**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                  |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                               |
| ** ** | **For the quarterly period ended March 31,  2005**                                                                                                                                  |
|       |
| **OR**     |
|       |
| **o**      | **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: 001-16159**

 

**WATSON WYATT & COMPANYHOLDINGS**

(Exact name of Registrantas specified in its charter)

 
| **Delaware**                                                     | ** ** | **52-2211537**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**1717 H Street NW**

**Washington, D.C. 20006-3900**

(Address of principalexecutive offices, including zip code)

 

**(202) 715-7000**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days:

 

| Yes |   | ý | No |   | o |
|-----|--------|--------|----|--------|---|

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2).

 

| Yes |   | ý | No |   | o |
|-----|--------|--------|----|--------|---|

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of April 30, 2005.

 
| **Class**                                  | ** ** | **Number of Shares** |
|--------------------------------------------|------------|----------------------|
| Class A Common  Stock, $.01 par value |       | 32,701,137           |

 

 

----

 

**WATSON WYATT & COMPANY HOLDINGSINDEX TO FORM 10-Q**

 

For the Three and NineMonths Ended March 31, 2005

 
| PART I.   | FINANCIAL INFORMATION                                                                                       |   |
|----------------|-------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                        |   |
| Item 1.        | Financial Statements (Unaudited)                                                                            |   |
|           |                                                                                                        |   |
|           | Consolidated  Statements of Operations—Three and nine months ended March 31, 2005 and  2004       |   |
|           |                                                                                                        |   |
|           | Consolidated Balance Sheets—March 31,  2005 and June 30, 2004                                |   |
|           |                                                                                                        |   |
|           | Consolidated  Statements of Cash Flows—Nine months ended March 31, 2005 and 2004                  |   |
|           |                                                                                                        |   |
|           | Consolidated  Statement of Changes in Stockholders’ Equity—Nine months ended March 31,  2005 |   |
|           |                                                                                                        |   |
|           | Notes to  the Consolidated Financial Statements                                                             |   |
|           |                                                                                                        |   |
| Item  2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                 |   |
|           |                                                                                                        |   |
| Item  3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                 |   |
|           |                                                                                                        |   |
| Item 4.        | Controls and  Procedures                                                                                    |   |
|           |                                                                                                        |   |
| PART II.  | OTHER INFORMATION                                                                                           |   |
|           |                                                                                                        |   |
| Item 1.        | Legal Proceedings                                                                                           |   |
|           |                                                                                                        |   |
| Item  2.       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                |   |
|           |                                                                                                        |   |
| Item 3.        | Defaults Upon  Senior Securities                                                                            |   |
|           |                                                                                                        |   |
| Item  4.       | Submission  of Matters to a Vote of Security Holders                                                        |   |
|           |                                                                                                        |   |
| Item 5.        | Other Information                                                                                           |   |
|           |                                                                                                        |   |
| Item 6.        | Exhibits                                                                                                    |   |
|           |                                                                                                        |   |
| Signatures     |                                                                                                        |
|           |                                                                                                        |
| Certifications |                                                                                                        |

 

----

 

**WATSONWYATT & COMPANY HOLDINGS**

**ConsolidatedStatements of Operations**

(Thousands of U.S. Dollars,Except Per Share Data)

 
| ** **                                                                                                                                                                          | ** ** | **Three months ended March 31,** | ** ** | **Nine months ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                          | ** ** | **(Unaudited)**                       | ** ** | **(Unaudited)**                      | ** ** |
|                                                                                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Revenue                                                                                                                                                                             |       | $                                     | 187,560    |                                 | $          | 180,655 |   | $ | 538,800 |   | $ | 521,991 |   |
|                                                                                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Costs of  providing services:                                                                                                                                                       |       |                                  |       |                                 |       |   |   |   |   |
| Salaries and  employee benefits                                                                                                                                                     |       | 101,730                               |       | 100,231                              |       | 294,000 |   | 299,678 |   |
| Professional and  subcontracted services                                                                                                                                            |       | 13,795                                |       | 11,618                               |       | 37,318 |   | 33,317 |   |
| Occupancy,  communications and other                                                                                                                                                |       | 27,110                                |       | 28,422                               |       | 79,111 |   | 77,861 |   |
| General and  administrative expenses                                                                                                                                                |       | 18,764                                |       | 15,269                               |       | 55,133 |   | 45,860 |   |
| Depreciation and  amortization                                                                                                                                                      |       | 5,161                                 |       | 4,091                                |       | 14,654 |   | 14,138 |   |
|                                                                                                                                                                                |       | 166,560                               |       | 159,631                              |       | 480,216 |   | 470,854 |   |
|                                                                                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Income from  operations                                                                                                                                                             |       | 21,000                                |       | 21,024                               |       | 58,584 |   | 51,137 |   |
|                                                                                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Income from  affiliates                                                                                                                                                             |       | 889                                   |       | 2,261                                |       | 5,819 |   | 5,099 |   |
| Interest income,  net                                                                                                                                                               |       | 617                                   |       | 20                                   |       | 1,479 |   | 404 |   |
| Other  non-operating (expense)/income                                                                                                                                               |       | (1,181                                | )          | 45                                   |       | (1,209 | ) | 6,197 |   |
|                                                                                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Income from  continuing operations before income taxes                                                                                                                              |       | 21,325                                |       | 23,350                               |       | 64,673 |   | 62,837 |   |
|                                                                                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Provision for  income taxes                                                                                                                                                         |       | 6,985                                 |       | 9,374                                |       | 25,527 |   | 25,562 |   |
|                                                                                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Income from  continuing operations                                                                                                                                                  |       | 14,340                                |       | 13,976                               |       | 39,146 |   | 37,275 |   |
|                                                                                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Discontinued  operations:                                                                                                                                                           |       |                                  |       |                                 |       |   |   |   |   |
|                                                                                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Adjustment to  reduce estimated loss on disposal of discontinued operations [less applicable  income tax expense for the three and nine months ended March 31, 2005  and 2004] |       | 739                                   |       | 592                                  |       | 739 |   | 592 |   |
|                                                                                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Sublease income  from discontinued operations, less applicable income tax expense for the  three and nine months ended March 31, 2005 and 2004                                 |       | 9                                     |       | 21                                   |       | 17 |   | 47 |   |
|                                                                                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Net income                                                                                                                                                                          |       | $                                     | 15,088     |                                 | $          | 14,589 |   | $ | 39,902 |   | $ | 37,914 |   |
|                                                                                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Basic earnings  per share:                                                                                                                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Income from  continuing operations                                                                                                                                                  |       | $                                     | 0.44       |                                 | $          | 0.42 |   | $ | 1.20 |   | $ | 1.13 |   |
| Income from  discontinued operations                                                                                                                                                |       | 0.02                                  |       | 0.02                                 |       | 0.02 |   | 0.02 |   |
| Net income                                                                                                                                                                          |       | $                                     | 0.46       |                                 | $          | 0.44 |   | $ | 1.22 |   | $ | 1.15 |   |
|                                                                                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Diluted earnings  per share:                                                                                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Income from  continuing operations                                                                                                                                                  |       | $                                     | 0.44       |                                 | $          | 0.42 |   | $ | 1.19 |   | $ | 1.12 |   |
| Income from  discontinued operations                                                                                                                                                |       | 0.02                                  |       | 0.02                                 |       | 0.02 |   | 0.02 |   |
| Net income                                                                                                                                                                          |       | $                                     | 0.46       |                                 | $          | 0.44 |   | $ | 1.21 |   | $ | 1.14 |   |
|                                                                                                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average  shares of common stock, basic (000)                                                                                                                               |       | 32,647                                |       | 32,968                               |       | 32,507 |   | 33,064 |   |
| Weighted average  shares of common stock, diluted (000)                                                                                                                             |       | 32,936                                |       | 33,288                               |       | 32,814 |   | 33,401 |   |

 

See accompanying notes to the

consolidated financial statements

 

1

----

 

**WATSON WYATT & COMPANY HOLDINGS**

**Consolidated Balance Sheets**

(Thousandsof U.S. Dollars, Except Share and Per Share Data)

 
| ** **                                                                                                 | ** ** | **March 31,  2005** | ** ** | **June 30,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                                 | ** ** | **(Unaudited)**          | ** ** | ** **              | ** ** |
| **Assets**                                                                                                 | ** ** | ** **               | ** ** | ** **              | ** ** |
| Cash and cash  equivalents                                                                                 |       | $                        | 126,465    |                    | $          | 136,940 |   |
| Marketable  securities                                                                                     |       | —                   |       | 20,000                  |       |
| Receivables from  clients:                                                                                 |       |                     |       |                    |       |
| Billed, net of  allowances of $3,131 and $1,241                                                            |       | 100,760                  |       | 86,726                  |       |
| Unbilled, net of  allowances of $1,291 and $456                                                            |       | 65,231                   |       | 63,108                  |       |
|                                                                                                       |       | 165,991                  |       | 149,834                 |       |
|                                                                                                       |       |                     |       |                    |       |
| Deferred income  taxes                                                                                     |       | 15,391                   |       | 15,052                  |       |
| Other current  assets                                                                                      |       | 39,229                   |       | 11,388                  |       |
| Total current  assets                                                                                      |       | 347,076                  |       | 333,214                 |       |
|                                                                                                       |       |                     |       |                    |       |
| Investment in  affiliates                                                                                  |       | 32,367                   |       | 30,235                  |       |
| Fixed assets,  net                                                                                         |       | 80,008                   |       | 65,438                  |       |
| Deferred income  taxes                                                                                     |       | 47,590                   |       | 55,240                  |       |
| Goodwill and  intangible assets                                                                            |       | 22,042                   |       | 20,909                  |       |
| Other assets                                                                                               |       | 6,041                    |       | 7,132                   |       |
|                                                                                                       |       |                     |       |                    |       |
| **Total  Assets**                                                                                          |       | $                        | 535,124    |                    | $          | 512,168 |   |
|                                                                                                       | ** ** | ** **               | ** ** | ** **              | ** ** |
| **Liabilities**                                                                                            | ** ** | ** **               | ** ** | ** **              | ** ** |
| Accounts payable  and accrued liabilities, including discretionary compensation                            |       | $                        | 97,062     |                    | $          | 113,233 |   |
| Income taxes  payable                                                                                      |       | 9,547                    |       | 12,526                  |       |
| Total current  liabilities                                                                                 |       | 106,609                  |       | 125,759                 |       |
|                                                                                                       |       |                     |       |                    |       |
| Accrued  retirement benefits                                                                               |       | 97,723                   |       | 97,984                  |       |
| Deferred rent  and accrued lease losses                                                                    |       | 10,593                   |       | 10,199                  |       |
| Deferred income  taxes                                                                                     |       | 346                      |       | 628                     |       |
| Other noncurrent  liabilities                                                                              |       | 31,209                   |       | 32,414                  |       |
|                                                                                                       |       |                     |       |                    |       |
| **Total  Liabilities**                                                                                     |       | 246,480                  |       | 266,984                 |       |
|                                                                                                       |       |                     |       |                    |       |
| Commitments and  contingencies                                                                             |       |                     |       |                    |       |
|                                                                                                       |       |                     |       |                    |       |
| **Stockholders’  Equity**                                                                             |       |                     |       |                    |       |
| Preferred Stock -  No par value:                                                                           |       |                     |       |                    |       |
| 1,000,000 shares  authorized; none issued and outstanding                                                  |       | —                   |       | —                  |       |
| Class A  Common Stock - $.01 par value:                                                               |       |                     |       |                    |       |
| 99,000,000  shares authorized; 33,372,880 and 33,372,880 issued and 32,693,650 and  32,317,156 outstanding |       | 334                      |       | 334                     |       |
| Additional  paid-in capital                                                                                |       | 148,304                  |       | 149,508                 |       |
| Treasury stock,  at cost - 679,230 and 1,055,724 shares                                                    |       | (16,885                  | )          | (26,149                 | )          |
| Retained  earnings                                                                                         |       | 158,262                  |       | 125,669                 |       |
| Accumulated  other comprehensive gain/(loss)                                                               |       | (1,371                   | )          | (4,178                  | )          |
| **Total  Stockholders’ Equity**                                                                       |       | 288,644                  |       | 245,184                 |       |
|                                                                                                       |       |                     |       |                    |       |
| **Total  Liabilities and Stockholders’ Equity**                                                       |       | $                        | 535,124    |                    | $          | 512,168 |   |

 

See accompanying notes tothe

consolidated financialstatements

 

2

----

 

**WATSON WYATT & COMPANY HOLDINGS**

**ConsolidatedStatements of Cash Flows**

(Thousandsof U.S. Dollars)

 
| ** **                                                                    | ** ** | **Nine months ended March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                    | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| ** **                                                                    | ** ** | **(Unaudited)**                      | ** ** |
| Cash flows from  operating activities:                                        |       |                                 |       |   |   |
| Net income                                                                    |       | $                                    | 39,902     |   | $ | 37,914 |   |
| Adjustments to  reconcile net income to net cash from operating activities:   |       |                                 |       |   |   |
| Other  non-operating gain related to PCIC                                     |       | —                               |       | (5,600 | ) |
| Income from  discontinued operations, net of income tax expense               |       | (739                                 | )          | (592 | ) |
| Provision for  doubtful receivables from clients                              |       | 5,967                                |       | 5,610 |   |
| Depreciation                                                                  |       | 14,426                               |       | 13,895 |   |
| Amortization of  intangible assets                                            |       | 228                                  |       | 243 |   |
| Provision for  deferred income taxes                                          |       | 7,029                                |       | (2,108 | ) |
| Income from  affiliates                                                       |       | (5,819                               | )          | (5,099 | ) |
| Distributions  from affiliates                                                |       | 4,624                                |       | 4,404 |   |
| Other, net                                                                    |       | 755                                  |       | 10 |   |
| Changes in  operating assets and liabilities (net of discontinued operations) |       |                                 |       |   |   |
| Receivables from  clients                                                     |       | (22,124                              | )          | (13,789 | ) |
| Other current  assets                                                         |       | (9,996                               | )          | (2,315 | ) |
| Other assets                                                                  |       | 1,091                                |       | 1,226 |   |
| Accounts payable  and accrued liabilities                                     |       | (11,351                              | )          | (10,080 | ) |
| Income taxes  payable                                                         |       | (20,824                              | )          | (4,477 | ) |
| Accrued  retirement benefits                                                  |       | (261                                 | )          | 5,089 |   |
| Deferred rent  and accrued lease losses                                       |       | 394                                  |       | 2,046 |   |
| Other noncurrent  liabilities                                                 |       | (481                                 | )          | (1,694 | ) |
| Net cash from  operating activities                                           |       | 2,821                                |       | 24,683 |   |
|                                                                          |       |                                 |       |   |   |
| Cash flows (used  in) from investing activities:                              |       |                                 |       |   |   |
| Purchases of  marketable securities                                           |       | (469,400                             | )          | (257,600 | ) |
| Sales and  maturities of marketable securities                                |       | 489,400                              |       | 286,300 |   |
| Purchases of  fixed assets                                                    |       | (20,129                              | )          | (12,334 | ) |
| Capitalized  software costs                                                   |       | (8,840                               | )          | — |   |
| Proceeds from  divestitures                                                   |       | 28                                   |       | 598 |   |
| Acquisitions and  contingent consideration payments                           |       | (517                                 | )          | (114 | ) |
| Net cash (used  in) from investing activities                                 |       | (9,458                               | )          | 16,850 |   |
|                                                                          |       |                                 |       |   |   |
| Cash flows used  in financing activities:                                     |       |                                 |       |   |   |
| Issuances of  common stock - exercises of stock options                       |       | 1,711                                |       | 1,632 |   |
| Issuances of  common stock - employee stock purchase plan                     |       | 5,549                                |       | 5,024 |   |
| Dividends paid                                                                |       | (7,309                               | )          | — |   |
| Repurchases of  common stock                                                  |       | (4,188                               | )          | (12,161 | ) |
| Net cash used in  financing activities                                        |       | (4,237                               | )          | (5,505 | ) |
|                                                                          |       |                                 |       |   |   |
| Effect of  exchange rates on cash                                             |       | 399                                  |       | 2,007 |   |
|                                                                          |       |                                 |       |   |   |
| (Decrease)  increase in cash and cash equivalents                             |       | (10,475                              | )          | 38,035 |   |
|                                                                          |       |                                 |       |   |   |
| Cash and cash  equivalents at beginning of period                             |       | 136,940                              |       | 115,674 |   |
|                                                                          |       |                                 |       |   |   |
| Cash and cash  equivalents at end of period                                   |       | $                                    | 126,465    |   | $ | 153,709 |   |

 

See accompanying notes tothe

consolidated financialstatements

 

3

----

 

