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, 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 November 12, 1999.
Common Stock, $1.00 par value 14,896,655
- ----------------------------- ----------------
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 September 30,
--------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Fees $ 146,323 $ 133,985
------------ ------------
Costs of providing services:
Salaries and employee benefits 85,803 78,498
Occupancy and communications 14,742 14,521
Professional and subcontracted services 9,796 8,714
Other 7,274 2,846
------------ ------------
117,615 104,579
General and administrative expenses 13,178 11,160
Depreciation and amortization 4,907 3,853
------------ ------------
135,700 119,592
------------ ------------
Income from operations 10,623 14,393
Other:
Interest income 1,036 124
Interest expense (390) (553)
Income from affiliates 988 160
------------ ------------
Income before income taxes and minority interest 12,257 14,124
Provision for income taxes 5,919 6,830
------------ ------------
Income before minority interest 6,338 7,294
Minority interest in net loss of consolidated subsidiaries 18 -
------------ ------------
Net Income $ 6,356 $ 7,294
============ ============
Earnings per share $ 0.41 $ 0.47
============ ============
Weighted average shares of Redeembable Common Stock 15,331 15,377
============ ============
See accompanying notes
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF U.S. DOLLARS)
September 30, June 30,
1999 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 13,835 $ 35,985
Receivables from clients:
Billed, net of allowances of $6,526 and $3,701 76,215 72,798
Unbilled 70,581 63,068
-------------- -------------
146,796 135,866
Other current assets 10,389 10,834
-------------- -------------
Total current assets 171,020 182,685
Investment in affiliates 16,561 15,306
Fixed assets 40,887 42,797
Deferred income taxes 56,206 56,206
Intangible assets 9,804 7,455
Other assets 9,908 9,511
-------------- -------------
$ 304,386 $ 313,960
============== =============
LIABILITIES, REDEEMABLE COMMON STOCK AND PERMANENT SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 125,393 $ 152,371
Note payable and book overdrafts 31,562 248
Income taxes payable 8,393 18,374
-------------- -------------
Total current liabilities 165,348 170,993
Accrued retirement benefits 74,871 77,140
Deferred rent and accrued lease losses 9,078 9,270
Other noncurrent liabilities 22,149 22,608
Minority interest in subsidiaries 564 669
Redeemable Common Stock - $1 par value:
25,000,000 shares authorized;
15,012,350 and 16,112,416 issued
and outstanding; at redemption value 100,282 107,631
Permanent shareholders' equity:
Adjustment for redemption value less
than amounts paid in by shareholders 10,641 11,420
Retained deficit (76,496) (83,209)
Cumulative translation loss (2,051) (2,562)
Commitments and contingencies
-------------- --------------
$ 304,386 $ 313,960
============== ==============
See accompanying notes
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF U.S. DOLLARS)
Three Months Ended September 30,
--------------------------------
1999 1998
------------ -------------
(Unaudited)
<S> <C> <C>
Cash flows from (used for) operating activities:
Net income $ 6,356 $ 7,294
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful receivables from clients 4,169 1,957
Depreciation 4,519 3,601
Amortization of intangible assets 388 252
Income from affiliates (988) (160)
Minority interest in net loss of consolidated subsidiaries (18) -
(Increase) decrease in assets (net of discontinued operations):
Receivables from clients (15,098) (15,093)
Income taxes receivable - 2,216
Other current assets 445 (3,287)
Other assets (397) 635
(Decrease) increase in liabilities (net of discontinued operations):
Accounts payable and accrued liabilities (26,978) (18,828)
Income taxes payable (9,981) 3,396
Accrued retirement benefits (2,269) (24)
Deferred rent and accrued lease losses (192) (635)
Other noncurrent liabilities 178 489
Other, net (72) (108)
Discontinued operations, net (637) (717)
------------- -------------
Net cash used for operating activities (40,575) (19,012)
------------- -------------
Cash flows (used in) from investing activities:
Purchases of fixed assets (2,645) (2,775)
Acquisitions (2,700) (5,671)
Investment in affiliates 297 1,151
------------- -------------
