<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 2000.
REGISTRATION NO. 333-94975
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WATSON WYATT & COMPANY HOLDINGS
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6719 52-2211537
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------------
6707 DEMOCRACY BOULEVARD, SUITE 800
BETHESDA, MARYLAND 20817
(301) 581-4600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
JOHN J. HALEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WATSON WYATT & COMPANY HOLDINGS
6707 DEMOCRACY BOULEVARD, SUITE 800
BETHESDA, MARYLAND 20817
(301) 581-4600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
Copies to:
<TABLE>
<S> <C>
WALTER W. BARDENWERPER, ESQ. JONATHAN M. WAINWRIGHT, ESQ.
JAMES S. MINOGUE, III, ESQ. DIANA R. DE BRITO, ESQ.
DIANE C. SAPIR, ESQ. CADWALADER, WICKERSHAM & TAFT
WATSON WYATT & COMPANY 100 MAIDEN LANE
6707 DEMOCRACY BOULEVARD, SUITE 800 NEW YORK, NEW YORK 10038
BETHESDA, MARYLAND 20817 (212) 504-6000
(301) 581-4600
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective and all other conditions to the proposed merger have been satisfied.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) UNIT OFFERING PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Class B-1 and Class B-2 common stock, each 30,000,000 $6.68 $103,540,000 $27,334.56
par value $.01 per share
</TABLE>
(1) The amount to be registered is the expected sum of class B-1 common stock
and class B-2 common stock of Watson Wyatt & Company Holdings that will be
issued upon conversion of shares of common stock of Watson Wyatt & Company
in the merger described in this registration statement. Class B-1 and
class B-2 will consist of an equal number of shares.
(2) Estimated under Rule 457(f)(2) solely for the purpose of calculating the
registration fee.
(3) Previously paid.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
FILES A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT THEREAFTER SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION ACTING PURSUANT
TO SECTION 8(A), DETERMINES.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION APRIL 18, 2000
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE>
[LOGO]
WATSON WYATT & COMPANY
6707 DEMOCRACY BOULEVARD, SUITE 800
BETHESDA, MD 20817
(301) 581-4600
, 2000
To our stockholders:
You are cordially invited to a special meeting of stockholders of Watson
Wyatt & Company, which will be held at our offices, 6707 Democracy Boulevard,
Suite 800, Bethesda, MD, on , 2000 at 9:00 A.M. At the special
meeting, stockholders will vote on changes to our corporate structure designed
to facilitate our plans to become a publicly traded company. Stockholders also
will be asked to approve a new long-term incentive (stock option) plan. Finally,
stockholders will be asked to vote on an amendment to Watson Wyatt & Company's
existing bylaws which will permit transfers of Watson Wyatt & Company's common
stock for estate planning purposes.
The changes involve the merger of Watson Wyatt & Company with a newly formed
merger subsidiary and the creation of a holding company, Watson Wyatt & Company
Holdings. In the merger, you will receive class B shares of the new holding
company in exchange for your shares of Watson Wyatt & Company. Class B-1 and B-2
shares cannot be transferred, except under limited exceptions, for 12 and
24 months, respectively, after the public offering. Watson Wyatt & Company
Holdings will have a public offering of its class A common stock immediately
after the merger. The merger and adoption of the new stock option plan are
contingent on our moving forward with the public offering.
In order to proceed with the merger and public offering our stockholders
must approve the merger. Under Delaware law the merger requires the approval of
over 50% of the outstanding shares. However, because we want strong stockholder
support to proceed with this transaction, we have decided not to proceed with
the merger unless we also receive the affirmative vote of over 80% of the shares
actually voting for or against the proposal, if higher than a majority of the
outstanding shares.
Our board of directors has determined that these proposals are in the best
interests of our stockholders and recommends that you vote FOR them. Your vote
is very important.
/s/ John J. Haley
John J. Haley
President and Chief Executive Officer
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS RELATING TO THE MERGER, THE
RELATED TRANSACTIONS AND OUR BUSINESS. SEE "RISK FACTORS" BEGINNING ON PAGE 6.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR HAS DETERMINED IF
THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this proxy statement/prospectus is , 2000. It is
first being mailed to Watson Wyatt & Company stockholders on , 2000.
<PAGE>
[LOGO]
WATSON WYATT & COMPANY
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2000
To our stockholders:
A special meeting of stockholders of Watson Wyatt & Company will be held at
6707 Democracy Boulevard, Suite 800, Bethesda, Maryland on , 2000,
at 9:00 A.M., for the following purposes:
- to consider and vote upon a proposal to adopt the Agreement and Plan of
Merger, dated as of , 2000, among Watson Wyatt & Company,
Watson Wyatt & Company Holdings and WW Merger Subsidiary, Inc. Under the
merger agreement, among other things, the merger subsidiary will merge
into Watson Wyatt & Company, and each share of our currently outstanding
common stock will be converted, into one share of class B-1 and one share
of class B-2 common stock of Watson Wyatt & Company Holdings, contingent
on the consummation of the public offering of class A common stock of
Watson Wyatt & Company Holdings. A copy of the merger agreement is
attached as Annex A and is described in the accompanying proxy
statement/prospectus;
- to consider and vote upon a proposal to adopt the 2000 Long Term Incentive
Plan, contingent on approval of the merger and the consummation of the
public offering;
- to consider and vote upon a proposal to amend the current bylaws of Watson
Wyatt & Company to permit transfers of our common stock to specified
categories of transferees, including trusts created for the benefit of the
stockholder, his or her spouse or descendants to facilitate estate
planning. The effectiveness of this proposal is not contingent upon the
effectiveness of any other proposal; and
- to consider any other matters that properly come before the special
meeting.
A list of stockholders entitled to vote at the special meeting will be
available for inspection by stockholders of record at least ten days prior to
the special meeting at the office of the secretary, 6707 Democracy Boulevard,
Suite 800, Maryland 20817. The board of directors has fixed the close of
business on , 2000, as the record date for determining holders of our
common stock entitled to notice of and to vote at the special meeting.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Walter W. Bardenwerper
Walter W. Bardenwerper
Secretary
Bethesda, Maryland
, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Summary............................... 1
Risk Factors.......................... 6
Use of Terminology.................... 13
Where You Can Find More Information... 13
Proposal No. 1--Approval of Merger.... 15
The Merger and the Public
Offering.......................... 15
Miscellaneous Questions and
Answers........................... 18
Description of Capital Stock,
Certificate of Incorporation and
Bylaws............................ 22
Proposal No. 2--Approval of 2000 Long
Term Incentive Plan................. 33
Proposal No. 3--Approval of Amendments
to Current Watson Wyatt & Company
Bylaws.............................. 36
General............................... 36
Selected Consolidated Financial
Data................................ 38
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 41
Business.............................. 51
Management............................ 65
Common Stock Purchase Arrangements
Before the Merger and the Public
Offering............................ 72
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Transactions with Management and
Others.............................. 72
Security Ownership of Management and
Others.............................. 73
Legal Matters......................... 73
Transfer Agent and Registrar.......... 73
Submission of Stockholder Proposals... 74
Experts............................... 74
Index to Consolidated Financial
Statements.......................... F-1
Annex A--Form of Agreement and Plan of
Merger.............................. A-1
Annex B--Form of Certificate of
Incorporation of Watson Wyatt &
Company Holdings.................... B-1
Annex C--Form of Bylaws of Watson
Wyatt & Company Holdings............ C-1
Annex D--Form of 2000 Long Term
Incentive Plan...................... D-1
Annex E--Amendment to Watson Wyatt &
Company Bylaws...................... E-1
Annex F--Section 262 of Delaware
General Corporation Law--Appraisal
Rights.............................. F-1
</TABLE>
ABOUT THIS PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus is part of a registration statement we have
filed with the Securities and Exchange Commission. You should read this proxy
statement/prospectus with the additional information described under the heading
"Where You Can Find More Information."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains forward-looking statements that
involve substantial risks and uncertainties. You can identify these statements
by forward-looking words such as "may," "will," "expect," "anticipate,"
"believe," "estimate," "plan," "intend," "continue" or similar words. You should
read statements that contain these words carefully because they discuss our
future expectations, contain projections of our future results of operations or
of our financial condition or state other "forward-looking" information. This
proxy statement/prospectus also contains third-party estimates regarding the
size and growth of markets.
The sections captioned "Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as any
cautionary language in this proxy statement/ prospectus, provide examples of
risks, uncertainties, and events that may cause our actual results to differ
materially from the expectations. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. We qualify any
forward-looking statements entirely by these cautionary factors.
i
<PAGE>
SUMMARY
THIS SUMMARY IS QUALIFIED BY MORE DETAILED INFORMATION APPEARING IN OTHER
SECTIONS OF THIS PROXY STATEMENT/PROSPECTUS. THE OTHER INFORMATION IS IMPORTANT,
SO PLEASE READ THIS ENTIRE PROXY STATEMENT/ PROSPECTUS CAREFULLY.
We are furnishing this proxy statement/prospectus to you in connection with
our solicitation of proxies at a special meeting of stockholders of Watson Wyatt
& Company. We also are furnishing this proxy statement/prospectus as a
prospectus in connection with the issuance by Watson Wyatt & Company Holdings of
class B common stock as a result of the proposed merger. We are first mailing
this proxy statement/prospectus and the accompanying proxy card on or about
, 2000.
THE SPECIAL MEETING
<TABLE>
<S> <C>
Date and Time........................ 9:00 a.m.
Location............................. 6707 Democracy Boulevard, Suite 800, Bethesda, Maryland
20817.
Record Date.......................... , 2000. Only stockholders of record as of the close of
business on the record date will be entitled to vote at the
special meeting.
Shares Entitled to Vote.............. We had shares of common stock outstanding and
entitled to vote as of the close of business on the record
date. These shares are the only securities that may be voted
at the special meeting. Each share is entitled to one vote
on each proposal.
Quorum............................... Holders of a majority of the issued and outstanding shares
of our common stock, present in person or by proxy, will
constitute a quorum for the transaction of business at the
special meeting.
Votes Required....................... A majority of all shares entitled to vote is required to
approve the merger at the special meeting. In addition, we
are requiring that the merger be approved by 80% of the
shares of common stock actually voting for or against the
proposal, if higher.
A majority of all shares present at the meeting, in person
or by proxy, is required to approve the 2000 Long Term
Incentive Plan.
A vote of 80% of shares entitled to vote is required to
amend the bylaws.
Appraisal Rights..................... Stockholders who do not vote for the merger and follow the
requisite procedures described in this prospectus may
exercise appraisal rights.
</TABLE>
At the special meeting, stockholders are being asked to vote on three
proposals:
- approval of the creation of a holding company structure. This structure is
to be accomplished by adopting the Agreement and Plan of Merger, dated as
of , 2000, among Watson Wyatt & Company, Watson Wyatt & Company
Holdings and WW Merger Subsidiary, Inc. In the merger agreement, the
merger subsidiary will merge into Watson Wyatt & Company and each share of
our currently outstanding common stock will be converted, into one share
of class B-1 common stock and one share of class B-2 common stock of
Watson Wyatt & Company Holdings, contingent on the consummation of the
public offering;
- adoption of the 2000 Long Term Incentive Plan of Watson Wyatt & Company
Holdings, contingent on approval of the merger and consummation of the
public offering; and
1
<PAGE>
- approval of an amendment to the current bylaws of Watson Wyatt & Company
to permit transfers of our common stock to specified categories of
transferees, including trusts created for the benefit of the stockholder,
his or her spouse or descendants to facilitate estate planning. The
effectiveness of this proposal is not contingent upon the effectiveness of
any other proposal.
After the merger and the related public offering, it is anticipated that
approximately 83% of the common stock will continue to be held by
associates, while approximately 17% of the common stock will be held by
the public.
2
<PAGE>
OUR COMPANY
Founded in 1946, Watson Wyatt & Company is a global human capital consulting
firm. We help our clients enhance business performance by improving their
ability to attract, retain and motivate qualified employees. We design, develop
and implement human resources strategies and programs through our closely
related practice areas, the Benefits Consulting Group, HR Technologies Group and
the Human Capital Group. We also offer web-based technologies that transform the
way our clients implement and deliver HR programs and improve communications
with their employees. This manner of implementing and delivering HR programs,
which we refer to as our eHR-TM- approach combines Internet applications and
other emerging technologies with our expertise in employee benefits and human
capital consulting.
