UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| (Mark One) | |
| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended June 30, 2001 | |
| OR | |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| o | For the transition period from __________ to __________ |
Commission File Number: 001-16159
WATSON WYATT & COMPANY HOLDINGS
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
52-2211537 (I.R.S. Employer Identification No.) |
1717 H
STREET NW
Washington, D.C. 20006-3900
(Address of principal executive offices, including zip code)
(202)
715-7000
(Registrant's telephone number, including area code)
| Securities registered pursuant to Section 12(b) of the Act: | ||
| Title of each class | Name of each exchange on which registered |
|
| Class A Common Stock | New York Stock Exchange | |
| Securities registered pursuant to Section 12 (g) of the Act: | ||
| Common Stock, $.01 par value (Title of Class) |
Outstanding at August 17,
2001 33,032,995 shares |
|
| Class | Number of Shares | |
| Class A Common Stock | 9,390,000 | |
| Class B Common Stock | 23,642,995 | |
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 | ý | No | o |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
| Yes | o | No | ý |
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant is $839,201,870 as of August 16, 2001.
Documents Incorporated by Reference
Portions of the Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on or about November 5, 2001 are incorporated by reference into Part III of this Form 10-K.
PART I
Item 1. Business.
Overview
Watson Wyatt & Company Holdings, including its subsidiaries, (collectively referred to as "we", "Watson Wyatt" or the "Company") is a global human capital consulting firm. We help our clients enhance business performance by improving their ability to attract, retain and motivate qualified employees. As leading economies worldwide become more services oriented, human capital has become increasingly important to companies and organizations. The heightened competition for skilled employees, unprecedented changes in workforce demographics and rising employee-related costs have increased the importance of effective human capital management. We help our clients address these issues by combining our expertise in human capital management with technologies in order to improve the design and implementation of various human resources, or HR, programs, including compensation, retirement and healthcare plans.
We design, develop and implement HR strategies and programs through the following three closely interrelated practice areas:
| Benefits Group | HR Technologies Group | Human Capital Group | |||||
| • | Retirement plans, including pension, 401(k) and executive benefits plans | • | EHRTM, our web-based delivery of HR information and programs | • | Compensation plans, including executive compensation and stock option programs | ||
| • | Investment consulting services to pension plans | • | Employee self-service applications and call centers | • | Strategies to align workforces with business objectives | ||
| • | Healthcare, disability and other group benefit plans | • | Benefit administration systems and retirement planning tools | • | Organization effectiveness services | ||
| • | Actuarial services | • | EHRTM strategy consulting, using best-of-breed research on HR vendors, products, and services | • | Strategies for attracting, retaining and motivating employees | ||
Our clients include many of the world's largest corporations as well as emerging growth companies, public institutions and non-profit organizations. Many of our client relationships have existed over several decades.
We believe that our extensive history, global presence, dedication to long-term client relationships and recognized reputation for quality provide us with significant competitive advantages. We focus on delivering value-added consulting services that help our clients anticipate, identify and capitalize on emerging opportunities in human capital management. We implement this strategy through over 4,200 associates in 62 offices located in 18 countries.
Corporate Information
Watson Wyatt & Company Holdings was incorporated in Delaware on January 7, 2000. Its principal operating subsidiary, Watson Wyatt & Company, was incorporated in Delaware on February 17, 1958. Including predecessors, we have been in business since 1946. We conducted our business as The Wyatt Company until changing our corporate name to Watson Wyatt & Company in connection with the establishment of the Watson Wyatt Worldwide alliance.
Watson Wyatt Worldwide Alliance
Recognizing our clients' need for a global organization to service their needs, 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 with R. Watson & Sons (now Watson Wyatt Partners), a leading United Kingdom-based actuarial, benefits and human resources consulting partnership that was founded in 1878. Since 1995, we have marketed our services globally under the Watson Wyatt Worldwide brand, sharing resources, technologies, processes and business referrals.
The Watson Wyatt Worldwide global alliance maintains 87 offices in 29 countries and employs over 6,100 employees. Watson Wyatt & Company Holdings operates 62 offices in 18 countries in North America, Latin America and Asia-Pacific. Watson Wyatt Partners operates 10 offices in the United Kingdom and Ireland. The alliance operates 15 offices in 9 continental European countries principally through a jointly owned holding company, Watson Wyatt Holdings (Europe) Limited, which is 25% owned by us and 75% owned by Watson Wyatt Partners.