Net cash used in investing activities (5,048) (7,295)
------------- -------------
Cash flows from (used by) financing activities:
Borrowings and book overdrafts 31,314 32,944
Issuances of Redeemable Common Stock - -
Repurchases of Redeemable Common Stock (7,771) (6,285)
------------- -------------
Net cash from financing activities 23,543 26,659
------------- -------------
Effect of exchange rates on cash (70) (165)
------------- -------------
(Decrease) increase in cash and cash equivalents (22,150) 187
Cash and cash equivalents at beginning of period 35,985 13,405
------------- -------------
Cash and cash equivalents at end of period $ 13,835 $ 13,592
============= =============
See accompanying notes
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CHANGE 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 6,356 - - 6,356
Foreign currency translation adjustment - 511 - 511
------------ ---------- ---------- ---------
Total Comprehensive Income 6,356 511 - 6,867
Effect of repurchases of 1,100,066 shares of
common stock 357 - (357) -
Adjustment of redemption value for change
in Formula Book Value per share - - (422) (422)
------------ ---------- ---------- ---------
Balance at September 30, 1999 $ (76,496) $ (2,051) $ 10,641 $ (67,906)
============ ========== ========== =========
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 year ended June 30, 1999.
The results of operations for the three months ended September 30, 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. Under the Company's 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 September 30, 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.
3. During the three months ended September 30, 1999, the Company repurchased
1,100,066 shares of Redeemable Common Stock. The computation of earnings
per share is based upon the weighted average number of shares of
Redeemable Common Stock outstanding during the period. The number of
shares (in thousands) used in the computation is 15,331 and 15,377 for the
three months ended September 30, 1999 and 1998, respectively.
4. 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"). The Company
recorded an after tax loss of $69.9 million. 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. No adjustments to net income
were recorded as a result of the discontinuation during the quarters ended
September 30, 1999 and 1998.
-6-
<PAGE>
5. 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 September 30, 1999,
comprehensive income totaled $6.9 million compared with $7.3 million for
the three months ended September 30, 1998.
6. In fiscal year 1999, the Company adopted SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." The Company is
primarily organized geographically and has seven reportable segments:
(1) U.S. East
(2) U.S. Central
(3) U.S. West
(4) Asia/Pacific
(5) Canada
(6) Latin America
(7) Data Services
The Company evaluates the performance of its segments and allocates resources
to them based on net operating income. Prior year data has been restated to be
consistent with current year classifications.
The table below presents specified information about reported segments as of
and for the quarter ended September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. U.S. Asia/ Latin Data
East Central West Pacific Canada America Services Total
---- ------- ---- ------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External fees $ 41,238 $ 33,340 $ 14,883 $ 12,346 $ 8,628 $ 1,219 $ 3,592 $ 115,246
Intersegment fees 10,550 7,006 4,631 1,079 1,098 346 34 24,744
Net operating
income 14,700 6,691 2,218 1,778 (22) (282) 1,883 26,966
Receivables 58,459 44,369 18,398 13,552 11,386 2,639 - 148,803
</TABLE>
The table below presents specified information about reported segments as of
and for the quarter ended September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. U.S. Asia/ Latin Data
East Central West Pacific Canada America Services Total
---- ------- ---- ------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External fees $ 34,598 $ 30,946 $ 17,253 $ 11,203 $ 8,396 $ 1,006 $ 3,904 $ 107,306
Intersegment fees 9,458 5,319 4,763 625 1,262 458 92 21,977
Net operating
income 12,112 6,485 3,705 1,804 470 (118) 1,756 26,214
Receivables 45,819 38,895 24,423 11,286 13,324 1,889 - 135,636
</TABLE>
Information about interest income and tax expense is not presented as it is not
considered a responsibility of the segments' operating management.
