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 MARCH 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: 33-369545
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 May 14, 1999.
Common Stock, $1.00 par value 16,201,605
- ----------------------------- ----------------
Class Number of Shares
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WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
QUARTERS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Fees $ 135,573 $ 124,558 $ 409,916 $ 377,828
Costs of providing services:
Salaries and employee benefits 77,877 70,293 234,345 199,959
Occupancy and communications 16,412 15,422 46,366 46,229
Professional and subcontracted services 11,573 11,626 33,625 37,699
Other 9,303 6,666 20,889 21,290
---------- ---------- ---------- ----------
115,165 104,007 335,225 305,177
General and administrative expenses 14,194 12,849 42,046 36,556
Depreciation and amortization 3,996 5,576 11,820 14,797
---------- ---------- ---------- ----------
133,355 122,432 389,091 356,530
Income from operations 2,218 2,126 20,825 21,298
Other:
Interest income 127 119 655 605
Interest expense (473) (1,168) (2,194) (2,594)
Income (loss) from affiliates 583 (215) 1,608 (219)
---------- ---------- ---------- ----------
Income before income taxes and minority interest 2,455 862 20,894 19,090
Provision for income taxes:
Current 1,530 470 10,447 8,953
Deferred - - - -
---------- ---------- ---------- ----------
1,530 470 10,447 8,953
---------- ---------- ---------- ----------
Income before minority interest 925 392 10,447 10,137
Minority interest in net loss/(income)
of consolidated subsidiaries 54 86 (31) (55)
---------- ---------- ---------- ----------
Income from continuing operations 979 478 10,416 10,082
Discontinued operations:
Loss from operations of discontinued Outsourcing
Business [net of applicable income tax benefit
of $1,895 and $4,772 respectively] - (1,664) - (7,102)
(Loss) adjustment on disposal of Outsourcing
Business. 1998 loss is net of applicable income
tax benefit of $48,148; 1999 adjustment is net
of applicable income tax expense of $6,322 - (71,652) 8,678 (71,652)
---------- ---------- ---------- ----------
Net income (loss) $ 979 $ (72,838) $ 19,094 $ (68,672)
========== ========== ========== ==========
Earnings per share, continuing operations $ 0.07 $ 0.03 $ 0.70 $ 0.58
========== ========== ========== ==========
Earnings/(loss) per share, discontinued operations $ - $ (4.33) $ 0.58 $ (4.50)
========== ========== ========== ==========
Earnings/(loss) per share, net income $ 0.07 $ (4.30) $ 1.28 $ (3.92)
========== ========== ========== ==========
</TABLE>
See accompanying notes
F-2
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WATSON WYATT & COMPANY
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF U.S. DOLLARS)
MARCH 31, JUNE 30,
1999 1998
-------------- --------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 12,756 $ 13,405
Receivables from clients:
Billed, net of allowances of $6,601 and $2,142 66,534 69,671
Unbilled 74,024 59,725
-------------- --------------
140,558 129,396
Income taxes receivable - 2,216
Other current assets 7,602 6,945
-------------- --------------
Total current assets 160,916 151,962
Investment in affiliates 15,807 17,666
Fixed assets 36,187 37,368
Deferred income taxes 48,911 48,911
Other intangible assets 7,757 2,412
Other assets 9,114 9,991
-------------- --------------
$ 278,692 $ 268,310
============== ==============
LIABILITIES, REDEEMABLE COMMON STOCK AND PERMANENT SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 116,862 $ 116,548
Note payable and book overdrafts 3,341 11,666
Income taxes payable 11,814 -
-------------- --------------
Total current liabilities 132,017 128,214
Accrued retirement benefits 80,929 82,528
Deferred rent and accrued lease losses 10,235 12,676
Other noncurrent liabilities 22,473 32,784
Minority interest in subsidiaries 424 322
Redeemable Common Stock - $1 par value:
25,000,000 shares authorized;
16,360,932 and 15,916,757 issued
and outstanding; at redemption value 98,984 96,296
Permanent shareholders' equity:
Adjustment for redemption value less
than amounts paid in by shareholders 21,912 25,240
Accumulated deficit (85,269) (106,834)
Cumulative translation loss (3,013) (2,916)
Commitments and contingencies
-------------- --------------
$ 278,692 $ 268,310