Human Resources Consulting Industry
Overview
The growing demand for employee benefits and human capital consulting services is directly related to the size, complexity and rapid change associated with human resources programs. In the U.S. alone, employers spend over $5 trillion annually on the direct costs of human capital such as compensation and benefits, according to the U.S. Department of Commerce, Bureau of Economic Analysis. In 1999, U.S. employers contributed over $170 billion to pension and profit sharing plans, and the assets of U.S. retirement plans exceeded $8 trillion.
Employers, regardless of geography or industry, are facing unprecedented challenges involving the management of their people. Changing technology, critical skill shortages and an aging population in many developed countries have increased competition for talented employees. At the same time, employees' expectations relating to compensation, benefits and other HR services are growing. Employers must address these challenges effectively in order to remain competitive.
Watson Wyatt is one of the leading HR-focused consulting firms, based on revenues, that compete in serving the large employer market worldwide. Other major consulting firms include: William M. Mercer, Towers Perrin and Hewitt Associates. In addition to these firms, the industry includes smaller benefits and compensation firms and the HR consulting divisions of diversified professional service firms, such as the big five accounting firms, Accenture, EDS and Booz, Allen & Hamilton. The global HR consulting industry is highly fragmented. There are approximately 950 firms providing HR-related consulting services, with the four major HR-focused consulting firms accounting for approximately 40% of total industry revenue.
Consulting Services
Our North American operations include three principal practice groups: Benefits, HR Technologies and Human Capital. Outside North America, our operations are organized and managed on a geographic basis. The percentage of revenues generated in the various groups is as follows:
| 2001 | 2000 | 1999 | ||||
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| Benefits Group | 56 | % | 56 | % | 58 | % |
| HR Technologies Group | 14 | 13 | 12 | |||
| Human Capital Group | 8 | 8 | 8 | |||
| International | 11 | 12 | 11 | |||
| Other (including Data Services and Communications) | 11 | 11 | 11 | |||
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| Total | 100 | % | 100 | % | 100 | % |
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Prior year percentages have been recalculated to conform to current classification. For more information about industry segments, see Note 13 of Notes to the Consolidated Financial Statements, included in Item 14 of this report.
Benefits Group
Our Benefits Group is our largest and most established practice, with a franchise dating to 1946. This group consists of approximately 1,540 associates and works with clients to create cost-effective benefits programs that help attract, retain and motivate a talented workforce. We strive to provide tailored benefits programs for our clients, and we base our recommendations on extensive research. Our Benefits Group, which consists of Retirement Consulting, Investment Consulting, and Group & Health Care Consulting, accounted for approximately 56% of our total revenues for the fiscal year ended June 30, 2001.
Retirement Consulting
We are one of the world's largest advisers on retirement plans, and we provide actuarial and consulting services for large defined benefit and defined contribution retirement plans. Our consultants work with clients to provide realistic assessments of the impact that the change in workforce demographics will have on their retirement plans, corporate cash flow requirements and retiree benefits adequacy and security.
In North America, and increasingly throughout much of the developed world, retirement security is provided through funded pension plans, most of which are either defined benefit or defined contribution plans. A typical defined benefit plan is characterized by employer contributions and a specified future benefit to the employee. These plans typically involve large asset pools, complex calculations to determine employer costs and funding requirements and sophisticated analysis to match liabilities and assets over long periods of time. These plans are commonly referred to as pension plans. A typical defined contribution retirement plan is characterized by employee contributions, possible employer matching contributions and an unspecified future benefit paid to the employee which will ultimately be based on investment returns. In the United States, the most common example of a defined contribution plan is a 401(k) plan.
Our target market for defined benefit plans consists of large plans such as the Fortune 1000, Pensions & Investments 1000, and other similarly sized plans and plan sponsors. Our consultants provide actuarial services to many of the world's largest retirement plans, including the three largest corporate-sponsored defined benefit plans in the United States. Our defined benefit services include:
• Strategic plan design
• Actuarial services
• Funding recommendations
• Multinational asset pooling consulting
• Financial reporting
• Valuation and diagnostic software and systems
• Assistance with merging, divesting and acquiring plans
We also help companies design and implement defined contribution plans, especially 401(k) plans in the United States. We assist clients with the selection of asset managers and administrators and in communicating with their employees concerning enrollment, plan provisions and investment alternatives.