We provide human capital consulting services to many of the world's largest
corporations as well as emerging growth companies, public institutions and
non-profit organizations. Our clients include, General Electric Company, General
Motors, IBM and Lockheed Martin Corporation. Many of our client relationships
have existed continuously over several decades. We generated approximately
$580 million in revenues during the twelve months ended December 31, 1999, with
net income of approximately $11.3 million during this same period.
The growing demand for employee benefits and human capital consulting
services is directly related to the size, complexity and rapid changes
associated with human resources programs. Employee salary and benefits costs
represent a significant component of worldwide corporate spending. In recent
years, several industry trends have emerged that have increased the demand for
our services, including:
- growing strategic importance of human capital;
- a technology revolution in HR programs as the Internet, intranets and
other e-business tools enable companies to manage their HR function more
efficiently and effectively;
- changing workforce demographics, such as a shortages of talented employees
and an unprecedented aging of the workforce;
- growing importance of employer-sponsored benefits programs due to limited
baby boomer retirement savings, uncertainty of government-sponsored
programs, and rising healthcare costs;
- record levels of global mergers and acquisitions that require the
integration of diverse corporate cultures and HR programs quickly and
effectively;
- continuing globalization of economies, which requires corporations to
retain human capital consultants with global resources and local
expertise; and
- complex and changing government regulation of employee benefits programs.
OUR GROWTH STRATEGY
Our strategy is to expand our competitive position by providing
comprehensive, value-added human capital consulting services that help our
clients solve their human resources challenges. We plan to pursue growth by:
- expanding our relationships with existing clients by identifying and
serving their growing needs for integrated human resources services
throughout the world;
- creating innovative web-based or eHR-TM- programs for delivering HR
services 24 hours a day, 7 days a week;
- developing new client relationships by capitalizing on our recognized
brand name, reputation for quality service, extensive and widely-cited
research studies and eHR-TM- methods for implementing HR programs; and
- pursuing strategic acquisitions that will expand our human capital
consulting capabilities and provide us with additional geographic
execution capabilities.
3
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes the consolidated financial data for our
business. You should read the following summary consolidated financial data
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the related
notes beginning on page F-1 of this proxy statement/prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED DECEMBER 31,
------------------------------- -------------------
1997 1998 1999 1998 1999
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA (A):
Continuing operations:
Fees................................... $486,502 $ 512,660 $556,860 $274,343 $298,734
Operating expenses:
Salaries and benefits................ 252,302 268,611 298,925 148,868 160,753
SIBP (b)............................. -- -- 22,600 7,600 15,000
Non-recurring compensation charge
related to formula book value
change (c)......................... -- 69,906 -- -- --
Other operating expenses............. 212,582 217,109 211,535 99,436 106,762
-------- --------- -------- -------- --------
Income (loss) before income taxes and
minority interest.................... $ 21,618 $ (42,966) $ 23,800 $ 18,439 $ 16,219
======== ========= ======== ======== ========
Income (loss) from continuing
operations........................... $ 12,381 $ (56,212) $ 12,135 $ 9,437 $ 8,560
Discontinued operations (d)............ (11,483) (69,906) 8,678 8,678 --
-------- --------- -------- -------- --------
Net income (loss)...................... $ 898 $(126,118) $ 20,813 $ 18,115 $ 8,560
======== ========= ======== ======== ========
Earnings (loss) per share, continuing
operations, basic and fully
diluted.............................. $ 0.71 $ (3.27) $ 0.80 $ 0.63 $ 0.57
Earnings (loss) per share, basic and
fully diluted........................ $ 0.05 $ (7.34) $ 1.37 $ 1.21 $ 0.57
Weighted average shares outstanding.... 17,438 17,170 15,215 14,977 15,140
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(E) AS ADJUSTED(F)
--------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 13,688 $ 13,688 $ 33,887
Net working capital.................................... 8,882 8,882 38,266
Total assets........................................... 301,024 301,024 321,223
Redeemable common stock................................ 99,398 -- --
Total stockholders' equity (deficit)................... (65,119) 34,279 63,663
</TABLE>
- ------------------------
(a) We believe that our income as an employee-owned company is not indicative of
the operating performance we will report as a publicly traded company due to
the significant impact of the following two non-recurring compensation
related expenses: (1) supplemental discretionary bonuses accrued under our
stock incentive bonus plan, described in more detail in footnote (b) below,
and (2) a one-time charge in fiscal year 1998 related to a change in the way
we calculated our formula book value, the price at which we sold and
repurchased our restricted common stock in transactions with our employees
prior to the public offering, described in more detail in footnote
(c) below.
4
<PAGE>
We believe that our results of operations in fiscal years 1998 and 1999 and
the six month periods ended December 31, 1998 and 1999 are more comparable
to, and a better indication of, our performance as a publicly traded company
if they are analyzed excluding the stock incentive bonus plan and the
non-recurring compensation charge described above. The continuing operations
loss before taxes and minority interest of $43.0 million for fiscal year
1998 would have improved by $69.9 million, and the continuing operations
income before taxes and minority interest of $23.8 million for fiscal year
1999 would have improved by $22.6 million without these items. Income before
taxes and minority interest from continuing operations for the three years
ended June 30, 1997, 1998 and 1999 would have been $21.6 million,
$26.9 million and $46.4 million, respectively. Income before taxes and
minority interest from continuing operations for the six month periods ended
December 31, 1998 and 1999 would have been $26.0 million and $31.2 million,
respectively, if bonuses were accrued under the compensation structure
management will adopt as a publicly traded company.
The proposed Watson Wyatt & Company Holdings 2000 Long Term Incentive Plan
provides for non-qualified stock options with an exercise price equal to
fair market value at the date of the grant and no uncertainties that would
require variable accounting under generally accepted accounting principles.
Therefore, grants under the stock option program will not result in
compensation expense.
In a few foreign jursidictions where option grants are impractical, we will
grant stock appreciation rights (SARs), which will require recognition of
compensation expense over a vesting period to the extent the market price of
the stock increases. However, it is anticipated that this expense will be
immaterial.
(b) Historically, we have paid incentive bonuses to associates under a fiscal
year-end bonus program. Beginning in fiscal year 1999, in addition to annual
fiscal year-end bonuses, we provided supplemental bonus compensation to our
employee stockholders pursuant to the stock incentive bonus plan in an
amount representing all income in excess of a targeted amount. Following the
public offering, we will terminate the stock incentive bonus plan and
replace it with equity based incentives more customary to publicly traded
companies.
(c) As an employee-owned company without a public trading market, we sold and
repurchased shares of common stock in transactions with our employee
stockholders at a formula book value calculated in accordance with our
bylaws. In fiscal year 1998, we recorded a one-time non-cash compensation
charge against continuing operations of $69.9 million to reflect a change in
the method of calculating the formula book value. This change eliminated
from the calculation of formula book value the $69.9 million charge taken
for discontinued operations in fiscal year 1998 to reflect the
discontinuation of our benefits administration outsourcing business.
(d) As discussed in footnotes (a) and (c) above, in fiscal year 1998 we
discontinued our benefits administration outsourcing business and recorded a
$69.9 million charge to earnings in the discontinued operations line. The
discontinuation is more fully described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Fiscal years
1997 and 1998 also include the operating losses of the benefits
administration outsourcing business prior to its discontinuation in 1998,
which are reflected in the discontinued operations line. In fiscal year
1999, the discontinued operations credit reflects the reduction of the
expected loss on disposal of the benefits administration outsourcing
business.
(e) The "Pro Forma" column reflects the exchange of shares under our corporate
reorganization, including the reclassification of the current redeemable
common stock to permanent stockholders' equity.
(f) The "Pro Forma As Adjusted" column reflects the sale of 2,800,000 shares of
class A common stock offered by us, the automatic conversion of all shares
of class B common stock sold by selling stockholders in the offering into
shares of class A common stock, and the application of the estimated net
proceeds to us from this offering.
5
<PAGE>
RISK FACTORS
BEFORE YOU APPROVE THE TRANSACTIONS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS, YOU SHOULD UNDERSTAND THE RISKS INVOLVED. YOU SHOULD
CAREFULLY CONSIDER THESE RISK FACTORS, AS WELL AS ALL OF THE OTHER INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT/PROSPECTUS BEFORE
YOU DECIDE TO APPROVE THE TRANSACTIONS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS. IF ANY OF THE RISKS DISCUSSED IN THIS PROXY
STATEMENT/PROSPECTUS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND
OPERATING RESULTS COULD BE ADVERSELY AFFECTED. AS A RESULT, THE VALUE OF OUR
COMMON STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
WE MUST CONTINUE TO RECRUIT AND RETAIN QUALIFIED CONSULTANTS; OUR FAILURE TO
DO SO COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE SUCCESSFULLY
Our continued success and future growth depend heavily upon our ability to
attract and retain enough highly skilled and motivated consultants. We must meet
these human capital requirements if we are to deliver our sophisticated and
technical services to our clients. We compete against many companies with
greater financial resources both within our industry and in other industries to
attract these qualified individuals. Our failure to recruit and retain adequate
talent could reduce our competitive strength and lead to a deterioration of our
business.
This competition for personnel may adversely affect our profitability. We
can give no assurance that we will be able to generate sufficient revenue to
offset any additional personnel costs. We also cannot guarantee that we will be
successful in hiring enough consultants to continue our growth.
CHANGES IN OUR COMPENSATION PROGRAMS COULD IMPAIR OUR ABILITY TO RETAIN
CONSULTANTS
Historically, our compensation programs have been principally cash-based. We
plan to change our compensation programs upon completing this offering by
introducing incentive stock options and discontinuing the payment of
supplemental bonuses under our current stock incentive bonus plan. This change
could adversely affect our ability to retain our consultants if our total
compensation program is not perceived by our consultants to be competitive with
those of other firms.
WE DEPEND ON OUR ASSOCIATES; THE LOSS OF KEY CONSULTANTS AND MANAGERS COULD
DAMAGE OR RESULT IN THE LOSS OF CLIENT RELATIONSHIPS AND ADVERSELY AFFECT
OUR BUSINESS
Our success largely depends upon the business generation capabilities and
project execution skills of our consultants. In particular, our consultants'
personal relationships with our clients are a critical element of obtaining and
maintaining client engagements. Losing consultants and account managers who
manage substantial client relationships or possess substantial experience or
expertise, could adversely affect our ability to secure and complete
engagements, which would adversely affect our results of operations.
In addition, if any of our key consultants were to join an existing
competitor or form a competing company, some of our clients could choose to use
the services of that competitor instead of our services. Clients or other
companies seeking to develop in-house services similar to ours also could hire
our key consultants. Such hiring would not only result in our loss of key
consultants but also could result in the loss of a client relationship or a new
business opportunity.
COMPETITION COULD RESULT IN LOSS OF OUR MARKET SHARE THAT COULD REDUCE OUR
PROFITABILITY
The markets for our principal services are highly competitive. Our
competitors currently include other human resources consulting and actuarial
firms, as well as the human resources consulting divisions of some public
accounting and consulting firms. Several of our competitors have greater
financial, technical, and marketing resources than we have, which could enhance
their ability to respond
6
<PAGE>
more quickly to technological changes, finance acquisitions and fund internal
growth. Also, the consulting practices of the large international accounting
firms, or other competitors who have a larger presence than we do in particular
markets, gain marketing advantages from their greater name recognition.
Our current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address client needs. New competitors or alliances among
competitors could emerge and gain significant market share. In addition, some of
our competitors may have or may develop a lower cost structure or superior
services that gain greater market acceptance than the services that we offer or
develop.
CLIENTS' CRITERIA FOR SELECTING CONSULTANTS MAY CHANGE
The ability to tailor services to clients' particular needs traditionally
has been a key selection criterion among buyers of consulting services in our
core businesses. However, these buyers' selection criteria may change and price
could become a more significant factor, thereby adversely affecting our
operating results.
DEMAND FOR OUR SERVICES MAY DECREASE FOR VARIOUS REASONS, INCLUDING A
DECLINE IN A CLIENT'S OR AN INDUSTRY'S FINANCIAL CONDITION OR AN
INDUSTRY-SPECIFIC ECONOMIC DOWNTURN THAT COULD ADVERSELY AFFECT OUR
OPERATING RESULTS
We can give no assurance that the demand for our services will continue to
grow or that we will compete successfully with our existing competitors, new
competitors or our clients' internal capabilities. Some of our clients may
decide to develop or use their internal resources to satisfy their needs for
some or all of the services that we provide. Our clients' demand for our
services also may change based on their own needs and financial conditions. When
economic downturns affect particular clients or industry groups, they frequently
reduce their budgets for outside consultants, which could reduce the demand for
our services and increase price competition.