============== ==============
</TABLE>
See accompanying notes
F-3
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<TABLE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF U.S. DOLLARS)
NINE MONTHS ENDED MARCH 31,
------------------------------------
1999 1998
-------------- --------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19,094 $ (68,672)
Adjustments to reconcile net income to net cash
provided by operating activities:
(Adjustment to) net loss from discontinued operations (8,678) 78,754
Provision for doubtful receivables from clients 9,670 5,981
Depreciation 10,780 11,357
Amortization of deferred software and development costs
and other intangible assets 1,040 3,440
Provision for deferred income taxes - (147)
(Income) loss from affiliates (1,608) 219
Minority interest in net income of consolidated subsidiaries 31 55
(Increase) decrease in assets (net of discontinued operations):
Receivables from clients (30,239) (18,957)
Income taxes receivable 2,216 2,558
Other current assets (657) 629
Other assets 877 590
(Decrease) increase in liabilities (net of discontinued operations):
Accounts payable and accrued liabilities 17,057 1,075
Income taxes payable 5,492 1,210
Accrued retirement benefits (1,599) (3,601)
Deferred rent and accrued lease losses (2,441) (2,981)
Other noncurrent liabilities 1,210 (1,211)
Other, net 210 (154)
Discontinued operations, net (3,857) (17,997)
-------------- --------------
Net cash provided by (used by) operating activities 18,598 (7,852)
-------------- --------------
Cash flows from investing activities:
Purchases of fixed assets (9,729) (8,854)
Acquisitions (6,207) -
Investment in software and development costs - (2,506)
Investment in affiliates 3,151 2,749
Discontinued operations - (14,750)
-------------- --------------
Net cash used in investing activities (12,785) (23,361)
-------------- --------------
Cash flows from financing activities:
Net borrowings and bank overdrafts (8,325) 28,229
Issuances of Redeemable Common Stock 15,055 525
Repurchases of Redeemable Common Stock (13,224) (9,674)
-------------- --------------
Net cash (used by) provided by financing activities (6,494) 19,080
-------------- --------------
Effect of exchange rates on cash 32 (3,120)
-------------- --------------
Decrease in cash and cash equivalents (649) (15,253)
Cash and cash equivalents at beginning of period 13,405 26,257
-------------- --------------
Cash and cash equivalents at end of period $ 12,756 $ 11,004
============== ==============
</TABLE>
See accompanying notes
F-4
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<TABLE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN PERMANENT SHAREHOLDERS' EQUITY
(THOUSANDS OF U.S. DOLLARS)
ADJUSTMENT FOR
REDEMPTION VALUE
CUMULATIVE LESS THAN AMOUNTS
ACCUMULATED TRANSLATION PAID IN BY
DEFICIT LOSS SHAREHOLDERS
---------- ---------- ----------
<S> <C> <C> <C>
Balance at June 30, 1998 $ (106,834) $ (2,916) $ 25,240
Comprehensive income:
Net income 19,094 - -
Foreign currency translation adjustment - (97) -
---------- ---------- ----------
Total comprehensive income 19,094 (97) -
Effect of repurchases of 2,106,426 shares of
common stock (various prices per share) 2,471 - (2,471)
Adjustment of redemption value for change
in Formula Book Value per share - - (857)
---------- ---------- ----------
Balance at March 31, 1999 $ (85,269) $ (3,013) $ 21,912
========== ========== ==========
</TABLE>
See accompanying notes
F-5
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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 Form 10-K for the year ended
June 30, 1998.
The results of operations for the nine months ended March 31, 1999 are not
necessarily indicative of the results that can be expected for the entire
fiscal year ending June 30, 1999. The results reflect prorata growth in
share value, anticipated tax rates and potential distributions at the
discretion of the Company's Board of Directors. The Consolidated Statement
of Cash Flows for the nine months ended March 31, 1998 has been restated
to reflect the Company's discontinued operations.
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 $6.05 per share at March 31, 1999
and June 30, 1998. 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 nine months ended March 31, 1999, the Company repurchased
2,106,426 shares of Redeemable Common Stock, at various prices per share.