In both the defined benefit and defined contribution areas, we emphasize research-based consulting to design retirement programs that align our clients' workforces with their business strategies. Examples of our products and services include:
| § | Pension Equity Plan - an alternative retirement plan that combines the lump sum portability of defined contribution and cash balance plans desired by younger workers with a benefits formula based on the final few years of earnings, providing benefits security typical to a traditional defined benefit plan that older and long-service employees seek; |
| § | Flex Pension PlusTM - a tax-effective Canadian supplemental retirement plan for attracting and retaining key employees; |
| § | PREpare!® - a web-based tool that enables employees to model different savings and retirement income scenarios; |
| § | Watson Wyatt 401(k) Value IndexTM - a tool that looks beyond cost to identify the total value that employers and their employees derive from their 401(k) plans; |
| § | Phased Retirement Programs - a combination of programs that help clients attract and retain older workers by enabling them to balance work/life needs through a gradual transition to retirement; and |
| § | Electronic Actuary/ElectraTM - a tool that performs immediate ''what if'' scenarios so that different plan designs can be modeled and priced interactively with clients. |
To support our retirement consulting services, we invest heavily in state-of-the-art technology, software and systems to ensure seamless consistency and efficiency of service delivery in all our offices worldwide. We also maintain extensive proprietary databases, Watson Wyatt COMPARISONTM and BenTRACKTM, that enable our clients to track and benchmark benefits plan provisions in the United States and throughout the world, respectively.
Group and Healthcare Consulting
Healthcare costs incurred by U.S. employers are rising by more than 10% per year. In this environment, we help our clients with the design, financing, administration and communication of medical, disability and other group benefits plans. Clients seek our services to assist them in an environment that is characterized by escalating costs, employee dissatisfaction with healthcare programs and the burden of managing multiple vendor relationships. Our approach is to establish a link between each element of an employers' benefits programs and the employers' desired cost, employee satisfaction and productivity goals. Our services include:
• Plan design;
• Actuarial services;
• Vendor management services;
• U.S. and off-shore funding analysis;
• Benefits pricing;
• Assistance with plan changes relating to mergers, acquisitions and divestitures; and
• Integrated disability management.
Our approach to group benefits consulting is research-based and makes use of sophisticated consulting tools such as:
| § | eHR/BenefitsTM - tools, including a customizable web portal to facilitate the administration and management of health and welfare benefits. |
| § | PreViewTM - a medical benefits cost modeling system which accurately and quickly models medical claims under alternative plan designs, covered populations and managed care delivery systems; |
| § | Health Plan Value LibraryTM - software tools and a database of information on the cost, quality and accessibility of health plans that are used to screen and evaluate health plans; and |
| § | Auto-RFPTM - a powerful software application that organizes and eases the administrative process of gathering and evaluating the responses from healthcare vendors to requests for proposals. |
Investment Consulting
Through our registered investment advisor subsidiary, we offer investment consulting services that help private and public sector clients throughout the world maximize the return on their retirement plan assets, develop governance policies and strategies and design investment structures to successfully manage financial liabilities within the context of their overall business objectives. Our services include:
• Asset/liability modeling and asset allocation studies;
• Governance and investment policy development;
• Investment policy implementation;
• Investment structure analysis;
• Investment manager selection and evaluation; and
• Performance evaluation and monitoring.
HR Technologies Group
Our HR Technologies Group helps clients select and implement technologies that enhance the delivery of benefits and related information to employees. Our HR Technologies Group consists of approximately 410 associates and represented approximately 14% of our total revenues for the fiscal year ended June 30, 2001.
As human resources programs become more complex and important for recruiting and retaining employees, organizations are seeking flexible, adaptable and cost-effective ways to provide benefits information to their employees. We are well-positioned to help clients address these challenges because of our eHRTM approach, which integrates human resources related data, computer systems and transactions in a single employee accessible network. We help organizations that have adopted internet applications for external business strategies to employ similar advanced technologies for internal applications such as human resources. Our services include assisting clients in implementing employee self-service applications, retirement plan administration systems, benefits enrollment, training programs, time and attendance systems and applicant tracking systems. Using our proprietary consulting methodology of ''Discover, Invent and Deliver,'' our consultants work with clients to evaluate existing human resources infrastructure and business strategy, identify the best sources of people, process and technology and design and implement tailored approaches. Our consulting work frequently involves the development of web-based employee self-service applications, the implementation of interactive call centers and the integration of existing legacy systems. We also offer hosting services for companies who prefer to access applications from our servers rather than host on their own intranets. In addition, we deliver state-of-the-art applications in health and welfare enrollment, pension administration, compensation planning and retirement planning.
In June 2001, we entered into an agreement with Workscape, Inc., a provider of internet based human capital management software and services, regarding a strategic alliance to market, distribute and implement a complete human resources portal solution.