In addition, the demand for many of our core benefits services is affected
by government regulation and taxation of employee benefits plans. This
regulation and taxation drive our clients' needs for compliance-related
services. Significant changes in tax or social welfare policy or regulations
could lead some employers to discontinue their employee benefit plans, thereby
reducing the demand for our services. A simplification of regulations or tax
policy also could reduce the need for our services.
OUR CLIENTS GENERALLY MAY TERMINATE OUR SERVICES AT ANY TIME, WHICH COULD
DECREASE ASSOCIATE UTILIZATION
Our clients generally may terminate our engagements at any time. If a client
reduces the scope of or terminates the use of our services with little or no
notice, our associate utilization will decline. In such cases, we must rapidly
redeploy our associates to other engagements in order to minimize the potential
negative impact on our financial performance. In addition, because much of our
work is project based rather than recurring in nature, our associates'
utilization depends on our ability to continually secure additional engagements.
MANY OF OUR ENGAGEMENTS, PARTICULARLY LONG-STANDING RELATIONSHIPS AND
ENGAGEMENTS INVOLVING STANDARD ANNUAL ACTIVITIES, ARE NOT BASED ON WRITTEN
AGREEMENTS, WHICH COULD RESULT IN DISPUTES WITH OUR CLIENTS
Many of our engagements, including the majority of those involving
long-standing relationships or standard annual activities such as actuarial
valuations, are not based on formal written agreements. In such cases, there is
a greater risk of misunderstandings with our clients concerning the scope and
terms of our engagement and our liability for unsatisfactory performance.
Disputes could damage our client relationships and result in unanticipated costs
and loss of revenue that could adversely affect our results of operations.
7
<PAGE>
OUR FIXED FEE ENGAGEMENTS COULD HURT OUR FINANCIAL RESULTS IF NOT MANAGED
PROPERLY
We enter into some engagements on a negotiated fixed fee basis. If we do not
properly negotiate the price and manage the performance of these engagements we
might incur losses on individual engagements and our overall financial results
would be adversely affected.
WE ARE SUBJECT TO MALPRACTICE CLAIMS ARISING FROM OUR WORK, WHICH COULD
ADVERSELY AFFECT OUR REPUTATION AND BUSINESS
Clients and third parties who are dissatisfied with our services or who
claim to suffer damages caused by our services may bring lawsuits against us.
The nature of our work, especially our actuarial services, involves assumptions
and estimates concerning future events, the actual outcome of which we cannot
know with certainty in advance. In addition, we could make computational,
software programming, or data management errors.
Clients may seek to hold us responsible for the financial consequences of
these errors or variances. Given that we frequently work with large pension
funds, relatively small percentage errors or variances could create significant
dollar variances and claims for unfunded liabilities. In most cases, our
exposure to liability on a particular engagement is substantially greater than
the profit opportunity that the engagement generates for us. For example,
possible claims might include:
- a client's assertion that actuarial assumptions used in a pension plan
were unreasonable, leading to plan underfunding;
- a claim arising out of the use of inaccurate data, which could lead to an
underestimation of plan liabilities; and
- a claim that employee benefit plan documents were misinterpreted or plan
amendments were misstated in plan documents, leading to overpayments to
beneficiaries.
Defending lawsuits of this nature or arising out of any of our services
could require substantial amounts of management attention, which could affect
their focus on operations and could adversely affect our financial performance.
In addition to defense costs and liability exposure, malpractice claims may
produce negative publicity that could hurt our reputation and business.
OUR QUARTERLY REVENUES MAY FLUCTUATE WHILE OUR EXPENSES ARE RELATIVELY FIXED
Quarterly variations in our revenues and operating results occur as a result
of a number of factors, such as:
- the significance of client engagements commenced and completed during a
quarter;
- the seasonality of some specific types of services; in particular,
retirement revenues are more heavily weighted toward the second half of
the fiscal year when annual actuarial valuations are required to be
completed for calendar year end companies and the related services are
performed. In the Human Resources Technologies group, the distribution of
work is concentrated at the end of the first fiscal quarter and through
the second fiscal quarter as there is demand from our clients for
assistance in updating systems and programs used in the annual
re-enrollment of employees in benefit plans, such as flex plans. Much of
the remaining business is project oriented and is thus influenced more by
particular client needs and the availability of our workforce;
- the number of business days in a quarter, employee hiring and utilization
rates, the clients' ability to terminate engagements without penalty;
- the size and scope of assignments;
8
<PAGE>
- the level of vacation and holidays taken by our associates; and
- general economic conditions.
Because 70-75% of our total operating expenses are relatively fixed, a
variation in the number of client assignments or the timing of the initiation or
the completion of client assignments can cause significant variations in
quarterly operating results and could result in losses. Increases in the number
of professional personnel that are not followed by corresponding increases in
revenues could materially and adversely affect our operating results. Over the
most recent ten fiscal quarters, quarterly income from continuing operations has
fluctuated from $0.5 million to $7.3 million, without the effect of the the
non-recurring compensation change.
WE DEPEND ON WATSON WYATT PARTNERS FOR OUR BRAND IN THE EUROPEAN MARKET; WE
COULD LOSE OUR POSITION IN EUROPE IF OUR ALLIANCE AGREEMENTS WERE TO
TERMINATE
Since 1995 we have marketed our services globally with Watson Wyatt Partners
as Watson Wyatt Worldwide. Under our alliance agreements with Watson Wyatt
Partners:
- we operate in North America, Latin America and Asia-Pacific;
- Watson Wyatt Partners operates in the United Kingdom, Ireland, Africa and
the Caribbean; and
- Watson Wyatt Holdings (Europe) Limited, of which we own a 25% minority
interest, operates in continental Europe.
The alliance agreements with Watson Wyatt Partners generally restrict each
party's ability to enter into each other's geographic markets. If the alliance
agreements were to terminate, we could lose our position in Europe, which could
interrupt our global development and impair our ability to deliver services
seamlessly to clients throughout the world.
TERMINATION OF OUR RELATIONSHIP WITH WATSON WYATT PARTNERS COULD RESULT IN A
NAME CHANGE
The alliance agreements set forth the rights we or Watson Wyatt Partners
have to buy each other out of our respective interests in each other's firm and
in Watson Wyatt Holdings (Europe) Limited in the event either of us becomes
affiliated with a competitor. A termination of our alliance with Watson Wyatt
Partners could precipitate a name change, which could result in confusion in our
markets.
OUR INTERNATIONAL OPERATIONS PRESENT SPECIAL RISKS THAT COULD NEGATIVELY
AFFECT OUR BUSINESS
We conduct a portion of our business from offices outside the United States.
This subjects us to foreign financial and business risks. These risks could
arise in the event of:
- unusual currency exchange rate fluctuations;
- unexpected increases in taxes;
- new regulatory requirements and/or changes in policies and local laws that
materially affect the demand for our services or directly affect our
foreign operations;
- unusual and unexpected monetary exchange controls;
- the impact of unusually severe or protracted recessions in foreign
economies; and
- civil disturbance or other catastrophic events that reduce business
activity in other parts of the world.
Any of these factors could have an adverse effect on our results of
operations.
9
<PAGE>
OPERATIONAL READINESS OF OUR GLOBAL ADMINISTRATIVE INFRASTRUCTURE MIGHT NOT
BE AS COMPLETE AS REQUIRED TO MANAGE INTERNATIONAL OPERATIONS EFFECTIVELY
The management of geographically dispersed operations requires substantial
management resources, resulting in significant ongoing expense. We have not
fully integrated all of our global operations from an administrative and
reporting standpoint. We are developing and implementing additional systems and
management reporting to help us manage our global operations, but we cannot
predict when these systems will be fully operational or how successful they will
be.
OUR BUSINESS FACES RAPID TECHNOLOGICAL CHANGE AND OUR FAILURE TO RESPOND TO
THIS CHANGE QUICKLY COULD ADVERSELY AFFECT OUR BUSINESS
Increasingly, to remain competitive in our practice areas, we must identify
and offer the most current technologies and methodologies. This is particularly
true of our HR Technologies Group in which our success largely depends upon our
ability to quickly absorb and apply technological advances in both generic
applications and, particularly, those which are specifically required to deliver
employee benefits services. In some cases, significant technology choices and
investments are required. If we do not respond correctly, quickly, or in a
cost-effective manner, our business and operating results might be harmed.
The effort to gain technological expertise and develop new technologies in
our business requires us to incur significant expenses and, in some cases, to
implement them globally. If we cannot offer new technologies as quickly or
effectively as our competitors, we could lose market share. We also could lose
market share if our competitors develop more cost-effective technologies than we
offer or develop.
OUR HR TECHNOLOGIES GROUP HAS PROJECT-RELATED RISKS THAT COULD ADVERSELY
AFFECT OUR FINANCIAL RESULTS
Our HR Technologies Group develops and implements computer software and
systems for clients. In securing or carrying out these engagements, we may
encounter inadequate project scope definitions, unforeseen technological and
systems integration problems, unanticipated costs, failures to meet contractual
performance objectives, and other business risks. If we are not successful in
defining, pricing and executing these assignments as planned, we may incur
financial losses.
LIMITED PROTECTION OF OUR PROPRIETARY EXPERTISE, METHODOLOGIES AND SOFTWARE
COULD HARM OUR BUSINESS
We cannot guarantee that trade secret, trademark, and copyright law
protections are adequate to deter misappropriation of our confidential
information. Moreover, we may be unable to detect the unauthorized use of our
intellectual property and take the necessary steps to enforce our rights. If
employees or third parties misappropriate our proprietary information, our
business could be harmed. Redressing infringements also may consume significant
management time and financial resources.
CHANGE IN ASSOCIATE OWNERSHIP COULD ADVERSELY AFFECT OUR FIRM CULTURE
We currently are predominantly owned by our associates. As owners, our
associates have traditionally been able to influence the direction of the firm,
which promotes an entrepreneurial spirit and motivates individual performance.
Immediately after the public offering, it is expected that approximately 83% of
the common stock will be held by associates and approximately 17% will be held
by the public. The stock transfer restrictions on shares held by associates will
expire within two years following this offering. As these transfer restrictions
expire and our associates' stock becomes transferable, associate ownership may
decline. A decline in associate ownership and an increase in non-associate
influence could lower morale which could, in turn, adversely affect our business
operations.
10
<PAGE>
WE HAVE VARIOUS MECHANISMS IN PLACE THAT MAY PREVENT A CHANGE IN CONTROL
THAT A STOCKHOLDER MIGHT FAVOR
Our certificate of incorporation and bylaws contain provisions that might
discourage, delay or prevent a change in control that a stockholder might favor.
Our certificate of incorporation and bylaws:
- authorize the issuance of preferred stock without fixed characteristics
that could be issued by our board of directors to increase the number of
outstanding shares and deter a takeover attempt;
- classify our board of directors with staggered, three-year terms, which
may lengthen the time required to gain control of our board of directors;
- provide that only the president or our board may call a special meeting of
stockholders;
- prohibit stockholder action by written consent, which requires all actions
to be taken at a meeting of the stockholders;
- provide that vacancies on our board of directors, including new
directorships, may be filled only by the directors then in office; and
- require super-majority voting to amend the classified board and these
other provisions of our certificate of incorporation.
WE COULD ISSUE ADDITIONAL SHARES, WHICH COULD HAVE A DILUTIVE EFFECT ON
STOCKHOLDERS
At the time of the offering we will have 69,000,000 authorized shares of
class A common stock. Immediately following the completion of this offering, we
expect to have approximately 63,400,000 authorized but unissued shares of
class A common stock. Additional class A common stock will be issued upon
conversion of outstanding shares of class B common stock and pursuant to
employee stock option plans, and might be issued in connection with acquisitions
or other transactions, or offered for sale in future offerings. The issuance of
additional shares of class A common stock could dilute the value of outstanding
shares, including those purchased in this offering.