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
14,693 and 16,935 for the three months ended March 31, 1999 and 1998,
respectively, and 14,931 and 17,503 for the nine months ended
March 31, 1999 and 1998, respectively.
4. In the third quarter of fiscal 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 $71.7 million, representing the write-off of
its investment in Wellspring, net capitalized software development costs
for the Retained Clients and a provision for completion of any obligations
to clients, vendors or its former venture partner and a further $7.1
million in net operating losses of the Outsourcing Business prior to
discontinuation. Through the full fiscal year 1998, the Company's losses
from discontinued operations totaled $69.9 million. In October 1998, the
Company consummated agreements with the remaining Retained Clients,
Wellspring, and its former venture partner to transfer operating
responsibility for these clients to Wellspring, clarifying the remaining
future obligations and costs related to the discontinuation. Management
believes that savings of $25.0 million compared with initial estimates
made in the third quarter of fiscal 1998 and $15.0 million from the amount
provided at June 30, 1998 will be realized from these events. The Company
reduced the amount of its provision for losses from disposal of the
Outsourcing Business in the second quarter of fiscal year 1999 by $8.7
million, net of tax.
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5. On September 30, 1998, the Company 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 March 31, 1999, comprehensive income totaled $0.5 million compared
with a comprehensive loss of $72.8 million for the three months ended
March 31, 1998. For the nine months ended March 31, 1999, comprehensive
income totaled $19.0 million, and for the nine months ended
March 31, 1998, comprehensive loss totaled $71.8 million.
6. In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information"
effective for fiscal years beginning after December 15, 1997. SFAS No.
131 requires the Company to report financial and descriptive information
about its reportable operating segments. The Company will adopt SFAS No.
131 in its year-end reporting as of June 30, 1999. The Company is
currently evaluating the impact of SFAS No. 131 on its financial
statements.
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, provides employee benefits, human resources and human resources
systems technology consulting. The Company and its alliance partner, Watson
Wyatt Partners, a United Kingdom partnership, operate globally as Watson
Wyatt Worldwide. The Company works primarily with large and mid-sized
organizations.
Founded in 1946, 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.
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 third quarter of fiscal year 1999 (March 31, 1999) and as of the end of
the prior fiscal year 1998 (June 30, 1998), and Consolidated Statements of
Operations, of Cash Flows and of Changes in Permanent Shareholders' Equity
for the three and nine months ended March 31, 1999 and 1998.
RESULTS OF OPERATIONS - NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE
MONTHS ENDED MARCH 31, 1998.
For the first nine months of fiscal year 1999 the Company produced net income
of $19.1 million, an increase of $87.8 million from a net loss of $68.7
million for the first nine months of fiscal year 1998. The fiscal year 1998
loss includes a loss of $78.8 million from the operation of the Company's
former Benefits Administration Outsourcing Business, while current year
results include the reversal of the estimated loss from the disposal of the
Company's Benefits Administration Outsourcing Business of $8.7 million.
Continuing operations generated income of $10.4 million for the first three
quarters of the year, an increase of $0.3 million from the 1998 level of
$10.1 million. Increased revenues are largely offset by increased salaries
and employee benefits.
Third quarter fees were $135.6 million, up 9% from $124.6 million in fiscal
1998. Fees for the first nine months of fiscal year 1999 total $409.9
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million compared to $377.8 million for the first nine months of fiscal year
1998, an increase of $32.1 million, or 8%. The revenue growth in both
periods is attributable to improved performance in the Company's North
American Benefits Consulting Group and Human Resource Technologies, primarily
from increased billable hours, as well as an improvement in the Company's
Asia/Pacific operations.
Salaries and employee benefit expenses for the third quarter of fiscal year
1999 were $77.9 million, an increase of $7.6 million, or 11%, from $70.3
million in the third quarter of fiscal year 1998. The Company incurred
salaries and employee benefit expenses of $234.3 million in the first nine
months of the year, up $34.4 million or 17% from the prior year. The
increase is attributable to increased compensation to associates of $26.6
million, partly the result of a 5% increase in associates. Further,
personnel restructuring expenses and retirement benefits expenses increased
$4.1 million. The remaining $3.7 million increase is due to higher related
fringe benefits expenses.