Human Capital Group
Our Human Capital Group, which consists of approximately 260 associates, helps clients achieve competitive advantage by aligning their workforce with their business strategy. This includes helping clients develop and implement strategies for attracting, retaining and motivating their employees to maximize the return on their investment in human capital. Our Human Capital Group represented approximately 8% of our total revenues for the fiscal year ended June 30, 2001. Our Human Capital Group focuses in three principal areas:
Executive Compensation
We counsel executives and boards of directors on executive pay programs, including cash compensation, stock options and stock purchase plans, and on ways to align pay-for-performance plans throughout the organization in order to increase shareholder value.
Strategic Rewards®
We help align an organization's rewards—including compensation, stock programs, incentives, recognition programs and flexible work arrangements—with its business strategies, cultural values, work design and human resources strategy. We work together with our Benefits Group to develop optimal total compensation programs for our clients.
Organization Effectiveness
We help clients build high-performance organizations by working with them to clarify and implement business strategy, recognizing the impact of employee attitudes and commitment and effective team and leadership development on business success. We provide a wide array of services centered around organization assessment, including organization measurement and surveys. In the area of talent management, we provide tools and methodologies for talent selection and development, succession planning and performance management. We also provide consulting regarding the organization and development of the HR function, including shared services and organizational design.
We have developed the Watson Wyatt Human Capital Indexâ, a proprietary tool for demonstrating the relationship between the effectiveness of an organization's human capital practices and the creation of superior shareholder returns. In support of our human capital consulting we also maintain databases of employee attitudes for client organization comparison.
Our WorkUSA®/WorkCanadaTM database is regarded as the most up-to-date survey in existence on the attitudes of North American workers. It includes the opinions of 10,000 employees surveyed independently, reflecting a large cross-section of jobs and industry types. Our clients compare their own employee survey results against these norms to identify workplace perceptions and satisfaction and commitment levels.
International Operations
Our operations outside North America are managed and organized on a geographic basis. These operations include 24 offices in Asia-Pacific and Latin America, employing approximately 920 associates, which generally provide our full array of services. This segment represented approximately 11% of our total revenues for the fiscal year ended June 30, 2001.
We established our presence in Asia-Pacific in 1979 with offices in Hong Kong and Malaysia, and grew substantially throughout the 1980's and 1990's by establishing new offices and acquiring existing firms. We have been successful in growing high-end human capital consulting services, which has become increasingly important since the 1997/1998 economic crisis, helping our clients with the people and cultural issues that are necessary to grow their businesses. We are also widely recognized as the leader in providing compensation and benefits surveys in the region, with over 50 different survey products. Our retirement consulting services continue to grow in the region, and we provide investment consulting services to some of the largest pension plans in Japan and Hong Kong. We were named HR Consultancy of the Year in Hong Kong for 1998, 1999 and 2000 by China Staff magazine. In addition to our human capital and benefits consulting services, we have also recently begun marketing HR Technologies services to clients in the region.
Our presence in Latin America began in the early 1980's in Mexico and grew to include such major markets as Brazil in the 1990's. With deregulation, privatization and the influx of multinationals, we believe there are significant opportunities for growth in the region, both in the benefits area, where most of our services are concentrated currently, and in the human capital consulting area.
Other Services
Communication Consulting
Our communication consulting group has won numerous awards for innovative and effective communications. Our consultants combine strong creative skills with technical excellence on human resources issues and solid research on employee attitudes and communication effectiveness. We conduct communications audits, research, and focus groups, and provide communications planning and implementation. In addition, our consultants assist employers in complying with disclosure requirements.
Watson Wyatt Data Services
Watson Wyatt Data Services provides a comprehensive array of global compensation, benefits and employment practices information that is often studied and cited by many of our clients and competitors. In the United States, we publish and market an extensive library of reports on human resources issues, and more than 7,500 organizations participate in one or more of our annual surveys. Our databases contain compensation information for more than two million employees in virtually every industry sector and major metropolitan area. Outside of the United States, our worldwide alliance offers more than 70 remuneration, benefits and employment practice reference guides, covering more than 50 countries and 6 continents. In addition to our annual survey references, we also offer many reference works intended to assist practitioners in creating or maintaining programs in a variety of subject areas such as variable pay, performance management and personnel policies.
Integrated Service Approach
While we focus our consulting services in the principal areas described above, we draw upon consultants from our different practices to deliver integrated services to meet the needs of our clients. An example is in the area of Merger and Acquisitions. Recognizing that many business combinations fail because of ''people problems,'' we help clients achieve better transactional success by assisting with faster integration, cost containment, increased customer focus and greater productivity. We assemble multi-disciplinary teams to provide key services that include due diligence of pension and benefits plans, company cultures and human resources strategies, integration of human resources processes and practices and enterprise-wide project management.