**WATSONWYATT & COMPANY HOLDINGS**

**ConsolidatedStatement of Changes in Stockholders’ Equity**

(Thousandsof U.S. Dollars)

 
| ** **                                                       | ** ** | **Class A  Common  Stock  Outstanding  (number of  shares)** | ** ** | **Class A  Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Treasury  Stock,  at Cost** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  (Loss)/Income** | ** ** | **Total**  | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|-------------------------------|------------|------------------------|------------|------------------------------------------------------|------------|------------|------------|
| ** **                                                       | ** ** | ** **                                                        | ** ** | ** **                      | ** ** | ** **                       | ** ** | ** **                    | ** ** | ** **             | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Balance at  June 30, 2004                                   |       | 32,317                                                            |       | $                               | 334        |                             | $          | 149,508                       |       | $                      | (26,149    | )                                                    | $          | 125,669    |       | $ | (4,178 | ) | $ | 245,184 |   |
|                                                             |       |                                                              |       |                            |       |                             |       |                          |       |                   |       |                                                 |       |       |       |
| Comprehensive  income:                                           |       |                                                              |       |                            |       |                             |       |                          |       |                   |       |                                                 |       |       |       |
| Net income                                                       |       | —                                                            |       | —                          |       | —                           |       | —                        |       | 39,902                 |       | —                                               |       | 39,902     |       |
| Additional  minimum pension liability                            |       | —                                                            |       | —                          |       | —                           |       | —                        |       | —                 |       | (261                                                 | )          | (261       | )          |
| Foreign currency  translation adjustment                         |       | —                                                            |       | —                          |       | —                           |       | —                        |       | —                 |       | 3,068                                                |       | 3,068      |       |
| Total  comprehensive income                                      |       |                                                              |       |                            |       |                             |       |                          |       |                   |       |                                                 |       | 42,709     |       |
| Cash dividends                                                   |       | —                                                            |       | —                          |       | —                           |       | —                        |       | (7,309                 | )          | —                                               |       | (7,309     | )          |
| Repurchases of  common stock                                     |       | (165                                                              | )          | —                          |       | —                           |       | (4,188                        | )          | —                 |       | —                                               |       | (4,188     | )          |
| Issuances of  common stock - employee stock purchase plan shares |       | 252                                                               |       | —                          |       | (687                             | )          | 6,236                         |       | —                 |       | —                                               |       | 5,549      |       |
| Issuances of  common stock - deferred stock units                |       | 151                                                               |       | —                          |       | 276                              |       | 3,769                         |       | —                 |       | —                                               |       | 4,045      |       |
| Issuances of  common stock to outside directors                  |       | 6                                                                 |       | —                          |       | 11                               |       | 157                           |       | —                 |       | —                                               |       | 168        |       |
| Issuances of  common stock - stock options                       |       | 133                                                               |       | —                          |       | (1,579                           | )          | 3,290                         |       | —                 |       | —                                               |       | 1,711      |       |
| Tax benefit of  exercises of stock options                       |       | —                                                            |       | —                          |       | 775                              |       | —                        |       | —                 |       | —                                               |       | 775        |       |
|                                                             |       |                                                              |       |                            |       |                             |       |                          |       |                   |       |                                                 |       |       |       |
| Balance at  March 31, 2005                                  |       | 32,694                                                            |       | $                               | 334        |                             | $          | 148,304                       |       | $                      | (16,885    | )                                                    | $          | 158,262    |       | $ | (1,371 | ) | $ | 288,644 |   |

 

See accompanying notes tothe

consolidated financialstatements

 

4

----

 

**WATSON WYATT & COMPANYHOLDINGS**

 

**Notes to the ConsolidatedFinancial Statements**

(Tabularamounts are in thousands, except per share data)

(Unaudited)

 

**Note 1 – Basis of Presentation.**

 

The accompanying unaudited quarterly consolidated financial statementsof Watson Wyatt & Company Holdings and our subsidiaries (collectivelyreferred to as “we,” “Watson Wyatt,” “Watson Wyatt & Company” or the “company”)are presented in accordance with the rules and regulations of theSecurities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q.  In the opinion of management, these financialstatements reflect all adjustments, consisting only of normal recurringadjustments, which are necessary for a fair presentation of the consolidatedfinancial statements for the interim periods. The consolidated financial statements should be read in conjunction withthe audited consolidated financial statements and notes thereto contained inthe company’s Annual Report on Form 10-K for the fiscal year ended June 30,2004, which is filed with the SEC and may be accessed via EDGAR on the SEC’sweb site at www.sec.gov.

 

The results of operations for the nine months ended March 31, 2005are not necessarily indicative of the results that can be expected for theentire fiscal year ending June 30, 2005. The results reflect certain estimates, including estimated bonuses andanticipated tax liabilities.

 

**Note 2 – Revision in the Classification of CertainSecurities.**

 

In connection with recent interpretations regarding the classificationof auction rate securities, the company concluded that it was appropriate toclassify its auction rate securities as marketable securities instead of cashand cash equivalents, which has been the historical classification.  Auction rate securities are investments thatare typically backed by preferred stock or long-term, variable-rate debtinstruments whose interest rates are reset at predetermined short-termintervals through an auction process. Accordingly, the company has revised theclassification to report these securities as marketable securities in theConsolidated Balance Sheet as of June 30, 2004. These securities were $20 million at June 30, 2004.  The company has also made correspondingadjustments to the Consolidated Statement of Cash Flows for the nine monthsended March 31, 2004, to reflect the gross purchases of $257.6 million andsales of $286.3 million of these securities as investing activities rather thanas a component of cash and cash equivalents. This change in classification doesnot affect previously reported cash flows from operations or from financingactivities in the company’s previously reported Consolidated Statements of CashFlows, or the company’s previously reported Consolidated Statements ofOperations for any period.

 

At March 31, 2005, the company had no auction rate securitiesclassified as available-for-sale short-term investments, compared to $20.0million at June 30, 2004.  Ourinvestments in these securities have been recorded at cost, which approximatedfair value due to their variable interest rates, which typically reset every 7to 28 days.  Despite the long-term natureof their stated contractual maturities, we have had the ability to quicklyliquidate these securities.  As a result,we had no cumulative gross unrealized or realized holding gains or losses fromthese investments.  All income generatedfrom these investments was recorded as interest income.

 

**Note 3 – Business Combination.**

 

On April 18,2005, the company and Watson Wyatt LLP (WWLLP) announced the signing of adefinitive agreement to combine the two firms. Watson Wyatt & Company currently owns approximately 20 percentof WWLLP and will acquire the remaining assets of WWLLP for total considerationcomprised of:

 

5

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•                  Approximately£88.3 million in cash (approximately $168.4 million based on exchange rates on April 29,2005); and

 

•                  11,040,571shares of Watson Wyatt & Company Holdings common stock, consisting of9,090,571 shares to be delivered at closing and up to an additional 1,950,000shares to be issued after June 30, 2007, contingent upon the achievement bythe acquired business of financial performance goals.  The market value of the stock considerationwill depend upon the market price for the common stock on the date ofclosing.  Based on the NYSE closing stockprice on April 29, 2005, the market value of the stock consideration was$291.5 million, of which $51.5 million represents the contingent stockconsideration.  The ultimate number ofshares of common stock to be issued as contingent consideration will not bedeterminable until after June 30, 2007, when achievement of the financialperformance goals is assessed.

 

The businesscombination will be accounted for using the purchase method of accounting asprescribed in Statement of Financial Accounting Standards Board No. 141, “BusinessCombinations” (SFAS 141).

 

The definitiveagreement is binding and the transaction is subject to a number of conditions,including approval by stockholders of Watson Wyatt & Company Holdingsof the issuance of Watson Wyatt & Company Holdings common stock inconnection with the acquisition, approval of the acquisition by the votingpartners of WWLLP, receipt of various regulatory and governmental approvals andcustomary closing conditions.

 

During the thirdquarter of fiscal year 2005, the company entered into a foreign currencyforward contract to offset the risk associated with the foreign exchange(Pound) exposure inherent in the combination. The forward contract provides for the purchase of £88 million at a fixedprice of $164.5 million, settling on July 29, 2005.  In accordance with Statement of FinancialAccounting Standards Board No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” (SFAS 133), as amended and interpreted, since theforward contract is associated with a business combination that is subject tothe provisions of SFAS 141 and the combination involves an equity methodinvestment, the forward contract does not qualify for hedge accounting.  As a result, changes in fair value associatedwith the forward contract will be recognized in the current ConsolidatedStatement of Operation.  Consequently, again of $1.4 million was recognized during the third quarter and included inother non-operating income.

 

**Note 4 – Segment Information.**

 

In North America, the company is primarily organized and managed bypractice.  Although our consultants inour international offices provide services in these same practice areas, ourinternational operations as a whole are managed geographically and comprise asingle operating segment.  Therefore, wehave five reportable operating segments or practice areas:

 

(1)          Benefits Group

(2)          Technology SolutionsGroup

(3)          Human Capital Group

(4)          International

(5)          Other (including DataServices and Communication)

 

The company evaluates the performance of its segments and allocatesresources to them based on net operating income on a pre-bonus, pre-tax basis.

 

6

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The table below presents specified information about reported segmentsas of and for the three months ended March 31, 2005:

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Technology  Solutions  Group** | ** ** | **Human  Capital  Group** | ** ** | **International** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|----------------------------------|------------|---------------------------|------------|-------------------|------------|-----------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 114,488    |                             | $          | 17,030                    |       | $                 | 14,633     |      | $          | 22,190    |       | $ | 9,082 |   | $ | 177,423 |   |
| Net operating  income/(loss)            |       | 24,829              |       | 874                              |       | 3,622                     |       | 263               |       | (488      | )          | 29,100    |       |
| Receivables                             |       | 112,673             |       | 7,263                            |       | 13,487                    |       | 20,844            |       | 6,670     |       | 160,937   |       |
|                                         |            |                     |            |                                  |            |                           |            |                   |            |           |            |           |            |  |  |  |  |  |  |

 

The table below presents specified information about reported segmentsas of and for the three months ended March 31, 2004:

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Technology  Solutions  Group** | ** ** | **Human  Capital  Group** | ** ** | **International** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|----------------------------------|------------|---------------------------|------------|-------------------|------------|-----------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 110,029    |                             | $          | 20,258                    |       | $                 | 11,639     |      | $          | 22,088    |       | $ | 9,562 |   | $ | 173,576 |   |
| Net operating  income/(loss)            |       | 26,541              |       | 2,729                            |       | 2,085                     |       | 1,713             |       | (319      | )          | 32,749    |       |
| Receivables                             |       | 98,713              |       | 8,830                            |       | 9,569                     |       | 19,148            |       | 5,321     |       | 141,581   |       |
|                                         |            |                     |            |                                  |            |                           |            |                   |            |           |            |           |            |  |  |  |  |  |  |

 

The table below presents specified information about reported segmentsas of and for the nine months ended March 31, 2005:

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Technology  Solutions  Group** | ** ** | **Human  Capital  Group** | ** ** | **International** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|----------------------------------|------------|---------------------------|------------|-------------------|------------|-----------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 319,208    |                             | $          | 53,785                    |       | $                 | 41,998     |      | $          | 65,487    |       | $ | 31,811 |   | $ | 512,289 |   |
| Net operating  income                   |       | 63,906              |       | 8,975                            |       | 10,589                    |       | 2,074             |       | 3,025     |       | 88,569    |       |
| Receivables                             |       | 112,673             |       | 7,263                            |       | 13,487                    |       | 20,844            |       | 6,670     |       | 160,937   |       |
|                                         |            |                     |            |                                  |            |                           |            |                   |            |           |            |           |            |  |  |  |  |  |  |

 

7

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The table below presents specified information about reported segmentsas of and for the nine months ended March 31, 2004:

 
| ** **                              | ** ** | **Benefits  Group** | ** ** | **Technology  Solutions  Group** | ** ** | **Human  Capital  Group** | ** ** | **International** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|---------------------|------------|----------------------------------|------------|---------------------------|------------|-------------------|------------|-----------|------------|-----------|------------|
| Revenue (net of  reimbursable expenses) |       | $                   | 312,325    |                             | $          | 62,398                    |       | $                 | 33,427     |      | $          | 60,420    |       | $ | 32,197 |   | $ | 500,767 |   |
| Net operating  income                   |       | 65,304              |       | 8,184                            |       | 3,973                     |       | 466               |       | 315       |       | 78,242    |       |
| Receivables                             |       | 98,713              |       | 8,830                            |       | 9,569                     |       | 19,148            |       | 5,321     |       | 141,581   |       |
|                                         |            |                     |            |                                  |            |                           |            |                   |            |           |            |           |            |  |  |  |  |  |  |

 

Information about interest income and tax expense is not presented as asegment expense because such items are not considered a responsibility of thesegments’ operating management.

 

8

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Reconciliations of the information reported by segment to theconsolidated amounts follow for the three and nine-month periods ended March 31,2005 and 2004:

 
| ** **                                                                                  | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Revenue:                                                                                    |       |                                  |       |                                 |       |   |   |   |   |
| Total segment  revenue                                                                      |       | $                                     | 177,423    |                                 | $          | 173,576 |   | $ | 512,289 |   | $ | 500,767 |   |
| Reimbursable  expenses not included in total segment revenue                                |       | 9,340                                 |       | 6,600                                |       | 25,619 |   | 21,448 |   |
| Other, net                                                                                  |       | 797                                   |       | 479                                  |       | 892 |   | (224 | ) |
| Consolidated revenue                                                                        |       | $                                     | 187,560    |                                 | $          | 180,655 |   | $ | 538,800 |   | $ | 521,991 |   |
|                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Net Operating  Income:                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| Total segment  net operating income                                                         |       | $                                     | 29,100     |                                 | $          | 32,749 |   | $ | 88,569 |   | $ | 78,242 |   |
| Income from  affiliates                                                                     |       | 889                                   |       | 2,261                                |       | 5,819 |   | 5,099 |   |
| Differences in  allocation methods for depreciation, G&A, medical and pension costs (1) |       | 5,325                                 |       | 1,551                                |       | 1,313 |   | 4,911 |   |
| Gain on sale of  business units                                                             |       | 48                                    |       | 45                                   |       | 20 |   | 598 |   |
| PCIC  non-operating gain                                                                    |       | —                                |       | —                               |       | — |   | 5,600 |   |
| Wyatt Bode  Grabner loss accrual                                                            |       | (2,203                                | )          | —                               |       | (2,203 | ) | — |   |
| Gain on hedge                                                                               |       | 1,392                                 |       | —                               |       | 1,392 |   | — |   |
| Discretionary  compensation                                                                 |       | (11,400                               | )          | (9,700                               | )          | (31,813 | ) | (29,170 | ) |
| Other, net                                                                                  |       | (1,826                                | )          | (3,556                               | )          | 1,576 |   | (2,443 | ) |
| Consolidated  income before income taxes                                                    |       | $                                     | 21,325     |                                 | $          | 23,350 |   | $ | 64,673 |   | $ | 62,837 |   |
|                                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| Receivables:                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| Total segment  receivables - billed and unbilled                                            |       | $                                     | 160,937    |                                 | $          | 141,581 |   | $ | 160,937 |   | $ | 141,581 |   |
| Net valuation  differences (2)                                                              |       | 5,054                                 |       | 5,520                                |       | 5,054 |   | 5,520 |   |
| Total billed and  unbilled receivables                                                      |       | 165,991                               |       | 147,101                              |       | 165,991 |   | 147,101 |   |
| Assets not  reported by segment                                                             |       | 369,133                               |       | 389,338                              |       | 369,133 |   | 389,338 |   |
| Consolidated  assets                                                                        |       | $                                     | 535,124    |                                 | $          | 536,439 |   | $ | 535,124 |   | $ | 536,439 |   |

 

----

(1) Depreciation, general andadministrative, pension, and medical costs are allocated to our segments basedon budgeted expenses determined at the beginning of the fiscal year asmanagement believes that these costs are largely uncontrollable to thesegment.  To the extent that the actualexpense base upon which allocations are made differs from the forecast/budgetamount, a reconciling item will be created between internally allocatedexpenses and the actual expense that we report for GAAP purposes.  The positive reconciling item in the quarterended March 31, 2005 was mainly due to our absorption in the third quarterto catch up $5.5 million of under-absorption in prior quarters.  The absorption had no impact on consolidatedresults of operations.

 

(2) Total segment receivables, whichreflects the receivable balances used by management to make business decisions,are included for management reporting purposes net of deferred revenues – cashcollections and invoices generated in excess of revenue recognized in thesegment revenues and cash held in suspense.

 

9

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**Note 5 – Targeted Job Reductions.**

 

We eliminated approximately 100 positions in our North American regionduring the first quarter of fiscal year 2004. A charge to earnings of $2.6 million related to these reductions wasincluded in the company’s financial results for the quarter ended September 30,2003.  We eliminated an additional 22positions in our North American region during the second quarter of fiscal year2004, resulting in a charge to earnings of $0.7 million in the company’sfinancial results for the quarter ended December 31, 2003.  Of the $3.3 million total severance charge,$3.2 million was included in Salaries and employee benefits and $0.1 millionwas included in Professional and subcontracted services.