-7-
<PAGE>
A reconciliation of the information reported by segment to the consolidated
amounts follows for the quarters ended September 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Fees:
- -----
Total segment external and intersegment fees $ 139,990 $ 129,283
Reimbursable expenses not included in segment fees 6,227 6,001
Other, net 106 (1,299)
--------- ---------
Consolidated fees $ 146,323 $ 133,985
========= =========
Net Operating Income:
- ---------------------
Total segment income $ 26,966 $ 26,214
Income from affiliates 988 160
Differences in allocation methods for depreciation
G&A and pension costs 2,112 1,833
Gain on sale of business units - 3,822
Discretionary payments (21,198) (15,774)
Other, net 3,389 (2,131)
--------- ---------
Consolidated pretax income from continuing operations $ 12,257 $ 14,124
========= =========
Receivables:
- ------------
Total segment receivables - billed and unbilled $ 148,803 $ 135,636
Net valuation differences and receivables of discontinued operations (2,007) 5,155
--------- ---------
Total billed and unbilled receivables 146,796 140,791
Assets not reported by segment 157,590 143,546
--------- ---------
Consolidated assets $ 304,386 $ 284,337
========= =========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
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 and its
alliance partner, Watson Wyatt Partners, the leading United Kingdom-based
employee benefits partnership, operate seamlessly as Watson Wyatt Worldwide.
Watson Wyatt is owned almost entirely by its active employees. The Company is
incorporated in Delaware, and its principal executive offices are located at
6707 Democracy Boulevard, Suite 800, Bethesda, MD 20817. The Company was
founded in 1946; Watson Wyatt Partners was founded in 1878.
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
first quarter of fiscal year 2000 (September 30, 1999) and as of the end of the
prior fiscal year 1999 (June 30, 1999), and Consolidated Statements of
Operations, of Cash Flows and of Changes in Permanent Shareholders' Equity for
the three months ended September 30, 1999 and 1998.
-8-
<PAGE>
GLOBAL OPERATIONS
Watson Wyatt Worldwide employs approximately 5,300 associates in offices in the
United States, Canada, Asia and the South Pacific, Europe, Africa, Latin
America and the U.S. Caribbean.
Watson Wyatt & Company is primarily organized based on the following geographic
regions: U.S. East, U.S. Central, U.S. West, Asia/Pacific, Canada and Latin
America. As of June 30, 1999, the Company employed approximately 3,850
associates as follows:
U.S. East 950
U.S. Central 975
U.S. West 450
Asia/Pacific 625
Canada 425
Latin America 80
Data Services 60
Corporate/Other 285
-------
3,850
=======
PRINCIPAL SERVICES
Watson Wyatt focuses its services in four principal areas:
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.
HUMAN CAPITAL CONSULTING: The Human Capital Consulting practice provides
comprehensive consulting in compensation plan design, executive compensation,
salary management, benefits communication and organizational effectiveness
consulting.
DATA SERVICES: Watson Wyatt Data Services produces custom and standard
compensation, benefits and best practices surveys and reference works to
clients throughout the world. Over 5,000 companies participate in the Company's
surveys; its services include over seventy reference publications in
remuneration, benefits and employment practices which are utilized by global
and local companies in fifty countries.
Within the past two years, Watson Wyatt has divested several non-core
businesses - including benefits administration outsourcing, defined
contribution record-keeping software, and its North American risk management
consulting services - in order to focus on these core consulting areas.
While the Company groups services into functional categories, management
believes a primary strength is its ability to deliver its services without
boundaries to meet the requirements of its clients.
-9-
<PAGE>
COMPETITION
The human resource consulting business, including all of the Company's
principal services, is highly competitive. Barriers to entry relate primarily
to the need to assemble the specialized intellectual capital to provide
expertise demanded by clients. The Company's competitive position is strongest
in retirement, benefits and HR technology consulting, but there is not a
substantial difference between the competitive position of its overall business
as compared to its individual lines of business.
Watson Wyatt ranks number one in the consulting industry when it comes to
delivering value to clients and overall reputation according to a recent
independent study conducted by THE WALL STREET JOURNAL among its subscribers.