Another example is our Total Rewards approach which encompasses compensation, benefits, career growth and company culture. We help clients determine the correct mix of reward programs to attract and retain the right employees and to motivate them to produce desired results.
Sales and Marketing
Our growth strategy starts with ensuring the satisfaction of current clients through our Account Management program. We have approximately 135 account managers who focus on the effective delivery of services to clients and on expanding our relationships across service lines, geographic boundaries and divisions within client companies. A key element of this program is an approach we call ClientFirstTM. Using proprietary processes and tools, we work with clients to define their needs and expectations before an engagement begins and then continually measure our performance according to agreed upon standards.
We also pursue new clients using cross-disciplinary teams of consultants as well as dedicated business developers to initiate relationships with carefully selected companies. Our client expansion and new client acquisition efforts are supported by market research, comprehensive sales training programs, and extensive marketing databases. Our sales efforts are also supported by a full array of marketing programs designed to raise awareness of the Watson Wyatt Worldwide brand and our reputation within our target markets. These programs promote our thought leadership on key human resources issues and establish us as a preferred human capital consulting firm to many of the world's largest companies.
Clients
We work with major corporations, emerging growth companies, government agencies and not-for-profit institutions in North America, Latin America and Asia-Pacific across a wide variety of industries. Our client base is broad and geographically diverse. For the fiscal year ended June 30, 2001, our ten largest clients accounted for approximately 13% of our consolidated revenues and no individual client represented more than 4% of our consolidated revenues.
Competition
The human capital consulting business is highly competitive. We believe that there are several barriers to entry, such as the need to assemble specialized intellectual capital to provide expertise on a global scale, and that we have developed competitive advantages in providing human resources consulting services. However, we face intense competition from several different sources.
Our current and anticipated competitors include:
| • | Major human resources focused consulting firms that compete in serving the large employer market worldwide, such as William M. Mercer, Towers Perrin and the administration/consulting firm Hewitt Associates; | |
| • | Smaller benefits and compensation consulting firms, such as Buck Consultants, The Segal Company and Hay Group; | |
| • | The human resources consulting practices of public accounting, consulting and insurance firms, such as PricewaterhouseCoopers, Deloitte & Touche, Booz, Allen & Hamilton and Aon; | |
| • | Information technology consulting firms, such as Accenture, and KPMG Consulting, as well as internet/intranet development firms; and | |
| • | Boutique consulting firms comprised primarily of professionals formerly associated with the firms mentioned above. |
The market for our services is subject to change as a result of regulatory, legislative, competitive and technological developments and to increased competition from established and new competitors. We believe that the primary determinants of selecting a human resources consulting firm include reputation, ability to provide measurable increases to shareholder value, global scale, service quality, and the ability to tailor services to a clients' unique needs. We believe we compete favorably with respect to these factors.
Employees
We employ approximately 4,200 associates as follows:
| Benefits Group | 1,540 |
| HR Technologies Group | 410 |
| Human Capital Group | 260 |
| International | 920 |
| Other (including Data Services and Communications) | 1,070 |
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| 4,200 | |
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None of our associates are subject to collective bargaining agreements. We believe relations with associates are good. Approximately 66% of our stock is held by our current associates.
Item 2. Properties.
We operate in 62 offices in principal markets throughout the world. Operations are carried out in leased offices under operating leases that normally do not exceed 10 years in length. We do not anticipate difficulty in meeting our space needs at lease expiration or if additional space is required earlier. We also evaluate office relocation on an ongoing basis to meet changing needs in our markets while minimizing our occupancy expense.
The fixed assets owned by Watson Wyatt represented approximately 14% of total assets at June 30, 2001 and consisted primarily of computer equipment, office furniture and leasehold improvements.
Item 3. 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 matters summarized below involve the most significant pending or potential claims against us. We believe, based on currently available information, that the results of all such proceedings, in the aggregate, will not have a material adverse effect on our financial condition, but claims which are possible in our business could be material to our financial results for a particular period.
We carry substantial professional liability insurance with a self-insured retention of $1 million per occurrence which provides coverage for professional liability claims including the cost of defending such claims. We also carry employment practices liability insurance. The Company has provided for the $1 million self-insured retention where estimated losses in excess of such amount are considered probable. The actual outcome of any lawsuit is not likely to result in any additional loss to the Company.
Connecticut Carpenters Pension Fund. The Connecticut Carpenters Pension Fund filed an action against us in 1999, in the U.S. District Court for District of Connecticut, claiming errors in valuations from 1991 through 1998 that allegedly resulted in understated liabilities. A jury trial was held in February 2001. On February 23, 2001, the jury returned a verdict in favor of the Fund and awarded $32 million in damages to the Fund, plus pre-judgment interest of approximately $7 million. We filed post-trial motions with the trial court disputing the damages amount, which were denied on June 19, 2001, and the judgment was satisfied on July 3, 2001.
