UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
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 January 8, 1999.
Common Stock, $1.00 par value 14,079,052
- ----------------------------- ----------------
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 DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
--------------------------- -----------------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Fees $ 140,358 $ 127,717 $ 274,343 $ 253,270
Costs of providing services:
Salaries and employee benefits 77,970 65,460 156,468 129,666
Occupancy and communications 15,433 15,588 29,954 30,807
Professional and subcontracted services 13,338 14,896 22,052 26,073
Other 8,740 7,624 11,586 14,624
--------- --------- --------- ---------
115,481 103,568 220,060 201,170
General and administrative expenses 16,692 13,330 27,852 23,707
Depreciation and amortization 3,971 4,534 7,824 9,221
--------- --------- --------- ---------
136,144 121,432 255,736 234,098
Income from operations 4,214 6,285 18,607 19,172
Other:
Interest income 404 237 528 486
Interest expense (1,168) (1,017) (1,721) (1,426)
Income (loss) from affiliates 865 95 1,025 (4)
--------- --------- --------- ---------
Income before income taxes and minority interest 4,315 5,600 18,439 18,228
Provision for income taxes:
Current 2,087 2,672 8,917 8,483
Deferred - - - -
--------- --------- --------- ---------
2,087 2,672 8,917 8,483
--------- --------- --------- ---------
Income before minority interest 2,228 2,928 9,522 9,745
Minority interest in income of consolidated subsidiaries (85) (97) (85) (141)
--------- --------- --------- ---------
Income from continuing operations 2,143 2,831 9,437 9,604
Discontinued operations:
Loss from operations of discontinued Outsourcing
Business [less applicable income tax benefit
of $1,715 and $2,877 respectively] (3,808) (5,438)
Adjustment to reduce loss on disposal of discontinued
Outsourcing Business [less applicable income tax
expense of $6,322 and $6,322 respectively] 8,678 8,678
========= ========= ============ ============
Net income (loss) $ 10,821 $ (977) $ 18,115 $ 4,166
========= ========= ============ ============
Earnings per share, continuing operations $ 0.15 $ 0.16 $ 0.63 $ 0.54
========= ========= ============ ============
Earnings/(loss) per share, discontinued operations $ 0.59 $ (0.22) $ 0.58 $ (0.31)
========= ========= ============ ============
Earnings/(loss) per share, net income $ 0.74 $ (0.06) $ 1.21 $ 0.23
========= ========= ============ ============
See accompanying notes
F-2
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WATSON WYATT & COMPANY
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF U.S. DOLLARS)
DECEMBER 31, JUNE 30,
1998 1998
-------------- --------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 11,819 $ 13,405
Receivables from clients:
Billed, net of allowances of $6,000 and $2,142 78,500 69,671
Unbilled 63,897 59,725
-------------- --------------
142,397 129,396
Income taxes receivable - 2,216
Other current assets 8,845 6,945
-------------- --------------
Total current assets 163,061 151,962
Investment in affiliates 16,416 17,666
Fixed assets 36,722 37,368
Deferred income taxes 48,911 48,911
Other intangible assets 8,051 2,412
Other assets 8,858 9,991
-------------- --------------
$ 282,019 $ 268,310
============== ==============
LIABILITIES, REDEEMABLE COMMON STOCK AND PERMANENT SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 95,811 $ 116,548
Note payable and book overdrafts 36,572 11,666
Income taxes payable 11,499 -
-------------- --------------
Total current liabilities 143,882 128,214
Accrued retirement benefits 84,311 82,528
Deferred rent and accrued lease losses 11,178 12,676
Other noncurrent liabilities 22,434 32,784
Minority interest in subsidiaries 530 322
Redeemable Common Stock - $1 par value:
25,000,000 shares authorized;
14,305,484 and 15,916,757 issued
and outstanding; at redemption value 86,548 96,296
Permanent shareholders' equity:
Adjustment for redemption value less
than amounts paid in by shareholders 22,684 25,240
Accumulated deficit (86,999) (106,834)
Cumulative translation loss (2,549) (2,916)
Commitments and contingencies
-------------- --------------
$ 282,019 $ 268,310
============== ==============
See accompanying notes
F-3
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WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF U.S. DOLLARS)
SIX MONTHS ENDED DECEMBER 31,
-------------------------------------
1998 1997
-------------- ---------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 18,115 $ 4,166
Adjustments to reconcile net income to net cash
provided by operating activities:
Net (income) loss from discontinued operations (8,678) 5,438
Provision for doubtful receivables from clients 6,423 5,872
Depreciation 7,184 7,107
Amortization of deferred software and development costs
and other intangible assets 641 2,114
(Income) loss from affiliates (1,025) 3