The Company's competitors include other human resource consulting firms and
certain public accounting/consulting firms; its most direct competitors are
five to seven firms which offer similar services in the United States and, in
several cases, internationally. Buyers of consulting services in the Company's
core businesses consistently mention that their key selection criteria are
quality, the ability to tailor services to a client's unique needs, creativity
and overall value. In recent years, price has become a somewhat more
significant competitive factor in some aspects of the business. Other
competitive factors of increasing importance are the quality and effectiveness
of available technology and software and the ability to serve multinational
clients.
RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1998.
For the first three months of fiscal year 2000 the Company produced net income
of $6.4 million, a decrease of $0.9 million from net income of $7.3 million for
the first three months of fiscal year 1999. Excluding a $1.9 million after-tax
gain from the sale of the Company's defined contribution daily record-keeping
software included in the fiscal year 1999 results, net income increased $1.0
million, or 19%. These results reflect share value growth and bonus accruals
that are ultimately determined at the discretion of the Board of Directors.
Fees for the first three months of fiscal year 2000 totaled $146.3 million,
compared to $134.0 million for the first three months of fiscal year 1999, an
increase of $12.3 million, or 9%. The revenue growth is attributable to
improved performance in the Company's U.S. East and U.S. Central Regions,
primarily from increased billable hours.
Salaries and employee benefit expenses for the first quarter of fiscal year
2000 were $85.8 million, an increase of $7.3 million, or 9%, from $78.5 million
in the first quarter of fiscal year 1999. The increase is attributable to a
$9.1 million rise in compensation to associates, caused by a 4% increase in
headcount and a higher fiscal year 2000 estimated bonus accrual. This increase
is partially offset by a $1.9 million reduction in pension expense.
Occupancy and communication expenses during the first quarter of fiscal year
2000 totaled $14.7 million, an increase of $0.2 million, or 1%, from $14.5
million in the first quarter of the prior fiscal year.
Professional and subcontracted services increased by $1.1 million, or 13%, from
the first quarter of fiscal year 1999, reflecting timing differences associated
mainly with legal, marketing and operational payments to external vendors.
-10-
<PAGE>
Other costs of providing services were $7.3 million for the first quarter of
fiscal year 2000, an increase of $4.4 million from the first quarter of fiscal
year 1999. The difference is mainly attributable to the inclusion in fiscal
year 1999 of a $3.7 million gain from the sale of the Company's defined
contribution daily record-keeping software. The remainder of the difference can
be attributed to increased general office and travel expenses.
General and administrative ("G&A") expenses for the first quarter of fiscal
year 2000 were $13.2 million, a $2.0 million, or 18%, increase from the first
quarter of fiscal year 1999. This increase is primarily the result of increased
salaries and benefits, and an increased bonus accrual.
Depreciation and amortization expense of $4.9 million for the first quarter of
fiscal year 2000 represents an increase of $1.1 million from the first quarter
of fiscal year 1999. This increase is due to a higher depreciable capital base
and higher intangibles related to prior year acquisitions.
Interest income increased $0.9 million from the first quarter of fiscal year
1999. This increase can be attributed to the receipt of interest of $0.5
million related to a federal tax refund as well as to interest income of $0.4
million earned during the quarter on a higher average investment balance.
Income from affiliates was $1.0 million for the quarter ended September 30,
1999 compared with $0.2 million for the quarter ended September 30, 1998. The
increase reflects significantly improved business operations in both
Continental Europe and the United Kingdom.
Income taxes for the quarter ending September 30, 1999 were $5.9 million
compared to $6.8 million in the first quarter of fiscal year 1999 due to lower
income before income taxes and minority interest. The Company's effective tax
rate of 48% at September 30, 1999 remained unchanged from the prior year. The
Company's tax rate is affected by differing foreign tax rates in various tax
jurisdictions. The Company has not recorded a tax benefit on certain foreign
net operating loss carryovers and foreign deferred expenses to the extent that
it is more likely than not that a benefit will not be realized.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies primarily on funds from operations and short-term borrowings
as its sources of liquidity. The Company believes that it has access to ample
financial resources to finance its growth, meet its commitments to affiliates
as well as support ongoing operations. The Company's cash and cash equivalents
at September 30, 1999 totaled $13.8 million, compared to $36.0 million at June
30, 1999. The decrease is mainly attributable to the timing of the payment of
corporate taxes and to purchases of capital assets during the first quarter.
