UNITED STATES

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 December 31, 2001

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 & COMPANY HOLDINGS
(Exact name of registrant as 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, DC 20006-3900
(Address of principal executive offices, including zip code)
(202) 715-7000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes  ý          No  o    

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of January 31,  2002.

Class

Number of Shares

Class A Common Stock, $.01 par value

 

20,067,360

Class B Common Stock, $.01 par value

 

12,910,857

 

WATSON WYATT & COMPANY HOLDINGS
INDEX TO FORM 10-Q

For the Three and Six Months Ended December 31, 2001


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited) 1-4
Consolidated Statements of Operations--Three and six months ended    December 31, 2001 and 2000 1
Consolidated Balance Sheets--December 31, 2001 and June 30,       2001 2
Consolidated Statements of Cash Flows--Six months ended    December 31, 2001 and 2000 3
Consolidated Statement of Changes in Stockholders' Equity--Six    months ended December 31, 2001 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and    Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

20

Item 2.

Changes in Securities and Use of Proceeds

20

Item 3.

Defaults Upon Senior Securities

21

Item 4.

Submission of Matters to a Vote of Security Holders

21

Item 5.

Other Information

21

Item 6.

Exhibits and Reports on Form 8-K

22

Signatures

23

 

 
WATSON WYATT & COMPANY HOLDINGS
Consolidated Statements of Operations
(Thousands of U.S. Dollars, Except Share Data)
               
    Three Months Ended December 31,   Six Months Ended December 31,
    2001   2000   2001   2000
      (Unaudited)       (Unaudited)  
                 
Revenue   $      174,897   $      168,781   $      347,353   $      339,474
   
 
 
 
Costs of providing services:               

   Salaries and employee benefits

 100,494   93,689   195,214   185,830
   Professional and subcontracted services 14,459   15,608   24,559   26,295
   Occupancy, communications and other 25,487  

27,472

  

54,215

  

54,494
   General and administrative expenses 14,032   15,238   27,207   28,105
   Depreciation and amortization 5,242   6,119   10,630   12,036
    159,714   158,126   311,825   306,760
   
Income from operations 15,183   10,655   35,528   32,714
Interest income, net 244   105   686   409
Other non-operating income -   -   1,000   -
Income from affiliates  1,403   1,090   2,095   2,093
   
Income before income taxes 16,830   11,850   39,309   35,216
                 
Provision for income taxes  6,734   5,113   15,725   15,144
   
Net income   $        10,096   $          6,737   $        23,584   $        20,072
   
 
 
 
Basic earnings per share, net income  $            0.31   $            0.21   $            0.71   $            0.64
   
 
 
 
Diluted earnings per share, net income  $            0.30   $            0.20   $            0.71   $            0.64
   
 
 
 
Weighted average shares of common stock,   
   basic (000) 32,973   32,755   33,003   31,190
   
 
 
 
Weighted average shares of common stock,               
   diluted (000) 33,313   33,146   33,418   31,386
 
 
 

 

See accompanying notes

1

 
WATSON WYATT & COMPANY HOLDINGS
Consolidated Balance Sheets
(Thousands of U.S. Dollars, Except Share Data)
           
      December 31,   June 30,
      2001   2001
      (Unaudited)    
Assets
Cash and cash equivalents   $            64,823   $            81,735
Receivables from clients:        
  Billed, net of allowances of $4,387 and $2,695   95,035   84,361
  Unbilled, net of allowances of $925 and $1,130   59,381   67,229
      154,416   151,590
Deferred income taxes   13,581   13,581
Other current assets   14,465   11,027
  Total current assets   247,285   257,933
Investment in affiliates   18,191   16,196
Fixed assets, net of accumulated depreciation of $93,388 and    $83,722   52,780   52,616
Deferred income taxes   38,526   38,526
Goodwill and intangible assets  

16,722

  

13,374
Other assets   8,856   8,811
Total Assets   $          382,360   $          387,456
Liabilities
Accounts payable and accrued liabilities   $          102,759   $          148,140
Income taxes payable   23,486   13,622
  Total current liabilities   126,245   161,762
Accrued retirement benefits   83,149   77,660
Deferred rent and accrued lease losses   2,914   3,484
Other noncurrent liabilities   27,822   25,825
     
 
Total Liabilities   240,130   268,731
Commitments and contingencies        
         
Stockholders' Equity        
Preferred Stock - $0 par value:        
  1,000,000 shares authorized        
  None issued and outstanding        
Class A Common Stock - $.01 par value:        
  69,000,000 shares authorized;        
  20,064,614 and 9,390,000 issued and outstanding   201   94
Class B-1 Common Stock - $.01 par value:        
  15,000,000 shares authorized;        
  none and 10,398,640 issued and outstanding   -   104
Class B-2 Common Stock - $.01 par value:        
  15,000,000 shares authorized;        
  12,910,857 and 13,244,355 issued and outstanding   129   132
Additional paid-in capital    146,655   146,649
Treasury stock, at cost   (209

)

 -
Retained earnings (deficit)   3,691  

(19,893

)
Cumulative translation adjustment (accumulated other        
  comprehensive loss)   (8,237

)

(8,361

)
Total Stockholders' Equity   142,230   118,725
     
 
Total Liabilities and Stockholders' Equity   $          382,360   $          387,456


See accompanying notes

2

 

WATSON WYATT & COMPANY HOLDINGS

Consolidated Statements of Cash Flows

(Thousands of U.S. Dollars)
         
   

Six months ended December 31,
2001   2000
   

(Unaudited)
Cash flows (used for) from operating activities:      
  Net income $        23,584   $       20,072
  Adjustments to reconcile net income to net cash      
     used for (from) operating activities:      
        Provision for doubtful receivables from clients 3,629   9,514
        Depreciation 10,563   10,827
        Non cash compensation charge -   751
        Amortization of goodwill and intangible assets 64   1,209
        Income from affiliates (2,175 )

(2,093

)
        Other, net (1,184 ) 512
        Discontinued operations, net (165 )

(146

)
        Changes in operating assets and liabilities (net of discontinued operations)      
           Receivables from clients (6,454 )

(23,664

)
           Other current assets (3,596 )

(610

)
           Other assets (45 ) 1,655
           Accounts payable and accrued liabilities (45,291 )

(20,162

)
           Income taxes payable 9,864   5,551
           Accrued retirement benefits 5,489   1,111
           Deferred rent and accrued lease losses (570 )

(1,241

)
           Other noncurrent liabilities 2,039  

(402

)
        Net cash (used for) from operating activities (4,248 ) 2,884
   
 
Cash flows used in investing activities:      
  Purchases of fixed assets (11,211 )