Minority interest in income of consolidated subsidiaries 85 141
(Increase) decrease in assets (net of discontinued operations):
Receivables from clients (27,822) (20,387)
Income taxes receivable 2,216 (145)
Other current assets (1,900) (2,529)
Other assets 1,133 1,088
(Decrease) increase in liabilities (net of discontinued operations):
Accounts payable and accrued liabilities (4,093) (13,814)
Income taxes payable 5,177 4,424
Accrued retirement benefits 1,783 1,879
Deferred rent and accrued lease losses (1,498) (2,044)
Other noncurrent liabilities 870 (1,325)
Other, net (138) (201)
Discontinued operations, net (4,466) (5,206)
-------------- ---------------
Net cash used by operating activities (5,993) (13,419)
-------------- ---------------
Cash flows from investing activities:
Purchases of fixed assets (6,297) (5,791)
Acquisitions (6,158) -
Investment in software and development costs - (1,912)
Investment in affiliates 2,257 2,425
Discontinued operations - (9,750)
-------------- ---------------
Net cash used in investing activities (10,198) (15,028)
-------------- ---------------
Cash flows from financing activities:
Net borrowings and bank overdrafts 24,906 17,189
Issuances of Redeemable Common Stock - 525
Repurchases of Redeemable Common Stock (10,584) (4,100)
-------------- ---------------
Net cash provided by financing activities 14,322 13,614
-------------- ---------------
Effect of exchange rates on cash 283 (3,116)
-------------- ---------------
Decrease in cash and cash equivalents (1,586) (17,949)
Cash and cash equivalents at beginning of period 13,405 26,257
-------------- ---------------
Cash and cash equivalents at end of period $ 11,819 $ 8,308
============== ===============
See accompanying notes
F-4
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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 18,115 - -
Foreign currency translation adjustment - 367 -
---------- ---------- ----------
Total comprehensive income 18,115 367 -
Effect of repurchases of 1,611,273 shares of
common stock (various prices per share) 1,720 - (1,720)
Adjustment of redemption value for change
in Formula Book Value per share - - (836)
---------- ---------- ----------
Balance at December 31, 1998 $ (86,999) $ (2,549) $ 22,684
========== ========== ==========
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 six months ended December 31, 1998 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. Certain prior year
amounts have been reclassified to conform to the current year
presentation, including the Consolidated Statements of Operations and of
Cash Flows for December 31, 1997, which have 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 December 31,
1998 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 six months ended December 31, 1998, the Company repurchased
1,611,273 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
14,587 and 17,679 for the three months ended December 31, 1998 and 1997,
respectively, and 14,977 and 17,831 for the six months ended December 31,
1998 and 1997, respectively.
4. During fiscal 1998, the Company discontinued its Benefits
Administration Outsourcing Business including its investment in its
affiliate Wellspring Resources, LLC ("Wellspring"). The Company recorded
a loss on discontinuation net of taxes of $69.9 million, which included
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. 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 million compared with initial
estimates made in the third quarter of fiscal 1998 and $15 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. A
credit to income of $15.0 million, less the associated tax expense of $6.3
million is reflected in the Consolidated Statement of Operations in the
line "Adjustment to reduce loss on disposal of discontinued Outsourcing
Business".
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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 December 31, 1998, comprehensive income totaled $11.2 million
compared with a comprehensive loss of $2.7 million for the three months
ended December 31, 1997. For the six months ended December 31, 1998 and
1997, comprehensive income totaled $18.5 million and $1.1 million,
respectively.
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 second quarter of fiscal year 1999 (December 31, 1998) 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 six months ended December 31, 1998 and 1997.
RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX
MONTHS ENDED DECEMBER 31, 1997.
For the first six months of fiscal year 1999 the Company produced net income
of $18.1 million, an increase of $13.9 million from net income of $4.2
million for the first six months of fiscal year 1998. Fiscal year 1998
income reflects a loss of $5.4 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 $9.4 million for the first half of
the year, a decrease of $0.2 million from the 1998 level of $9.6 million.
Increased revenues are largely offset by increased salaries and employee
benefits.
