2 Incorporated by reference from Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1996 (File No. 0-20724), filed on September
16, 1996
3 Incorporated by reference from Registrant's Statement on Form S-8 (File
No. 33-369545), filed on December 23, 1998
4 Incorporated by reference from Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998 (File No. 0-20724), filed on September
24, 1998
-17-
<PAGE>
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
(Registrant)
/S/ JOHN J. HALEY FEBRUARY 14, 2000
- ------------------------------ -----------------
Name: John J. Haley Date
Title: President and Chief
Executive Officer
/S/ CARL D. MAUTZ FEBRUARY 14, 2000
- ------------------------------ -----------------
Name: Carl D. Mautz Date
Title: Vice President and Chief
Financial Officer
/S/ PETER L. CHILDS FEBRUARY 14, 2000
- ------------------------------ -----------------
Name: Peter L. Childs Date
Title: Controller
-18-
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