(11,567

)
  Proceeds from divestitures 1,428   296
  Acquisitions and contingent consideration payments (3,598 )

(6,851

)
  Distributions from affiliates 324   1,826
      Net cash used in investing activities (13,057 )

(16,296

)
   
 
Cash flows from financing activities:      
  Issuances of common stock, net of offering costs 6   35,225
  Issuances of redeemable common stock -   134
  Repurchases of redeemable common stock -  

(252

)
     Net cash from financing activities 6   35,107
   
 
Effect of exchange rates on cash 387  

(1,276

)
   
(Decrease) increase in cash and cash equivalents (16,912 ) 20,419
Cash and cash equivalents at beginning of period 81,735   41,410
   
 
Cash and cash equivalents at end of period $        64,823   $       61,829

 

See accompanying notes

3

 
WATSON WYATT & COMPANY HOLDINGS
Consolidated Statement of Changes in Stockholders' Equity
(Thousands of U.S. Dollars, Except Share Data)
(Unaudited)
                               
                               
                               
      Cumulative               Additional   Treasury    
  Retained   Translation   Class A   Class B-1   Class B-2   Paid-in   Stock,    
  (Deficit) Earnings   Gain (Loss)   Common Stock   Common Stock   Common Stock   Capital   at Cost   Total
 
 
 
 
 
 
 
 
Balance at June 30, 2001 $                (19,893

 )

 $        (8,361

) 

 $                    94   $                  104   $                  132   $    146,649   $            -   $ 118,725
Comprehensive income:                              
    Net income

23,584

                           23,584
    Foreign currency translation adjustment     124                       124
Total comprehensive income                             23,708
Reclassification for sale of 442,500 shares                              
    by existing stockholders         4   (4 )              -
Transfer restriction expiration of                              
    9,956,140 shares         100   (100 )              -
Conversion of 333,498 shares held by                              
    Watson Wyatt Partners for distibution to                              
    its partners         3       (3

)

         -
Distribution of 62,600 shares from Watson                              
    Wyatt Partners to Watson Wyatt &                              
    Company Holdings                         (209 ) 

(209

 )
Exercise of 4,931 common stock options                     6       6
 
 
 
 
 
 
 
 
Balance at December 31, 2001 $                    3,691   $        (8,237 )  $                  201   $                       -   $                  129   $    146,655   $      (209 )  $ 142,230

 

See accompanying notes

4

WATSON WYATT & COMPANY HOLDINGS

Notes to the Consolidated Financial Statements
 (Tabular amounts are in thousands, except per share data)
(Unaudited)

1.    The accompanying unaudited quarterly consolidated financial statements of Watson Wyatt & Company Holdings and our subsidiaries (collectively referred to as "we," "Watson Wyatt" or the "Company") are presented in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC") and do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America. In the opinion of management, these statements reflect all adjustments, including recurring adjustments, which are necessary for a fair presentation of the consolidated financial statements for the interim periods. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2001, which is filed with the SEC and may be accessed via EDGAR on the SEC's web site at www.sec.gov.

The results of operations for the three and six months ended December 31, 2001 are not necessarily indicative of the results that can be expected for the entire fiscal year ending June 30, 2002. The results reflect estimated bonuses ultimately accrued at the discretion of the Company's Board of Directors and anticipated tax rates. Certain prior year amounts have been reclassified to conform to the current year's presentation.

2.    In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (FAS 141) and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Watson Wyatt has historically applied the purchase method of accounting to its acquisitions and will continue to do so in the future.

FAS 142 addresses the accounting for goodwill and intangible assets subsequent to their acquisition. FAS 142 provides that goodwill and indefinite-lived intangible assets will no longer be amortized and that these assets must be tested at least annually for impairment beginning in the year of adoption. FAS 142 also provides that the amortization of intangible assets with finite lives is not limited to 40 years. The Company adopted the provisions of FAS 142 effective July 1, 2001. The Company completed its transitional impairment testing of goodwill as of July 1, 2001, for all of its reporting units and concluded that no impairment of goodwill exists.

 

5

The following table reflects consolidated results adjusted as though the adoption of FAS 142 occurred as of July 1, 2000:

Three Months Ended December 31,

Six Months Ended December 31,

2001

2000

2001

2000

Net income, as reported

$

10,096

$

6,737

$

23,584

$

20,072

Goodwill amortization, net of tax

--

355

--

634

Equity method goodwill amortization, net of tax

--

30

--

60

Net income, as adjusted

$

10,096

$

7,122

$

23,584

$

20,766

Basic earnings per share, as reported

$

0.31

$

0.21

$

0.71

$

0.64

Goodwill amortization

--

0.01

--

0.02

Equity method goodwill amortization

--

--

--

--

Basic earnings per share, as adjusted

$

0.31

$

0.22

$

0.71

$

0.66

Diluted earnings per share, as reported

$

0.30

$

0.20

$

0.71

$

0.64

Goodwill amortization

--

0.01

--

0.02

Equity method goodwill amortization

--

--

--

--

Diluted earnings per share, as adjusted

$

0.30

$

0.21

$

0.71

$

0.66

 

The changes in the carrying amount of goodwill for the six months ended December 31, 2001 are as follows:

 

Benefits

Group

 

eHR

Group

 

Human

Capital

Group

 

International

 

Other

 

Total

Balance as of June 30, 2001

$

10,807

  

$

724

  

$

59

  

$

19

  

$

1,214

  

$

12,823

  

Goodwill recorded during the period

  

3,136

    

200

    

--

    

283

    

--

    

3,619

  

Impairment losses

  

--

    

--

    

--

    

--

    

--

    

--

  

Translation adjustment

  

(206

 )  

--

    

(2

)

  

--

    

--

    

(208

)

Balance as of December 31, 2001

$

13,737

  

$

924

  

$

57

  

$

302

  

$

1,214

   $

16,234

  
 
 
 
 
 
 
 

 

6

The following table reflects the components of intangible assets at December 31, 2001:

Gross Carrying Amount

 

Accumulated Amortization

Amortizable intangible assets:

Non-compete agreements

$

672

$

266

Purchased software

125

43

Total amortizable intangible assets

$

797

$

309


The weighted average remaining life of amortizable intangible assets at December 31, 2001 was 4.1 years. Amortization expense for the six months ended December 31, 2001 was $64,000. Estimated amortization expense for fiscal year 2002 and each of the four succeeding fiscal years is as follows:

Fiscal year ending June 30:

Amount

2002

$

128

2003

128

2004

117

2005

95

2006

63

3.    In the third quarter of fiscal year 1998, we discontinued our benefits administration outsourcing business, including our investment in our affiliate, Wellspring Resources, LLC ("Wellspring"). We believe we have adequate provisions for any remaining costs associated with our obligations related to the benefits administration outsourcing business. All Wellspring related activity is reflected on the Statements of Cash Flows as discontinued operations.