Pacific Group Medical Association (PGMA). In connection with the insolvency and liquidation of the Pacific Group Medical Association, a health insurance provider and former client, the Hawaii Insurance Commissioner, acting as liquidator of PGMA, brought claims in the 1st Circuit for the Circuit Court of Hawaii against the former officers, directors, accountants, attorneys and other service providers of PGMA. Late in 2000, a lawsuit by the Insurance Commissioner against Watson Wyatt & Company and others was consolidated with an earlier lawsuit brought by the Insurance Commissioner against the PGMA officers and directors. The Insurance Commissioner alleged that PGMA's liabilities exceeded its assets by approximately $15 million when it was shut down in 1997 and sought to recover damages from all of the defendants. During a mediation conducted in Honolulu during the week of March 19, 2001, we and the Insurance Commissioner reached a tentative settlement of the liquidator's claims against us. Settlement negotiations among the parties to the litigation have continued, and we anticipate that a stipulation dismissing claims against the settling defendants will be submitted to the court for approval in the near future.
Regina, Saskatchewan Police. The Administrative Board of the Regina Police Superannuation and Benefit Plan filed an action against us and three individual employees in 1994 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 1970’s. The claim has been settled and the lawsuit was dismissed on June 19, 2001.
Societe Internationale de Telecommunications Aeronautique S.C. (SITA). In 1999, a law firm representing SITA, a Belgium cooperative based in France, 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 & Company Holdings (Europe) Limited. Suit was filed on November 15, 2000, in the High Court of Justice Chancery Division against Watson Wyatt Partners and The Wyatt Company (UK) Limited, one of our subsidiaries. SITA's specific damage claim is indeterminate, but could be in the $90 million range. With our respective insurers, we and Watson Wyatt Partners have entered into a joint defense agreement. We filed our statement of defense on February 7, 2001 and the parties have commenced discovery.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters.
Initial Public Offering
On October 10, 2000, our Registration Statement on Form S-3 (File No. 333-94973), registering for sale up to 6,440,000 shares of class A common stock at $12.50 per share to be issued in connection with our initial public offering, was declared effective. On October 16, 2000, we completed changes in our corporate structure in conjunction with the initial public offering. The changes in corporate structure involved the merger of Watson Wyatt & Company with WW Merger Subsidiary, Inc., a wholly-owned subsidiary of Watson Wyatt & Company Holdings. Watson Wyatt & Company is now a wholly-owned subsidiary of Watson Wyatt & Company Holdings.
At the time of the reorganization, each share of Watson Wyatt & Company's redeemable common stock was converted into one share of class B-1 common stock and one share of class B-2 common stock of Watson Wyatt & Company Holdings. The class B common stock is divided into two classes to accommodate different transfer restriction periods. The class B-1 shares are subject to a transfer restriction period of 12 months following the public offering date, while the class B-2 shares are subject to a transfer restriction period of 24 months following the public offering date, unless waived by the Board of Directors. The Company waived the transfer restrictions on a total of 1,559,250 class B-1 and 1,559,250 class B-2 shares to allow for conversion into the class A shares sold by selling stockholders in the initial public offering described below. Following the expiration or waiver of the respective transfer restriction periods, the remaining class B-1 and class B-2 shares will automatically convert into class A common stock. Class A, B-1 and B-2 shares all retain equal voting rights.
In conjunction with our initial public offering, we entered into agreements providing for additional transfer restrictions with major stockholders, executive officers and employee directors affecting approximately 36% of our remaining class B common stock. The agreements restrict transfers of all shares held by such persons immediately following the offering, and the restrictions terminate as to 25% of such shares on each of the first, second, third and fourth anniversaries of the consummation of the public offering.
A total of 5,600,000 shares of class A common stock were offered and sold in our initial public offering at an offering price of $12.50 per share, for an aggregate offering price of $70.0 million. Of the shares included in this transaction, Watson Wyatt & Company Holdings offered 2,800,000 newly-issued shares, and the selling stockholders offered the remaining 2,800,000 shares. On November 8, 2000, our underwriters exercised their over-allotment option. As a result, the underwriters purchased an additional 840,000 shares of class A common stock from us and from the selling stockholders at the initial public offering price of $12.50 per share less the underwriting discount, for an aggregate offering price of $10.5 million. Of the shares included in this transaction, Watson Wyatt & Company Holdings sold 521,500 newly-issued shares, and the selling stockholders sold 318,500 shares. The managing underwriters of the offering were Deutsche Banc Alex. Brown, Banc of America Securities LLC, and Robert W. Baird & Co.