YEAR 2000 ISSUES COULD ADVERSELY AFFECT OUR BUSINESS
We have provided our clients with software that we have developed and
software-related services. We also use software and information technology
extensively to deliver our consulting services to our clients and operate our
business. We cannot guarantee that we have identified all potential software
problems or that we will have successfully corrected all software problems. In
addition, some software (such as software used for open enrollment in benefit
plans) normally is modified on an annual or periodic basis. In some cases, we
have deferred performing Year 2000 remediation to coincide with the software's
next scheduled modification. We also have provided software to clients subject
to warranties regarding Year 2000 performance. If we fail to identify or correct
Year 2000 problems in our software, we may incur costs to repair or replace
affected systems. We also may incur liability or unanticipated costs as a result
of errors caused by our software that could have a material adverse effect on
the results of our operations.
WE WILL HAVE BROAD DISCRETION REGARDING THE NET OFFERING PROCEEDS OF THE
PUBLIC OFFERING
We have not designated the anticipated net proceeds of the public offering
for specific uses. We will have broad discretion regarding the use of the net
proceeds of this offering, and we may apply the proceeds differently than
investors in our stock might anticipate. Although we have no plans or agreements
regarding any material acquisitions on the date of this prospectus, we might use
a portion of the net proceeds to fund acquisitions.
11
<PAGE>
ADDITIONAL SHARES BECOMING AVAILABLE FOR SALE COULD ADVERSELY AFFECT THE
PRICE OF OUR STOCK
Transfer restrictions on the class B common stock expire 12 and 24 months
following this offering. As the transfer restrictions on the class B common
stock expire, those shares automatically will convert into shares of class A
common stock that will be eligible for sale in the public market, subject in the
case of affiliates to the restrictions of Rule 144 under the Securities Act of
1933. The class B shares will be owned largely by our current associates, and
these persons might want to sell their shares in the public market immediately
after the transfer restrictions expire. Substantial sales after the transfer
restrictions expire could adversely affect the market value of the class A
common stock and the value of your shares. In addition, we cannot guarantee that
the board of directors will not waive the class B common stock restricitons or
that the underwriters will not waive their requirement that holders not sell any
shares for 180-days following the offering.
The following chart identifies the number of additional class A shares that
will become available for resale at the time the class B 12 and 24 month
restrictions expire:
<TABLE>
<CAPTION>
/ /2000 / /2001 / /2002
-------- ---------- ----------
<S> <C> <C> <C>
Post-Merger Shares Eligible for Resale...... 0 13,416,780 13,416,780
</TABLE>
WE CANNOT GUARANTEE A LIQUID TRADING MARKET FOR OUR STOCK; OUR STOCK WILL BE
SUBJECT TO MARKET FLUCTUATIONS
Before the public offering, there has been no public market for our common
stock and we cannot predict the extent to which investor interest will lead to
the development of an active and liquid trading market for our class A common
stock. The initial public offering price for the shares will be determined by
negotiations between us and the underwriters and might not be indicative of the
market price of the class A common stock that will prevail in the trading
market.
In recent years the securities markets have experienced substantial
volatility, and individual stock prices have fluctuated due to factors that are
often unrelated or disproportionate to a company's operating performance. In
addition, the market price of our class A common stock may be highly volatile
and therefore subject to wide fluctuations in response to such factors as:
- actual or anticipated changes in our future financial performance;
- failure to meet market expectations; and
- announcements by our competitors of new services or significant contracts
or acquisitions.
WE WILL NO LONGER BE REQUIRED TO REPURCHASE SHARES FROM EMPLOYEE
STOCKHOLDERS.
As part of the reorganization, we are amending the bylaw provision which has
required us to repurchase associate shares. After the reorganization, we will no
longer be required to purchase these shares if associates leave Watson Wyatt &
Company. Employees who leave Watson Wyatt & Company after this time will not be
able to sell their class B-1 and class B-2 shares back to us but instead, will
be required to hold such shares until the expiration of the transfer
restrictions in 12 and 24 months, respectively.
STOCKHOLDERS WILL NO LONGER BE ABLE TO CALL SPECIAL MEETINGS
Prior to the reorganization, stockholders representing 10% of the voting
power were able to call a special meeting of stockholders. After the
reorganization, stockholders will no longer be able to call a special meeting of
stockholders.
12
<PAGE>
The Watson Wyatt & Company Holdings certificate of incorporation will allow
a special meeting of stockholders only if such meeting is called by the
president or by resolution of the board of directors by a vote of a majority of
the members of the board.
USE OF TERMINOLOGY
If approved under this proxy statement/prospectus, we will effect a
corporate reorganization in order to create a holding company structure. As part
of this transaction, our current operating company, Watson Wyatt & Company, will
merge with an indirect wholly-owned subsidiary to become a wholly-owned
subsidiary of Watson Wyatt & Company Holdings. Unless the context indicates
otherwise, the information in this proxy statement/prospectus assumes that the
corporate reorganization transactions have been completed. References in this
proxy statement/prospectus to "Watson Wyatt," "we," "our" and "us" refer both to
Watson Wyatt & Company and its subsidiaries before the merger, and to Watson
Wyatt & Company Holdings and its subsidiaries after the merger. References to WW
Holdings refer to Watson Wyatt & Company Holdings. We refer to our employees as
"associates."
Watson Wyatt Worldwide is the name of our global alliance with Watson Wyatt
Partners.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the U.S. Securities and Exchange Commission a
registration statement on Form S-4 under the Securities Act relating to the
shares of class B common stock being offered by this proxy statement/prospectus.
This proxy statement/prospectus is part of that registration statement and, as
allowed by SEC rules, does not include all of the information you can find in
the registration statement or the exhibits to the registration statement. For
further information about us and the class B common stock offered, see the
registration statement and its exhibits. We have also filed a registration
statement on Form S-3 with the SEC relating to the offering of shares of
class A common stock of Watson Wyatt & Company Holdings.
The SEC allows us to incorporate by reference into this proxy
statement/prospectus the information we file with the SEC. This means that we
can disclose important information to you by referring you to those documents.
The information incorporated by reference is considered to be part of this proxy
statement/prospectus. If we subsequently file updating or superseding
information in a document that is incorporated by reference into this proxy
statement/prospectus, the subsequent information will also become part of this
proxy statement/prospectus and will supersede the earlier information. We are
incorporating by reference the following documents that we have filed with the
SEC:
- our annual report on Form 10-K for the fiscal year ended June 30, 1999
(file no. 0-20724);
- our quarterly reports on Form 10-Q for the quarters ended September 30,
1999 and December 31, 1999;
- our proxy statement for the annual meeting of stockholders dated
October 28, 1999; and
- our current report on Form 8-K filed with the SEC on January 27, 2000.
We also are incorporating by reference into the proxy statement/prospectus
all of our future filings with the SEC under Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act until the offering under this proxy statement/prospectus is
completed. You may obtain a copy of any or all of our filings which are
incorporated by reference, at no cost, by writing to or telephoning us at the
following address:
Watson Wyatt & Company/Watson Wyatt & Company Holdings
6707 Democracy Boulevard, Suite 800
Bethesda, Maryland 20817
Attention: Secretary
Telephone: (301) 581-4600
13
<PAGE>
You should rely only on the information provided in this proxy
statement/prospectus or incorporated by reference. We have not authorized anyone
to provide you with different information. You should not assume that the
information in this proxy statement/prospectus is accurate as of any date other
than the date on the first page of the proxy statement/prospectus. We are
offering the class B common stock only in jurisdictions where such offers are
permitted. We are not making this offer of securities in any state or country in
which the offer or sale is not permitted.
Watson Wyatt & Company currently files reports and other information with
the SEC, but its common stock, which has been subject to various transfer
restrictions, has not been publicly traded. After the offering under this proxy
statement/prospectus and related public offering, Watson Wyatt & Company
Holdings will continue to file annual, quarterly and special reports, proxy
statements and other information with the SEC. Watson Wyatt & Company's SEC
filings are available at the SEC's web site at http://www.sec.gov. You may read
and copy any filed document at the SEC's public reference rooms in Washington,
D.C. at Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549, and at the
SEC's regional offices in New York at 7 World Trade Center, 13(th) Floor, New
York, New York 10048, and in Chicago at Suite 400, Northwestern Atrium Center,
14(th) Floor, 500 W. Madison Street, Chicago, Illinois 60661. Please call the
SEC at 1-800-SEC-0330 for further information about the public reference rooms.
14
<PAGE>
PROPOSAL NO. 1--APPROVAL OF MERGER
THE MERGER AND THE PUBLIC OFFERING
PURPOSE OF THE MERGER
Our capital structure, certificate of incorporation and bylaws are designed
for our current status as a publicly registered but employee-owned company.
Existing transfer restrictions have essentially prevented sales of stock to
non-employees, and sales and repurchases have been at formula book value.
In anticipation of our selling shares to the public, we wanted to
recapitalize so as to have more authorized shares and to provide for the
issuance of preferred stock. We will be issuing in the merger one class B-1
share and one class B-2 share for each outstanding share. We also wanted to
implement a number of changes to our certificate of incorporation that are
common for public companies, such as creating a classified board. Finally, we
wanted to build into the certificate of incorporation transfer restrictions for
the shares to be held by current stockholders. If the transfer restrictions were
not implemented through a merger transaction, only those stockholders voting for
a charter or bylaw amendment implementing transfer restrictions would be subject
to the restrictions. By effecting a merger and creating a new holding company,
we will be able to implement all of these changes at one time.
The purpose of the merger is to reorganize our company and establish a new
holding company in a manner that facilitates our becoming a publicly-traded
company. Our board of directors has carefully considered the advisability of a
public offering of our common stock. They have determined that creating a
publicly traded security will substantially enhance our continuing growth and
success because it will increase our capital resources for internal growth and
growth through acquisitions.
We do not have specific plans to use equity for acquisitions. However, we
believe that publicly traded stock is more attractive to potential sellers
because of liquidity and the potential for market appreciation.
Based on the efficiency of the merger transaction in accomplishing the
desired corporate structural changes and the board's belief in the advisability
of the public offering, the board has determined the merger is advisable and in
the best interests of our stockholders.
THE MERGER: HOW IT WILL WORK
Initially, Watson Wyatt & Company will own all of the common stock of Watson
Wyatt & Company Holdings, and Watson Wyatt & Company Holdings will own all of
the common stock of WW Merger Subsidiary, Inc. The merger can be broken down
into the following steps:
- WW Merger Subsidiary, Inc. merges into Watson Wyatt & Company.
- Watson Wyatt & Company survives the merger, and WW Merger
Subsidiary, Inc. ceases to exist.
- Each share of Watson Wyatt & Company's outstanding common stock
automatically converts into one share of Watson Wyatt & Company Holdings'
class B-1 common stock and one share of class B-2 common stock, so that
current Watson Wyatt & Company stockholders become the sole holders of the
class B common stock of Watson Wyatt & Company Holdings.
- Each share of WW Merger Subsidiary, Inc. converts into one newly issued
share of common stock of Watson Wyatt & Company. Watson Wyatt & Company
Holdings receives one share of Watson Wyatt & Company stock.
- Watson Wyatt & Company returns to the capital of Watson Wyatt & Company
Holdings the shares of stock of such company that it owns.
15
<PAGE>
WW Holdings will not issue fractional shares in the merger. Any fractional
shares resulting from the conversion will be paid in cash in an amount equal to
the fair value of the fractional interest.
The result will be that our current company, Watson Wyatt & Company, will
become a subsidiary of Watson Wyatt & Company Holdings, and you will own Watson
Wyatt & Company Holdings class B common stock instead of Watson Wyatt & Company
common stock. The class B common stock will be uncertificated. Watson Wyatt &
Company will continue as our operating company. Watson Wyatt & Company Holdings
will have a new certificate of incorporation and bylaws. The certificate of
incorporation and bylaws of Watson Wyatt & Company will be made appropriate for
the company's status as a subsidiary of Watson Wyatt & Company Holdings. A copy
of the merger agreement is included as ANNEX A to this proxy
statement/prospectus.
The following charts illustrate the holding company structure before and
after the planned merger.
BEFORE MERGER
[CHART]
AFTER MERGER
[CHART]
16
<PAGE>
MANAGEMENT FOLLOWING THE MERGER
As a practical matter, consummation of the merger will not change our
present officers and directors. The current directors of Watson Wyatt & Company
are also the directors of Watson Wyatt & Company Holdings. After the merger,
Watson Wyatt & Company will have a smaller board than it has now, which is
appropriate for a subsidiary.
WW HOLDINGS' CERTIFICATE OF INCORPORATION
WW Holdings' certificate of incorporation will be different from our current
certificate of incorporation in the following principal ways:
- The certificate of incorporation will authorize class A common stock,
class B-1 common stock, class B-2 common stock, all of which will have
indentical voting rights, and preferred stock.