4.    During the second quarter of fiscal year 2001, we changed the structure of our internal organization in a manner that caused the composition of our reportable segments to change. In order to better position the Company to deliver the integrated, global solutions that have the largest impact on our growth, management consolidated our three U.S. regions into a single region. As a result of this consolidation, and because we also use a practice-based matrix form of organization for our North American regions, we have changed our reportable segments to reflect our practice-based structure. After the change, we have five reportable segments:

(1)

  

Benefits Group

(2)

eHR Group

(3)

  

Human Capital Group

(4)

International

(5)

  

Other (including Data Services and Communications)

 

7

The Company evaluates the performance of its segments and allocates resources to them based on net operating income. Prior year data has been restated to be consistent with current classifications for comparative purposes.

The table below presents specified information about reported segments as of and for the three months ended December 31, 2001:

 

Benefits

Group

 

eHR

Group

 

Human

Capital

Group

 

International

 

Other

 

Total

Revenue (net of

   reimbursable

   expenses)

$

95,386

  

$

27,711

  

$

12,330

  

$

16,758

  

$

14,122

  

$

166,307

Net operating

   income/(loss)

  

22,760

    

6,479

    

(1,207

)

  

(454

)

  

111

    

27,689

Receivables

 

91,047

    

21,338

    

10,558

    

14,081

    

10,298

    

147,322

 

The table below presents specified information about reported segments as of and for the three months ended December 31, 2000:

 

Benefits

Group

 

eHR

Group

 

Human

Capital

Group

 

International

 

Other

 

Total

Revenue (net of

   reimbursable

   expenses)

$

88,005

 

$

24,589

 

$

14,519

 

$

17,537

 

$

15,645

 

$

160,295

Net operating

   income/(loss)

 

16,865

 

 

7,158

 

 

2,444

 

 

1,502

 

 

1,904

 

 

29,873

Receivables

 

93,135

 

 

19,394

 

 

15,713

 

 

19,322

 

 

11,609

 

 

159,173

 

The table below presents specified information about reported segments as of and for the six months ended December 31, 2001:

 

Benefits

Group

 

eHR

Group

 

Human

Capital

Group

 

International

 

Other

 

Total

Revenue (net of

   reimbursable

   expenses)

$

188,308

 

$

55,347

 

$

24,106

 

$

33,643

 

$

30,707

 

$

332,111

Net operating

   income/(loss)

 

43,151

 

 

12,589

 

 

(3,632

)

 

363

 

 

2,172

 

 

54,643

Receivables

 

91,047

 

 

21,338

 

 

10,558

 

 

14,081

 

 

10,298

 

 

147,322

 

8

The table below presents specified information about reported segments as of and for the six months ended December 31, 2000:

 

Benefits

Group

 

eHR

Group

 

Human

Capital

Group

 

International

 

Other

 

Total

Revenue (net of

   reimbursable

   expenses)

$

176,785

 

$

49,441

 

$

28,486

 

$

35,914

 

$

33,319

 

$

323,945

Net operating

   income/(loss)

 

38,748

 

 

15,834

 

 

5,179

 

 

5,052

 

 

5,964

 

 

70,777

Receivables

 

93,135

 

 

19,394

 

 

15,713

 

 

19,322

 

 

11,609

 

 

159,173

Information for the three and six months ended December 31, 2000 has been restated to reflect the realignment of a group of U.S. consultants who deal with large multinational assignments into the "Benefits Group" from "Other." The amounts reclassified include revenue and expenses of $2,001,000 for the three months ended December 31, 2000, revenue and expense of $3,864,000 for the six months ended December 31, 2000, and receivables of $2,767,000 for both periods.

Information about interest income and tax expense is not presented as a segment expense because it is not considered a responsibility of the segments' operating management.

 

9

A reconciliation of the information reported by segment to the consolidated amounts follow for the three and six month periods ended December 31, 2001 and 2000:

 

Three Months Ended December 31,

Six Months Ended December 31,

2001

2000

2001

2000

Revenue:

 

   Total segment revenue

$

166,307

$

160,295

$

332,111

$

323,945

  

   Reimbursable expenses not included in total

 

      segment revenue

8,312

9,656

14,499

 

16,673

  

   Other, net

278

(1,170

)

743

(1,144

 )
 
 
 
 
 

   Consolidated revenue

$

174,897

$

168,781

$

347,353

$

339,474

  
 

Net Operating Income:

   Total segment net operating income

$

27,689

$

29,873

$

54,643

$

70,777

  

   Income from affiliates

1,403

1,090

2,095

2,093

  

   Differences in allocation methods for

 

     depreciation, G&A and pension costs

(348

)

(3,562

)

(510

)

  

(3,694

 )

   Gain on sale of U.S. based public plan

      retirement business

--

--

1,000

--

  

   Gain on sale of business units, other

269

296

311

 

696

  

   Discretionary compensation

(12,479

)

(14,000

)

(18,814

)

(33,100

 )

   IPO-related compensation charge

--

(3,480

)

--

 

(3,480

 )

   Other, net

296

1,633

584

1,924

   Consolidated pretax income from continuing

 

    operations

$

16,830

$

11,850

$

39,309

$

35,216

  

Receivables:

   Total segment receivables - billed and unbilled

$

147,322

$

159,173

$

147,322

$

159,173

  

   Net valuation differences

7,094

(2,286

)

7,094

(2,286

 )
 
 
 
 
 

   Total billed and unbilled receivables

154,416

156,887

154,416

 

156,887

  

   Assets not reported by segment

227,944

211,662

227,944

211,662

  
 

   Consolidated assets

$

382,360

$

368,549

$

382,360

$

368,549

  
 
 
 
 
 

 

10

5.    Basic earnings per share is calculated on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is calculated on the basis of the weighted average number of common shares outstanding plus the effect of outstanding stock options using the "treasury stock" method. The components of basic and diluted earnings per share are as follows:

Three Months Ended December 31,

Six Months Ended December 31,

2001

2000

2001

2000

Net income

$

10,096

$

6,737

$

23,584

$

20,072

Weighted average outstanding shares of

   common stock

32,973

32,755

33,003

31,190

Dilutive effect of employee stock options

340

391

415

196

Common stock and stock equivalents

33,313

33,146

33,418

31,386

Earnings per share:

Basic

$

0.31

$

0.21

$

0.71

$

0.64

Diluted

$

0.30

$

0.20

$

0.71

$

0.64

6.    From time to time, we are a party to various lawsuits, arbitrations or mediations, typically involving claims relating to the rendering of professional services or employment matters. Management believes that the results of all such proceedings will not have a material adverse effect on our financial condition. We carry professional liability insurance with a self-insured retention of $1 million per occurrence, which has been provided for where estimated losses equal to or in excess of such amount are considered probable. We also carry employment practices liability insurance. For further details, refer to Part II, Item 1, "Legal Proceedings," on page 20.