As a result of these transactions and upon completion of the offering, we received gross proceeds of $41.5 million, and the selling stockholders received gross proceeds of $39.0 million. Net proceeds to the Company were $35.0 million, which is net of $6.5 million in underwriting discounts, commissions and other offering costs. Also, we paid $2.7 million to selling stockholders as reimbursement for commission payments resulting from the sale of their shares.
From the time of receipt through June 30, 2001, proceeds from the offering of $17.7 million were applied to the repayment of short-term debt, $16.5 million were used for capital expenditures and a $0.8 million installment payment was made for our acquisition of Talisman, Inc., a boutique firm specializing in recruiting and staffing consulting.
Secondary Public Offering
In June 2001, we completed a secondary public offering ("the Secondary") of our class A common stock. In this offering, a total of 2,950,000 shares of class A common stock was offered and sold at a price of $22.00 per share, for an aggregate offering price of $64.9 million. Of the shares included in this transaction, Watson Wyatt & Company Holdings offered 104,285 newly-issued shares, and selling stockholders offered the remaining 2,845,715 shares. On July 6, 2001, our underwriters exercised their over-allotment option. As a result, the underwriters purchased an additional 442,500 shares of class A common stock from selling stockholders at the offering price of $22.00 per share less the underwriting discount, for an aggregate offering price of $9.7 million. The managing underwriters of the offering were Deutsche Banc Alex. Brown, Robert W. Baird & Co. and UBS Warburg.
In conjunction with this offering, the Board of Directors waived the transfer restrictions on a total of 3,288,215 class B-1 shares to allow for conversion into the class A shares sold by selling stockholders.
Net proceeds to the Company from the Secondary were $1.8 million, net of underwriting discounts, commissions and other offering costs. These proceeds were used for capital expenditures. We did not receive any proceeds from the sale of shares by the selling stockholders.
Market Information
Watson Wyatt & Company Holdings class A common stock is currently traded on the New York Stock Exchange under the symbol WW. The following table sets forth the range of high and low closing share prices for each period since our initial public offering in October 2000, determined by the daily closing stock prices.
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| Second quarter (October 1, 2000 through December 31, 2000) | $ | 23.50 | $ | 16.00 | ||
| Third quarter (January 1, 2001 through March 31, 2001) | 24.00 | 15.60 | ||||
| Fourth quarter (April 1, 2001 through June 30, 2001) | 25.01 | 14.81 | ||||
Prior to our initial public offering in October 2000, there was no established public trading market for our redeemable common stock since the price of the Company's redeemable common stock was determined by our formula book value and the transferability of such shares was restricted.
Holders
As of August 17, 2001, there were 1,516 registered holders of our common stock.
Dividends
Under our credit facility (see Note 10 of Notes to the Consolidated Financial Statements, included in Item 14 of this report), we are required to observe certain covenants (including requirements as to minimum net worth) that affect the amounts available for the declaration or payment of dividends. Under the most restrictive of these covenants, approximately $36.5 million was available for the declaration or payment of dividends as of June 30, 2001. The declaration and payment of dividends by the Company is at the discretion of our Board of Directors and depends on numerous factors, including, without limitation, our net earnings, financial condition, availability of capital, debt covenant limitations, and our other business needs, including those of our subsidiaries and affiliates. Historically, while our performance would have permitted the payment of dividends, we have chosen not to declare dividends every year since fiscal year 1991. We currently intend to retain our future earnings to finance the operation and expansion of our business and we do not anticipate paying cash dividends on our common stock in the foreseeable future.
Item 6. Selected Consolidated Financial Data.
The table on the following page sets forth selected consolidated financial data of Watson Wyatt as of and for each of the years in the five year period ended June 30, 2001. The selected consolidated financial data as of June 30, 2001 and 2000 and for each of the three years in the period ended June 30, 2001 are derived from the audited consolidated financial statements of Watson Wyatt included in this Form 10-K. The selected consolidated financial data as of June 30, 1999, 1998, 1997, and for each of the years ended June 30, 1998 and 1997 have been derived from audited consolidated financial statements of Watson Wyatt not included in this Form 10-K and have been restated to reflect our discontinued operations. Earnings per share data for each period have also been restated to reflect our corporate reorganization and two-for-one share conversion as if our corporate reorganization and two-for-one share conversion were effective at the beginning of each period. See Note 2 of the Consolidated Financial Statements for further information regarding the corporate reorganization and share conversion.