 

**Note 6 – Professional Consultants InsuranceCompany Inc. (PCIC) Other Non-operating Gain.**

 

On July 9, 2003, the Board of Directors of PCIC, a captiveinsurance company of which we own 34.8 percent, decided to pass on to each ofits owners a credit in their 2003-04 policy year in connection with benefitsreceived from an aggregate stop loss insurance policy entered into byPCIC.  PCIC’s Board determined in July 2003that this credit would be used to offset all or a portion of each insureds’obligation to PCIC for historical loss experience.  As a result, the company recorded a $5.6million pre-tax non-operating gain in the first quarter of fiscal year 2004 andincluded this gain in “Other non-operating income” in the ConsolidatedStatements of Operations.

 

As a result of this gain, the company also recorded a $5.6 millionsupplemental bonus accrual in the first quarter of fiscal year 2004 that wasincremental to the company’s fiscal year end bonus, and was paid in September 2004during the regular bonus cycle.  Thissupplemental bonus amount was included in Salaries and employee benefits forthe first quarter of fiscal year 2004.

 

**Note 7 – Stock-based Compensation.**

 

We have elected to follow Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (APB 25), for stock options issuedunder the 2000 Long-term Incentive Plan, and the 2001 Employee Stock PurchasePlan.  Compensation expense for the 2000Long-term Incentive Plan, if any, would be recorded and measured as thedifference between the fair market value of the stock at the date of the grantand the option price.  The compensationexpense would be recognized over the five-year vesting period identified in theplan.  For any cash-based, non-stockawards, such as stock appreciation rights, compensation expense will berecognized over the vesting period to the extent that the market price of thestock increases.  We have elected thedisclosure-only provisions of Statement of Financial Accounting Standards No. 123,“Accounting for Stock-based Compensation” (SFAS 123).

 

As required by SFAS 123, the company has determined pro forma netincome and earnings per share as if the company had accounted for its stockcompensation plans under the fair value method of SFAS 123.   The company estimated compensation expensefor its Stock Purchase Plan based on the 15 percent discounted purchase priceoffered to employees enrolled in the plan, which approximates fair value.  For the Stock Option Plan, the company usesthe Black-Scholes option valuation model to calculate the fair value of optionsgranted for pro forma disclosure purposes.

 

10

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The table below reflects the pro forma effect on net income andearnings per share for the three and nine months ended March 31, 2005 and2004 as if the company were to recognize compensation expense under thefair-value-based method of SFAS 123:

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Net income, as  reported                                                                                                                      |       | $                                     | 15,088     |                                 | $          | 14,589 |   | $ | 39,902 |   | $ | 37,914 |   |
| Add: Stock-based  compensation expense included in reported net income, net of related tax  effects                                           |       | 39                                    |       | 36                                   |       | 106 |   | 113 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair-value-based  method for all awards, net of related tax effects |       | (389                                  | )          | (361                                 | )          | (1,121 | ) | (1,159 | ) |
| Pro forma net  income                                                                                                                         |       | $                                     | 14,738     |                                 | $          | 14,264 |   | $ | 38,887 |   | $ | 36,868 |   |
|                                                                                                                                          |       |                                  |       |                                 |       |   |   |   |   |
| **Earnings  per share:**                                                                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| Basic - as  reported                                                                                                                          |       | $                                     | 0.46       |                                 | $          | 0.44 |   | $ | 1.22 |   | $ | 1.15 |   |
| Basic - pro  forma                                                                                                                            |       | $                                     | 0.45       |                                 | $          | 0.43 |   | $ | 1.20 |   | $ | 1.12 |   |
|                                                                                                                                          |       |                                  |       |                                 |       |   |   |   |   |
| Diluted - as  reported                                                                                                                        |       | $                                     | 0.46       |                                 | $          | 0.44 |   | $ | 1.21 |   | $ | 1.14 |   |
| Diluted - pro  forma                                                                                                                          |       | $                                     | 0.45       |                                 | $          | 0.43 |   | $ | 1.20 |   | $ | 1.10 |   |

 

In December 2004, the Financial Accounting Standards Board (FASB)published revisions to Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation” (SFAS 123R).  For more information about SFAS 123R, seeNote 17 of the Notes to the Consolidated Financial Statements.

 

**Note 8 – Retirement Benefits.**

 

*Defined Benefit Plans*

 

We sponsor both qualified and non-qualified, non-contributory definedbenefit pension plans covering substantially all of our associates.  Under our principal plans (United States,Canada, Hong Kong and U.K.), benefits are based on the number of years ofservice and the associates’ compensation during the five highest paidconsecutive years of service.  Thenon-qualified plan provides for pension benefits that would be covered underthe qualified plan but are limited by the Internal Revenue Code.  The non-qualified plan has no assets andtherefore is an unfunded arrangement. The benefit liability is reflected on the balance sheet.  Included in the results is our U.K. plan,which is inactive but is part of the additional minimum pension liabilityreported on the Consolidated Balance Sheets. The measurement date for the plans is June 30.

 

11

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*Components of Net Periodic Benefit Cost for DefinedBenefit Pension Plans*

 

The following table sets forth the components of net periodic benefitcost for the company’s U.S. and non-U.S. defined benefit pension plans for thethree and nine months ended March 31, 2005 and 2004:
| ** **                             | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                   |       |                                  |       |                                 |       |   |   |   |   |
| Service Cost                           |       | $                                     | 6,321      |                                 | $          | 6,682 |   | $ | 18,933 |   | $ | 20,046 |   |
| Interest Cost                          |       | 8,852                                 |       | 8,398                                |       | 26,515 |   | 25,193 |   |
| Expected return  on plan assets        |       | (10,363                               | )          | (8,958                               | )          | (31,042 | ) | (26,875 | ) |
| Amortization of  transition obligation |       | (2                                    | )          | (1                                   | )          | (5 | ) | (3 | ) |
| Amortization of  net loss              |       | 1,702                                 |       | 2,975                                |       | 5,100 |   | 8,926 |   |
| Amortization of  prior service cost    |       | (540                                  | )          | (670                                 | )          | (1,621 | ) | (2,009 | ) |
| Net periodic  benefit cost             |       | $                                     | 5,970      |                                 | $          | 8,426 |   | $ | 17,880 |   | $ | 25,278 |   |

 

The fiscal year 2005 net periodic benefit cost is based, in part, onthe following rate assumptions as of June 30, 2004:

 
| Discount rate                               |   | 6.25 | % |
|---------------------------------------------|--------|------|---|
| Expected long-term rate of return on assets |   | 9.00 | % |
| Rate of increase in compensation levels     |   | 3.34 | % |

 

*Employer contributions*

 

The company made $10 million of contributions to the U.S. plan and$800,000 in contributions to the non-U.S. plans during the third quarter offiscal year 2005.  We anticipate makingan additional $2 million in contributions to the non-U.S. plans in the lastquarter of fiscal year 2005.

 

*Defined Contribution Plans*

 

We sponsor asavings plan that provides benefits to substantially all U.S. associates. Priorto July 1, 2003, we matched employee contributions at 50 percent of thefirst 6 percent of total pay, which included base salary, overtime and annualperformance-based bonuses.  Vesting ofthe company match occurs after three years for new employees and is 100 percentfor all employees hired before January 1, 1997.  Effective July 1, 2004, the companyreinstituted a match to employee contributions at a rate of 50 percent of thefirst 6 percent up to $60,000 of associates’ eligible compensation.  The company may also make an annual profitsharing contribution to the plan in an amount that is dependant upon thecompany’s financial performance during the fiscal year.

 

*Health Care Benefits*

 

We sponsor a contributory health care plan that provideshospitalization, medical and dental benefits to substantially all U.S.associates.  We accrue a liability forestimated incurred but unreported claims based on projected use of the plan aswell as prior plan history.

 

12

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*Postretirement Benefits*

 

We provide certain health care and life insurance benefits for retiredassociates.  The principal plans coverassociates in the U.S. and Canada who have met certain eligibilityrequirements. Our principal post-retirement benefit plans are unfunded.  We accrue a liability for these benefits.

 

*Components of Net Periodic Benefit Cost for OtherPostretirement plans*

 

The following table sets forth the components of net periodic benefitcost for the company’s healthcare and post-retirement plans for the three andnine months ended March 31, 2005 and 2004:

 
| ** **                             | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                   |       |                                  |       |                                 |       |   |   |   |   |
| Service Cost                           |       | $                                     | 422        |                                 | $          | 418 |   | $ | 1,257 |   | $ | 1,253 |   |
| Interest Cost                          |       | 612                                   |       | 583                                  |       | 1,831 |   | 1,749 |   |
| Expected return  on plan assets        |       | —                                |       | —                               |       | — |   | — |   |
| Amortization of  transition obligation |       | 13                                    |       | 12                                   |       | 38 |   | 35 |   |
| Amortization of  net gain              |       | (142                                  | )          | (145                                 | )          | (425 | ) | (434 | ) |
| Amortization of  prior service cost    |       | (107                                  | )          | (67                                  | )          | (318 | ) | (200 | ) |
| Net periodic  benefit cost             |       | $                                     | 798        |                                 | $          | 801 |   | $ | 2,383 |   | $ | 2,403 |   |

 

*Employer contributions*

 

The company made contributions in the form of premiums and medicalclaim payments to its healthcare and post-retirement plans of $800,000 and$900,000 in the three months ended March 31, 2005 and 2004, respectively,and contributions of $2.1 million and $1.9 million in the nine months ended March 31,2005 and 2004, respectively.  We plan tomake additional payments estimated to total $800,000 through the end of June 30,2005.

 

**Note 9 – Goodwill & Intangible Assets.**

 

The changes in the carrying amount of goodwill for the nine monthsended March 31, 2005, are as follows: 

 
| ** **                         | ** ** | **Benefits  Group** | ** **   | **Technology  Solutions  Group** | ** ** | **Human  Capital  Group** | ** ** | **International** | ** ** | **Other** | ** ** | **Total**   | ** ** |
|------------------------------------|------------|---------------------|--------------|----------------------------------|------------|---------------------------|------------|-------------------|------------|-----------|------------|-------------|------------|
| Balance as of  June 30, 2004  |       | $                   | 16,331       |                             | $          | 1,449                     |       | $                 | 70         |      | $          | 1,292       |       | $ | 1,214 |   | $ | 20,356 |   |
| Goodwill  recorded during the year |       | —              |         | —                           |       | —                    |       | 517               |       | —    |       | 517         |       |
| Impairment  losses                 |       | —              |         | —                           |       | —                    |       | —            |       | —    |       | —      |       |
| Translation  adjustment            |       | 530                 |         | —                           |       | 8                         |       | 267               |       | —    |       | 805         |       |
| Balance as of  March 31, 2005 |       | $                   |  16,861 |                             | $          |  1,449               |       | $                 | 78         |      | $          |  2,076 |       | $ |  1,214 |   | $ |  21,678 |   |

 

13

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The following table reflects changes in the net carrying amount of thecomponents of intangible assets for the nine months ended March 31, 2005:

 
| ** **                                  | ** ** | **Non-contractual  customer  relationships** | ** ** | **Non-compete  agreements** | ** ** | **Purchased  software** | ** ** | **Pension** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|----------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|-------------|------------|-----------|------------|
|                                        |       |                                         |       |                        |       |                    |       |        |       |      |       |
| Balance as of  June 30, 2004           |       | $                                            | 253        |                        | $          | 176                     |       | $           | 2          |      | $          | 124 |   | $ | 555 |   |
| Intangible  assets recorded during the year |       | —                                       |       | —                      |       | —                  |       | —      |       | —    |       |
| Amortization  expense                       |       | (157                                         | )          | (69                         | )          | (2                      | )          | —      |       | (228      | )          |
| Translation  adjustment                     |       | 32                                           |       | —                      |       | —                  |       | 5           |       | 37        |       |
| Balance as of  March 31, 2005          |       | $                                            | 128        |                        | $          | 107                     |       | $           | —     |      | $          | 129 |   | $ | 364 |   |

 

The following table reflects the carrying value of intangible assets atMarch 31, 2005 and June 30, 2004:

 
| ** **                                           | ** ** | **March 31, 2005**     | ** ** | **June 30, 2004**        | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                           | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                                           | ** ** | ** **                  | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intangible assets and intangible pension asset:      |       |                        |       |                          |       |   |   |   |   |
| Non-contractual customer relationships               |       | $                           | 879        |                          | $          | 751 |   | $ | 962 |   | $ | 503 |   |
| Non-compete agreements                               |       | 672                         |       | 565                           |       | 672 |   | 496 |   |
| Purchased software                                   |       | 125                         |       | 125                           |       | 125 |   | 123 |   |
| Intangible pension asset                             |       | 129                         |       | —                        |       | 124 |   | — |   |
| Total intangible assets and intangible pension asset |       | $                           | 1,805      |                          | $          | 1,441 |   | $ | 1,883 |   | $ | 1,122 |   |

 

A component of thechange in the gross carrying amount of non-contractual customer relationshipsand the intangible pension asset reflect translation adjustments between June 30,2004 and March 31, 2005.  Theseintangible assets are denominated in the currencies of our subsidiaries outsidethe United States, and are translated into our reporting currency, the U.S.dollar, based on exchange rates at the balance sheet date.

 

The weighted average remaining life of amortizable intangible assets atMarch 31, 2005, was 1.0 years. Estimated amortization expense for the remainder of 2005 and thereafteris as follows:
| **Fiscal  year ending June 30:** | ** ** | **Amount** | ** ** |
|---------------------------------------|------------|------------|------------|
| 2005                                  |       | $          | 78         |   |
| 2006                                  |       | 136        |       |
| 2007                                  |       | 21         |       |
| 2008                                  |       | —     |       |
| Thereafter                            |       | —     |       |
|                                       |            |            |            |  |

 

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**Note 10 – Earnings Per Share.**

 

Basic earnings per share is calculated on the basis of the weightedaverage number of common shares outstanding during the three and nine monthsended March 31, 2005 and 2004. Diluted earnings per share is calculated on the basis of the weightedaverage number of common shares outstanding plus the effect of outstandingstock options and employee stock purchase plan shares using the “treasury stock”method.  The components of basic anddiluted earnings per share are as follows:

 
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Income from  continuing operations                                                 |       | $                                     | 14,340     |                                 | $          | 13,976 |   | $ | 39,146 |   | $ | 37,275 |   |
| Discontinued  operations                                                           |       | 748                                   |       | 613                                  |       | 756 |   | 639 |   |
| Net income                                                                         |       | $                                     | 15,088     |                                 | $          | 14,589 |   | $ | 39,902 |   | $ | 37,914 |   |
|                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average  outstanding shares of common stock                               |       | 32,647                                |       | 32,968                               |       | 32,507 |   | 33,064 |   |
| Dilutive effect  of employee stock options and employee stock purchase plan shares |       | 289                                   |       | 320                                  |       | 307 |   | 337 |   |
|                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Common stock and  stock equivalents                                                |       | 32,936                                |       | 33,288                               |       | 32,814 |   | 33,401 |   |
|                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Basic earnings  per share:                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Income from  continuing operations                                                 |       | $                                     | 0.44       |                                 | $          | 0.42 |   | $ | 1.20 |   | $ | 1.13 |   |
| Discontinued  operations                                                           |       | 0.02                                  |       | 0.02                                 |       | 0.02 |   | 0.02 |   |
| Net income                                                                         |       | $                                     | 0.46       |                                 | $          | 0.44 |   | $ | 1.22 |   | $ | 1.15 |   |
|                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Diluted earnings  per share:                                                       |       |                                  |       |                                 |       |   |   |   |   |
| Income from  continuing operations                                                 |       | $                                     | 0.44       |                                 | $          | 0.42 |   | $ | 1.19 |   | $ | 1.12 |   |
| Discontinued  operations                                                           |       | 0.02                                  |       | 0.02                                 |       | 0.02 |   | 0.02 |   |
| Net income                                                                         |       | $                                     | 0.46       |                                 | $          | 0.44 |   | $ | 1.21 |   | $ | 1.14 |   |

 

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**Note 11 – Variable Interest Entities.**

 

In January 2003, the FASB issued FASB Interpretation No. 46,“Consolidation of Variable Interest Entities,” which was later revised inDecember 2003 (FIN 46R) and effective March 31, 2004 for the company.  FIN 46(R) expands existing accountingguidance about when a company should include in its consolidated financialstatements the assets, liabilities, and activities of another entity.  In general, FIN 46(R) requires a variableinterest entity (VIE), as defined by FIN 46(R), to be consolidated by itsprimary beneficiary.  The primarybeneficiary is defined as the company that will absorb a majority of the VIE’sexpected losses or residual returns if they occur.

 

We have evaluated under FIN 46(R) our consolidated subsidiaries aslisted in Exhibit 21 of the Form 10-K for the year ended June 30, 2004, all ofour affiliates as listed in Note 4 of the same Form 10-K, and both Wellspringand Gabriel, Roeder, Smith & Company (“GRS”), and believe that our accountingand disclosure is in compliance with the pronouncement.

 

Investment in Affiliates consists of equity investments in threeentities, Watson Wyatt Holdings (Europe) Limited (WWHE), WWLLP and PCIC, eachof which is accounted for under the equity method.  The company evaluated each of these entitiesbased on FIN 46(R)’s criteria in order to determine the applicability of FIN46(R).

 

Since the company is not obligated to absorb a majority of expectedlosses or residual returns in the entities it determined to be variableinterest entities, the company is not required to consolidate theseentities.  Therefore, the adoption of FIN46(R) had no effect on the company.