Occupancy and communication expenses during the third quarter of fiscal year
1999 totaled $16.4 million, an increase of $1.0 million, or 6%, from the
third quarter of the prior year. The Company incurred occupancy and
communications expenses of $46.4 million in the first nine months of the
year, up $0.1 million from the prior year.
Professional and subcontracted services were unchanged from the third quarter
of fiscal year 1998. For the nine months, professional and subcontracted
services decreased 11%, or $4.1 million from last year, reflecting decreased
legal and general corporate expenses.
Other costs of providing services were $9.3 million for the third quarter of
fiscal year 1999, an increase of $2.6 million, or 40%, from the third quarter
of fiscal year 1998. The increase is due to increased travel and hotel,
higher publications and other expenses totaling $1.9 million and $0.7 million
in other expenses related to the sale of certain businesses. For the first
nine months of fiscal year 1999, other costs of providing services decreased
$0.4 million, or 2%, from $21.3 million in fiscal 1998.
Interest expense was $0.5 million for the 1999 quarter compared with $1.2
million in the 1998 quarter and $2.2 million for the nine month period in
1999 compared with $2.6 million in the 1998 period. The decrease is due to
lower borrowings in the recent quarter in 1999, mostly as a result of the
Company's annual stock sale, which did not occur in 1998. Income from
affiliates was $0.6 million for the quarter ended March 31, 1999 compared
with a loss of $0.2 million for the same quarter in 1998. For the nine month
period in 1999, income from affiliates totaled $1.6 million compared with a
loss of $0.2 million in the 1998 period. The change in both periods relates
to the Company's European affiliates.
General and administrative ("G&A") expenses for the third quarter of fiscal
year 1999 were $14.2 million, a $1.3 million, or 11%, increase from the third
quarter of fiscal year 1998. For the first nine months of fiscal year 1999,
G&A increased $5.5 million, or 15%, from $36.6 million in fiscal 1998,
reflecting increased advertising expenditures, human resource activities and
technology support of core consulting areas.
Depreciation and amortization expense of $4.0 million for the third quarter
of fiscal year 1999 represents a decrease of $1.6 million from the third
quarter of fiscal year 1998. For the first nine months of fiscal year 1999,
depreciation and amortization decreased $3.0 million, or 20%, from $14.8
million in fiscal 1998. The decrease is attributable to the absence of
amortization expense for deferred software in 1999, as the Company had fully
amortized such balances at June 30, 1998.
Income taxes for the quarter ending March 31, 1999 were $1.5 million, an
effective rate of 62%, compared with $0.5 million, 55%, for the third quarter
in fiscal year 1998. For the first nine months of fiscal 1999, the income
tax provision was $10.4 million, an effective rate of 50%. This compares to
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a provision of $9.0 million, or 47%, in fiscal year 1998. The increase in
the effective tax rates is due to changes in income in various jurisdictions
with differing tax rates, particularly foreign jurisdictions.
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 and support ongoing operations. The Company's cash
and cash equivalents at March 31, 1999 totaled $12.8 million, compared to
$13.4 million at June 30, 1998. The Company had borrowings outstanding under
its line of credit of $0.8 million at March 31, 1999 and $9.0 million at
June 30, 1998.
CASH FROM OPERATIONS. For the first nine months of fiscal year 1999, the
Company had cash inflows from operations of $18.6 million, compared to
outflows from operations of $7.9 million for the first nine months of fiscal
year 1998. Discontinued operations used $14.1 million less cash than in
fiscal year 1998. Additional cash flow was generated in 1999 mainly by
higher increases in accounts payable, partly offset by higher net receivables.
The Company's ratio of current assets to current liabilities of 1.22 at
March 31, 1999 strengthened slightly from the 1.19 figure on June 30, 1998.
CASH FROM INVESTING ACTIVITIES. Cash used in investing activities was $12.8
million for the first nine months of fiscal year 1999, versus $23.4 million
for the same period in fiscal year 1998. The overall decrease in cash usage
results from the lack of investment in the Company's discontinued operation
in 1999 compared with $14.8 million in 1998, net of the $6.2 million
acquisition in 1999.