The Company had no borrowings outstanding under its line of credit as of
September 30, 1999 and June 30, 1999.
The allowance for doubtful accounts increased $2.8 million from June 30, 1999
to September 30, 1999. The movement is attributable to an increased accounts
receivable balance as of September 30, 1999 and an increased emphasis on cash
collections in the last month of the fiscal year that decreased the allowance
as of June 30, 1999. The change in the allowance for the first quarter of
fiscal year 2000 is consistent with the change in the first quarter of fiscal
year 1999. The number of months of accounts receivable outstanding was 1.2 at
September 30, 1999 compared to 1.3 at September 30, 1998.
CASH USED FOR OPERATING ACTIVITIES. For the first three months of fiscal year
2000, the Company had operating cash outflows of $40.6 million, compared to
$19.0 million for the first three months of fiscal year 1999. The increase in
cash outflows results mainly from the payment of higher accrued bonuses and
corporate tax payments for fiscal year 1999 in fiscal year 2000 compared with
the prior year.
-11-
<PAGE>
The Company's ratio of current assets to current liabilities was 1.0 at
September 30, 1999, compared to 1.1 at September 30, 1998.
CASH USED IN INVESTING ACTIVITIES. Cash used in investing activities was $5.0
million for the first three months of fiscal year 2000, versus $7.3 million for
the same period in fiscal year 1999. The decrease in cash usage was due to
lower contingency payments associated with 1999 acquisitions and lower
distributions from affiliates to the Company.
Anticipated commitments of funds are estimated at $24.0 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 the Company's cash needs.
CASH FROM FINANCING ACTIVITIES. Cash flows provided by financing activities
were $23.5 million for the first three months of fiscal year 2000, versus $26.7
million in the preceding fiscal year. The decrease is mainly due to the lower
level of borrowings and book overdrafts and higher repurchases of Redeemable
Common Stock.
The Company's $120.0 million revolving credit line matures on June 29, 2003. Of
the $95.0 million of the credit line that is allocated for operating needs,
$92.8 million is available as of September 30, 1999 ($2.2 million is
unavailable as a result of support required for letters of credit issued under
the credit line), compared to $74.9 million on September 30, 1998.
YEAR 2000 ISSUE
The Company has substantially completed its scheduled preparations to address
the Year 2000 problem. Remaining scheduled activities include finalization of
contingency plans, monitoring of developments and completion of unfinished
remediation activity. Management expects that effort will be required through
the end of calendar year 1999 and beyond to enable the Company to meet its Year
2000 compliance goals. Based on the work completed during the past year,
management continues to be confident that the Year 2000 problem is not likely
to have a material effect on the Company's business, results of operations,
financial condition or cash flows. Nevertheless, since the effects of the Year
2000 problem are likely to be unpredictable, management does not expect that
the Company's Year 2000 compliance program will eliminate all risk to the
Company associated with the Year 2000 problem.
The Company's Year 2000 compliance plan relies on geographic and practice
leaders to assess and oversee repair or replacement of software and hardware
used in their domain. As of September 30, 1999, this effort has been
substantially completed and exceptions to the plan have been identified.
Management believes that geographic and practice leaders have adopted
appropriate plans to address the remaining work identified in their respective
domains.
Based on its ongoing review, management continues to believe that the most
significant risk facing the Company in connection with Year 2000 issues 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 practice
(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 costs
of replacing or repairing client systems. The following summarizes the status
of the Company's Year 2000 compliance efforts related to client software as of
September 30, 1999:
-12-
<PAGE>
Remediation and testing were complete on substantially all of the systems
inventoried by the Retirement practice in North America. This assessment,
however, does not include certain internal systems with limited
application (such as calculators used to estimate benefits for a single
client plan). The Company will remediate and test such systems as a part
of its normal quality review process when such systems are next used.