Fees for the first six months of fiscal year 1999 total $274.3 million
compared to $253.3 million for the first six months of fiscal year 1998, an
increase of $21.1 million, or 8%. Second quarter fees were $140.4 million,
up 10% from $127.7 million in fiscal 1998. 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 second quarter of fiscal year
1999 were $78.0 million, an increase of $12.5 million, or 19%, from $65.5
million in the second quarter of fiscal year 1998. The Company incurred
salaries and employee benefit expenses of $156.5 million in the first six
months of the
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year, up $26.8 million or 21% from the prior year. The
increase is attributable to increased compensation to associates of $18.7
million, partly the result of a 5% increase in headcount. Further, personnel
restructuring expenses and retirement benefits expenses increased $5.7
million. The remaining $2.4 million increase is due to higher related fringe
benefits expenses.
Occupancy and communication expenses during the second quarter of fiscal year
1999 totaled $15.4 million, a decrease of $0.2 million, or 1%, from the
second quarter of the prior year. The Company incurred occupancy and
communications expenses of $30.0 million in the first six months of the year,
down 3% from the prior year. The change is related to a general reduction of
expense due to the relocation of offices to lower cost space.
Professional and subcontracted services decreased by $1.6 million, or 10%,
from the second quarter of fiscal year 1998. For the six months,
professional and subcontracted services decreased 15%, or $4.0 million from
last year, reflecting decreased legal and general corporate expenses.
Other costs of providing services were $8.7 million for the second quarter of
fiscal year 1999, an increase of $1.1 million, or 15%, from the second
quarter of fiscal year 1998. For the first six months of fiscal year 1999,
other costs of providing services decreased $3.0 million, or 21%, from $14.6
million in fiscal 1998. The decrease is primarily the result of a $3.7
million gain from the sale of defined contribution daily record-keeping
software to a third party in the first quarter of fiscal year 1999.
General and administrative ("G&A") expenses for the second quarter of fiscal
year 1999 were $16.7 million, a $3.4 million, or 25%, increase from the
second quarter of fiscal year 1998. For the first six months of fiscal year
1999, G&A increased $4.1 million, or 17%, from $23.7 million in fiscal 1998,
reflecting increased advertising expenditures, human resource activities and
other support of core consulting areas.
Depreciation and amortization expense of $4.0 million for the second quarter
of fiscal year 1999 represents a decrease of $0.6 million from the second
quarter of fiscal year 1998. For the first six months of fiscal year 1999,
depreciation and amortization decreased $1.4 million, or 15%, from $9.2
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 before income taxes and minority interest for continuing operations of
$4.3 million in the second quarter of fiscal year 1999 resulted in a tax
provision of $2.1 million. This compares to a provision of $2.7 million on
$5.6 million of continuing operations pre-tax income in the second quarter of
fiscal year 1998. For the first six months of fiscal 1999, income before
income taxes and minority interest from continuing operations of $18.4
million resulted in a tax provision of $8.9 million. This compares to a
provision of $8.5 million on $18.2 million of pre-tax income in fiscal year
1998. The effective tax rate for the first six months of fiscal year 1999 is
48% compared to 47% for the same period in fiscal year 1998. The increase in
the effective tax rate 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 December 31, 1998 totaled $11.8 million, compared to
$13.4 million at June 30, 1998. The Company had
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borrowings outstanding under
its line of credit of $28.0 million at December 31, 1998 and $9.0 million at
June 30, 1998.
CASH FROM OPERATIONS. For the first six months of fiscal year 1999, the
Company had cash outflows from operations of $6.0 million, compared to
outflows from operations of $13.4 million for the first six months of fiscal
year 1998. The decrease in cash outflows results mainly from higher accrued,
but unpaid, compensation in fiscal 1999 compared to the prior year.
The Company's ratio of current assets to current liabilities of 1.13 at
December 31, 1998 was down slightly from the 1.19 figure on June 30, 1998.
CASH FROM INVESTING ACTIVITIES. Cash used in investing activities was $10.2
million for the first six months of fiscal year 1999, versus $15.0 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 $9.8 million in 1998, net of the $6.2 million
acquisition in 1999.
The Company has commitments to spend cash of $13.3 million for the remainder
of fiscal year 1999, mostly for capital assets.
CASH FROM FINANCING ACTIVITIES. Cash flows provided by financing activities
were $14.3 million for the first six months of fiscal year 1999, versus $13.6
million in the preceding fiscal year. The increase is due to the higher
level of borrowings and book overdrafts of $7.7 million, partially offset by
$6.5 million more in repurchases of Redeemable Common Stock in fiscal year
1999 compared to 1998.
The Company's revolving credit line matures on June 30, 2003. As of
December 31, 1998, $64.8 million of the credit line was available to the
Company as revolving credit for operating needs, compared to $35.9 million on
December 31, 1997.