- The restrictions for class B-1 common stock will expire 12 months after
our public offering; and the restrictions for class B-2 common stock will
expire 24 months after our public offering.
- We will no longer be required to purchase your shares when you leave the
company.
- There are additional changes in WW Holdings' certificate of incorporation
which are generally intended to discourage unsolicited purchase offers and
which are customary to include public company certificates of
incorporation.
WW Holdings' certificate of incorporation is included as ANNEX B to this
proxy statement/ prospectus.
WHAT YOU WILL RECEIVE; TRANSFER RESTRICTIONS
Provided you enter into an underwriting agreement with the underwriters, you
will be able to convert to class A shares and sell up to the equivalent of 500
of your present Watson Wyatt & Company shares, as measured on a pre-converted
basis, and up to 500 class B-1 shares and 500 class B-2 shares, as measured on a
post-converted basis, plus 10% of the remainder of your shares, in the public
offering. Subject to limited exceptions in which the board waives the transfer
restrictions before their expiration, including the sale of shares in the public
offering, you will not be able to sell or transfer shares of class B common
stock to anyone, or convert shares of class B common stock into class A common
stock, until the relevant restricted period expires. These restrictions apply
even if you are no longer a Watson Wyatt & Company employee.
Upon the expiration of the applicable restricted period, your shares of
class B common stock will convert automatically into shares of class A common
stock. Subject to restrictions imposed by the federal securities laws on persons
deemed to be our affiliates, stockholders may transfer shares of class A common
stock freely after the applicable restricted period expires. Management,
however, thinks it is important for our associates in higher salary band levels
to have an investment in our company, although formal stock ownership guidelines
have not yet been adopted.
LISTING; THE PUBLIC OFFERING
The class B common stock will not be listed on a national securities
exchange or traded in an organized over-the-counter market. We have applied to
list the class A common stock on the New York Stock Exchange. Listing is subject
to fulfilling all applicable listing requirements.
Immediately after the merger is approved, we hope to effect the merger and
the public offering of shares of WW Holdings' class A common stock.
Although we do not expect to determine the initial public offering price for
our class A common stock until immediately prior to the initial public offering,
in order to proceed with the public offering,
17
<PAGE>
the initial public offering price would necessarily be higher than the formula
book value price currently determined under our bylaws. The consummation of the
public offering and the price at which our stock will trade depends on a number
of factors, including market conditions, our net income and performance relative
to that of comparable companies with publicly traded stock.
HOW WE WILL EFFECT THE MERGER AND THE PUBLIC OFFERING
If approved, we will effect the merger immediately prior to the consummation
of the public offering. At that time, we will file a certificate of merger with
the Secretary of State of Delaware. The portion of your shares you choose to
sell in the public offering will be converted first into WW Holdings class B
shares and immediately thereafter into WW Holdings' class A common stock.
The merger will become effective only if:
- a majority of the outstanding shares of our common stock entitled to vote
at the special meeting approve the merger, and 80% of the shares actually
voting for or against the proposal approve the merger, if such amount is
higher than a majority of outstanding shares entitled to vote; and
- the initial public offering of our class A shares is consummated.
MISCELLANEOUS QUESTIONS AND ANSWERS
- - WHEN IS THE DEADLINE FOR ME TO TELL THE UNDERWRITERS FOR THE PROPOSED PUBLIC
OFFERING THAT I WOULD LIKE TO BE A SELLING STOCKHOLDER AND HAVE MY SHARES
INCLUDED IN THE REGISTRATION STATEMENT?
All stockholders have already received forms asking them to indicate their
interest in offering a portion of their shares in the public offering.
Interested stockholders will receive follow-up forms that will ask them to
indicate what shares the stockholders wishes to sell. The forms will provide
detailed information on the procedure for instructing us to sell your shares,
which will include signing a power of attorney authorizing us to sell your
shares. Any shares not sold in the public offering will remain class B shares.
The class B-1 shares will be restricted from resale for 12 months and the class
B-2 shares will be restricted for 24 months.
- - WHAT WILL HAPPEN TO ANY BANK OF AMERICA STOCK LOANS?
The current loan documents would require the payment in full of all
outstanding loan amounts at the time of the initial public offering. If you do
not want to pay off all outstanding loans at the time of the initial public
offering, Bank of America has agreed to continue the current loans in force as
long as you sign new loan documentation pledging your class B shares as
collateral for your current loans. You will be required to execute new
promissory notes and pledge agreements, containing the same amortization
schedule, maturity and payment terms as your current loans. You will only be
required to pledge those class B shares that are proportionately equivalent to
the number of current shares you have pledged. If you sell all of your shares in
the public offering, you will be required to pay off your loan in full at that
time.
At the time the 12 and 24 month restrictions on the class B-1 and B-2 shares
expire, you will be required to pay down a pro rata portion of your loan balance
if you sell pledged shares. For example, if you sell 25% of your pledged shares,
you will have to pay-down 25% of your outstanding loan balance. Because the
market share price should be higher than the current formula book value price,
you should still receive sufficient proceeds from any sale after pay-down of the
portion of the loan. If you terminate your employment at any time prior to
paying off your loan, the loan will become due and payable within 30 days of the
date of your termination, unless the 12 month transfer restriction on your class
B shares has not yet expired, in which case your loan will become due and
payable within 30 days of the restriction lapsing.
18
<PAGE>
- - HOW AND WHEN WILL WE COMPLETE THE PUBLIC OFFERING?
As soon as our board of directors deems advisable and with the advice of our
underwriters, after we receive SEC approval and the merger is approved, we plan
to sell shares of Watson Wyatt & Company Holdings class A common stock to the
public in an underwritten public offering. At the time the offering takes place,
the underwriter will have committed to purchase and accept delivery of an agreed
upon number of shares. If the merger is not approved, the public offering will
not occur. If we have not determined that the public offering will occur, we
will not effect the merger.
- - WILL I BE ABLE TO BUY MORE SHARES?
Yes. Subject to certain restrictions on affiliates, including officers and
directors of the company, you will be able to buy shares of our class A common
stock in the open market on the New York Stock Exchange, subject to our
satisfying listing requirements, at market-determined prices after the public
offering. We also will be establishing a long term incentive (stock option)
plan, subject to approval of the plan and the merger by the stockholders at the
special meeting, and contingent on consummation of the public offering. In
addition, we will continue to study the advisability of adopting a stock
purchase, or similar, plan in the future.
- - HOW MUCH STOCK ARE WE SELLING TO THE PUBLIC?
Immediately after the public offering, after given effect to anticipated
sales of shares by both the company and associates, we expect that roughly 17%
of the outstanding shares of Watson Wyatt & Company Holdings will be in the
hands of the public, while existing stockholders will hold the remaining 83%.
Although we anticipate some interest from individual investors, we have been
advised by the underwriters that institutional investors will be the predominant
purchasers of our stock in the public offering. The underwriters based this
advice on their experience as an investment bank of international standing, with
substantial experience in conducting underwritten offerings of this type and
size. The underwriters have also advised us that the final placement of our
stock will depend upon market conditions and other influences at the time the
public offering occurs.
- - WHAT WILL HAPPEN TO OUR COMPANY IF THE PUBLIC OFFERING IS DELAYED OR NOT
CONSUMMATED?
Effecting the proposed merger and implementing the proposed incentive plan
are contingent on the consummation of the public offering. If the public
offering is not consummated, the proposals regarding the merger and the
incentive plan will have no effect, and we will continue to do business on the
same basis that we do today. The board of directors has the responsibility to
determine whether completing the public offering is in the best interests of the
stockholders and the company. The proposal to amend the current Watson Wyatt &
Company bylaws to facilitate estate planning is not contingent upon the
effectiveness of the proposed public offering or the approval of the other
proposals. Whether or not the public offering is consummated, this proposed
amendment to the bylaws will become effective if approved.
If the public offering were to be delayed for a significant period of time,
the board of directors would reassess the situation and make a decision about
future internal stock sales.
- - HOW WILL THE IPO AFFECT WATSON WYATT AS A PLACE TO WORK, I.E. OUR UNIQUE
CULTURE?
We see the IPO as leveraging the best qualities of Watson Wyatt - our
culture of open communications, teamwork and creativity and innovation. The IPO
is also likely to promote increased discipline as a firm. Publicly traded firms
are rewarded or penalized by investors based on their performance.
- - HOW WILL OUR CURRENT NON-COMPETE AGREEMENTS BE CHANGED TO REFLECT THE
TRANSITION TO PUBLICLY HELD STOCK?
We will be changing the current non-compete agreements to remove all of the
provisions relating to participation in the stock purchase plan, holding stock
proceeds during the non-compete period and
19
<PAGE>
losing appreciation on stock in the event of a violation of the non-compete.
This will apply to all outstanding agreements and agreements that will be signed
by new hires.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The merger, the conversion of your shares into WW Holdings' class B common
stock and the public offering by us will not be taxable transactions to you for
U.S. federal income tax purposes. For U.S. taxpayers, however, any sale of your
class A common stock, in the public offering or otherwise, will be a taxable
transaction to you for U.S. federal income tax purposes. All stockholders should
consult their individual tax advisors about the tax consequences of any
transactions involving your shares.
NOTICE TO CANADIAN STOCKHOLDERS
The WW Holdings class B common stock that will be issued to existing Watson
Wyatt & Company stockholders in the merger will not be qualified for
distribution to the public in Canada. We will file an application with Canadian
securities commissions for exemption orders that will allow us to issue the WW
Holdings class B common stock to current stockholders without filing a
prospectus in Canada or delivering the stock through a Canadian securities
dealer. We plan to obtain these exemption orders prior to the date the merger
takes effect, so that Canadian-resident stockholders will be able to participate
in the merger on the same basis as U.S. stockholders.
We also expect that any exemption orders from the Canadian securities
commissions that are necessary to permit the resale of Watson Wyatt & Company
Holdings class A common stock through the New York Stock Exchange will be
obtained. Canadian-resident stockholders are encouraged to seek legal advice
prior to reselling shares of WW Holdings class A common stock.
APPRAISAL RIGHTS
Watson Wyatt & Company is organized under Delaware law. Watson Wyatt &
Company stockholders have the right to dissent from the merger and to receive
payment for their shares in accordance with the terms of Section 262 of the
Delaware General Corporation Law. The following discussion is a summary of the
Delaware dissenters' rights law. Section 262 of the Delaware General Corporation
Law is reprinted in ANNEX F. Any stockholder wishing to exercise dissenters'
rights or preserve the right to do so should review the statute carefully.
Stockholders who do not comply with the procedures of the statute will lose
their dissenters' rights.
If the merger is consummated, a holder of record of Watson Wyatt & Company's
stock on the date of making a demand for appraisal must:
- continue to hold those shares through the time of the merger;
- strictly comply with the procedures set forth under Section 262 of the
Delaware General Corporation Law; and
- not vote in favor of the merger
to be entitled to have those shares appraised by the Delaware General Court of
Chancery under Section 262 of the Delaware General Corporation Law and to
receive payment for the "fair value" of those shares in lieu of the
consideration provided for in the merger agreement.
This proxy statement/prospectus is being sent to all holders of record of
Watson Wyatt & Company stock on the record date for the Watson Wyatt & Company
special meeting and constitutes notice of the appraisal rights available to
those holders under Section 262. The statutory right of appraisal granted by
Section 262 requires strict compliance with the procedures set forth in
Section 262.
20
<PAGE>
A holder of Watson Wyatt & Company's stock electing to exercise appraisal
rights under Section 262 must deliver a written demand for appraisal of such
stockholder's shares prior to the vote on the merger. The written demand must
identify the stockholder of record and state the stockholder's intention to
demand appraisal of the stockholder's shares. All demands should be delivered
to: Walter W. Bardenwerper, General Counsel, Vice President and Secretary, 6707
Democracy Boulevard, Suite 800, Bethesda, Maryland 20817.
Only a holder of shares of Watson Wyatt & Company on the date of making a
written demand for appraisal who continuously holds those shares through the
time of the merger is entitled to seek appraisal. Demand for appraisal must be
executed by or for the holder of record, fully and correctly, as the holder's
name appears on the books and records of Watson Wyatt & Company. If Watson Wyatt
& Company stock is owned of record in a fiduciary capacity, such as by a
trustee, the demand should be made in that capacity. An authorized agent may
execute the demand for appraisal for a holder of record. That agent, however,
must identify the record owner or owners and expressly disclose in the demand
that the agent is acting as agent for the record owner or owners of shares.