The Company has anticipated commitments to spend cash of $10.0 million for
the remainder of fiscal year 1999, mostly for capital assets.
CASH FROM FINANCING ACTIVITIES. Cash flows used by financing activities were
$6.5 million for the first nine months of fiscal year 1999, versus $19.1
million of inflows in the preceding fiscal year. The higher use of cash is
due to the lower level of outstanding borrowings and book overdrafts of $36.6
million, and $3.6 million more in repurchases of Redeemable Common Stock in
fiscal year 1999 compared to 1998. The Company also conducted a stock sale
in the third quarter of fiscal year 1999, generating $15.1 million in cash.
The Company did not hold a stock sale in fiscal year 1998.
The Company's revolving credit line matures on June 30, 2003. As of
March 31, 1999, $94.2 million of the credit line was available to the Company
as revolving credit for operating needs, compared to $27.4 million on
March 31, 1998.
YEAR 2000 ISSUE
The Company has continued to address the Year 2000 problem as it affects the
Company's business. Management believes that a sustained effort will be
required to enable the Company to meet its Year 2000 goals. Based on the
work completed during the third quarter, management is increasingly confident
that the Company will address its Year 2000 issues on a timely basis.
Based on the review conducted to date, 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
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benefit calculators). The risks presented include the possibility of errors
or contractual liability caused by non-compliant software that is not
identified or corrected, the possibility that remediation will not be
accomplished according to the timetable identified below, and the costs of
replacing or repairing client systems.
Other risks identified by the Company include:
* Risks from operations outside the United States
* Risk of a general economic downturn as a result of the Year 2000 problem
* Risk arising from the failure of infrastructure, including power and
telecommunications services
* Liabilities as a result of Year 2000 warranties provided to third
parties
The Company's Year 2000 compliance plan relies on geographic and practice
leaders to assess and oversee repair or replacement of software used in their
domain. Management believes that this plan is appropriate for the risks
presented, but this conclusion is subject to reassessment as a result of the
Company's on-going compliance efforts. Since the Year 2000 problem is likely
to have unpredictable effects, including effects that have not been planned
for, 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.
Management believes that the Year 2000 problem is not likely to have a
material effect on the Company's business, results of operations, or
financial condition. Management believes its plan will enable it to
appropriately address Year 2000 issues on a timely basis.
While the Company has made progress toward meeting its compliance goals for
software provided to or used on behalf of clients, the Company continues to
be behind in its schedule for compliance activity. The Company has
substantially completed the inventory of systems used by or on behalf of
clients. During January, the Company began to actively contact its clients
to determine the compliance status of software provided to them by the
Company. This effort has increased Management's confidence that the Company
will ultimately be successful in identifying and repairing most client
systems. If the Company fails to meet its schedule for addressing Year 2000
problems in client software, it may incur additional costs. Because of the
wide diversity of systems involved, the Company is unable to estimate costs
associated with remediation of client software, revenue that may be lost as a
result of non-compensated activities related to remediation, or costs that
may arise from delays in remediation. The Company will continue to assess
the materiality of the Year 2000 problem as part of its on-going remediation
efforts.
The Company has completed assessment, repair and testing of its major
internal systems, including WyVal, the Company's actuarial valuation
software. Management believes that the Company is likely to meet its
forthcoming deadlines for Year 2000 compliance activity affecting other
internal systems. The Company has completed an inventory of its vendors and
will seek appropriate confirmation of Year 2000 compliance efforts by
material vendors. Because of the nature of the Company's business,
management believes that the Company does not face significant risks from
Year 2000 failures in systems relied upon by its vendors. Nevertheless, it
is likely that some vendor systems will fail (particularly those outside the
United States or Canada) and the Company cannot predict the effect of such
failure upon its operations. The Company has established contingency
procedures to deal with risks presented specifically by the Year 2000
situation. The Company has not reviewed the Year 2000 compliance status of
its clients. It is likely that the Year 2000 will affect operations of some
clients. Management is unable to predict the effect of client problems on
the Company's own operations, but believes these are not likely to be
material because of the broad, diversified nature of the Company's client
base.