7.    On March 19, 2001, the Board of Directors approved the creation of an employee stock purchase plan for all associates and a restricted stock program for senior associates. The proposed employee stock purchase plan and the restricted stock program were approved at the annual stockholders' meeting on November 5, 2001, and will commence during the third quarter of fiscal year 2002. Management currently anticipates that these programs will not dilute earnings per share.

8.    On November 19, 2001, the Board of Directors approved a plan to purchase up to 1,150,000 shares of the Company's class A common stock for purposes which may include offsetting any potential dilution from shares which may be issued in connection with the Company's employee benefit plans.

9.    Comprehensive income includes net income and changes in the cumulative translation adjustment gain or loss. For the six months ended December 31, 2001, comprehensive income totaled $23.7 million, compared with $18.3 million for the six months ended December 31, 2000. For the three months ended December 31, 2001, comprehensive income totaled $9.3 million, compared with $6.2 million for the three months ended December 31, 2000.

10.    Effective August 31, 2001, we sold our U.S. based public sector retirement business to Gabriel, Roeder, Smith & Company ("GRS"). The sale included approximately 120 U.S. public sector retirement clients, representing approximately $6.0 million in annual revenues.

In accordance with the terms of the sale, GRS paid $1.0 million to the Company during the first quarter. The amount of additional contractual cash payments over the next five years are contingent upon the successful transition of certain clients to GRS and upon their retention by GRS. The Company has also elected to receive approximately 7% of the common stock of GRS in lieu of a portion of future cash payments. The total potential value of stock and cash proceeds from the sale is anticipated to be $3.3 million, subject to the contingencies noted above.

 

11

Simultaneous with the sale, we entered into an alliance agreement with GRS under which we will mutually refer future business opportunities and explore joint consulting assignments.

11.     In conjunction with the Company's review of its overhead cost structure in the second quarter of fiscal year 2002, the Company examined the classification of its operating expenses. This review included the identification and evaluation of the costs that comprise General and administrative expenses. Prior to the second quarter of fiscal year 2002, expenses associated with and incurred by various associates from our practice groups (the "Practice Support Team") for the centralized development of practice-specific tools and services, were included in General and administrative expenses. The costs associated with the Practice Support Team are mainly comprised of the salaries and employee benefits and professional services expenses incurred by the associates on this team.

As a result of our review, we have reclassified the Practice Support Team's expenses from the beginning of fiscal year 1998 through the first quarter of fiscal year 2002 as components of Salaries and employee benefits, Professional and subcontracted services, and Occupancy, communications and other expenses. These expenses have previously been included as a component of General and administrative expenses and represent less than 2.5% of total operating expenses, and 2% of revenue, for the three and six months ended December 31, 2000. Revenue, Income from operations, Income before income taxes, and Net income were unaffected by this reclassification.

For more information on the Company's reclassification of our Practice Support Team's expenses, refer to the Company's Form 8-K that was filed on January 24, 2002.


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

General

Watson Wyatt is a global provider of human capital consulting services. We operate from 62 offices in 18 countries throughout North America, Asia-Pacific and Latin America. We provide services in three principal practice areas: benefits, human resources technologies (eHR) and human capital consulting. Watson Wyatt & Company, which became a wholly-owned subsidiary of Watson Wyatt & Company Holdings as a result of our corporate reorganization and initial public offering in October 2000, was incorporated in Delaware on February 17, 1958. Watson Wyatt & Company Holdings was incorporated in Delaware on January 7, 2000. Including our predecessors, we have been in business since 1946. In 1995, we entered into an alliance agreement with R. Watson & Sons (now Watson Wyatt Partners), a United Kingdom based actuarial, benefits and human resources consulting partnership that was founded in 1878. We conducted business as The Wyatt Company until changing our corporate name to Watson Wyatt & Company in connection with the establishment of the Watson Wyatt Worldwide alliance. Since 1995, we and our alliance partners have marketed our services globally and seamlessly under the Watson Wyatt Worldwide brand, sharing resources, technologies, processes and business referrals.

Watson Wyatt's principal executive offices are located at 1717 H Street NW, Washington, DC 20006. Our web site is www.watsonwyatt.com. Information on this website is not a part of this filing.

 

12

Global Operations

We employ approximately 4,200 associates as follows:

Benefits Group

1,580

eHR Group

440

Human Capital Group

260

International

940

Other (Including Data Services and Communications)

760

Corporate

220

Total

4,200

Principal Services

We focus on the following core consulting areas:

Benefits: The Benefits Group provides analysis, design and implementation of retirement programs, including actuarial services and required reporting of plan contributions and funding levels, group health benefit plan design and provider selection, defined contribution plan design and related services, and investment consulting services.

eHR: The eHR Group develops technology-based solutions to reduce employer costs and improve employee service in human resources administration, including web-based applications.

Human Capital: The Human Capital Group provides comprehensive consulting in compensation plan design, executive compensation, salary management and organizational effectiveness consulting.

International: Our consultants, working internationally, operate on a geographic basis from 24 offices in 16 countries and provide consulting services in the practice areas mentioned herein.

Other: Other services include:

(1) Communication consulting: Our communication consulting group provides research on employee attitudes and communication effectiveness, conducts communications audits, facilitates research and focus groups, provides communications planning and implementation and assists employers in complying with disclosure requirements.

(2) Data Services: Watson Wyatt Data Services produces custom and standard compensation and benefits surveys and human resource reference materials for use by global and local companies in 50 countries. Over 7,500 companies participate in our surveys and our products include over 70 compensation, benefits and employment practices references and survey reports.