The HR Technologies practice has completed assessment on all of the
systems inventoried in North America. Over 90% of the effort has been
completed relating to the testing and remediation of these systems.
Testing and remediation of the remaining systems are scheduled to be
completed before the end of 1999. A substantial number of the remaining
systems are used to support open enrollment in benefit plans; these
systems are normally modified late in the calendar year and any required
Year 2000 remediation will be performed as a part of such modifications.
The Company has substantially completed a program of contacting clients to
discuss Year 2000 issues related to Watson Wyatt software.
The Company has completed assessment, repair, and testing of all its internal
information technology systems, including WyVal, the Company's actuarial
valuation software. The Company has completed an inventory of its vendors and
is monitoring Year 2000 compliance efforts by its major vendors. Because of the
nature of the Company's business and the widely distributed locations of the
Company's operations, management believes that the Company does not face
significant risks from Year 2000 failures in systems relied upon by its
vendors. The Company has not reviewed the Year 2000 compliance status of its
clients, some of which may be affected by Year 2000 problems. Management
believes that the effect of client problems on the Company's own operations is
not likely to be material because of the broad, diversified nature of the
Company's client base. The Company will continue to develop and revise
contingency procedures to address the Year 2000 situation. In many cases, the
Company will rely on existing contingency plans relating to failures in
information technology systems. A principal focus of the Company's contingency
planning is backing up systems and maintaining communications among employees
and with clients in case of short-term telecommunications failures or
short-term limitations on access to the Company's offices.
Other risks identified by the Company include: risk of a general economic
downturn as a result of the Year 2000 problem; risk arising from the failure of
infrastructure, including power, water, telecommunications, and building
services; and risks from operations outside North America. Because of the size
of these operations, management does not expect that Year 2000 problems outside
North America will have a material effect on the Company, but such operations
are included within the Company's Year 2000 program. The Company's Year 2000
compliance program will not address or prevent adverse effects to the Company
because of economic disruption or failure of public infrastructure.
The Company has not projected Year 2000 compliance costs for fiscal year 2000.
Management expects these costs will be lower in fiscal year 2000 than in fiscal
year 1999, when the Company's Year 2000 compliance costs exceeded $4.0 million.
Funds for costs associated with the Company's Year 2000 compliance efforts will
come from operating cash flows for all areas of the Company's operations and
will be expensed as incurred.
-13-
<PAGE>
The information concerning the Company's Year 2000 compliance effort includes
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties, and other factors that may cause actual
events or costs to be materially different than indicated by such
forward-looking statements. These factors include, among others, unanticipated
costs of remediation and replacement, the Company's inability to meet its
targeted dates as scheduled and extensive failures of governmental and
municipal infrastructures. Any estimates and projections described have been
developed by the management of the Company and are based on the Company's best
judgments together with the information that is available to date. Due to the
many uncertainties surrounding the Year 2000 problem, the shareholders of the
Company are cautioned not to place undue reliance on such forward-looking
statements.
-14-
<PAGE>
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
Watson Wyatt is from time to time a defendant in various lawsuits which arise
in the ordinary course of business. These disputes typically involve claims
relating to employment matters or the rendering of professional services. The
management of the Company does not believe that any such currently pending or
threatened litigation is likely to have a material adverse effect on the
business or financial condition of Watson Wyatt.
ITEM 2. CHANGES IN SECURITIES
None.
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 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 Report 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
-15-
<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 November 12, 1999
- ------------------- -----------------
Name: John J. Haley Date
Title: President and Chief
Executive Officer
/S/ Carl D. Mautz November 12, 1999
- ------------------- -----------------
Name: Carl D. Mautz Date
Title: Vice President and Chief
Financial Officer
/S/ Peter L. Childs November 12, 1999
- ------------------- -----------------
Name: Peter L. Childs Date
Title: Controller
-16-
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