Within ten days after the time of the merger, the surviving corporation is
required to send notice of the effectiveness of the merger to each stockholder
who, prior to the time of the merger, complies with the requirements of
Section 262.
Within 120 days after the time of the merger, the surviving corporation or
any stockholder who has complied with the requirements of Section 262 may
file a petition in the Delaware Court of Chancery demanding a determination of
the fair value of the shares of Watson Wyatt & Company held by all stockholders
seeking appraisal. A dissenting stockholder must serve a copy of the petition to
the surviving corporation. If no petition is filed by either the surviving
corporation or any dissenting stockholder within the 120-day period, the rights
of all dissenting stockholders to appraisal will cease. Stockholders seeking to
exercise appraisal rights should initiate all necessary action within the time
periods and in the manner prescribed in Section 262. Failure to file the
petition on a timely basis will cause the stockholder's right to an appraisal to
cease.
Within 120 days after the time of the merger, any stockholder who has
complied with subsections (a) and (d) of Section 262 is entitled, upon written
request, to receive from the surviving corporation a statement setting forth the
aggregate number of shares of Watson Wyatt & Company's stock not voted in favor
of the merger with respect to which demands for appraisal have been received by
Watson Wyatt & Company and the number of holders of those shares. The statement
must be mailed within 10 days after the written request has been received by
Watson Wyatt & Company or within 10 days after expiration of the time for
delivery of demands for appraisal under subsection (d) of Section 262, whichever
is later.
If a petition for an appraisal is filed in a timely manner, at the hearing
on the petition the Delaware Court of Chancery will determine which stockholders
are entitled to appraisal rights and will appraise the shares of Watson Wyatt &
Company stock owned by those stockholders, determining the fair value of those
shares, exclusive of any element of value arising from the accomplishment or
expectation of the merger, together with a fair rate of interest, to be paid, if
any, upon the amount determined to be the fair value.
Stockholders considering seeking appraisal should consider that the fair
value of their shares determined under Section 262 could be more than, the same
as, or less than, the value of the consideration provided for in the merger
agreement without the exercise of appraisal rights. The cost of the appraisal
proceeding may be determined by the Court of Chancery and assessed against the
parties as the Court deems equitable in the circumstances. Upon application of a
dissenting stockholder, the Court may order that all or a portion of the expense
incurred by any dissenting stockholder in connection with the appraisal
proceeding be charged pro rata against the value of all shares of Watson
21
<PAGE>
Wyatt & Company entitled to appraisal. In the absence of such a determination or
assessment, each party bears its own expenses.
Any stockholder who has demanded appraisal in compliance with Section 262
will not, after the time of the merger, be entitled to vote such stock for any
purpose or receive payment of dividends or other distributions, if any, on the
Watson Wyatt & Company stock, except for dividends or distributions, if any,
payable to stockholders of record at a date prior to the merger.
A stockholder may withdraw a demand for appraisal and accept the WW Holdings
class B common stock at any time within 60 days after the time of the merger, or
thereafter may withdraw such demand with the written approval of the surviving
corporation. If an appraisal proceeding is properly instituted, such proceeding
may not be dismissed as to any stockholder without the approval of the Delaware
Court of Chancery, and any such approval may be conditioned on any terms the
Court of Chancery deems to be just. If, after the merger, a holder of Watson
Wyatt & Company stock who had demanded appraisal for the holder's shares fails
to perfect or loses his right to appraisal, those shares will be treated under
the merger agreement as if they had been converted as of the time of the merger
into WW Holdings common stock.
In view of the complexity of these provisions of the Delaware statutes, any
Watson Wyatt & Company stockholder who is considering exercising appraisal
rights should consult a legal advisor.
DESCRIPTION OF CAPITAL STOCK, CERTIFICATE OF INCORPORATION AND BYLAWS
AUTHORIZED CAPITALIZATION; RESALE RESTRICTIONS
WATSON WYATT & COMPANY HOLDINGS
WW Holdings' capital structure will consist of 100,000,000 authorized
shares, 99,000,000 of which will be authorized common shares and 1,000,000 of
which will be authorized preferred shares. Class A will have 69,000,000
authorized shares, class B-1 will have 15,000,000 authorized shares and
class B-2 will have 15,000,000 authorized shares. After the merger and the
public offering, there will be approximately 5,600,000 class A, 13,416,780
class B-1 and 13,416,780 class B-2 shares outstanding. This assumes that the
underwriters do not exercise their over-allotment option in connection with the
public offering.
WATSON WYATT & COMPANY
Watson Wyatt & Company's current capital structure consists of 25,000,000
authorized shares of common stock. At the close of business on March 1, 2000,
14,816,780 shares of common stock were outstanding and entitled to vote. As a
publicly registered but employee owned company, Watson Wyatt & Company's common
stock has been subject to resale restrictions.
Watson Wyatt & Company has restricted ownership of its stock to active
employees, outside directors, persons or entities designated by the board of
directors with which it has a business affiliation, and the employees of such
entities. Stock transfer restrictions are contained in the Watson Wyatt &
Company bylaws and certificate of incorporation. Before any stockholder
encumbers or disposes of any shares the holder must first give Watson Wyatt &
Company notice in writing at least 120 days prior to the proposed transaction,
stating in detail specific information about the terms, including the proposed
consideration to be received. Watson Wyatt & Company can then either purchase
the stock at formula book value or designate other eligible purchasers under the
bylaws. If Watson Wyatt & Company or eligible purchasers do not purchase the
stock within the prescribed time period, the stockholder may proceed to sell the
stock in the next 30-days, but the transfer restrictions will apply to the
transferee.
22
<PAGE>
When a stockholder's employment with Watson Wyatt & Company terminates for
any reason, including retirement, death and voluntary or involuntary
termination, bankruptcy of a stockholder or the imposition of any lien or
attachment on shares of Watson Wyatt & Company stock, other than Bank of America
liens, all shares owned by the stockholder are considered to be offered to the
company or designated eligible purchasers based on the terms of repurchase
described above, except that Watson Wyatt & Company will be obligated to
purchase all shares of stock if the designated eligible purchasers fail to
purchase the shares. The purchase price of the shares is calculated based on a
formula in the bylaws that produces essentially a modified book value price. In
recent years, Watson Wyatt & Company has generally repurchased the shares itself
and has not designated eligible purchasers.
If the merger proposal is approved, the new certificate of incorporation and
bylaws of Watson Wyatt & Company will not contain these restrictions on resale.
All of the outstanding shares of Watson Wyatt & Company will be owned by Watson
Wyatt & Company Holdings.
23
<PAGE>
COMPARISON OF CERTAIN RIGHTS OF THE STOCKHOLDERS OF WATSON WYATT & COMPANY'S
CURRENTLY OUTSTANDING COMMON STOCK TO WW HOLDINGS' CLASS A COMMON STOCK AND
CLASS B COMMON STOCK
<TABLE>
<CAPTION>
OLD WATSON WYATT &
COMPANY WW HOLDINGS WW HOLDINGS
COMMON STOCK CLASS A SHARES CLASS B SHARES
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
PUBLIC MARKET No. Sales limited to Yes. Application has No. When restrictive
company and been made for listing periods lapse, class
associate- on the New York Stock B shares convert
stockholder purchases Exchange. Listing is automatically to
and sales. subject to fulfilling class A shares.
all applicable
listing requirements.
- --------------------- --------------------- --------------------- ---------------------
VOTING RIGHTS One vote per share on Same. Same.
all matters voted
upon by stockholders.
- --------------------- --------------------- --------------------- ---------------------
TRANSFER RESTRICTION Stockholders cannot No transfer Class B-1 shares may
sell stock to any restrictions (other not be transferred
party without first than restrictions until 12 months after
offering them to required by the our public offering;
Watson Wyatt & securities laws). Class B-2 shares may
Company or an not be transferred
eligible purchaser. until 24 months after
Watson Wyatt & our public offering.
Company must There are limited
repurchase shares on exceptions for
termination of transfers to
employment. Shares permitted
are purchased and transferees,
sold at the current including trusts for
formula book value as the benefit of a
defined in the stockholder, his or
bylaws. her spouse or
descendants, to
facilitate estate
planning.
- --------------------- --------------------- --------------------- ---------------------
CONVERSION Not convertible. Not convertible. Convert automatically
to class A common
stock upon expiration
of restricted
periods; convertible
to enable
participation in an
underwritten public
offering and other
circumstances,
subject to the
discretion of the
board of directors.
- --------------------- --------------------- --------------------- ---------------------
RIGHTS UPON MERGER, All common stock has Same. Same.
CONSOLIDATION OR same rights.
REORGANIZATION
- --------------------- --------------------- --------------------- ---------------------
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
OLD WATSON WYATT &
COMPANY WW HOLDINGS WW HOLDINGS
COMMON STOCK CLASS A SHARES CLASS B SHARES
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
AUTHORIZED SHARES 25,000,000 authorized 69,000,000 authorized 30,000,000 authorized
common shares. class A common class B shares,
shares, 99,000,000 99,000,000 class A
class A and B shares and B shares combined
combined (and an (and an additional
additional 1,000,000 1,000,000 preferred
preferred shares). shares).
Par value of $1.00 Par value is $0.01 Par value is $0.01
per share of common per share of common per share of common
stock. stock. stock.
- --------------------- --------------------- --------------------- ---------------------
CLASSIFIED BOARD OF One class of Three classes of Same as class A
DIRECTORS directors. directors with each shares; directors are
class serving for a elected by holders of
three year term. class A shares and
class B shares,
voting together.
67% of shares
entitled to vote must
vote in favor to
amend the provisions
establishing a
classified board of
directors.
- --------------------- --------------------- --------------------- ---------------------
REMOVAL OF DIRECTORS The certificate of The certificate of Same as class A
incorporation is incorporation shares; directors are
silent. Delaware law requires a vote of removed by holders of
requires a vote of 67% of the shares class A shares and
the majority of entitled to vote to class B shares,
outstanding remove a director; voting together.
stockholders to because board of
remove a director. directors is
classified, such
removal must be for
cause.
Employee directors Same. Same.
must resign from
board at termination
of employment, unless
otherwise approved by
the board.
- --------------------- --------------------- --------------------- ---------------------
VACANCIES ON THE May be filled by May only be filled by Same as class A
BOARD stockholders or directors. shares.
directors.
- --------------------- --------------------- --------------------- ---------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
OLD WATSON WYATT &
COMPANY WW HOLDINGS WW HOLDINGS
COMMON STOCK CLASS A SHARES CLASS B SHARES
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
STOCKHOLDER ACTION BY Stockholders may act The certificate of Same as class A
WRITTEN CONSENT by written consent. incorporation shares.
requires that
stockholder actions
be taken by the
stockholders at an
annual or special
meeting and not by
written consent.
67% of shares
entitled to vote must
vote in favor to
amend the provisions
that require
stockholders to take
action only at a
special or annual
meeting
- --------------------- --------------------- --------------------- ---------------------
STOCKHOLDER ABILITY Special meetings can Special meetings can Same as class A
TO CALL A SPECIAL be called by the be called by the shares.
MEETING chairman of the board president or by the
or the board at the board at the request
request of the of the majority of
majority of a quorum the board.
of the board or at
the request of
stockholders holding
at least 10% of
voting power.
67% of shares Same as class A
entitled to vote must shares.
vote in favor to
amend the provisions
that permit only the
president or majority
of the board to call
meetings.
- --------------------- --------------------- --------------------- ---------------------
APPROVAL OF MERGERS Vote of majority of Same. Same.
AND SUBSTANTIAL shares entitled to
ASSET SALES vote.
- --------------------- --------------------- --------------------- ---------------------
</TABLE>
DIVIDENDS; SUBDIVISION AND COMBINATIONS
Subject to the rights of the holders of preferred stock, if any, holders of
class A shares and class B shares will be entitled to receive dividends and
other distributions, in cash, stock of any corporation or other property, as the
board of directors may declare from time to time out of legally available assets
or funds, and will share equally on a per share basis in all such dividends and
other distributions. If dividends or other distributions are payable in WW
Holdings' common stock, including distributions pursuant to stock splits or
divisions of common stock, only class A shares will be paid or distributed with
respect to class A shares and only class B shares will be paid or distributed
with respect to class B shares.