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

Watson Wyatt Worldwide Alliance

Recognizing that a global organization is essential to service the needs of our clients, we established operations throughout Europe in the late 1970's by acquiring local firms and opening new offices. Responding to the rapidly increasing globalization of the world economy, we made a strategic decision in 1995 to strengthen our European capabilities significantly and extend our global reach by entering into an alliance agreement with R. Watson & Sons (now Watson Wyatt Partners), a United Kingdom-based actuarial, benefits and human resources consulting partnership that was founded in 1878. Since 1995, we have marketed our services globally and seamlessly under the Watson Wyatt Worldwide brand, sharing resources, technologies, processes and business referrals.

 

13

The Watson Wyatt Worldwide global alliance maintains 87 offices in 29 countries and employs over 6,200 associates. Watson Wyatt & Company operates 62 offices in 18 countries in North America, Asia-Pacific and Latin America. Watson Wyatt Partners operates 10 offices in the United Kingdom and Ireland. The alliance operates 15 offices in 9 continental European countries principally through a jointly owned holding company, Watson Wyatt Holdings (Europe) Limited, which is 25% owned by Watson Wyatt and 75% owned by Watson Wyatt Partners.

Financial Statement Overview

Watson Wyatt's fiscal year ends June 30. The financial statements contained in this quarterly report reflect a Consolidated Balance Sheet as of the end of the second quarter of fiscal year 2002 (December 31, 2001), a Consolidated Balance Sheet as of the end of fiscal year 2001 (June 30, 2001), Consolidated Statements of Operations for the three and six month periods ended December 31, 2001 and 2000, Consolidated Statements of Cash Flows for the six month periods ended December 31, 2001 and 2000 and a Consolidated Statement of Changes in Stockholders' Equity for the six month period ended December 31, 2001.

We operate globally as an alliance with our affiliates. However, the revenues and operating expenses in the Consolidated Statements of Operations reflect solely the results of operations of Watson Wyatt & Company Holdings. Our share of the results of our affiliates, recorded using the equity method of accounting is reflected in the "Income from affiliates" line. Our principal affiliates are Watson Wyatt Partners, in which we hold a 10% interest in a defined distribution pool, and Watson Wyatt Holdings (Europe) Limited, a holding company through which we conduct continental European operations. We own 25% of Watson Wyatt Holdings (Europe) Limited and Watson Wyatt Partners owns the remaining 75%.

We derive substantially all of our revenue from fees for consulting services, which generally are billed at standard hourly rates or on a fixed-fee basis; management believes the approximate percentages of such billing methods are 60% and 40%, respectively. Clients are typically invoiced on a monthly basis with revenue recognized as services are performed. For the most recent three fiscal years, revenue from U.S. consulting operations have comprised approximately 80% of consolidated revenue. No single client accounted for more than 4% of our consolidated revenue for any of the most recent three fiscal years.

In delivering consulting services, our principal direct expenses relate to compensation of personnel. Salaries and employee benefits are comprised of wages paid to associates, related taxes, benefit expenses such as pension, medical and insurance costs and discretionary compensation. In addition, professional and subcontracted services represent fees paid to external service providers for legal, marketing and other services, approximately 50% of which are directly incurred on behalf of our clients and are reimbursed by them and included in revenue.

Occupancy, communications and other expenses represent expenses for rent, utilities, supplies and telephone to operate office locations as well as non-client-reimbursed travel by associates, publications and professional development. General and administrative expenses include the operational costs and professional fees paid by corporate management, general counsel, marketing, human resources, finance, research and technology support.

 

14

Results of Operations. The table below sets forth Consolidated Statements of Operations data as a percentage of revenue for the periods indicated:

 

Three Months Ended December 31,

Six Months Ended December 31,

2001

2000

2001

2000

Revenue

100.0

 %

100.0

 %

100.0

 %

100.0

 %

Costs of providing services:

   Salaries and employee benefits

57.4

55.6

56.2

54.8

   Professional and subcontracted services

8.3

9.2

7.1

7.7

   Occupancy, communications and other

14.6

16.3

15.6

16.1

   General and administrative expenses

8.0

9.0

7.8

8.3

   Depreciation and amortization

3.0

3.6

3.1

3.5

91.3

93.7

89.8

90.4

Income from operations

8.7

6.3

10.2

9.6

Interest income, net

0.1

0.1

0.2

0.1

Other non-operating income

--

--

0.3

--

Income from affiliates

0.9

0.6

0.6

0.7

Income before income taxes

9.7

7.0

11.3

10.4

Provision for income taxes

3.9

3.0

4.5

4.5

Net income

5.8

%

4.0

%

6.8

%

5.9

 %

 

15

Three and Six Months Ended December 31, 2001 Compared to the Three and Six Months Ended December 31, 2000

Revenue. Revenue from operations for the second quarter of fiscal year 2002 was $174.9 million, compared to $168.8 million for the second quarter of fiscal year 2001, an increase of $6.1 million, or 4%. The revenue increase was comprised of a $7.4 million, or 8% increase in our Benefits Group, a $3.1 million, or 13% increase in our eHR Group, partially offset by a $2.2 million, or 15% decrease in our Human Capital Group, a $0.7 million, or 4% decrease in International and a $1.5 million, or 10% decrease in Other practice areas in North America. Revenue from operations was $347.4 million for the first six months of fiscal year 2002, compared to $339.5 million for the first six months of fiscal year 2001, an increase of $7.9 million, or 2%. This revenue growth was comprised of an $11.5 million, or 7% increase in our Benefits Group and a $5.9 million or 12% increase in our eHR Group, partially offset by a $4.4 million, or 15% decrease in our Human Capital Group, a $2.3 million, or 6% decrease in International and a $2.6 million, or 8% decrease in Other practice areas in North America.

Salaries and Employee Benefits. Salaries and employee benefits for the second quarter of fiscal year 2002 were $100.5 million, compared to $93.7 million for the second quarter of fiscal year 2001, an increase of $6.8 million, or 7%. Salaries and employee benefit expenses for the quarter ended December 31, 2000 includes a $3.5 million compensation charge (2.1% of revenue) that the Company incurred resulting from agreements with our employee stockholders related to our initial public offering in October, 2000. The increase, exclusive of this charge, was due to a $7.3 million increase in salaries, which is primarily the result of salary increases of 3% and a 6% increase in headcount, a $4.5 million increase in pension expenses, a $0.5 million increase in benefits and wage taxes, partially offset by a $2.0 million decrease in the accrual for discretionary compensation. As a percentage of revenue, salaries and employee benefits increased from 55.6% to 57.4%. Salaries and employee benefit expenses for the first six months of fiscal year 2002 were $195.2 million, compared to $185.8 million for the first six months of fiscal year 2001, an increase of $9.4 million, or 5%. Salaries and employee benefit expenses for the six months ended December 31, 2000 includes the $3.5 million compensation charge (1% of revenue) mentioned above. The increase, exclusive of this charge, was due to a $15.3 million increase in salaries, which is primarily the result of salary increases of 3% and a 6% increase in headcount, an $8.4 million increase in pension expenses, a $2.4 million increase in benefits and wage taxes, partially offset by a $13.5 million decrease in the accrual for discretionary compensation. As a percentage of revenue, salaries and employee benefits increased from 54.8% to 56.2%.