 

On April 1, 1995, the company transferred its United Kingdom (“U.K.”)operations to WWLLP, an actuarial partnership based in the U.K., and received a20 percent interest in the working capital of WWLLP and a 10 percent interestin a defined profit pool of WWLLP.  Thecompany also transferred its Continental European operations to WWHE as anewly-formed holding company, jointly owned and controlled by the company andWWLLP, in exchange for 50.1 percent of its shares. Effective July 1, 1998, thecompany sold one-half of its investment in WWHE to WWLLP.  WWHE is now jointly owned and controlled bythe company (25 percent) and WWLLP (75 percent).  While Watson Wyatt & Company, WWLLP, andWWHE remain separate legal entities, the companies have marketed their servicesglobally under the Watson Wyatt Worldwide brand, sharing resources,technologies, processes and business referrals. Management believes that the company’s maximum financial statementexposure to loss is limited to the carrying value of the company’s investmentin WWHE of $7.6 million as of March 31, 2005. See Note 3 for additional information regarding the company’s potentialtransaction with WWLLP.

 

PCIC was organized in 1987 as a captive insurance company under thelaws of the State of Vermont.  PCICprovides professional liability insurance on a claims-made basis to WatsonWyatt and two other actuarial and management consulting firms, all of whichparticipate in the program as both policyholders and stockholders.  The company currently owns 34.8 percent ofPCIC.  Capital contributions to PCIC arerequired when approved by a majority of its stockholders.  Management believes that the company’smaximum financial statement exposure to loss is limited to the carrying valueof the company’s investment in PCIC of $5.9 million, combined with letters ofcredit totaling $4.9 million for which PCIC has been designated as beneficiary,for a total maximum exposure of $10.8 million.

 

**Note 12 – Comprehensive Income.**

 

Comprehensive income includes net income, changes in the additionalminimum pension liability resulting from translation adjustments and changes inthe cumulative translation adjustment gain or loss.  For the three months ended March 31, 2005,comprehensive income totaled $14.0 million, compared with $15.5 million for thethree months ended March 31, 2004.  Forthe nine months ended March 31, 2005, comprehensive income totaled $42.7million for the nine months ended March 31, 2005 and 2004.

 

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**Note 13 – Restricted Shares.**

 

In conjunction with our initial public offering in October 2000,we entered into agreements providing for additional transfer restrictions withmajor stockholders, executive officers and employee directors.  At each of the first four anniversaries ofour initial public offering, a portion of these shares became freelytransferable.  The final 1,665,400 Class Ashares became freely transferable in October, 2004.

 

**Note 14 – Guarantees.**

 

The company historically has provided guarantees on an infrequent basisto third parties in the ordinary course of business.  The guarantees described below are currentlyin effect and could require the company to make payments to third parties undercertain circumstances.

 

*Letters of Credit*.  The company has two outstanding letters ofcredit totaling $7.5 million under our existing credit facility to guaranteepayment to beneficiaries in the event that the company fails to meet itsfinancial obligations to these beneficiaries. One letter of credit for $2.6 million will expire in October 2006,while the second letter of credit for $4.9 million will remain outstanding aslong as we retain an ownership share of our affiliated captive insurancecompany, PCIC.  The estimated fair marketvalue of these letters of credit is nominal because they have never been used,and the company believes that future usage is remote.

 

*Affiliate Agreements*.  In 1995, we entered into an allianceagreement with R. Watson & Sons, a United Kingdom-based actuarial,benefits and human resources consulting partnership (now WWLLP - See Note 3 for additional information regardingthe company’s potential transaction with WWLLP), the predecessor ofwhich was founded in 1878.  Included inthe agreements between the company and WWLLP (the “Alliance Agreements”) arevarious indemnities and guarantees relating to the performance of the companyand its subsidiaries, some of which became part of WWHE, as to such matters astax liabilities, liabilities for prior acts or omissions arising from theoperation of the U.K. and European businesses prior to the alliance and failureto perform various obligations under the Alliance Agreements.  In addition, certain events, such as a saleof material parts of our business, could require the company to either purchasefrom or sell to WWLLP an interest in our European business and/or repurchasethe shares of the company’s stock currently held by WWLLP.  The company is unable to estimate an amountof any potential future payments under these contractual arrangements becausethe potential occurrence of any of the events to which the indemnities apply isentirely speculative, there is no history of payments and the dollar amount, ifany, would be dependent upon the nature of the event triggering such indemnity.Management believes that any potential for payment under such indemnities andguarantees should decline with the passage of time.  There are no provisions for recourse to thirdparties, nor are any assets held by any third parties that the company asguarantor can liquidate to recover amounts paid under such indemnities.

 

The company owns 25 percent of WWHE and WWLLP owns the remaining 75percent.  Additional capital for WWHE, ifrequired, may be provided by both owners based on their respective ownershipinterests.  If either the company orWWLLP does not provide its pro rata share of any additional capital invested inWWHE, that party’s respective ownership interest will be reduced accordingly.

 

In connection with the establishment of our alliance with Watson WyattLLP in 1995, the company terminated its then existing office space in Londonand a new lease was entered into by WWLLP that expires in 2015.  The company agreed to guarantee Watson WyattLLP’s performance under this new lease. Payments by Watson Wyatt LLP under the lease total £1.4 million (orapproximately $2.6 million based on the March 31, 2005, exchange rate) peryear.  The company also entered into twooption agreements with WWLLP with respect to the leased space.  One option agreement provides WWLLP with theright to require the company to accept a sublease of two floors of the leasedspace upon any termination of the alliance. The second option agreement provides WWLLP with the right to assign theentire lease to the company on or after December 25, 2009. If Watson WyattLLP were to exercise either of these options, the company would attempt tosublease the space at the then-current market rates.

 

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*Indemnification Agreements*.  The company has various agreements thatprovide that it may be obligated to indemnify the other party with respect tocertain matters.  Generally, theseindemnification clauses are included in contracts arising in the normal courseof business and in connection with the purchase and sale of certain businesses.  Although it is not possible to predict themaximum potential amount of future payments under these indemnificationagreements due to the conditional nature of the company’s obligations and theunique facts of each particular agreement, the company does not believe thatany potential liability that might arise from such indemnity provisions isprobable or material.  There are noprovisions for recourse to third parties, nor are any assets held by any thirdparties that any guarantor can liquidate to recover amounts paid under suchindemnities.

 

*Wellspring Leases*.  We continue to guarantee three leases foroffice premises for Wellspring Resources, LLC (“Wellspring”), the benefitsadministration outsourcing business that we exited from in fiscal year1998.  At March 31, 2005, minimumremaining payments guaranteed under these leases, which expire at various datesthrough 2007, total $13.2 million, excluding anticipated future subleaseincome.  See Note 16 for more informationregarding our obligation to guarantee Wellspring’s leases.

 

**Note 15 – Contingent Liabilities.**

 

From time to time, we are a party to variouslawsuits, arbitrations or mediations that arise in the ordinary course ofbusiness.  We have received subpoenas andrequests for information in connection with government investigations.  The matters reported on below involve themost significant pending or potential claims against us.

 

We reserve for contingent liabilities basedon Statement of Financial Accounting Standards No. 5, “Accounting forContingencies” (SFAS 5) when it is determined that a liability, inclusive ofdefense costs, is probable and reasonably estimable.

 

*Government Investigations:*

 

*SEC Examination of InvestmentAdvisers. *In December 2003, the Securities andExchange Commission (SEC) formally asked many of the major investmentconsulting firms, Watson Wyatt Investment Consulting (WWIC) among them, toprovide detailed information on their business structures and practices inorder to determine if conflicts of interest with money managers exist.  In March 2004, WWIC completed itsresponses to the SEC staff’s requests for information.  In May 2005, WWIC provided additionalinformation to SEC staff in response to comments made in connection with itsinquiry and undertook to amend its Form ADV to clarify the scope of itsAdvanced Investment Solutions service.

 

*Department of Justice AntitrustInvestigation. *In March 2004, the United StatesDepartment of Justice (DOJ) issued a Civil Investigative Demand (CID) to WatsonWyatt and other companies in the employee benefits industry.  On January 20, 2005, we received asupplementary CID.  The DOJ is seeking todetermine whether firms that have entered into agreements with their clientslimiting liability have done so in violation of U.S. antitrust laws. WatsonWyatt has been providing information to DOJ in response to the CIDs.

 

*New York State AttorneyGeneral*.  On December 17, 2004, the New York StateAttorney General issued a subpoena to Watson Wyatt seeking information about “override”and other insurance placement compensation.  Preliminary data indicate that such payments accounted for less than 0.2percent of Watson Wyatt’s revenue over the past four years.  Watson Wyatt has provided information to theNew York State Attorney General in response to the subpoena and will continueto cooperate in the investigation.

 

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*ProfessionalLiability Claims:*

 

*IronWorkers Local 25 et al. v. Watson Wyatt & Co. *On July 8, 2004, Watson Wyatt was served with an amended complaintfiled by a former client in the United States District Court for the EasternDistrict of Michigan.  The complaintalleged malpractice, breach of contract, and related claims in the performanceof actuarial consulting.  The complaintstated that the plaintiff’s pension fund is underfunded as a result of thealleged deficiencies in our work.  Inresponse to a discovery request, in January the plaintiffs disclosed thattheir minimum damage claim is $53.7 million. We have established a reserve in the amount of our professionalliability insurance self-retention for this case.

 

*SBC Holdings, Inc.. *On July 23, 2004, we received a demand letter from counsel for aclient alleging that errors in valuations for 2001 and subsequent yearsunderstated the liabilities of its pension plan and overstated its networth.  As a result, the client claimedit did not annuitize its defined benefit plan and redeemed its stock at aninflated price.  On April 15, 2005we filed a declaratory action in the U.S. District Court for the EasternDistrict of Michigan to compel arbitration of the matter.  On May 5, 2005, SBC filed an answer andcounterclaim to the declaratory judgment action, alleging damages in excess of$46 million.  At this time, we are unableto reasonably estimate the possibility of loss or range of possible loss.

 

*Client Demand Letter.*  On February 8, 2005,we received a demand letter from counsel for a client alleging failure toensure that the method for performing certain benefit calculations under thepension administration system developed by Watson Wyatt for the client wasconsistent with the method required under the client’s pension equity plan andthe summary plan description, and failure to advise the client of thediscrepancies between the plan documents and the pension system.  The demand letter claimed damages in excessof $13 million and also sought to hold the client’s outside ERISA counselresponsible for the damages.  On March 3,2005, we entered into a tolling agreement with the client and the client’sERISA counsel in order to pursue resolution of this matter throughmediation.  We have established a reserve in anon-material amount for this case.

 

*OtherMatters:*

 

*Wyatt Bode Grabner (GmbH)*.  The claim arising out of contracts relatingto a joint venture has been settled for €1.7 million (or approximately$2.2 million based on the March 31, 2005, exchange rate) as a result ofmediation.  This is not a professionalliability claim, and therefore it is not covered by our insurance.  The settlement amount has been reflected asan other non-operating expense in the third quarter of fiscal year 2005.

 

**Note 16 –Discontinued Operations.**

 

As discussed in Note 14, the company continues to guarantee threeleases for office premises for Wellspring. In accordance with the contractual arrangements pursuant to which WatsonWyatt divested its interest in Wellspring, Watson Wyatt agreed to share withState Street either costs or benefits arising from these facilities leased byWellspring.  Since one of the threeWellspring leases is currently sub-leased at rates in excess of the lease rate,the company is contractually entitled to a share of the benefit of the excesscash flow from the sub-leases.  Throughthe first nine months of fiscal year 2005, the company received sublease incomeof approximately $29,000 in excess of lease payments related to thisbusiness.  Since the second quarter offiscal year 2003, the leases have been generating positive cash flows of lessthan $0.1 million per fiscal year.  Thecompany’s current assessment is that the positive cash flow from the sub-leaseswill continue until they expire in December 2006.

 

During the third quarter of fiscal years 2004 and 2005, the Companyevaluated its accrual for the estimated remaining future obligations and costsrelated to the exit from Wellspring.  Theevaluations included an analysis of occupancy rates of Wellspring, along withan analysis of real estate market conditions in cities in which the leasesexist and an assessment of probable future sublease income for these leases.  As a result of the analysis performed, theCompany reduced its accrual during fiscal year

 

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2004 by $1.0 million and by $1.25 million during fiscal year 2005, lessthe associated income tax expenses.  Suchadjustments are reflected in the Consolidated Statement of Operations for thethird quarter of fiscal years 2004 and 2005 in the line “Adjustment to reduceestimated loss on disposal of discontinued operations.”  The remaining non-current liability of $1.75million represents management’s estimate of potential future cash outflowsrelated to guarantees associated with Wellspring leases.

 

**Note17 – Recent Accounting Pronouncements.**

** **

In January 2003, the Financial Accounting Standards Board (FASB)issued FASB Interpretation No. 46 (FIN 46), “Consolidation of VariableInterest Entities,” which clarifies the financial reporting guidance associatedwith the consolidation of another entity. In December 2003, the FASB revised and superceded FIN 46 with theissuance of FIN 46R in order to address certain implementation issues.  The company adopted FIN 46R effective March 31,2004 and has included appropriate disclosure in this Form 10-Q.  Adoption of FIN 46R has not resulted in achange in our accounting.  See Note 11 ofthe Consolidated Financial Statements for further information regarding theimpact of adopting FIN 46R.

 

Emerging Issues Task Force Issue 00-21, “Revenue Arrangements withMultiple Deliverables” (EITF 00-21), was effective for the company beginning July 1,2003.  There was no change in revenuerecognized in the current portfolio of client engagements due to our adoptionof EITF 00-21.

 

In December 2003,the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 104(SAB 104), “Revenue Recognition,” which supercedes Staff Accounting Bulletin No. 101(SAB 101), “Revenue Recognition in Financial Statements.”  SAB 104’s primary purpose is to rescindaccounting guidance contained in SAB 101 related to multiple element revenuearrangements, superceded as a result of the issuance of EITF 00-21.  While the wording of SAB 104 has changed toreflect the issuance of EITF 00-21, the revenue recognition principles of SAB101 remain largely unchanged by the issuance of SAB 104.  The issuance of SAB 104 has not had an effecton our revenue recognition policies as they are in accordance with SAB 104.

 

In December 2003, the Financial Accounting Standards Board (FASB)published revisions to Statement of Financial Accounting Standards No. 132,“Employers’ Disclosures about Pensions and Other Postretirement Benefits” (SFAS132).  SFAS 132 revisions retain theoriginal disclosures but require additional annual disclosures about assets,obligations, cash flows and interim disclosures about net periodic benefitcosts of defined benefit pension plans and other postretirement plans.   The statement was effective for fiscal yearsending after December 15, 2003.  Thecompany has adopted SFAS 132 as revised and included appropriate disclosure inthis Form 10-Q.

 

In May 2004, the Financial Accounting Standards Board issued FASBStaff Position (FSP) No. 106-2 “Accounting and Disclosure RequirementsRelated to the Medicare Prescription Drug Improvement and Modernization Act of2003” (the Act) (SFAS 106-2), which was effective as of the first quarterbeginning after June 15, 2004. The Act includes a prescription drugbenefit under Medicare Part D as well as a federal subsidy to sponsors ofretiree health care benefit plans that provide a benefit that is at leastactuarially equivalent (as defined in the Act) to Medicare Part D.  The adoption of SFAS 106-2 has not had amaterial effect on the financial condition or results of operations of thecompany.

 

In June 2004, the Emerging Issues Task Force (EITF) issued EITF 02-14****“Whether an Investor Should Apply the Equity Method ofAccounting to Investments Other Than Common Stock if the Investor Has theAbility to Exercise Significant Influence Over the Operating and FinancialPolicies of the Investee.”  This EITF indicatesthat an investor should only apply the equity method of accounting when it hasinvestments in either common stock or in-substance common stock of acorporation, provided that the investor has the ability to exercise significantinfluence over the operating and financial policies of the investee.  The issuance of EITF 02-14 has not had aneffect on our accounting for equity investments which has been in accordancewith EITF 02-14.

 

In December 2004, the Financial Accounting Standards Board (FASB)published revisions to Statement

 

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of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation” (SFAS 123R). SFAS 123R requires companies to account for share-based paymenttransactions with employees using a fair-value based method, therebyeliminating the disclosure-only provisions of SFAS 123.  SFAS 123R will be effective for publiccompanies for the first annual reporting period beginning after June 15,2005.  Effective July 1, 2005, thecompany will be required to apply the standard to all awards granted, modified,cancelled or repurchased after that date as well as the unvested portion ofprior awards.  SFAS 123R permits publiccompanies to adopt its requirements using one or two methods:

 

• A “modified prospective” method in which compensation cost isrecognized beginning with the effective date (a) based on the requirementsof SFAS 123R for all share-based payments granted after the effective date and (b) basedon the requirements of SFAS 123R for all awards granted to employees prior tothe effective date of SFAS 123R that remain unvested on the effective date.