Neither class A shares nor class B shares may be reclassified, subdivided or
combined unless the reclassification, subdivision or combination occurs
simultaneously and in the same proportion for each class.
26
<PAGE>
When the merger becomes effective, all the outstanding class B shares will
be validly issued, fully paid and nonassessable. When the public offering is
completed, all the outstanding class A shares will be validly issued, fully paid
and nonassessable.
PREFERRED STOCK
WW Holdings' board of directors has the authority to issue shares of
preferred stock from time to time on terms it determines, to divide preferred
stock into one or more classes or series, and to fix the designations, voting
powers, preferences and relative participating, optional or other special rights
of each class or series, and the qualifications, limitations or restrictions of
each class or series, to the fullest extent permitted by Delaware law.
POTENTIAL ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF DELAWARE LAW AND WW
HOLDINGS' CERTIFICATE OF INCORPORATION AND BYLAWS
ANTI-TAKEOVER PROVISIONS GENERALLY
The provisions of our certificate of incorporation and bylaws described
below were put into place to help ensure that our board of directors plays a
role in attempts to acquire control of our company. In this way, the board can
further and protect the interests of the company and its stockholders as
appropriate under the circumstances. If the board determines that a sale of
control is in their best interests, having the board involved enhances its
ability to maximize the value to be received by the stockholders upon such a
sale.
Although our board believes these provisions, referred to as anti-takeover
provisions, are beneficial to stockholders, their existence also may tend to
discourage open market purchases by a potential acquirer and some takeover bids.
As a result, our stockholders may be deprived of opportunities to sell some or
all of their shares at prices that are higher than prevailing market prices. The
provisions in theory may decrease the market price of our common stock by making
the stock less attractive to persons who invest in securities in anticipation of
price increases from potential acquisition attempts. On the other hand,
defeating undesirable acquisition offers can be a very expensive and
time-consuming process. To the extent the provisions discourage undesirable
proposals, we may be able to avoid those expenditures of time and money.
The anti-takeover provisions may make it more difficult and time consuming
for a potential acquirer and existing stockholders to obtain control of the
company through replacing our board of directors and management. This is the
case even if a majority of the stockholders believes such replacement is in the
best interests of the company. As a result, these provisions may tend to
perpetuate the incumbent board of directors and management.
DELAWARE ANTI-TAKEOVER STATUTE
Watson Wyatt & Company is now, and after the merger WW Holdings will be,
subject to Section 203 of the Delaware General Corporation Law. Subject to
specific exceptions, Section 203 prohibits a publicly-held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless:
- the "business combination," or the transaction in which the stockholder
became an "interested stockholder" is approved by the board of directors
prior to the date the "interested stockholder" attained that status;
- upon consummation of the transaction that resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced (excluding those shares owned
27
<PAGE>
by persons who are directors and also officers, and employee stock plans
in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in
a tender or exchange offer); or
- on or subsequent to the date a person became an "interested stockholder,"
the "business combination" is approved by the board of directors and
authorized at an annual or special meeting of stockholders by the
affirmative vote of at least two-thirds of the outstanding voting stock
that is not owned by the "interested stockholder."
"Business combinations" include mergers, asset sales and other transactions
resulting in a financial benefit to the "interested stockholder." Subject to
various exceptions, an "interested stockholder" is a person who, together with
his or her affiliates and associates, owns, or within three years did own, 15%
or more of the corporation's outstanding voting stock. These restrictions could
prohibit or delay the accomplishment of mergers or other takeover or
change-in-control attempts, and, therefore, may discourage acquisition attempts.
The following are various provisions of WW Holdings' certificate of
incorporation and bylaws that may be deemed to have an anti-takeover effect and
may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
AUTHORIZED CAPITAL STOCK
The authority to issue additional shares of common stock provides WW
Holdings with the flexibility necessary to meet its future needs without the
delay resulting from seeking stockholder approval. The authorized but unissued
shares of common stock will be issuable from time to time for any corporate
purpose, including, without limitation, stock splits, stock dividends, employee
benefit and compensation plans, acquisitions, and public or private sales for
cash as a means of raising capital. Such shares could be used to dilute the
stock ownership of persons seeking to obtain control of WW Holdings. In
addition, the sale of a substantial number of shares of WW Holdings common stock
to persons who have an understanding with WW Holdings concerning the voting of
such shares, or the distribution or declaration of a dividend of shares of WW
Holdings common stock to stockholders, may have the effect of discouraging or
increasing the cost of unsolicited attempts to acquire control of WW Holdings.
The certificate of incorporation does not provide preemptive rights to WW
Holdings' stockholders.
Similarly, the ability of WW Holdings to issue preferred stock, on terms the
board determines, could have the effect of impeding or delaying a possible
takeover and adversely affecting the voting and other rights of the holders of
class A common stock and class B common stock, resulting in a decrease in the
market price of WW Holdings' stock.
CLASSIFIED BOARD OF DIRECTORS AND ABSENCE OF CUMULATIVE VOTING
WW Holding's certificate of incorporation will provide for the
classification of the board of directors into three separate classes as nearly
equal in number as possible with one class being elected each year to serve a
staggered three-year term, commencing with the election of directors to be held
in the year 2000. Because WW Holdings has a classified board of directors, only
approximately one-third of the members of the board are elected each year.
Consequently, two annual meetings are effectively required for WW Holdings
stockholders to change a majority of the members of the board.
Pursuant to the certificate of incorporation, each stockholder generally is
entitled to one vote for each share of WW Holdings stock held and is not
entitled to cumulative voting rights in the election of directors. With
cumulative voting, a stockholder would have the right to cast a number of votes
equal to the total number of such holders' shares multiplied by the number of
directors to be elected. The
28
<PAGE>
stockholder would have the right to cast all of such holder's votes in favor of
one candidate or to distribute such holder's votes in any manner among any
number of candidates. Directors are elected by a plurality of the total votes
cast by all stockholders. With cumulative voting, it may be possible for
minority stockholders to obtain representation on the board of directors.
Without cumulative voting, the holders of more than 50% of the shares of WW
Holdings common stock generally have the ability to elect 100% of the directors.
As a result, the holders of the remaining WW Holdings common stock effectively
may not be able to elect any person to the board of directors. The absence of
cumulative voting, therefore, could make it more difficult for a stockholder who
acquires less than a majority of the shares of WW Holdings common stock to
obtain representation on WW Holdings' board of directors.
NO STOCKHOLDER ABILITY TO CALL A SPECIAL MEETING
This provision of the certificate of incorporation, combined with the
provision requiring that stockholder action be taken at a meeting and the
restriction on the removal of directors, would prevent a substantial stockholder
from compelling stockholder consideration of any proposal--such as a proposal
for a business combination--over the opposition of WW Holdings' board of
directors. Therefore, such stockholder would not be able to call a special
meeting of stockholders to replace the entire board with nominees who were in
favor of such proposal.
NO ACTION BY STOCKHOLDERS WITHOUT A MEETING
This provision would prevent stockholders from taking action, including
action on a business combination, except at an annual meeting or special meeting
called by the board of directors or the president, even if a majority of the
stockholders were in favor of such action.
REMOVAL OF DIRECTORS
Under the WW Holdings certificate of incorporation, any director or the
entire board of directors may be removed only for cause and only by the
affirmative vote of the holders of at least 67% of WW Holdings voting stock.
Also, under the WW Holdings bylaws, employee directors must resign as directors
upon termination of their employment.
LIMITATION ON DIRECTORS' LIABILITY
WW Holdings' certificate of incorporation provides that a director of WW
Holdings will have no personal liability to WW Holdings or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability for any of the following:
- any breach of the director's duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law; and
- under Section 174 of the Delaware General Corporation Law, the payment of
unlawful dividends and the making of unlawful stock purchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
INDEMNIFICATION
The WW Holdings' certificate of incorporation and bylaws provide that WW
Holdings will indemnify its officers, directors, employees, and agents to the
full extent permitted by the Delaware General Corporation Law subject to very
limited exceptions. Under Section 145 of the Delaware General Corporation Law as
currently in effect, other than in actions brought by or in the right of WW
29
<PAGE>
Holdings, such indemnification would apply if it were determined in the specific
case that the proposed indemnitee acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of WW
Holdings and, with respect to any criminal proceeding, if such person had no
reasonable cause to believe that the conduct was unlawful. In actions brought by
or in the right of WW Holdings, such indemnification probably would be limited
to reasonable expenses, including attorneys' fees, and would apply if it were
determined in the specific case that the proposed indemnitee acted in good faith
and in a manner such person reasonably believed to be in or not opposed to, the
best interests of WW Holdings, except that no indemnification may be made with
respect to any matter as to which such person is adjudged liable to WW Holdings,
unless, and only to the extent that, the court determines upon application that,
in view of all the circumstances of the case, the proposed indemnitee is fairly
and reasonably entitled to indemnification for such expenses as the court deems
proper. To the extent any director, officer, employee, or agent of WW Holdings
has been successful on the merits or otherwise in defense of any action, suit,
or proceedings, as discussed herein, whether civil, criminal, administrative, or
investigative, such person must be indemnified against reasonable expenses
incurred by such person in connection therewith.
WW Holdings will also be expressly authorized to carry directors' and
officers' insurance providing indemnification for its directors, officers and
certain employees for some liabilities.
AMENDING THE CERTIFICATE OF INCORPORATION AND BYLAWS
The Delaware General Corporation Law generally provides that the approval of
a corporation's board of directors and the affirmative vote of a majority of
(1) all shares entitled to vote and (2) the shares of any class of stock
entitled to vote as a class, is required to amend a corporation's certificate of
incorporation, unless the certificate specifies a greater voting requirement.
The WW Holdings' certificate of incorporation states that each of the following
provisions in the certificate of incorporation may be amended only by a vote of
67% of the outstanding shares:
- classification and removal of directors;
- the prohibition on stockholder action by written consent; and
- the ability to call special meetings of stockholders being vested solely
in the board of directors and the president.
WW Holdings certificate of incorporation also provides that the board of
directors has the power to adopt, amend, or repeal the bylaws. Stockholders also
have the power to adopt, amend, or repeal bylaws, but only by a vote of 67% of
the outstanding shares.
RIGHTS PLAN
The board of directors has approved implementing a rights plan, although the
specific terms of the plan have not been determined. It is likely that, under
such plan, WW Holdings stockholders will be issued rights to purchase shares of
preferred stock upon the occurrence of specified events, such as the acquisition
by a person of 15% of the company's outstanding shares. The purpose of this plan
is to ensure that the board is given the opportunity to negotiate with persons
contemplating significant transactions with WW Holdings.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF MERGER TRANSACTION TO STOCKHOLDERS
The following is a discussion of the anticipated significant U.S. federal
income tax consequences of the merger that are generally applicable to "U.S.
Holders" of Watson Wyatt & Company shares. Statements of law and conclusions of
law in this discussion are the opinions of Cadwalader, Wickersham & Taft,
counsel to Watson Wyatt, and are covered by a tax opinion.
30
<PAGE>
For purposes of this discussion, a U.S. Holder means a beneficial owner of
Watson Wyatt & Company stock that is, for U.S. federal income tax purposes:
- an individual who is a citizen or resident of the United States;
- a corporation, partnership or other business entity created or organized
under the laws of the United States or any state or political subdivision
thereof, including the District of Columbia;
- an estate, the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust with respect to which a court within the United States is able to
exercise primary supervision over its administration, and one or more
United States persons have the authority to control all of its substantial
decisions.
An individual may, subject to certain exceptions, be deemed to be a resident of
the United States by reason of being present in the United States for at least
31 days in the calendar year and for an aggregate of at least 183 days during a
three-year period ending in the current calendar year (counting for such
purposes all the days present in the current year, one-third of the days present
in the immediately preceding year, and one-sixth of the days present in the
second preceding year). A "Non-U.S. Holder" is a beneficial owner of Watson
Wyatt & Company shares that is not a U.S. Holder.
This discussion does not deal with all income tax considerations that might
be relevant to particular U.S. Holders of Watson Wyatt & Company stock in light
of their particular circumstances, such as stockholders who are dealers in
securities, banks, insurance companies or tax-exempt entities, stockholders who
hold their shares as part of a hedging, straddle, conversion or other risk
reduction transaction or stockholders who acquired their shares in connection
with stock option or certain types of stock purchase plans or other compensatory
transactions. Further, this discussion does not address the income tax
considerations relevant to Non-U.S. Holders. In addition, the following
discussion does not address the tax consequences of transactions effectuated
prior to or after the merger (whether or not these transactions are in
connection with the merger), including transactions in which Watson Wyatt shares
were or are acquired or in which Watson Wyatt shares were or are disposed of.