Professional and Subcontracted Services. Professional and subcontracted services used in consulting operations for the second quarter of fiscal year 2002 were $14.5 million, compared to $15.6 million for the second quarter of fiscal year 2001, a decrease of $1.1 million, or 7%. As a percentage of revenue, professional and subcontracted services decreased from 9.2% to 8.3%. Professional and subcontracted services were $24.6 million for the first six months of fiscal year 2002, compared to $26.3 million for the first six months of fiscal year 2001, a decrease of $1.7 million, or 6%. As a percentage of revenue, professional and subcontracted services decreased from 7.7% to 7.1%. The decrease in both periods was mainly due to a decrease in reimbursable expenses incurred on behalf of clients.

Occupancy, Communications and Other. Occupancy, communications and other expenses for the second quarter of fiscal year 2002 were $25.5 million, compared to $27.5 million for the second quarter of fiscal year 2001, a decrease of $2.0 million, or 7%. The decrease was mainly due to lower travel costs of $1.0 million, lower general office expenses of $0.7 million, which are evenly spread throughout our consulting offices, and lower dues and entertainment expenses of $0.4 million, partially offset by higher telephone expenses of $0.4 million, which are mainly attributable to the additional capacity required to expand our electronic communications infrastructure. As a percentage of revenue, occupancy, communication and other decreased from 16.3% to 14.6%. Occupancy, communications and other expenses were $54.2 million for the first six months of fiscal year 2002, compared to $54.5 million for the first six months of fiscal year 2001, a decrease of $0.3 million, or 1%. The decrease was mainly due to lower travel costs of $2.0 million and to lower general office expenses of $0.9 million, partially offset by higher telephone expenses of $1.2 million, and higher rent expense of $1.2 million, which is attributable to an increase in leased space required to support our operations and higher real estate and operating expenses. As a percentage of revenue, occupancy, communication and other decreased from 16.1% to 15.6%.

16

General and Administrative Expenses. General and administrative expenses for the second quarter of fiscal year 2002 were $14.0 million, compared to $15.2 million for the second quarter of fiscal year 2001, a decrease of $1.2 million, or 8%. The decrease was mainly attributable to lower professional services of $1.4 million associated with corporate initiatives involving our knowledge sharing and systems infrastructure, a $1.3 million decrease in travel costs, partially offset by a $0.9 million increase in pension and insurance expenses and a $0.6 million increase in base salaries. As a percentage of revenue, general and administrative expenses decreased from 9.0% to 8.0%. General and administrative expenses for the first six months of fiscal year 2002 were $27.2 million, compared to $28.1 million for the first six months of fiscal year 2001, a decrease of $0.9 million, or 3%. The decrease was mainly attributable to lower professional services of $1.5 million, lower travel costs of $1.3 million and a lower accrual for discretionary compensation of $0.8 million, partially offset by a $1.6 million increase in pension and insurance expenses and a $1.1 million increase in base salaries. As a percentage of revenue, general and administrative expenses decreased from 8.3% to 7.8%.

Depreciation and Amortization. Depreciation and amortization for the second quarter of fiscal year 2002 was $5.2 million, compared to $6.1 million for the second quarter of fiscal year 2001, a decrease of $0.9 million, or 15%. Depreciation and amortization for the first six months of fiscal year 2002 was $10.6 million, compared to $12.0 million for the first six months of fiscal year 2001, a decrease of $1.4 million, or 12%. As a percentage of revenue, depreciation and amortization decreased from 3.6% to 3.0% for the second quarter of fiscal year 2002 and 3.5% to 3.1% for the first six months of fiscal year 2002. The decrease in both periods is primarily attributable to the Company ceasing amortization of goodwill, pursuant to FAS 142. For more information about the adoption of FAS 142, see Note 2 of the Notes to the Consolidated Financial Statements.

Interest Income, Net. Interest income, net for the second quarter of fiscal year 2002 was $0.2 million, compared to $0.1 million for the second quarter of fiscal year 2001, an increase of $0.1 million, or 100%. Interest income, net for the first six months of fiscal year 2002 was $0.7 million, compared to $0.4 million for the second quarter of fiscal year 2001, an increase of $0.3 million, or 75%.

Other Non-Operating Income. Other non-operating income for the first six months of fiscal year 2002 was $1.0 million, which is due to the gain on the sale of our U.S. based public plan retirement business. See Note 10 of the Notes to the Consolidated Financial Statements for more information about this transaction.

Income from Affiliates. Income from affiliates for the second quarter of fiscal year 2002 was $1.4 million, compared to $1.1 million for the second quarter of fiscal year 2001, an increase of $0.3 million, or 27%. Income from affiliates for the first six months of fiscal year 2002 was $2.1 million, unchanged from the prior year.

Provision for Income Taxes. Provision for income taxes for the first six months of fiscal year 2002 was $15.7 million, compared to $15.1 million for the first six months of fiscal year 2001. Our effective tax rate was 40.0% for the first six months of fiscal year 2002, compared to 42.9% for the first six months of fiscal year 2001. The change in rate was due to an increase in foreign tax credits utilized and a decrease in non-deductible expenses. We record a tax benefit on foreign net operating loss carryovers and foreign deferred tax assets only if it is more likely than not that a benefit will be realized.

Net Income. Net income for the second quarter of fiscal year 2002 was $10.1 million, compared to $6.7 million for the second quarter of fiscal year 2001, an increase of $3.4 million, or 51%. As a percentage of revenue, net income increased from 4.0% to 5.8%. Net income for the first six months of fiscal year 2002 was $23.6 million, compared to $20.1 million for the first six months of fiscal year 2001, an increase of $3.5 million, or 17%. As a percentage of revenue, net income increased from 5.9% to 6.8%.