The Company estimates that its cost to address Year 2000 compliance issues
will exceed $4.0 million for fiscal year 1999 and that its costs will be
significantly lower in fiscal year 2000. These costs include the fees of
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outside consultants and remediation costs associated with software and
hardware used internally by the Company. Funds for costs associated with the
Company's Year 2000 compliance efforts will come from general revenues for
all areas of the Company's operations. These costs will be expensed as
incurred.
The Company has established July 1, 1999 as the target date for all systems
(including internal systems and systems used by clients) to be compliant,
retired, or replaced. It is likely that some remediation efforts,
particularly for software developed for clients, will be delayed beyond July
1, 1999. In the past the Company has revised its target dates for Year 2000
compliance activity and target dates remain subject to revision.
The following table summarizes the approximate percentage of work in the
stages specified which as been completed as of April 15, 1999:
ASSESSMENT REMEDIATION TESTING
---------- ----------- -------
INTERNAL SYSTEMS
- ----------------
Major Systems Completed Completed Completed
Other Systems Completed 50% 30%
SYSTEMS DEVELOPED FOR CLIENTS
- -----------------------------
HR Technology More than 70% More than 20% More than 20%
Retirement More than 90% More than 90% More than 90%
The Company's principal Retirement valuation software system is included in
"Internal Systems - Major Systems." In the case of systems developed for
clients, the figures are subject to adjustment as a result of on-going
efforts to inventory systems. Figures presented do not include operations
outside of North America. The Company has previously reported progress
regarding practices other than Retirement and HR Technologies. The Company
is discontinuing this reporting because, based on the review to date, the
systems involved are not material to the Company's Year 2000 compliance
effort.
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.
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.
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<PAGE>
ITEM 2. CHANGES IN SECURITIES
On the dates below, unregistered shares of the Company's Redeemable Common
Stock were sold to certain eligible purchasers (as that term is defined in
the Company's Bylaws) in transactions not involving a public offering in
reliance on Section 4(2) of the Securities Act of 1933. The aggregate
offering price was $411,400.00. The table below summarizes the sales.
AGGREGATE
DATE SHARES ISSUED SHARE PRICE OFFERING PRICE
- ---------------------------------------------------------------------------
January 15, 1999 18,000 $ 6.05 $ 108,900.00
January 18, 1999 50,000 $ 6.05 $ 302,500.00
- ---------------------------------------------------------------------------
TOTAL 68,000 $ 411,400.00
===========================================================================
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)4
4 Form of Certificate Representing Common Stock1
10 Credit Agreement Among NationsBank, N.A. and Others dated June 30,
19983
b. Reports on Form 8-K
None.
- -------
1 Incorporated by reference from Registrant's Initial Statement on Form 10
(File No. 33-369545), 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. 33-369545), filed on
September 16, 1996
3 Incorporated by reference from Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998 (file no. 33-369545), filed on
September 24, 1998
4 Incorporated by reference from Registrant's Report on Form S-8
(file no. 33-369545), filed on December 23, 1998
-12-
<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 May 14, 1999
- -------------------------- ------------
Name: John J. Haley Date
Title: President and Chief
Executive Officer
/S/ Carl D. Mautz May 14, 1999
- -------------------------- ------------
Name: Carl D. Mautz Date
Title: Vice President and Chief Financial Officer
-13-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 12,756
<SECURITIES> 0
<RECEIVABLES> 147,159
<ALLOWANCES> 6,601
<INVENTORY> 0
<CURRENT-ASSETS> 160,916
<PP&E> 122,559
<DEPRECIATION> 86,372
<TOTAL-ASSETS> 278,692
<CURRENT-LIABILITIES> 132,017
<BONDS> 113,638
0
0
<COMMON> 16,361
<OTHER-SE> 16,253
<TOTAL-LIABILITY-AND-EQUITY> 278,692
<SALES> 0
<TOTAL-REVENUES> 409,916
<CGS> 335,225
<TOTAL-COSTS> 389,091
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,194
<INCOME-PRETAX> 20,894
<INCOME-TAX> 10,447
<INCOME-CONTINUING> 10,416
<DISCONTINUED> 8,678
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,094
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 0
</TABLE>