 

• A “prospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under SFAS 123R for purposes of pro formadisclosures either (a) all prior periods presented or (b) priorinterim periods of the year of adoption.

 

The company does not expect that the adoptionwill have a material effect on its financial statements since the company hasnot issued stock options since fiscal year 2002 and does not expect to grantany further options under the Long-term Incentive Plan.  Also, compensation expense currentlyrecognized for restricted stock units is based on the market price of ourcommon stock at the date of grant.

 

In April 2005, the Securities and Exchange Commission (SEC) issuedStaff Accounting Bulletin No. 107, “Share-Based Payments” (SAB 107) inwhich the SEC expressed views regarding the interaction between SFAS123R andcertain SEC rules and regulations and provide the staff’s views regardingthe valuation of share-based payment arrangements for public companies.  Before adoption of SFAS 123R, the companyplans to evaluate the impact on our financial condition and results ofoperations.

 

On October 22, 2004, the American Jobs Creation Act (AJCA) wassigned into law.  The AJCA includes a one-time election to exclude 85percent of its foreign unrepatriated earnings in either fiscal year 2005 or2006.  The Company has started evaluating the effect of the repatriationprovision; however, the Company will not be able to complete the analysis untilafter Congress or Treasury provides additional guidance on key elements of theprovision.  As a result, it is currently not practical to estimate therange of income taxes associated with repatriation.

 

**Note 18 – Sale of U.S.-based Public SectorRetirement Business.**

 

In fiscal year 2002, we sold our U.S.-based public sector retirementbusiness to Gabriel, Roeder, Smith & Company (“GRS”).  The future consideration from the sale of theU.S.-based public sector retirement business is contingent upon the successfultransition of certain clients to GRS and upon their retention by GRS.

 

In accordance with the terms of thesale, GRS paid the company a $0.5 million contingent payment in the firstquarter of fiscal year 2004.  The amountof additional contractual cash payments over the upcoming two fiscal years isalso contingent upon the successful transition of certain clients to GRS andupon their retention by GRS.

 

**ITEM 2. MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF****OPERATIONS.**

 

**Overview**

 

Watson Wyatt & Company Holdings, including its subsidiaries,is a global human capital consulting firm. We help our clients enhance businessperformance by improving their ability to attract, retain and motivatequalified employees. We focus on delivering value-added consulting servicesthat help our

 

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clients anticipate, identify and capitalize on emerging opportunitiesin human capital management.  Weimplement this strategy through 3,700 associates in 61 offices located in 19countries.

 

As leading economies worldwide become more services-oriented, humancapital has become increasingly important to companies and other organizations.The heightened competition for skilled employees, unprecedented changes inworkforce demographics, regulatory changes related to compensation and retireebenefits and rising employee-related costs have increased the importance ofeffective human capital management. We help our clients address these issues bycombining our expertise in human capital management with consulting and technology,to improve the design and implementation of various human resources, or HR,programs, including compensation, retirement and health care plans.

 

**General**

 

We employed the following number of associates as of March 31,2005 and 2004:

 

| ** **                                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| Benefits Group                                            |       | 1,600    |       | 1,635    |       |
| Technology  Solutions Group                               |       | 300      |       | 330      |       |
| Human Capital  Group                                      |       | 165      |       | 150      |       |
| International                                             |       | 900      |       | 965      |       |
| Other (including  Data Services & Communication) |       | 510      |       | 575      |       |
| Corporate                                                 |       | 225      |       | 225      |       |
| Total                                                     |       | 3,700    |       | 3,880    |       |

 

**Principal Services**

 

We design, develop and implement HR strategies and programs through thefollowing closely-interrelated practice areas:

 
| **Benefits Group**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **Technology  Solutions Group**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | **Human  Capital Group**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •                  Retirement  plans, including pension, 401(k) and executive benefits plans

•                  Health  care, disability and other group benefit plans

•                  Investment  consulting services to pension plans

•                  Global  compensation, benefits, expatriate and HR practice strategy, implementation  and administration

•                  Actuarial  services

•                  Strategic  workforce planning |       | •                  Web-based  applications for health and welfare, pension and compensation administration

•                  Call  center strategy, design and tools

•                  Strategic,  research-based HR technology and service delivery consulting

•                  Targeted  online compensation and benefits statements, content management and call  center case management solutions |       | •                  Compensation  plans, including broad-based and executive compensation, stock and other  long-term incentive programs

•                  Strategies  to align workforce performance with business objectives

•                  Organization  effectiveness consulting, including talent management, through organization  and employee research

•                  Strategies  for attracting, retaining and motivating employees

•                  Performance  management |

 

Our clients include many of the world’s largest corporations as well asemerging growth companies, public institutions and nonprofit organizations.

 

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**International Operations**

 

Outside of North America, our consultants, working in Asia-Pacific andLatin America, operate on a geographic basis from 25 offices in 17 countriesand provide consulting services in the practice areas described above.

 

**Other**

** **

While we focus our consulting services in the areas described above,management believes that one of our primary strengths is our ability to drawupon consultants from our different practices to deliver integrated services tomeet the needs of our clients.

 

**Watson Wyatt Worldwide Alliance**

 

Recognizing our clients’ need for consulting services worldwide, in thelate 1970s we established operations throughout Europe by acquiring local firmsand opening new offices.  In 1995, inresponse to the rapidly increasing globalization of the world economy, we madea strategic decision to strengthen our European capabilities significantly andextend our global reach. We entered into an alliance with R. Watson &Sons (which subsequently became Watson Wyatt Partners, now Watson Wyatt LLP), aleading United Kingdom-based actuarial, benefits and human resources consultingpartnership founded in 1878. Since 1995, we have marketed our services globallyunder the Watson Wyatt Worldwide brand, sharing resources, technologies, processesand business referrals with Watson Wyatt LLP.

 

The Watson Wyatt Worldwide alliance maintains 88 offices in 31countries and employs over 5,800 associates. Watson Wyatt & CompanyHoldings operates 61 offices in 19 countries in North America, Latin Americaand Asia-Pacific. Watson Wyatt LLP operates 10 offices in the United Kingdomand Ireland, and also operates two offices engaged in the insurance andfinancial services business in the United States and India.  The alliance operates 15 offices in 10 continentalEuropean countries, principally through a jointly-owned holding company, WatsonWyatt Holdings (Europe) Limited.  WatsonWyatt & Company owns 25 percent of the holding company; Watson WyattLLP owns 75 percent.  See Note 3 for additional information regardingthe company’s potential transaction with WWLLP.

 

**ExecutiveOverview**

 

Watson Wyatt is a global provider of human capital consultingservices.  We provide services in threeprincipal practice areas: Benefits, Technology Solutions and Human Capitalconsulting, operating from 61 offices in 19 countries throughout North America,Asia-Pacific and Latin America.  We alsooperate through our affiliates in Europe: Watson Wyatt LLP – which conductsoperations in the United Kingdom and Ireland and in which we hold a 10 percentinterest in a defined distribution pool – and Watson Wyatt Holdings (Europe)Limited, a holding company through which we conduct Continental Europeanoperations.  We own 25 percent of WatsonWyatt Holdings (Europe) Limited and Watson Wyatt LLP owns the remaining 75percent.  We collectively market ourservices globally under the Watson Wyatt Worldwide brand, sharing resources,technologies, processes and business referrals with our alliance partners.

 

We design, develop and implement HR strategies and programs through thefollowing closely-interrelated practice areas:

 

*Benefits Group –*The BenefitsGroup, accounting for 61 percent of our total third quarter 2005 revenues, isthe foundation of our business. Retirement, the core of our Benefits business, is less impacted bydiscretionary spending reductions than our other segments, mainly due to therecurring nature of client relationships. Our corporate client retention rate within our target market hasremained very high, averaging over 95 percent over the past two years. Revenuefor our retirement practice is seasonal, with the third and fourth quarters ofeach fiscal year being the

 

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busier periods. Major revenue growth drivers in this practice include changes inregulations, particularly those affecting pension plans, leverage from otherpractices, an improving economy, increased global demand and increased marketshare.  Revenue from the Benefits Groupfor the third quarter of fiscal year 2005 increased $4.5 million or 4 percentdue to the retirement and healthcare practice, as well as additional projectwork for new clients.

 

*Technology Solutions Group –*OurTechnology Solutions Group, accounting for 9 percent of our total third quarterfiscal year 2005 revenues, provides information technology services to ourcustomers.  In fiscal year 2004, delaysin discretionary technology spending resulted in lower revenues, but thebacklog of work, which is a fairly accurate indicator of future revenues, hasimproved over the past three quarters. Revenue from our Technology Solutions Group decreased $3.2 million or 16percent during the third quarter of fiscal year 2005.  However, this decrease includes time spentcustomizing administration systems. Related revenue will be recognized as these systems go into service.

 

*Human Capital Group –*Our**Human Capital Group, accounting for 8 percent of our totalthird quarter fiscal year 2005 revenues, generally encompasses short-termprojects and as a result is most sensitive to economic conditions.  Growth slowed significantly in the secondhalf of fiscal year 2001 and continued to contract in fiscal years 2002, 2003and 2004.  However, revenue grew by 26percent over the prior-year third quarter.  This increase reflects continued strong demandfor executive compensation work and for project work related to strategicrewards.

* *

In the short term, our revenues are driven by many factors includingthe general state of the economy and the resulting level of discretionaryspending by our clients, the ability of our consultants to attract new clientsor cross-sell to existing clients, and the impact of new regulations in thelegal and accounting fields that most recently increased demand for ourexecutive compensation and benefits practices.

 

The human resources consulting industry, although highly fragmented, ishighly competitive and is comprised of major human capital consulting firms,specialist firms, consulting arms of accounting firms and informationtechnology consulting firms.  Our overallrevenues have been flat over the past three years, and it is clear that thecompetitive environment will remain challenging until the economy fullyrebounds and companies are committed to spending on human capitalprojects.  To mitigate the pressuresfaced by the economy, we have successfully managed costs throughout the companyby leveraging our variable compensation cost structure, initiating targeted jobreductions and controlling discretionary spending.  We believe we are well-positioned to takeadvantage of an improvement in the overall economy.

 

In the long term, we believe that benefits spending will continue to bethe largest component of U.S. corporate spending.  We believe that the aging workforce, the projectedshortfall in workers over the next decade and changing regulations willtranslate into opportunities for us.  Webelieve that the company’s financial results will depend in large part upon howwell we succeed in deepening our existing client relationships through thoughtleadership and focus on cross-practice solutions, actively pursuing new clientsin our target markets, cross selling and strategic acquisitions.  We believe that the highly fragmentedindustry in which we operate represents tremendous growth opportunities for us,because we offer a unique combination of benefits and human capital consultingas well as strategic technology solutions.

 

**Financial Statement Overview**

** **

Watson Wyatt’s fiscal year ends June 30. The financial statementscontained in this quarterly report reflect Consolidated Balance Sheets as ofthe end of the third quarter of fiscal year 2005 (March 31, 2005) and asof the end of fiscal year 2004 (June 30, 2004), Consolidated Statements ofOperations for the three and nine-month periods ended March 31, 2005 and2004, Consolidated Statements of Cash Flows for the nine-month periods ended March 31,2005 and 2004 and a Consolidated Statement of Changes in Stockholders’ Equityfor the nine-month period ended March 31, 2005.

 

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We operate globally as an alliance with our affiliates.  However, the revenues and operating expensesin the Consolidated Statements of Operations reflect solely the results ofoperations of Watson Wyatt & Company Holdings. Our share of theresults of our affiliates, recorded using the equity method of accounting, isreflected in the “Income from affiliates” line. Our affiliates are Watson WyattLLP, Watson Wyatt Holdings (Europe) Limited and PCIC, our captive insurancecompany.

 

We derive substantially all of our revenue from fees for consultingservices, which generally are billed based on time and materials or on afixed-fee basis.  Clients are typicallyinvoiced on a monthly basis with revenue generally recognized as services areperformed. For the most recent three fiscal years, revenue from U.S. consultingoperations has comprised approximately 80 percent of consolidated revenue. Nosingle client accounted for more than 4 percent of our consolidated revenue forany of the most recent three fiscal years.

 

In delivering consulting services, our principal direct expenses relateto compensation of personnel. Salaries and employee benefits are comprised ofwages paid to associates, related taxes, benefit expenses such as pension,medical and insurance costs and fiscal year-end incentive bonuses.

 

Professional and subcontracted services represent fees paid to externalservice providers for employment, marketing and other services.  For the most recent three fiscal years,approximately 60 to 70 percent of these professional and subcontracted serviceswere directly incurred on behalf of our clients and were reimbursed by them,with such reimbursements being included in revenue.

 

Occupancy, communications and other expenses represent expenses forrent, utilities, supplies and telephone to operate office locations as well asnon-client-reimbursed travel by associates, publications and professionaldevelopment. This line item also includes miscellaneous expenses, includinggains and losses on foreign currency transactions.

 

General and administrative expenses include the operational costs andprofessional fees paid by corporate management, general counsel, marketing,human resources, finance, research and technology support.

 

**Critical Accounting Policies andEstimates**

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, disclosures of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Our estimates, judgments and assumptions are continually evaluated basedon available information and experience. Because of the use of estimates inherent in the financial reportingprocess, actual results could differ from those estimates.  The accounting policies discussed below arecritical to the understanding of the use of estimates in the company’sfinancial statements.

 

***RevenueRecognition***

* *

Revenue includes fees primarily generated from consulting servicesprovided in the areas of employee benefits, human capital strategies andrelated technology solutions.  Werecognize revenue from these consulting engagements when hours are worked,either on a time-and-materials basis or on a fixed-fee basis, depending on theterms and conditions defined at the inception of an engagement with aclient.  The terms of our contracts with clients arefixed and determinable and can only be changed based on agreement of bothparties.  Individual consultants’ billingrates are principally based on a multiple of salary and compensation costs.

 

Revenue for fixed-fee arrangements, which span multiple months, isbased upon the percentage of completion method.* *The company typically has threetypes of fixed-fee arrangements:  annualrecurring projects, projects of a short duration, and non-recurring systemprojects.  Annual recurring projects andthe projects of short duration are typically straightforward and highlypredictable in nature.  As a result,

 

25

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the project manager and financial staff are able to identify, as theproject status is reviewed and bills are prepared monthly, the rare occasionwhen cost overruns could lead to the recording of a loss accrual.

 

Our non-recurring system projects are typically found in our TechnologySolutions Group.  They tend to be morecomplex, to incur changes in scope as the project progresses and to belonger-term projects.  We evaluate, atleast quarterly, and more often as needed, project managers’ estimates tocomplete to assure that the projects’ current status is properly accounted for.  Contracts are written such that, in the unexpected event that thecustomer terminates a contract, the company gets paid for work performedthrough termination.

 

Revenue recognition for fixed-fee engagements is affected by a numberof factors that change the estimated amount of work required to complete theproject such as changes in scope, the staffing on the engagement and/or thelevel of client participation.  Theperiodic engagement evaluations require us to make judgments and estimatesregarding the overall profitability and stage of project completion that, inturn, affect how we recognize revenue. The company recognizes a loss on an engagement when estimated revenue tobe received for that engagement is less than the total estimated direct andindirect costs associated with the engagement. Losses are recognized in the period in which the loss becomes probableand the amount of the loss is reasonably estimable.  The company has experienced certain costs in excess ofestimates from time to time.  Managementbelieves that it is rare, however, for these excess costs to result in overallproject losses.

 

The company hasdeveloped various software programs and technologies that we provide to clientsin connection with consulting services. In most instances, such software is hosted and maintained by the companyand ownership of the technology and rights to the related code remain with thecompany.  Software developed to beutilized in providing services to a client, but for which the client does nothave the contractual right to take possession, is capitalized in accordancewith the AICPA’s Statement of Position 98-1 “Accounting for the Costs ofComputer Software Developed or Obtained for Internal Use.”  Revenue associated with the related contract,together with amortization of the related capitalized software, is recognizedover the service period.  As a result,and in accordance with EITF 00-3, we do not recognize revenue during thecustomization phase of an engagement.

 

Revenue recognizedin excess of billings is recorded as unbilled accounts receivable.  Cash collections and invoices generated inexcess of revenue recognized are recorded as deferred revenue until the revenuerecognition criteria are met.  Clientreimbursable expenses, including those relating to travel, other out-of-pocketexpenses and any third-party costs, are included in revenue, and an equivalentamount of reimbursable expenses are included in professional and subcontractedservices as a cost of revenue.

 

In December 2003, the Securities and Exchange Commission (SEC)issued Staff Accounting Bulletin No. 104 (SAB 104), “Revenue Recognition,”which supercedes Staff Accounting Bulletin No. 101 (SAB 101), “RevenueRecognition in Financial Statements.” The primary purpose of SAB 104 is to rescind accounting guidancecontained in SAB 101 related to multiple element revenue arrangements,superceded as a result of the issuance of EITF 00-21.  While the wording of SAB 104 has changed toreflect the issuance of EITF 00-21, the revenue recognition principles of SAB101 remain largely unchanged by the issuance of SAB 104.  The issuance of SAB 104 has not had an effecton our revenue recognition policies as they are in accordance with SAB 104.