17

Liquidity and Capital Resources

Our cash and cash equivalents at December 31, 2001 totaled $64.8 million, compared to $81.7 million at June 30, 2001. The $16.9 million decrease in cash and cash equivalents from June 30, 2001 to December 31, 2001 follows a typical pattern of cash flows for the Company that is attributable to the payment of bonuses in the first quarter of each fiscal year. During the six month period ended December 31, 2001, the Company generated $55.7 million of cash from our ongoing operations (before bonus payments), paid cash bonuses of $57.8 million, purchased fixed assets for $11.2 million and completed an acquisition and paid contingent acquisition consideration for $3.6 million. These expenditures were principally funded by cash generated from operating activities. The primary difference between the change in cash and cash equivalents during the six months ended December 31, 2001 is the $35.2 million of proceeds from our initial public offering received during the six months ended December 31, 2000.

Cash Used for/from Operating Activities. Cash used for operating activities for the first six months of fiscal year 2002 was $4.2 million, compared to cash from operating activities of $2.9 million for the first six months of fiscal year 2001. The variance is mainly due to a larger reduction in the bonus accrual due to greater bonus payments for fiscal year 2001, which were paid in September 2001 (fiscal year 2002), partially offset by improved collections of receivables.

The allowance for doubtful accounts increased $1.7 million and the allowance for work in process decreased $0.2 million from June 30, 2001 to December 31, 2001. The number of days of accounts receivable and work in process outstanding was 83 at December 31, 2001, down from 94 at September 30, 2001, and 89 at December 31, 2000.

Cash Used in Investing Activities. Cash used in investing activities for the first six months of fiscal year 2002 was $13.1 million, compared to $16.3 million for the first six months of fiscal year 2001. The decrease can be attributed to lower acquisition related payments of $3.3 million, higher proceeds from divestitures of $1.4 million, which includes $1.0 million of proceeds from the sale of our U.S. based public plan retirement business and lower purchases of fixed assets of $0.4 million, partially offset by lower distributions from affiliates of $1.5 million.

Cash from Financing Activities. Cash from financing activities for the first six months of fiscal year 2002 was insignificant. Cash flows from financing activities of $35.1 million for the six months ended December 31, 2000 were mainly due to proceeds from the Company's initial public offering.

Expenditures of capital funds were $14.8 million for the first six months of fiscal year 2002. Anticipated commitments of capital funds are estimated at $24.6 million for the remainder of fiscal year 2002, mainly for computer hardware purchases, office relocations and renovations, development and upgrade of financial and human resources systems, and acquisition-related payments. Additionally, our consultants require access to hardware and software that will support servicing our clients. In a rapidly changing technological environment, management anticipates we will need to make continued investments in our knowledge sharing and financial systems infrastructure. Although the Company anticipates that cash from operations will provide for our cash needs, a significant decrease in the demand for our consulting services caused by an economic slowdown or other factors could impact the Company's cash flows.

Our foreign operations do not materially impact liquidity or capital resources. At December 31, 2001, $15.6 million of the total cash balance of $64.8 million was held outside of North America, which we have the ability to utilize, if necessary. There are no significant repatriation restrictions other than local or U.S. taxes associated with repatriation. Our foreign operations in total are substantially self-sufficient for their working capital needs.

We lease office space, furniture and selected computer equipment under operating lease agreements with terms ranging from one to ten years. Management has determined that there is not a large concentration of leases that will expire in any one fiscal year. Consequently, management anticipates that any increase in future expenses will be mainly market driven. The Company continues to guarantee certain leases for office premises and equipment for Wellspring. Minimum remaining payments guaranteed under these leases at December 31, 2001, which expire at various dates through 2007, total $34.9 million, not including sublease income. These leases are also jointly and severally guaranteed by the Company's former partner in Wellspring, State Street Bank and Trust Company. The estimated loss from the potential exercise of these guarantees was included in the fiscal year 1998 loss on disposal of the benefits administration outsourcing business. The Company currently makes cash payments of $0.5 to $1.0 million per year related to Wellspring.

18

We have a $95.0 million revolving credit facility with a group of banks at an interest rate that varies with LIBOR and/or the Prime Rate. We are charged a quarterly commitment fee, currently 3/10 of 1% of the facility, that varies with our financial leverage and is paid on the unused portion of the credit facility. No amounts were outstanding under the revolving credit facility as of December 31, 2001, or June 30, 2001. Credit under the facility is available upon demand, although the credit facility requires us to observe certain covenants (including requirements as to minimum net worth and other financial and restrictive covenants) and is collateralized by a blanket lien on all assets. At December 31, 2001, we were in compliance with all covenants under the credit facility. The revolving portion of the credit facility is scheduled to mature on June 30, 2003. A portion of the revolving facility is used to support required letters of credit issued under the credit line. As a result, $4.3 million of the facility is currently unavailable for operating needs.

Additionally, the Company guarantees a credit facility which it established to collateralize loans to associates for purchased redeemable common stock under our former Stock Purchase Program. This program was discontinued in conjunction with our initial public offering. As a result, the facility decreases as the loans are repaid. The maximum available borrowings and aggregate outstanding balances under this facility were $3.7 million and $8.5 million at December 31, 2001, and June 30, 2001, respectively. Shares totaling 3,067,000 and 4,598,000 of Watson Wyatt & Company Holdings shares were pledged by stockholders to collateralize these loans at December 31, 2001, and June 30, 2001, respectively.

Disclaimer Regarding Forward-Looking Statements

This filing contains certain statements that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to the following: Note 3 on page 7; Notes 6 and 7 on page 11; the sixth paragraph under Liquidity and Capital Resources on page 18; the eighth paragraph under Liquidity and Capital Resources on page 18; and Part II, Item 1 "Legal Proceedings" on page 20. In some cases, you can identify these statements and other forward-looking statements in this filing by words such as "may," "will," "expect," "anticipate," "believe," "estimate," "plan," "intend," "continue," or similar words. You should read these statements carefully because they contain projections of our future results of operations or financial condition, or state other "forward-looking" information. A number of risks and uncertainties exist which could cause actual results to differ materially from the results reflected in these forward-looking statements. Such factors include, but are not limited to our continued ability to recruit and retain highly qualified associates, outcomes of litigation, a significant decrease in the demand for the consulting services we offer as a result of changing economic conditions or other factors, actions by competitors offering human resources consulting services, including public accounting and consulting firms, technology consulting firms and internet/intranet development firms, regulatory, legislative and technological developments that may affect the demand for or costs of our services and other factors discussed under "risk factors" in our prospectus dated June 25, 2001, which is filed with the SEC and may be accessed via EDGAR on the SEC's web site at www.sec.gov. These statements are based on assumptions that may not come true. All forward-looking disclosure is speculative by its nature. The Company undertakes no obligation to update any of the forward-looking information included in this report, whether as a result of new information, future events, changed expectations or otherwise.