The consolidated financial data should be read in conjunction with our Consolidated Financial Statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of this Form 10-K. Amounts are in thousands of U.S. Dollars except per share data.
| Year Ended June 30, | ||||||||||||||||
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| 2001 | 2000 | 1999 | 1998 | 1997 | ||||||||||||
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| Statement of Operations Data: | ||||||||||||||||
| (amounts are in thousands, except per share data) | ||||||||||||||||
| Revenue | $ | 700,189 | $ | 624,583 | $ | 556,860 | $ | 512,660 | $ | 486,502 | ||||||
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| Costs of providing services: | ||||||||||||||||
| Salaries and employee benefits | 370,045 | 332,339 | 298,915 | 268,611 | 252,302 | |||||||||||
| Stock incentive bonus plan (a) | - | 30,283 | 22,610 | - | - | |||||||||||
| Non-recurring compensation charge (b) | - | - | - | 69,906 | - | |||||||||||
| Professional and subcontracted services | 53,865 | 49,608 | 47,863 | 49,907 | 48,827 | |||||||||||
| Occupancy, communications and other | 112,314 | 100,099 | 92,668 | 88,840 | 96,026 | |||||||||||
| General and administrative expenses | 69,402 | 63,596 | 56,578 | 51,759 | 45,696 | |||||||||||
| Depreciation and amortization | 21,995 | 17,878 | 15,248 | 24,994 | 22,094 | |||||||||||
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| 627,621 | 593,803 | 533,882 | 554,017 | 464,945 | ||||||||||||
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| Income (loss) from operations | 72,568 | 30,780 | 22,978 | (41,357 | ) | 21,557 | ||||||||||
| Other: | ||||||||||||||||
| Interest income | 2,855 | 1,823 | 944 | 901 | 1,462 | |||||||||||
| Interest expense | (1,144 | ) | (1,876 | ) | (2,646 | ) | (2,768 | ) | (1,506 | ) | ||||||
| Income from affiliates | 4,098 | 3,116 | 2,524 | 258 | 105 | |||||||||||
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| Income (loss) before income taxes and minority interest |
78,377 | 33,843 | 23,800 | (42,966 | ) | 21,618 | ||||||||||
| Income taxes | 33,623 | 15,195 | 11,448 | 13,134 | 9,070 | |||||||||||
| Minority interest | (318 | ) | (115 | ) | (217 | ) | (112 | ) | (167 | ) | ||||||
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| Income (loss) from continuing operations | 44,436 | 18,533 | 12,135 | (56,212 | ) | 12,381 | ||||||||||
| Discontinued operations (c) | - | - | 8,678 | (69,906 | ) | (11,483 | ) | |||||||||
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| Net income (loss) | $ | 44,436 | $ | 18,533 | $ | 20,813 | $ | (126,118 | ) | $ | 898 | |||||
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| Earnings (loss) per share, continuing operations, basic |
$ | 1.39 | $ | 0.62 | $ | 0.40 | $ | (1.63 | ) | $ | 0.35 | |||||
| Earnings (loss) per share, continuing operations, diluted |
$ | 1.37 | $ | 0.62 | $ | 0.40 | $ | (1.63 | ) | $ | 0.35 | |||||
| Earnings (loss) per share, net income
(loss), basic |
$ | 1.39 | $ | 0.62 | $ | 0.68 | $ | (3.67 | ) | $ | 0.02 | |||||
| Earnings (loss) per share, net income
(loss), diluted |
$ | 1.37 | $ | 0.62 | $ | 0.68 | $ | (3.67 | ) | $ | 0.02 | |||||
| Weighted average shares of common stock, basic |
32,068 | 30,000 | 30,430 | 34,340 | 34,876 | |||||||||||
| Weighted average shares of common stock, diluted |
32,363 | 30,000 | 30,430 | 34,340 | 34,876 | |||||||||||
| As of June 30, | ||||||||||||||||
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| 2001 | 2000 | 1999 | 1998 | 1997 | ||||||||||||
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| Balance Sheet Data: | ||||||||||||||||
| Cash and cash equivalents | $ | 81,735 | $ | 41,410 | $ | 35,985 | $ | 13,405 | $ | 26,257 | ||||||
| Working capital | 96,171 | 16,177 | 11,692 | 23,748 | 21,307 | |||||||||||
| Total assets | 387,456 | 329,960 | 313,960 | 268,310 | 331,778 | |||||||||||
| Note payable | - | - | - | 9,000 | - | |||||||||||
| Common stock | 330 | - | - | - | - | |||||||||||
| Additional paid-in capital | 146,649 | - | - | |||||||||||||