 

***Valuationof Billed and Unbilled Receivables from Clients***

 

We maintain allowances for doubtful accounts to reflect estimatedlosses resulting from our clients’ failure to pay for our services after theservices have been rendered, including allowances when customer disputes mayexist.  The related provision isgenerally recorded as a reduction to revenue. Our allowance policy is based on the aging of our billed and unbilledclient receivables and has been developed based on our write-off history.  Facts and circumstances such as the averagelength of time the receivables are past due, general market conditions, currenteconomic trends and our clients’ ability to pay may cause fluctuations in ourvaluation of billed and unbilled receivables.

 

26

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***DiscretionaryCompensation***

 

The company’s compensation program includes a discretionary annualbonus that is determined by management and paid once per fiscal year in theform of cash and/or deferred stock units after the company’s annual operatingresults are finalized.

 

An estimated annual bonus amount is initially developed at thebeginning of each fiscal year in conjunction with our budgeting process.  Quarterly, estimated annual operatingperformance is reviewed by the company and the discretionary annual bonusamount is then adjusted, if necessary, by management to reflect changes in theforecast of pre-bonus profitability for the year.   After determining the estimated annual bonusamount, the bonus is then allocated to remaining quarterly reporting periods asa constant percentage of estimated pre-bonus profitability.  In those quarters where the estimated annualbonus level changes, the remaining estimated annual bonus is accrued over theremaining quarters as a constant percentage of estimated future pre-bonusprofitability.  Annual bonus levels mayvary from current expectations as a result of changes in the company’s forecastof pre-bonus profitability and competitive employment market conditions.

 

As a result of a $5.6 million pre-tax non-operating gain recorded inthe first quarter of fiscal year 2004, the company recorded a $5.6 millionsupplemental bonus accrual in the first quarter of fiscal year 2004 that wasincremental to the company’s fiscal year end bonus.  This supplemental bonus amount, which waspaid out in September 2004 during the regular bonus cycle, is included insalaries and employee benefits. Management does not expect this supplemental bonus to recur.

 

***IncomeTaxes***

 

Determining the consolidated provision for income tax expense, deferredtax assets and liabilities and the related valuation allowance involvesjudgment.  As a global company withoffices in 18 countries, we are required to calculate and provide for estimatedincome tax liabilities for each of the tax jurisdictions in which we operate.  This process involves estimating current taxobligations and exposures in each jurisdiction as well as making judgmentsregarding the future recoverability of deferred tax assets.  Tax costs can involve complex issues and mayrequire an extended period to resolve. Changes in the geographic mix or estimated level of annual pre-taxincome, limitations on the use of the company’s foreign subsidiary losses,changes in tax laws and changes resulting from tax audits can all affect theoverall effective income tax rate which, in turn, impacts the overall level ofincome tax expense and net income.

 

***PensionAssumptions***

 

We sponsor both qualified and non-qualified, non-contributory definedbenefit pension plans covering substantially all of our associates.  Under our principal plans (United States,Canada, Hong Kong and the United Kingdom), benefits are based on our associates’years of service and compensation during the five highest-paid consecutiveyears of service.

 

Determination of our obligations and annual expense under the plans isbased on a number of assumptions that, given the longevity of the plans, arelong-term in focus.  A change in one or acombination of these assumptions could have a material impact on our pensionbenefit obligation and related expense. For this reason, management employs a long-term view so that assumptionsdo not change frequently in response to short-term volatility in theeconomy.  Any difference between actualand assumed results is amortized into our pension expense over the averageremaining service period of participating employees.  We consider several factors prior to thestart of each fiscal year when determining the appropriate annual assumptions,including economic forecasts, historical trends, portfolio composition and peercomparisons.

 

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The following assumptions were used at the end of the past three fiscalyears in the valuation of our U.S. plan, which comprises the majority of theprincipal defined benefit pension plans:

 
| ** **                                   | ** ** | **Year Ended June 30** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| Discount rate                                |       | 6.25                        | %          | 6.00 | % | 7.25 | % |
| Expected long-term  rate of return on assets |       | 9.00                        | %          | 9.00 | % | 10.00 | % |
| Rate of increase  in compensation levels     |       | 3.34                        | %          | 3.09 | % | 4.34 | % |

 

The 6.25 percent discount rate assumption used at the end of fiscalyear 2004 represents a 25 basis point increase from the 6.00 percent discountrate used at the end of fiscal year 2003 and represents a 100 basis pointreduction from the 7.25 percent discount rate used at the end of fiscal year2002.  The company’s 2004 discount rateassumption was determined by matching future pension benefit payments withexpected future AA bond yields for the same periods.

 

The expected long-term rate of return on assets assumption remained at9.00 percent per annum for fiscal year 2004. The rate of return was lowered infiscal year 2003 to 9.00 percent from 10.00 percent at the end of fiscal year2002.  Selection of the return assumptionat 9.00 percent per annum was supported by an analysis performed by the companyof the weighted average yield expected to be achieved with the anticipatedmakeup of investments.  The investmentmakeup is heavily weighted towards equities. The return on assets through the first nine months of fiscal year 2005has been 4.8 percent, compared to a return of 14.0 percent in the first ninemonths of fiscal year 2004.

 

The following information illustrates thesensitivity to a change in certain assumptions for the U. S. pension plans:

 

| **Change  in Assumption**                             | ** ** | **Effect on FY2005  Pre-Tax Pension Expense** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                            | ** ** | ** **                                    | ** ** |
| 25 basis point  decrease in discount rate             |       | +$2.8 million                                 |       |
|                                                  |       |                                          |       |
| 25 basis point  increase in discount rate             |       | -$2.6 million                                 |       |
|                                                  |       |                                          |       |
| 25 basis point  decrease in expected return on assets |       | +$1.0 million                                 |       |
|                                                  |       |                                          |       |
| 25 basis point  increase in expected return on assets |       | -$1.0 million                                 |       |

 

The above sensitivities reflect the impact ofchanging one assumption at a time. It should be noted that economic factors andconditions often affect multiple assumptions simultaneously and the effects ofchanges in key assumptions are not necessarily linear.

 

The company’s U.S. Other PostretirementEmployee Benefits plan is relatively insensitive to discount rate changes dueto the plan provisions that have been established to control costs and as suchno sensitivity results are shown in this display.

 

***IncurredBut Not Reported Claims***

 

Thecompany uses actuarial assumptions to estimate and record a liability forincurred but not reported (IBNR) professional liability claims and engaged anexternal actuarial firm to assist in the calculation of these estimates.  Our estimated IBNR liability is based onlong-term trends and averages, and considers a number of factors, includingchanges in claim reporting patterns, claim settlement patterns, judicialdecisions, and legislation and economic decisions, but excludes the effect ofclaims data for large cases due to the insufficiency of actual experience withsuch cases.  Management does notcurrently expect significant fluctuations in the IBNR liability, based on thecompany’s historical claims experience.

 

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However,our estimated IBNR liability will fluctuate if claims experience changes overtime.

 

**Results of Operations.**

 

The table below sets forth Consolidated Statements of Operations datafor continuing operations as a percentage of revenue for the periods indicated:

 
| ** **                                             | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                             | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Revenue                                                |       | 100.0                                 | %          | 100.0                                | %          | 100.0 | % | 100.0 | % |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Costs of  providing services:                          |       |                                  |       |                                 |       |   |   |   |   |
| Salaries and  employee benefits                        |       | 54.1                                  |       | 55.5                                 |       | 54.6 |   | 57.4 |   |
| Professional and  subcontracted services               |       | 7.4                                   |       | 6.4                                  |       | 6.9 |   | 6.4 |   |
| Occupancy,  communications and other                   |       | 14.5                                  |       | 15.7                                 |       | 14.7 |   | 14.9 |   |
| General and administrative  expenses                   |       | 10.0                                  |       | 8.5                                  |       | 10.2 |   | 8.8 |   |
| Depreciation and  amortization                         |       | 2.8                                   |       | 2.3                                  |       | 2.7 |   | 2.7 |   |
|                                                   |       | 88.8                                  |       | 88.4                                 |       | 89.1 |   | 90.2 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Income from  operations                                |       | 11.2                                  |       | 11.6                                 |       | 10.9 |   | 9.8 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Income from  affiliates                                |       | 0.5                                   |       | 1.3                                  |       | 1.0 |   | 0.9 |   |
| Interest income,  net                                  |       | 0.3                                   |       | —                               |       | 0.3 |   | 0.1 |   |
| Other non-operating  income                            |       | (0.6                                  | )          | —                               |       | (0.2 | ) | 1.2 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Income from  continuing operations before income taxes |       | 11.4                                  |       | 12.9                                 |       | 12.0 |   | 12.0 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Provision for  income taxes                            |       | 3.8                                   |       | 5.2                                  |       | 4.7 |   | 4.9 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Income from  continuing operations                     |       | 7.6                                   | %          | 7.7                                  | %          | 7.3 | % | 7.1 | % |

 

**Three and Nine Months Ended March 31, 2005,Compared to the Three and Nine Months Ended March 31, 2004**

 

***Revenue*.**

 

Revenue from operations for the third quarter of fiscal year 2005 was$187.6 million, an increase of 4 percent from $180.7 million in the priorperiod.

 

The Benefits Group increased revenue $4.5 million or 4 percent duringthe third quarter of fiscal year 2005 due to the retirement and healthcare practices,as well as additional project work for existing clients.  Revenue from our Human Capital Groupincreased $3.0 million or 26 percent during the third quarter of fiscal year2005, reflecting continued strong demand for executive compensation work andfor project work related to strategic rewards. Our international segment finished the quarter with revenue growth of$0.1 million, as a result of improving economic conditions, particularly in ourJapan and Taiwan offices.  However,revenue decreased 2 percent on a constant currency basis.  Revenue from our Technology Solutions Groupdecreased $3.2 million or 16 percent, reflecting, in part, time spentcustomizing administration systems.  Inaccordance with EITF 00-3, “Application of AICPA Statement of Position 97-2 toArrangements That Include the Right to Use Software Stored on Another Entity’sHardware” (EITF 00-3), revenue for certain contracts for which the companyprovides a hosting arrangement is recognized over the hosting period.  Revenue for other practice areas in NorthAmerica decreased $0.5 million or 5 percent during the third quarter of fiscalyear 2005.

 

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Revenue from operations for the first nine months of fiscal year 2005was $538.8 million, an increase of 3 percent from $522.0 million in the priorperiod.

 

The Benefits Group increased revenue $6.9 million or 2 percent duringthe first nine months of fiscal year 2005 due to the retirement and healthcarepractices, as well as additional project work for existing clients.  Revenue from our Human Capital Groupincreased $8.6 million or 26 percent during the first nine months of fiscalyear 2005, reflecting continued strong demand for executive compensation workand project work related to strategic rewards. Our international segment finished the nine months with reported revenuegrowth of $5.1 million or 8 percent, with growth on a constant currency basisof 5% resulting from improving economic conditions, particularly in our Japanand Taiwan offices.  Revenue from ourTechnology Solutions Group decreased $8.6 million or 14 percent, reflecting, inpart, time spent customizing administration systems.  In accordance with EITF 00-3, revenue forcertain contracts for which the company provides a hosting arrangement isrecognized over the hosting period. Revenue for other practice areas in North America decreased $0.4 millionduring the first nine months of fiscal year 2005.

 

***Salariesand Employee Benefits*.**

 

Salaries and employee benefit expenses for the third quarter of fiscalyear 2005 were $101.7 million, compared to $100.2 million for the third quarterof fiscal year 2004, an increase of $1.5 million or 1 percent.  The increase was mainly due to higher salariesof $2.0 million, higher profit sharing expenses of $1.5 million, which reflectsthe re-instatement of the company’s 401(k) match, higher benefits of $1.0million and a higher accrual for discretionary compensation of $1.1 million,partially offset by the capitalization of time spent customizing in-houseadministration systems of $2.1 million, in accordance with AICPA’s Statement ofPosition 98-1, “Accounting for the Costs of Computer Software Developed orObtained for Internal Use”, and lower pension and post-retirement costs of $1.7million.  As a percentage of revenue,salaries and employee benefits decreased from 55.5 percent to 54.2 percent.

 

Salaries and employee benefit expenses for the first nine months offiscal year 2005 were $294.0 million, compared to $299.7 million for the firstnine months of fiscal year 2004, a decrease of $5.7 million or 2 percent.  Salaries and employee benefit expenses forthe first nine months of fiscal year 2004 include severance charges of $3.2million related to job reductions in North America and the $5.6 millionsupplemental bonus related to PCIC.  Theincrease, exclusive of these charges, was mainly due to a higher accrual fordiscretionary compensation of $8.1 million, higher salaries of $3.7 million,higher profit sharing expenses of $2.5 million, which reflects there-instatement of the company’s 401(k) match and higher benefits of $1.1million, partially offset by the capitalization of time spent customizingin-house administration systems of $7.0 million, in accordance with AICPA’sStatement of Position 98-1, “Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use”, and lower pension and post-retirementcosts of $5.2 million.  As a percentageof revenue, salaries and employee benefits decreased from 57.4 percent to 54.6percent.

 

***Professionaland Subcontracted Services*.**

 

Professional and subcontracted services used in consulting operationsfor the third quarter of fiscal year 2005 were $13.8 million, compared to $11.6million for the third quarter of fiscal year 2004, an increase of $2.2 millionor 19 percent.  As a percentage ofrevenue, professional and subcontracted services increased from 6.4 percent to7.4 percent.

 

Professional and subcontracted services used in consulting operationsfor the first nine months of fiscal year 2005 were $37.3 million, compared to$33.3 million for the first nine months of fiscal year 2004, an increase of$4.0 million or 12 percent.  For bothperiods, the increase is attributable to reimbursable expenses incurred onbehalf of clients.  As a percentage ofrevenue, professional and subcontracted services increased from 6.4 percent to6.9 percent.

 

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***Occupancy,Communications and Other.***

 

Occupancy, communications and other expenses for the third quarter offiscal year 2005 were $27.1 million compared to $28.4 million for the thirdquarter of fiscal year 2004, a decrease of $1.3 million or 5 percent.  The decrease is mainly attributable to adecrease in rent and utilities.  As apercentage of revenue, occupancy, communications and other decreased from 15.7percent to 14.5 percent.

 

Occupancy, communications and other expenses for the first nine monthsof fiscal year 2005 were $79.1 million, compared to $77.9 million for the firstnine months of fiscal year 2004, an increase of $1.2 million or 2 percent.  The increase is mainly due to miscellaneousexpenses, including travel, promotional expenses, office supplies, repairs andmaintenance and dues and entertainment, partially offset by a reduction in rentand utilities.  As a percentage ofrevenue, occupancy, communications and other decreased from 14.9 percent to14.7 percent.

 

***Generaland Administrative Expenses.***

 

General and administrative expenses for the third quarter of fiscalyear 2005 were $18.8 million, compared to $15.3 million for the third quarterof fiscal year 2004, an increase of $3.5 million or 23 percent.  As a percentage of revenue, general andadministrative expenses increased from 8.5 percent to 10.0 percent.

 

General and administrative expenses for the first nine months of fiscalyear 2005 were $55.1 million, compared to $45.9 million for the first ninemonths of fiscal year 2004, an increase of $9.2 million or 20 percent.  The increase in both periods is mainly due tohigher insurance costs, increased legal expenses and expenses associated withcompliance with the Sarbanes-Oxley Act of 2002 and related SEC rules.  As a percentage of revenue, general andadministrative expenses increased from 8.8 percent to 10.2 percent.

 

***Depreciationand Amortization.***

** **

Depreciation and amortization for the third quarter of fiscal year 2005was $5.2 million, compared to $4.1 million for the third quarter of fiscal year2005, an increase of $1.1 million or 27 percent.  As a percentage of revenue, depreciation andamortization increased from 2.3 percent to 2.8 percent.

 

Depreciation and amortization for the first nine months of fiscal year2005 was $14.7 million, compared to $14.1 million for the first nine months offiscal year 2004, an increase of $0.6 million or 4 percent.  As a percentage of revenue, depreciation andamortization remained at 2.7 percent.

 

***IncomeFrom Affiliates.***

** **

Income from affiliates for the third quarter of fiscal year 2005 was$0.9 million, compared to $2.3 million for the third quarter of fiscal year2004, a decrease of $1.4 million.  Thedecrease was due to our share of lower operating results of PCIC of $1.8million, partially offset by higher equity income in WWHE of $0.3 million andhigher equity income in WWLLP of $0.2 million.

 

Income from affiliates for the first nine months of fiscal year 2005was $5.8 million, compared to $5.1 million for the first nine months of fiscalyear 2004, an increase of $0.7 million or 14 percent.   The increase was due to our share of higheroperating results of Watson Wyatt LLP of $1.3 million, increased equity incomein WWHE of $0.6 million, partially offset by lower equity income in PCIC of$1.1 million.

 

***InterestIncome, Net.***

 

Interest income, net for the third quarter of fiscal year 2005 was $0.6million, compared to $20,000 for the third quarter of fiscal year 2004.  Interest income, net for the first ninemonths of fiscal year 2005 was $1.5 million, compared to $0.4 million for thefirst nine months of fiscal year 2004, an increase of $1.1 million.  The increase in both periods was due to ahigher rate earned on our investments and lower expenses due to the company’snew credit agreement.