19

Item 3. Quantitative and Qualitative Disclosures About 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. We have examined our exposure to these risks and concluded that none of our exposures in these areas are material to fair values, cash flows or earnings.


PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are a party to various lawsuits, arbitrations or mediations that arise in the ordinary course of business. These disputes typically involve claims relating to the rendering of professional services or employment matters. The matters reported on below involve the most significant pending or potential claims against us. We are incorporating, by reference, the descriptions of the legal proceedings that appear under the caption "Legal Proceedings" beginning on page 18 of the Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2001. Management believes, based on currently available information, that the results of all such proceedings, in the aggregate, will not have a material adverse effect on our financial condition.

Societe Internationale de Telecommunications Aeronautique S.C. (SITA). We are in the mediation process regarding this claim.  If this case is not settled, trial is scheduled for June 2002.

Pacific Group Medical Association. The settlement agreement disposing of the claim, which has been signed by the parties in October, is awaiting court approval.

Other. The attorney for a retirement client in the U.S. has advised us of a claim involving an estimate of the cost of a benefit enhancement, alleging approximately $60 million in damages. We are evaluating the claim and have exchanged correspondences with the client proposing mediation of this matter.

Insurance Coverage

We carry substantial professional liability insurance with a self-insured retention of $1 million per occurrence, which provides coverage for professional liability claims including the cost of defending such claims. We also carry employment practices liability insurance. The Company has provided for the self-insured retention where estimated losses in excess of such amount are considered probable. The actual outcome of any pending lawsuit is not likely to result in any additional loss to us beyond the $1 million retention.

Item 2. Changes in Securities and Use of Proceeds

Initial Public Offering

In October 2000, we completed an initial public offering ("IPO") of our class A common stock. In conjunction with that offering, we reorganized our corporate structure by merging Watson Wyatt & Company with a wholly-owned subsidiary of the Company. As a result, Watson Wyatt & Company became a wholly-owned subsidiary of the Company.

20

At the time of the reorganization, each share of Watson Wyatt & Company's redeemable common stock was converted into one share of class B-1 common stock and one share of class B-2 common stock of the Company. The class B common stock was divided into two classes to accommodate two different transfer restriction periods, which may be waived by the Board of Directors. The class B shares will automatically convert into class A common stock following the expiration or waiver of the respective transfer restriction periods. The class B-1 shares were subject to a transfer restriction period of 12 months following the IPO date, which expired on October 16, 2001, while the class B-2 shares are subject to a transfer restriction period of 24 months following the IPO date. The Company waived the transfer restriction on a total of 1,559,250 class B-1 and 1,559,250 class B-2 shares to allow for conversion into the class A shares for sale in the IPO.

Secondary Public Offering

In June 2001, we completed a secondary public offering of 2,950,000 shares of our class A common stock. In July 2001, our underwriters exercised their over-allotment option and purchased an additional 442,500 shares of class A common stock from selling stockholders. In conjunction with this offering, the Board of Directors waived the transfer restrictions on a total of 3,288,215 class B-1 shares to allow for conversion into the class A shares sold by selling stockholders.

Other Conversions

On October 16, 2001, the 12-month transfer restriction on our class B-1 shares expired. As a result, 9,956,140 class B-1 shares were automatically converted to class A shares of common stock.

In August 2001, the Board of Directors of the Company approved a proposal to amend the alliance agreement with Watson Wyatt Partners to reduce Watson Wyatt Partners' minimum required holdings of the Company's common stock to 100,000 shares. The Board authorized the conversion, on or after October 16, 2001, of up to 313,000 of the Company's class B-2 shares held by Watson Wyatt Partners for distribution by Watson Wyatt Partners to its partners, subject to the prior execution by each partner of a lock-up agreement imposing the same transfer restrictions on such class A shares as are applicable to the Company's class B-2 shares. In December 2001, the Board also authorized the conversion of 20,460 of the Company's class B-2 shares held by Watson Wyatt Partners for distribution by Watson Wyatt Partners to certain retiring associates. Following the conversion of the class B-1 shares pursuant to the Company's Amended and Restated Certificate of Incorporation and the class B-2 shares pursuant to the Board's authorization, Watson Wyatt Partners distributed 626,000 shares to its individual partners, of which we received 62,600 representing our 10% ownership interest. We have accounted for these shares as treasury stock.


Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

21

Item 6.   Exhibits and Reports on Form 8-K

a.

Exhibits

   3.1

Amended and Restated Certificate of Incorporation of Watson Wyatt & Company    Holdings1

   3.2

Amended and Restated Bylaws of Watson Wyatt & Company Holdings2

   4

Form of Certificate Representing Common Stock1

   10.1

Amended Credit Agreement Among Bank of America, N.A. and Others dated October 6,    20003

   10.2

Consent of Bank of America, N.A. 4

   10.3

Agreement with David B. Friend, M.D. dated October 22, 19991

   10.4

Senior Officer Deferred Compensation Plan4

   10.5

Form of agreement among Watson Wyatt & Company, Watson Wyatt & Company    Holdings and employee directors, executive officers and significant stockholders    restricting the transfer of shares5

   10.6

Voluntary Deferred Compensation Plan

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Subsidiaries of Watson Wyatt & Company Holdings

   22

Definitive Proxy Statement on Schedule 14A, filed on October 5, 20016

b.

Reports on Form 8-K

Report on Form 8-K filed January 24, 2002

 

___________________________

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

2Incorporated by reference from Registrant's Form 10-Q, filed on May 2, 2001

3Incorporated by reference from Registrant's Form 10-Q, filed on November 14, 2000

4Incorporated by reference from Registrant's Form 10-K, filed on August 20, 2001

5Incorporated by reference from Registrant's Form S-3/A, Amendment No. 5 (File No. 33-394973), filed on September 14, 2000

6Incorporated by reference from Registrant's Form DEF14A, filed on October 5, 2001

 

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Signatures

 Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Watson Wyatt & Company Holdings
(Registrant)

/S/ John J. Haley              

February 12, 2002

Name:

John J. Haley

Date

Title:

President and Chief

 

 

Executive Officer

 

 

 

 

/S/ Carl D. Mautz             

February 12, 2002

Name:

Carl D. Mautz

Date

Title:

Vice President and Chief

 

 

Financial Officer

 

 

 

 

/S/ Peter L. Childs            

February 12, 2002

Name:

Peter L. Childs

Date

Title:

Controller

 

 

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