YEAR 2000 ISSUE
The Company has continued to address the Year 2000 problem as it affects the
Company's business.
Based on the review conducted to date, management believes 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 Technology
practice (including defined contribution recordkeeping 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, 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
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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. In the case of the
Company's internal systems, management believes that the Company is likely to
meet its forthcoming deadlines for Year 2000 compliance activity. In the
case of software provided to clients, the Company is somewhat behind in its
schedule for compliance activity. Management believes that a substantial
effort will be required to address Year 2000 issues in client software. 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 is substantially on schedule to repair or replace its major
internal systems, including WyVal, the Company's actuarial valuation
software. The Company has also completed local office assessment, except in
offices in Asia and Latin America, where no completion date has been
scheduled. 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 some contingency procedures
to address interruptions in its operations and will adopt additional
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 $2 million for fiscal year 1999. The Company has not yet
estimated compliance costs for fiscal year 2000. These costs include the
fees of outside consultants and remediation costs associated with software
and hardware used internally by the Company that exceed costs otherwise
budgeted for repair and replacement. 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 the following revised schedule for key activities
relating to Year 2000 compliance:
* The target date to complete practice inventory and assessment is March
30, 1999.
* The target date to complete testing for major internal systems is March
30, 1999.
* The target date for all systems to be compliant, retired, or replaced
is July 1,1999.
It is likely that the Company will revise this schedule again as a result of
its compliance efforts. It is likely that some remediation efforts,
particularly for software developed for clients, will be delayed beyond the
target dates identified above.
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The following table summarizes the approximate percentage of work in the
stages specified which as been completed as of January 31, 1999:
ASSESSMENT REMEDIATION TESTING
---------- ----------- -------
INTERNAL SYSTEMS
Major Systems Completed Completed 90%
Other Systems 80% 50% 30%
SYSTEMS DEVELOPED FOR CLIENTS
HR Technology 70% 20% 10%
Retirement 10% * *
Other 20% * *
* Less than 10%
The Company's principal Retirement valuation software systems are 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.
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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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 $620,197.94. The table below summarizes the sales.
AGGREGATE
DATE SHARES ISSUED SHARE PRICE OFFERING PRICE
- -----------------------------------------------------------------------------
April 1, 1997 2,075 $ 4.94 $ 10,250.50
June 24, 1997 25,000 $ 4.94 $123,500.00
June 27, 1997 1,376 $ 4.94 $ 6,797.44
June 24, 1998 90,500 $ 5.30 $479,650.00
- ----------------------------------------------------------------------------
TOTAL 118,951 $620,197.94
============================================================================
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the fifty-second annual meeting of shareholders of the Company, held on
November 19, 1998, the shareholders elected fourteen (14) nominees to the
Board. Proxies representing 12,620,286 shares were received (total shares
outstanding as of the Record Date were 14,683,417) and the results of the
voting were as follows:
NOMINEES TO THE BOARD FOR WITHHOLD
----------------------------------------------
Thomas W. Barratt 11,625,867 994,419
Paula A. DeLisle 11,966,821 653,465
David B. Friend 9,937,060 2,683,226
John J. Haley 11,875,632 744,654
Ira T. Kay 10,384,413 2,235,873
Brian E. Kennedy 11,776,935 843,351
Eric P. Lofgren 11,833,154 787,132
Robert D. Masding 11,989,818 630,468
R. Michael McCullough 10,871,064 1,749,222
Gail E. McKee 10,549,638 2,070,648
Paul V. Mee 9,905,959 2,714,327
A. W. Smith, Jr. 9,431,415 3,188,871
John A. Steinbrunner 12,080,126 540,160
A. Grahame Stott 12,009,772 610,514
An amendment to Section 9.4 of the Company's Bylaws to more specifically
describe permitted liens arising in connection with loan programs established
by the Board of Directors was also voted upon by the shareholders.
The amendment was approved by the affirmative vote of shareholders of more
than 80% of the Company's outstanding stock (as required per Section 9 of the
Bylaws) as follows:
For: 12,490,243
Against: 130,043
-12-
<PAGE>
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 December 23, 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
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Watson Wyatt & Company
(Registrant)
/S/ JOHN J. HALEY FEBRUARY 9, 1998
- ------------------------------ ----------------
Name: John J. Haley Date
Title: President and Chief
Executive Officer
/S/ CARL D. MAUTZ FEBRUARY 9, 1998
- ------------------------------ ----------------
Name: Carl D. Mautz Date
Title: Controller and Acting
Chief Financial Officer
-14-
<PAGE>
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