 

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***OtherNon-operating Expenses.***

 

In the third quarter of fiscal year2005, the company recognized a settlement cost of $2.2 million related to theclaim by WyattBode Grabner discussed in Note 15, recorded a $1.4 million gainassociated with the forward contractdiscussed in Note 2 and spent $0.4 million to external advisors for strategicconsulting.  The non-operating gain forthe first nine months of fiscal year 2004 includes a $5.6 million gain thecompany recorded in the first quarter of fiscal year 2004 related to PCIC.  See Note 6 of the Notes to the ConsolidatedFinancial Statements for more information about this non-operating gain.  During the first nine months of fiscal year2004, the company also received cash payments of $0.6 million in connectionwith the fiscal year 2002 sale of our U.S.-based public retirement business toGRS.  All payments received in connectionwith this sale were contingent upon the successful transition of certainclients to GRS and upon their retention by GRS.

 

***Provisionfor Income Taxes.***

 

Provision for income taxes for the first nine months of fiscal year2005 was $25.5 million, compared to $25.6 million for the first nine months offiscal year 2004. Our effective tax rate was 39.5 percent for the first ninemonths of fiscal year 2005 and 40.7 percent for the first nine months of fiscalyear 2004.  The tax rate decrease is dueto a tax benefit in the third quarter related to the reversal of income taxcontingency accruals due to the lapse of the statutory periods for assessingtax for 2001, offset by an increase related to tax, net of foreign tax credits,on dividends from foreign subsidiaries. We record a tax benefit on foreign net operating loss carryovers andforeign deferred expenses only if it is more likely than not that a benefit willbe realized.

 

***IncomeFrom Continuing Operations.***

 

Income from continuing operations for the third quarter of fiscal year2005 was $14.3 million, compared to $14.0 million for the third quarter offiscal year 2004, an increase of $0.3 million or 2 percent.  As a percentage of revenue, income fromcontinuing operations decreased from 7.7 percent to 7.6 percent.  Income from continuing operations for thefirst nine months of fiscal year 2005 was $39.1 million, compared to $37.3million for the first nine months of fiscal year 2004, an increase of $1.8million or 3 percent.  As a percentage ofrevenue, income from continuing operations increased from 7.1 percent to 7.3percent.

 

***EarningsPer Share, Income From Continuing Operations.***

 

Diluted earnings per share, income from continuing operations for thethird quarter of fiscal year 2005 was $0.44, compared to $0.42 in fiscal year2004.  Diluted earnings per share, incomefrom continuing operations for the first nine months of fiscal year 2005 was$1.19, compared to $1.12 for the first nine months of fiscal year 2004.

 

***DiscontinuedOperations.***

 

The company received sublease income through the first nine months offiscal year 2005 of approximately $29,000 in excess of lease payments relatedto Wellspring.

 

Also, discontinued operations for the third quarter of fiscal years2005 and 2004 reflect the reduction of the company’s accrual for the estimatedremaining future obligations and costs related to the exit from Wellspring by$1.25 million and $1.0 million, respectively, less the associated income taxexpenses.  See Note 16 of the Notes tothe Consolidated Financial Statements for more information related toWellspring.

 

**Liquidity and Capital Resources**

 

Our cash and cash equivalents at March 31, 2005, totaled $126.5million, compared to $136.9 million at June 30, 2004.  The decrease in cash from June 30, 2004to March 31, 2005, follows a typical pattern of

 

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cash flow for the company that is attributable to the payment ofpreviously accrued discretionary compensation. During the first nine months of fiscal year 2005, we paid $34.8 millionin previously accrued discretionary compensation, a $10 million pensioncontribution, $38.9 million in corporate taxes, $4.2 million for the repurchaseof the company’s stock, $20.1 million in capital expenditures and $7.3 millionin dividends.  These outflows of cashwere funded by cash flow from current consulting operations and from currentlyavailable resources.  Consistent with thecompany’s liquidity position, management considers various alternativestrategic uses of cash reserves including acquisitions, dividends and stockbuybacks, or any combination of these options.

 

Our non U.S. operations do not materially impact liquidity or capitalresources as they are substantially self-sufficient for their working capitalneeds.  At March 31, 2005, $30.1million of the total cash balance of $126.5 million was held outside of NorthAmerica, which we have the ability to utilize, if necessary. There are nosignificant repatriation restrictions other than local or U.S. taxes associatedwith repatriation.

 

***CashFrom Operating Activities.***

 

Cash from operating activities**for the firstnine months of fiscal year 2005 was $2.8 million, compared to cash fromoperating activities of $24.7 million for the first nine months of fiscal year2004.  The decrease is principallyattributable to increased accounts receivable, taxes and the timing ofinsurance payments, offset by a reduction of our pension liability due to ourpension contribution.

 

The allowance for doubtful accounts increased $1.9 million and theallowance for work in process increased $0.8 million from June 30, 2004,to March 31, 2005. The number of days of accounts receivable and work inprocess outstanding was 85 at March 31, 2005, compared to 78 at June 30,2004.

 

***Cash(Used in) From Investing Activities.***

 

Cash used in investing activities for the first nine months of fiscalyear 2005 was $9.5 million, compared to $16.9 million from investing activitiesfor the first nine months of fiscal year 2004. The increase can be primarily attributed to higher purchases of fixedassets of $7.8 million and costs associated with the capitalization of timespent customizing in-house administration systems of $8.8 million, inaccordance with AICPA’s Statement of Position 98-1, and purchases of marketablesecurities of $212.5 million, partially offset by sales and maturities ofmarketable securities of $203.8 million. We have made reclassifications to our Consolidated Statement of Cash Flowsfor the nine months ended March 31, 2004 to reflect the gross purchasesand sales of dutch auction rate securities as investing activities rather thanas a component of cash and cash equivalents. Refer to Note 2 to the Consolidated Financial Statements for additionalinformation.

 

Expenditures of capital funds were $36.8 million for the first ninemonths of fiscal year 2005, including the $8.8 million spent for customizingin-house administrative systems. Anticipated commitments of capital funds are estimated at $10 millionfor the remainder of fiscal year 2005, mainly for dividends, funds spent forcustomizing in-house administrative systems, computer hardware purchases,office relocations and renovations, development and upgrade of financial and retirementsystems and acquisition-related payments. We expect cash from operations toadequately provide for these cash needs. The company anticipates that future annual commitments of capital fundswill include approximately $13 million in dividends and $24 to $27 million inpurchases of fixed assets.  Capital ofapproximately $165 million required for our combination with WWLLP (see Note 3of Notes to the Consolidated Financial Statements) will come from existing cashreserves and borrowing under our revolving credit facility.

 

***CashUsed in Financing Activities****.*

 

Cash used in financing activities for the third quarter of fiscal year2005 was $4.2 million, compared to cash used in financing activities of $5.5million for the third quarter of fiscal year 2004.  The difference can be attributed to $8.0million in fewer common stock repurchases due to the fact that the company’strading window remained closed as a result of the impending businesscombination with WWLLP,

 

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partially offset by $7.3 million in quarterly dividends paid during thefirst nine months of fiscal year 2005.

 

**Off-Balance Sheet Arrangements and ContractualObligations**

 

***Operating Leases***. We lease office space, furniture and selected computer equipment underoperating lease agreements with terms ranging from one to ten years.  Future expected payments are as follows:

 
| ** **                         | ** ** | **Remaining payments due by fiscal year as of March 31, 2005** | ** ** |
|------------------------------------|------------|---------------------------------------------------------------------|------------|
| **Contractual  Cash  Obligations** | ** ** | **Total**                                                           | ** ** | **2005** | ** ** | **2006  through  2007** | ** ** | **2008  through  2009** | ** ** | **Thereafter** | ** ** |
| Lease  commitments                 |       | $                                                                   | 248,921    |   | $ | 10,254 |   | $ | 67,617 |   | $ | 55,065 |   | $ | 115,985 |   |
|                                    |            |                                                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Management has determined that there is not a large concentration ofleases that will expire in any one fiscal year. Consequently, management anticipates that any increase in future rentexpense will be mainly market driven.

 

***Guarantees.***

 

*Wellspring Leases*.  The company continues to guarantee certainleases for office premises and equipment for Wellspring.  At March 31, 2005, minimum remainingpayments guaranteed under these leases, which expire at various dates through2007, totaled $13.2 million, excluding anticipated sublease income.  The leases are currently generating positivecash flows of less than $0.1 million per fiscal year.  Management will continue to evaluate theadequacy of these provisions and make adjustments as appropriate.  See Notes 14 and 16 of the Notes to theConsolidated Financial Statements for more information related to Wellspring.

 

*Affiliate Agreements*.  In connection with the establishment of ouralliance with WWLLP in 1995, the company terminated its then existing officespace in London and a new lease was entered into by WWLLP that expires in2015.  The company agreed to guaranteeWWLLP’s performance under this new lease. Payments by WWLLP under the lease total £1.4 million (or approximately$2.6 million based on the March 31, 2005, exchange rate) per year.  The company also entered into two optionagreements with WWLLP with respect to the leased space.  One option agreement provides WWLLP with theright to require the company to accept a sublease of two floors of the leasedspace upon any termination of the alliance. The second option agreement provides WWLLP with the right to assign theentire lease to the company on or after December 25, 2009. If WWLLP wereto exercise either of these options, the company would attempt to sublease thespace at the then-current market rates.

 

**Credit Agreement**

 

In June 2004, we reduced the size of our revolving credit facilityto $50 million from $100 million in order to better align it with our businessneeds.  The facility is provided by asyndicate of banks.  Interest ratesassociated with this facility vary with LIBOR and/or the Prime Rate and arebased on our leverage ratio, as defined by the credit agreement.  We are charged a quarterly commitment fee,currently 0.20 percent of the facility that varies with our financial leverageand is paid on the unused portion of the credit facility.  No amounts were outstanding under the company’srevolving credit facility as of June 30, 2004 or March 31, 2005.  Credit under the facility is available upondemand, although the credit facility requires us to observe certain covenants(including requirements for a fixed coverage charge, cashflow leverage ratioand asset coverage) and is collateralized with a pledge of stock of materialsubsidiaries.  We were in compliance withall covenants under the credit facility as of March 31, 2005.

 

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A portion of the revolving facility is used to support required lettersof credit issued under the credit line. As a result, $7.5 million of the facility is currently unavailable foroperating needs.  We are also charged afee for outstanding letters of credit that also fluctuates based on ourleverage ratio.  The credit facility isscheduled to mature on June 29, 2009.

 

In connection with the acquisition of WWLLP, we are currently indiscussions with our bank group regarding a new revolving credit facility forthe amount of $200 million.  We expectthat covenants to be included in this new facility will be consistent withthose included in our credit facilities historically.  As compared to our current credit facility,we expect that the new revolving credit facility will extend the terminationdate from June 30, 2009 to approximately June 30, 2010, and willinvolve additional participating banks.

 

**Risk Management**

 

**As a part of our overall riskmanagement program, we carry customary commercial insurance policies, includingcommercial general liability, employment practices liability, and claims-madeprofessional liability insurance with a self-insured retention of $1 millionper claim, which provides coverage for professional liability claims includingthe cost of defending such claims.  Ourprimary insurance coverage beyond this retention is written by an affiliatedcaptive insurance company owned by us and two other professional servicesfirms.  Prior to July 1, 2003, thefirst $5 million of coverage had a premium structure which provided that thecaptive insurance company would recover from the firm defending the claimapproximately 75 percent of any loss up to $5 million.  This recovery occurred through insurancepremium payments in subsequent years. The company recorded an accrual for this liability.  The remaining 25 percent of any loss up to $5million was a risk borne by the captive insurance company, which carriedreinsurance in the commercial markets for most losses above $5 million.**

** **

**As of July 1, 2003, PCIC has attemptedto recover through its premium structure the amounts it expects to pay out formember companies in claims losses, continuing the loss sharing formula whereby75 percent of the losses incurred by PCIC with respect to each member areincorporated in the member’s future premium charges, and will increase suchmember’s premium by approximately a like amount over the next five years. PCICnow bases premium calculations, which are determined annually based onexperience through March of each year, on relative risk of the variouslines of business performed by each of the owner companies, past claimexperience of each owner company, growth of each of those companies, industryrisk profiles in general and the overall insurance markets.  As of July 1, 2004, the captiveinsurance company carries reinsurance for a substantial portion of losses above$25 million.**

** **

**Our agreements with PCIC couldrequire additional payments to PCIC in the event that the company decided toexit PCIC and adverse claims significantly exceed prior expectations.  If these circumstances were to occur, thecompany would record a liability at the time it becomes estimable and probable.**

** **

**The company will continue toprovide for the self-insured retention where specific estimated losses for knownclaims in excess of $1 million are considered probable and reasonablyestimable.**

** **

**Although the company maintainsprofessional liability insurance coverage, this insurance does not cover claimsmade after expiration of our current insurance contracts.  Generally accepted accounting principlesrequire that we record a liability for incurred but not reported (IBNR)professional liability claims if they are estimable and probable, and for whichwe have not yet contracted for insurance coverage.  The company uses actuarial assumptions toestimate and record its IBNR liability and has a $13.7 million IBNR liabilityrecorded as of March 31, 2005.**

** **

**Current insurance market conditionsfor our industry include increases in overall premium cost, higher self-insuredretentions and reductions in aggregate excess coverages, trends that areanticipated to continue.  We expect thesetrends to be reflected in our future annual insurance renewals and, as aresult, we will continue to assess our ability to secure future insurancecoverage.  In anticipation of thepossibility of future reductions in risk transfer from PCIC to reinsurers, aswell as the trend toward a**

 

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**generally hardening insurancemarket, the firms that own PCIC, including the company, increased PCIC’scapital in fiscal years 2002 and 2003. No capital contribution was provided during fiscal year 2004 or thefirst nine months of fiscal year 2005, although the PCIC Board of Directors hasapproved a resolution in their meeting on April 19, 2005 to require acapital contribution from the company of approximately $4.9 million within thenext three months.**

** **

**In light of increasing worldwidelitigation, including litigation against professionals, the company has beenimplementing a requirement that all client relationships be documented byengagement letters containing specific risk mitigation clauses that were notincluded in all historical client agreements. Nearly 100 percent of the company’s U.S. corporate clients have signedengagement letters including mitigation clauses, and initiatives to completethat process both in the United States and elsewhere are underway. The companyhas disengaged from certain client relationships where satisfactory engagementterms could not be achieved.**

** **

**RecentAccounting Pronouncements**

 

In January 2003, the Financial Accounting Standards Board (FASB)issued FASB Interpretation No. 46 (FIN 46), “Consolidation of VariableInterest Entities”, which clarifies the financial reporting guidance associatedwith the consolidation of another entity. In December 2003, the FASB revised and superceded FIN 46 with theissuance of FIN 46R in order to address certain implementation issues.  The company adopted FIN 46R effective March 31,2004 and has included appropriate disclosure in this Form 10-Q.  Adoption of FIN 46R has not resulted in achange in our accounting.  See Note 11 ofthe Consolidated Financial Statements for further information regarding theimpact of adopting FIN 46R.

 

Emerging Issues Task Force Issue 00-21, “Revenue Arrangements withMultiple Deliverables” (EITF 00-21), was effective for the company beginning July 1,2003.  There was no change in revenuerecognized in the current portfolio of client engagements due to our adoptionof EITF 00-21.

 

In December 2003,the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 104(SAB 104), “Revenue Recognition”, which supercedes Staff Accounting Bulletin No. 101(SAB 101), “Revenue Recognition in Financial Statements”.  SAB 104’s primary purpose is to rescindaccounting guidance contained in SAB 101 related to multiple element revenuearrangements, superceded as a result of the issuance of EITF 00-21.  While the wording of SAB 104 has changed toreflect the issuance of EITF 00-21, the revenue recognition principles of SAB101 remain largely unchanged by the issuance of SAB 104.  The issuance of SAB 104 has not had an effecton our revenue recognition policies as they are in accordance with SAB 104.

 

In December 2003, the FASB published revisions to Statement ofFinancial Accounting Standards No. 132, “Employers’ Disclosures aboutPensions and Other Postretirement Benefits” (SFAS 132).  SFAS 132 revisions retain the originaldisclosures but require additional annual disclosures about assets,obligations, cash flows and interim disclosures about net periodic benefitcosts of defined benefit pension plans and other postretirement plans.   The statement was effective for fiscal yearsending after December 15, 2003.  Thecompany has adopted SFAS 132 as revised and included appropriate disclosure inthis Form 10-Q.

 

In May 2004, the Financial Accounting Standards Board issued FASBStaff Position (FSP) No. 106-2 “Accounting and Disclosure RequirementsRelated to the Medicare Prescription Drug Improvement and Modernization Act of2003” (the Act) (SFAS 106-2), which was effective as of the first quarterbeginning after June 15, 2004. The Act includes a prescription drugbenefit under Medicare Part D as well as a federal subsidy to sponsors ofretiree health care benefit plans that provide a benefit that is at leastactuarially equivalent (as defined in the Act) to Medicare Part D.  The adoption of SFAS 106-2 has not had amaterial effect on the financial condition or results of operations of thecompany.

 

In June 2004, the Emerging Issues Task Force (EITF) issued EITF02-14****“Whether an Investor Should Apply theEquity Method of Accounting to Investments Other Than Common Stock if theInvestor Has

 

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the Ability to Exercise Significant Influence Over the Operating andFinancial Policies of the Investee”. This EITF indicates that an investor should only apply the equity methodof accounting when it has investments in either common stock or in-substancecommon stock of a corporation, provided that the investor has the ability toexercise significant influence over the operating and financial policies of theinvestee.  The issuance of EITF 02-14 hasnot had an effect on our accounting for equity investments which has been inaccordance with EITF 02-14.

 

In December 2004, the Financial Accounting Standards Board (FASB)published revisions to Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation” (SFAS 123R).  SFAS 123R requires companies to account forshare-based payment transactions with employees using a fair-value basedmethod, thereby eliminating the disclosure-only provisions of SFAS 123.  SFAS 123R will be effective for publiccompanies for the first annual reporting period after June 15, 2005.  Effective July 1, 2005, the company willbe required to apply the standard to all awards granted, modified, cancelled orrepurchased after that date as well as the unvested portion of priorawards.  SFAS 123R permits publiccompanies to adopt its requirements using one or two methods:

 

• A “modified prospective” method in which compensation cost isrecognized beginning with the effective date (a) based on the requirementsof SFAS 123R for all share-based payments granted after the effective date and (b) basedon the requirements of SFAS 123R for all awards granted to employees prior tothe effective date of SFAS 123R that remain unvested on the effective date.

 

• A “prospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under SFAS 123R for purposes of pro formadisclosures either (a) all prior periods presented or (b) prior interimperiods of the year of adoption.

 

The company does not expect that the adoptionwill have a material effect on its financial statements since the company hasnot issued stock options since fiscal year 2002 and does not expect to grantany further options under the Long-term Incentive Plan.  Also, compensation expense currentlyrecognized for restricted stock units is based on the market price of ourcommon stock at the date of grant.

 

In April 2005, the Securities and Exchange Commission (SEC) issuedStaff Accounting Bulletin No. 107, “Share-Based Payments” (SAB 107) inwhich the SEC expressed views regarding the interaction between SFAS 123R andcertain SEC rules and regulations and provide the staff’s views regardingthe valuation of share-based payment arrangements for public companies.  Before adoption of SFAS 123R, the companyplans to evaluate the impact on our financial condition and results ofoperations.

 

On October 22, 2004, the American Jobs Creation Act (AJCA) wassigned into law.  The AJCA includes a one-time election to exclude 85percent of its foreign unrepatriated earnings in either fiscal year 2005 or2006.  The company has started evaluating the effect of the repatriationprovision; however, the company will not be able to complete the analysis untilafter Congress or Treasury provides additional guidance on key elements of theprovision.  As a result, it is currently not practical to estimate therange of income taxes associated with repatriation.

 

**Disclaimer Regarding Forward-looking Statements**

** **

This filing contains certain statements that are “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, including, but not limited to the following: Note 8 -  Retirement Benefits on pages 11 through13; Note 9 – Goodwill and Intangible Assets on pages 13 and 14; Note 14 –Guarantees on pages 17 and 18; Note 15 – Contingent Liabilities on pages 18and 19; the Executive Overview on pages 23 and 24; Critical AccountingPolicies and Estimates on pages 25 through 28; the discussion of ourcapital expenditures on page 33; Off-Balance Sheet Arrangements andContractual Obligations on page 34; Risk Management on pages 35 and36; and Part II, Item 1 “Legal Proceedings” on pages 39 through40.  In some cases, you can identifythese statements and other forward-looking statements in this filing by wordssuch as “may”, “will”, “expect”, “anticipate”,

 

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“believe”, “estimate”, “plan”, “intend”, “continue”, or similar words.You should read these statements carefully because they contain projections ofour future results of operations or financial condition, or state other “forward-looking”information. A number of risks and uncertainties exist which could cause actualresults to differ materially from the results reflected in theseforward-looking statements. Such factors include, but are not limited to risksand uncertainties specific to our transaction with WWLLP, including adverseeffects on the market price of the company’s common stock and on the company’soperating results because of failure to complete the transaction (due tofailure to obtain stockholder or regulatory approvals or to satisfy all of theother conditions to the transaction), failure by the parties to successfullyintegrate their respective businesses, processes and systems in a timely andcost-effective manner, significant transaction costs expected, unknownliabilities relating to the transaction or the acquired business, the successof the company’s marketing, development and sales programs following thetransaction, the company’s ability to maintain client relationships and attractnew clients following the transaction, the company’s ability to achieve costreductions after the transaction, general economic and business conditions thataffect the company following the transaction, the level of capital resourcesrequired for ongoing operations and future acquisitions, post-closing sales ofthe company’s common stock received by former Watson Wyatt LLP partners, andother economic, business, competitive and/or regulatory factors affecting theproposed transaction, and other factors, including but not limited to, ourcontinued ability to recruit and retain highly qualified associates, outcomes oflitigation, a significant decrease in the demand for the consulting services weoffer as a result of changing economic conditions or other factors, actions bycompetitors offering human resources consulting services, including publicaccounting and consulting firms, technology consulting firms andinternet/intranet development firms, regulatory, legislative and technologicaldevelopments that may affect the demand for or costs of our services and otherfactors discussed under “risk factors” in our Annual Report on Form 10-Kfor the fiscal year ended June 30, 2004, which was filed with the SEC on August 17,2004, and may be accessed via EDGAR on the SEC’s web site at www.sec.gov. Thesestatements are based on assumptions that may not come true. All forward-lookingdisclosure is speculative by its nature. The company undertakes no obligationto update any of the forward-looking information included in this report,whether as a result of new information, future events, changed expectations orotherwise.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK.**

 

We are exposed to market risks in the ordinary course of business.These risks include interest rate risk and foreign currency exchange risk. Wehave examined our exposure to these risks and concluded that none of ourexposures in these areas are material to fair values, cash flows or earnings*.*

* *

See Note 3 forfurther information regarding our handling of risk associated with the proposedbusiness combination.

 

**ITEM 4. CONTROLS AND PROCEDURES.**

 

**Evaluation of Disclosure Controls and Procedures**

 

The chief executive officer(CEO) and chief financial officer (CFO) of the company evaluated our disclosurecontrols and procedures as of the end of the third quarter of fiscal year2005.  Based on this evaluation, theyhave concluded that, as of March 31, 2005, such controls and procedureswere effective, such that information required to be disclosed in reports thatthe company files with or submits to the SEC is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules andforms and is accumulated and communicated to management, including the CEO andCFO, as appropriate, to allow timely decisions regarding such disclosure.

 

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**Compliance with Section 404 of theSarbanes-Oxley Act of 2002**

 

Our company is required to comply with Section 404 of theSarbanes-Oxley Act of 2002 and SEC rules and Public Company AccountingOversight Board (PCAOB) standards for implementing Section 404 by June 30,2005.  With regards to the company’scontinuing compliance efforts, the company continues to test certain keycontrols in preparation for compliance with Section 404 and as the basisfor management’s assessment of the adequacy and effectiveness of internalcontrol over financial reporting at the end of our fiscal year 2005.

 

**Limitations on the Effectiveness of Controls**

 

Our management, including the CEO and CFO, does not expect that our disclosure controls and procedures will necessarily prevent all error and all fraud.  However, our management does expect that the control system provides reasonable assurance that its objectives will be met.  A control system, no matter how well designed and operated, cannot provide absolute assurance that the control system’s objectives will be met.   In addition, the design of such internal controls must take into account the costs of designing and maintaining such a control system.  Certain inherent limitations exist in control systems to make absolute assurances difficult, including the realities that judgments in decision-making can be faulty, that breakdowns can occur because of a simple error or mistake, and that individuals can circumvent controls.  The design of any control system is based in part upon existing business conditions and risk assessments. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in business conditions or deterioration in the degree of compliance with policies or procedures.  As a result, they may require change or revision.  Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected.  Nevertheless, the disclosure controls and procedures are designed to provide reasonable assurance of achieving their stated objectives, and the CEO and CFO have concluded that the disclosure controls and procedures are effective at a reasonable assurance level.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS.**

 

From time to time, we are a party to variouslawsuits, arbitrations or mediations that arise in the ordinary course ofbusiness.  We have received subpoenas andrequests for information in connection with government investigations.  The matters reported on below involve themost significant pending or potential claims against us.

 

We reserve for contingent liabilities basedon Statement of Financial Accounting Standards No. 5, “Accounting forContingencies” (SFAS 5) when it is determined that a liability, inclusive ofdefense costs, is probable and reasonably estimable.

 

*Government Investigations:*

* *

*SEC Examination of InvestmentAdvisers. *In December 2003, the Securities andExchange Commission (SEC) formally asked many of the major investmentconsulting firms, Watson Wyatt Investment Consulting (WWIC) among them, toprovide detailed information on their business structures and practices inorder to determine if conflicts of interest with money managers exist.  In March 2004, WWIC completed itsresponses to the SEC staff’s requests for information.  In May 2005, WWIC provided additionalinformation to SEC staff in response to comments made in connection with itsinquiry and undertook to amend its Form ADV to clarify the scope of itsAdvanced Investment Solutions service.

 

*Department of Justice AntitrustInvestigation. *In March 2004, the United StatesDepartment of Justice (DOJ) issued a Civil Investigative Demand (CID) to WatsonWyatt and other companies in the employee

 

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benefits industry.  On January 20, 2005, we received asupplementary CID.  The DOJ is seeking todetermine whether firms that have entered into agreements with their clientslimiting liability have done so in violation of U.S. antitrust laws. WatsonWyatt has been providing information to DOJ in response to the CIDs.

 

*New York State AttorneyGeneral*.  On December 17, 2004, the New York StateAttorney General issued a subpoena to Watson Wyatt seeking information about “override”and other insurance placement compensation.  Preliminary data indicate that such payments accounted for less than 0.2percent of Watson Wyatt’s revenue over the past four years.  Watson Wyatt has provided information to theNew York State Attorney General in response to the subpoena and will continueto cooperate in the investigation.

 

*ProfessionalLiability Claims:*

* *

*IronWorkers Local 25 et al. v. Watson Wyatt & Co. *On July 8, 2004, Watson Wyatt was served with an amended complaintfiled by a former client in the United States District Court for the EasternDistrict of Michigan.  The complaintalleged malpractice, breach of contract, and related claims in the performanceof actuarial consulting.  The complaintstated that the plaintiff’s pension fund is underfunded as a result of thealleged deficiencies in our work.  Inresponse to a discovery request, in January the plaintiffs disclosed thattheir minimum damage claim is $53.7 million. We have established a reserve in the amount of our professional liabilityinsurance self-retention for this case.

 

*SBC Holdings, Inc.. *On July 23, 2004, we received a demand letter from counsel for aclient alleging that errors in valuations for 2001 and subsequent yearsunderstated the liabilities of its pension plan and overstated its networth.  As a result, the client claimedit did not annuitize its defined benefit plan and redeemed its stock at aninflated price.  On April 15, 2005we filed a declaratory action in the U.S. District Court for the EasternDistrict of Michigan to compel arbitration of the matter.  On May 5, 2005, SBC filed an answer andcounterclaim to the declaratory judgment action, alleging damages in excess of$46 million.  At this time, we are unableto reasonably estimate the possibility of loss or range of possible loss.

 

*Client Demand Letter.*  On February 8, 2005,we received a demand letter from counsel for a client alleging failure toensure that the method for performing certain benefit calculations under thepension administration system developed by Watson Wyatt for the client wasconsistent with the method required under the client’s pension equity plan andthe summary plan description, and failure to advise the client of the discrepanciesbetween the plan documents and the pension system.  The demand letter claimed damages in excessof $13 million and also sought to hold the client’s outside ERISA counselresponsible for the damages.  On March 3,2005, we entered into a tolling agreement with the client and the client’sERISA counsel in order to pursue resolution of this matter throughmediation.  We have established a reserve in anon-material amount for this case.

 

*OtherMatters:*

* *

*Wyatt Bode Grabner (GmbH)*.  The claim arising out of contracts relatingto a joint venture has been settled for €1.7 million (or approximately$2.2 million based on the March 31, 2005, exchange rate) as a result ofmediation.  This is not a professionalliability claim, and therefore it is not covered by our insurance.  The settlement amount has been reflected asan other non-operating expense in the third quarter of fiscal year 2005.

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS.**

 

The company did notengage in any unregistered sales of equity securities during the quarter.

 

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**Issuer Purchases of EquitySecurities**

 

The company did notrepurchase its own stock during the third quarter of fiscal year 2005.  The maximum number of shares that may yet bere-purchased under our Board of Director approved plans is 763,934.  Shares that the company repurchases aregenerally issued in connection with the company’s employee benefit plans.

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.**

 

**None.**

** **

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.**

 

None.

 

**ITEM 5. OTHER INFORMATION.**

 

None.

 

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**ITEM 6.EXHIBITS.**

 
| 3.1    |   | Amended and Restated Certificate of Incorporation of  Watson Wyatt & Company Holdings(1)                                                                                                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                             |
| 3.2    |   | Amended and Restated Bylaws of Watson  Wyatt & Company Holdings(2)                                                                                                                      |
|   |   |                                                                                                                                                                                             |
| 4      |   | Form of Certificate Representing Common  Stock(1)                                                                                                                                           |
|   |   |                                                                                                                                                                                             |
| 10.1   |   | Credit Agreement Among Suntrust Bank and Others  dated June 30, 2004(7)                                                                                                                     |
|   |   |                                                                                                                                                                                             |
| 10.2   |   | Senior Officer Deferred Compensation Plan(3)                                                                                                                                                     |
|   |   |                                                                                                                                                                                             |
| 10.3   |   | 2001 Deferred Stock Unit Plan for Selected  Employees(4)                                                                                                                                         |
|   |   |                                                                                                                                                                                             |
| 10.4   |   | Compensation Plan for Outside Directors(5)                                                                                                                                                       |
|   |   |                                                                                                                                                                                             |
| 10.5   |   | Lease between Watson Wyatt & Company and  Arlington Office, L.L.C., dated April 27, 2004(6)                                                                                        |
|   |   |                                                                                                                                                                                             |
| 10.6   |   | Watson Wyatt &  Company Performance Share Bonus Incentive Program(8)                                                                                                                    |
|   |   |                                                                                                                                                                                             |
| 10.7   |   | First Amendment to Lease  between Watson Wyatt & Company and Arlington Office, L.L.C., dated  April 22, 2005(9)                                                                    |
|   |   |                                                                                                                                                                                             |
| 21     |   | Subsidiaries of Watson Wyatt & Company  Holdings(9)                                                                                                                                     |
|   |   |                                                                                                                                                                                             |
| 31.1   |   | Certification of Chief Executive Officer Pursuant to  Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002(9)        |
|   |   |                                                                                                                                                                                             |
| 31.2   |   | Certification of Chief Financial Officer Pursuant to  Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002(9)        |
|   |   |                                                                                                                                                                                             |
| 32     |   | Certification of Chief Executive Officer and Chief  Financial Officer Pursuant to Title 18, U.S.C. Section 1350, adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(9) |

 

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(1)          Incorporatedby reference from Registrant’s Form S-3/A, Amendment No. 1 (File No. 33-394973),filed on March 17, 2000

(2)          Incorporatedby reference from Registrant’s Form 10-Q, filed on May 2, 2001

(3)          Incorporatedby reference from Registrant’s Form 10-K, filed on August 15, 2001

(4)          Incorporatedby reference from Registrant’s Form DEF14A, filed on October 17, 2003

(5)          Incorporatedby reference from Registrant’s Form DEF14A, filed on October 15, 2004

(6)          Incorporatedby reference from Registrant’s Form 10-Q, filed on May 7, 2004

(7)          Incorporatedby reference from Registrant’s Form 10-K, filed on August 17, 2004

(8)          Incorporatedby reference from Registrant’s Form 10-Q, filed on February 9, 2005

(9)          Filed withthis Form 10-Q

 

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**Signatures**

 

Pursuant to the requirements of the Securities and Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 

Watson Wyatt & Company Holdings

(Registrant)

 

 
| /s/ John J. Haley   |                    | May 10, 2005 |   |
|---------------------|-------------------------|-------------------|--------|
| Name:               | John J. Haley           | Date              |
| Title:              | President and           |              |
|                | Chief Executive Officer |              |
|                |                    |              |
| /s/ Carl D. Mautz   |                    | May 10, 2005 |   |
| Name:               | Carl D. Mautz           | Date              |
| Title:              | Vice President and      |              |
|                | Chief Financial Officer |              |
|                |                    |              |
| /s/ Peter L. Childs |                    | May 10, 2005 |   |
| Name:               | Peter L. Childs         | Date              |
| Title:              | Controller              |              |
|                     |                         |                   |        |  |

 

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