Furthermore, no foreign, state or local tax considerations are addressed in this
proxy statement/prospectus.
This summary is based on interpretations of the Internal Revenue Code of
1986, as amended, regulations issued thereunder, and rulings and decisions
currently in effect (or in some cases proposed), all of which are subject to
change. Any such change may be applied retroactively and may adversely affect
the federal tax consequences described herein. Accordingly, Watson Wyatt &
Company stockholders are urged to consult their tax advisers as to the specific
tax consequences of the merger, including the applicable federal, state, local
and foreign income and estate tax consequences to them of the merger and
applicable tax return reporting requirements.
The following U.S. federal income tax consequences will result from the
merger:
- no gain or loss will be recognized by holders of Watson Wyatt & Company
shares solely as a result of their receipt of new Watson Wyatt & Company
Holdings class B-1 and class B-2 shares in the merger;
- the aggregate tax basis of the new Watson Wyatt & Company Holdings
class B-1 and B-2 shares received in the merger by a Watson Wyatt
stockholder will be the same as the aggregate tax basis of the Watson
Wyatt & Company shares surrendered in exchange for such new class B-1 and
B-2 shares;
- for tax purposes, the holding period of the new class B-1 and B-2 shares
received in the merger by a Watson Wyatt & Company stockholder will
include the period during which the stockholder
31
<PAGE>
held the shares surrendered in exchange for such new class B-1 and B-2
shares, so long as the Watson Wyatt & Company shares are held as a capital
asset at the time of the merger; and
- Watson Wyatt & Company, Watson Wyatt & Company Holdings and WW Merger
Subsidiary, Inc. will not recognize gain or loss solely as a result of the
merger.
Under the applicable regulations, the aggregate tax basis of the Watson
Wyatt shares surrendered by a holder in the merger is allocated among the
class B-1 and class B-2 common stock in proportion to the fair market value of
the stock in each such class.
Holders of Watson Wyatt & Company shares who receive cash in lieu of
fractional shares of Watson Wyatt & Company Holdings class B-1 and class B-2
shares will be treated as having received such fractional shares under the
merger, and then as having exchanged such fractional shares for cash in a
redemption by Watson Wyatt & Company Holdings. The amount of such gain or loss
will be equal to the difference between the ratable portion of the tax basis of
the Watson Wyatt & Company shares exchanged in the merger that is allocated to
such fractional shares and cash received in lieu thereof. Any such capital gain
or loss will constitute long term capital gain or loss if such Watson Wyatt &
Company shares have been held by the holder for more than one year at the time
of the consummation of the merger. Generally, capital gain on assets held by
individuals for more than 12 months will be subject to tax at a rate not to
exceed 20%.
Underwriting fees attributable to the sale of stock by selling stockholders
in the public offering that are reimbursed by Watson Wyatt & Company will be
taxable to selling stockholders as ordinary income.
The opinion of counsel assumes:
- the accuracy of the statements and facts concerning the merger set forth
in the merger agreement and in this proxy statement/prospectus;
- that the merger is consummated in the manner contemplated by, and in
accordance with, the terms of the merger agreement and this proxy
statement/prospectus; and
- the accuracy of representations made by Watson Wyatt & Company and Watson
Wyatt & Company Holdings set forth in certificates delivered to counsel.
The parties are not requesting a ruling from the Internal Revenue Service in
connection with the merger. The opinion of counsel referred to above does not
bind the IRS or prevent the IRS from adopting a contrary position.
THE OPINION OF CADWALADER, WICKERSHAM & TAFT DOES NOT ADDRESS ANY STATE,
LOCAL, FOREIGN, OR OTHER TAX CONSEQUENCES OF THE MERGER. WATSON WYATT & COMPANY
STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES OF THE PROPOSED TRANSACTION TO THEM INDIVIDUALLY, INCLUDING TAX
CONSEQUENCES UNDER STATE, LOCAL, OR FOREIGN LAW.
VOTE REQUIRED AND RECOMMENDATION
For the reasons discussed above, our board of directors deems it advisable
and in the best interests of Watson Wyatt & Company to approve the proposed
merger of WW Merger Subsidiary Inc. with and into Watson Wyatt & Company on the
terms set forth in the attached merger agreement.
The vote required to approve the merger is:
- a majority of the outstanding shares of our common stock entitled to vote
at the special meeting; and
- 80% of the shares actually voting for or against the proposal, if such
amount is higher than a majority of outstanding shares entitled to vote.
The persons named in the enclosed proxy intend to vote "FOR" approval of the
proposed merger unless otherwise directed. If the proposed merger is approved by
the stockholders, it will not take effect unless the public offering is to take
place.
32
<PAGE>
PROPOSAL NO. 2--APPROVAL OF 2000 LONG TERM INCENTIVE PLAN
The Compensation and Stock Committee has adopted, and the board of directors
has ratified, the Watson Wyatt & Company Holdings 2000 Long Term Incentive Plan.
The proposed incentive plan provides for grants to be made by Watson Wyatt &
Company Holdings, the new holding company that will be created by the merger
described in this proxy statement/prospectus. The incentive plan authorizes the
grant of stock options and stock appreciation rights to eligible employees of
Watson Wyatt and its subsidiaries. The board believes the incentive plan will
provide it with the required flexibility to design long term incentive award
programs which will provide associates with a strong performance incentive and
be adaptable to the changing business environment for associate compensation.
The plan will become effective at the time it is approved by the stockholders,
but it will be implemented only if the proposed merger, contained in Proposal
No. 1, and the public offering are completed.
The following summary describes all material elements of the incentive plan,
but is not complete. The summary is qualified in its entirety by reference to
the full plan, a copy of which is attached to this proxy statement/prospectus as
ANNEX D.
SUMMARY OF PLAN
PURPOSE OF THE PLAN
The purpose of the incentive plan is to secure for Watson Wyatt and its
stockholders the benefits of the additional incentive inherent in the ownership
of Watson Wyatt & Company Holdings class A common stock by associates of Watson
Wyatt & Company Holdings and its subsidiaries who are important to the success
and growth of the business of the company, and to help secure and retain the
services of such persons.
EFFECTIVE DATE
The incentive plan will become effective at the time it is approved by the
stockholders, subject to completion of the merger and the public offering.
ADMINISTRATION
The incentive plan generally will be administered by a committee appointed
by the Board. The plan provides that the members of the committee will consist
solely of two or more directors who are "outside directors," within the meaning
of Section 162(m) of the Internal Revenue Code, and "non-employee directors"
within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934. The
committee will have full and final authority to select the individuals to
receive awards and to grant awards and will have a wide degree of flexibility in
determining the terms and conditions of awards.
ELIGIBILITY
All full-time and regular part-time associates and directors of Watson Wyatt
& Company Holdings and its subsidiaries are eligible to participate in the
incentive plan. We estimate that about 3,600 associates and directors of Watson
Wyatt & Company Holdings and its subsidiaries will participate in the plan.
Because the plan is a discretionary plan, we currently cannot determine the
amount or form of any award that will be allocated to any individual during the
term of the plan.
SHARES SUBJECT TO THE PLAN
The shares that may be issued pursuant to awards granted under the plan will
be shares of class A common stock. The maximum number of shares of class A
common stock that may be issued pursuant
33
<PAGE>
to awards granted under the plan is 4,500,000 shares. The plan also contains
customary anti-dilution provisions.
TYPES OF AWARDS
Awards under the incentive plan may include nonqualified stock options and
stock appreciation rights. The exercise price for options granted under the plan
will be not less than 100% of the fair market value of a share of class A common
stock on the date of grant.
An award granted under the plan to a participant will generally include a
provision that accelerates the exercisability upon the occurrence of specified
events, such as the death or disability of the participant while employed by the
company or its subsidiaries, the occurrence of a change of control of Watson
Wyatt & Company Holdings or a dissolution, liquidation, sale of substantially
all of the property and assets of Watson Wyatt or other significant corporate
transaction. All options which have not vested will terminate upon termination
of employment.
MAXIMUM AWARDS ISSUABLE TO INDIVIDUALS
In general, the plan administrator may not, within any calendar year, grant
options to purchase more than 200,000 shares of class A common stock and/or
grant stock appreciation rights covering more than 200,000 shares of class A
common stock to a participant.
AMENDMENTS TO AND TERMINATION OF THE PLAN
Subject to limitations imposed by law and the plan, the board of directors
may amend or terminate the plan at any time and in any manner. No amendment or
termination may deprive the recipient of an award previously granted under the
plan of any rights under the award without his or her consent.
DURATION OF THE PLAN AND OF OPTIONS
The incentive plan will remain in effect until all shares subject to the
plan have been purchased or acquired pursuant to the plan. We may not grant
awards under the plan on or after the tenth anniversary of the plan's adoption.
We may not grant any option under the plan that is exercisable after the 7(th)
anniversary of the date of grant, except that options may be exercised for a
period of one year after the death of a participant while employed by Watson
Wyatt & Company Holdings or its subsidiary, even if that period extends beyond
such 7(th) anniversary.
COMPLIANCE WITH SECTION 16(B)
Pursuant to Section 16(b) of the Securities Exchange Act, directors,
executive officers and 10% stockholders of Watson Wyatt will be generally liable
to Watson Wyatt for repayment of any profits realized from any non-exempt
purchase and sale of common stock occurring within a six-month period.
Rule 16b-3 provides an exemption from Section 16(b) liability for some
transactions by an officer or director made pursuant to approval by the board of
directors, a committee composed of outside directors or stockholders. It is
intended that all grants made under the plan would meet the requirements of the
Rule 16b-3 exemption.
NON-COMPETE PROVISIONS
The plan contains non-compete restrictions that are identical to those
contained in our current non-compete agreements. In addition, the plan provides
for the cancellation of unexercised options and the recapture of any option
gains resulting from exercises during the 24-month period immediately before any
breach of the non-compete.
34
<PAGE>
U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a brief description of the U.S. federal income tax
consequences that will generally apply to awards made under the plan, based on
U.S. federal income tax laws in effect on the date of this proxy
statement/prospectus. The exact U.S. federal income tax treatment of awards will
depend on the specific nature of any award.
The grant of a "nonqualified stock option" is generally not a taxable event
for the optionee. Upon exercise of an option, the optionee will generally
recognize ordinary income in an amount equal to the excess of the fair market
value of the shares acquired upon exercise, determined as of the date of
exercise, over the exercise price of the option, and the participant's employer
generally will be entitled to a deduction equal to that amount.
Special rules will apply in cases where an optionee pays the exercise price
or applicable withholding tax obligations under the plan by delivering
previously owned shares of class A common stock. This surrender of shares will
result in a non-taxable exchange, with a carryover basis, of a number of shares
acquired equal to the number of shares delivered. The remainder of the shares
acquired are fully taxable to the participant (the full fair market value on the
date of exercise is includable in the participant's gross income), and the
participant will have a basis in those shares equal to the amount included in
income.
In the case of a stock appreciation right, generally, a participant to whom
such a right is granted recognizes no income at the time of grant. Upon exercise
of the right and receipt of cash or common stock, the amount received, or the
fair market value of the property received, is ordinary income to the
participant and is deductible by the company.
The terms of specific award agreements may provide for accelerated vesting
or payment of an award in connection with a change of control of WW Holdings. In
that event, and depending upon the individual circumstances of the recipient,
some amounts with respect to the award may be "excess parachute payments" under
the "golden parachute" provisions of the Internal Revenue Code. Pursuant to
these provisions, a recipient will be subject to a 20% excise tax on any "excess
parachute payments" and Watson Wyatt will be denied any deduction with respect
to such a payment.
In some circumstances, the company may be denied a deduction for
compensation (including compensation attributable to the ordinary income
recognized with respect to awards made under the plan) to some officers of
Watson Wyatt to the extent that the compensation to that officer exceeds
$1,000,000 in a given year. Section 162(m) of the Internal Revenue Code limits
an employer's annual deduction for compensation paid to certain executives to
$1,000,000, with certain exceptions. One of those exceptions provides that
"performance-based compensation" is not subject to the deduction limit. It is
our intention that the ordinary income with respect to awards made under this
plan will be fully deductible as performance-based compensation.
Participants should consult their tax advisors with respect to the tax
consequences of the long term incentive plan under state, local or foreign tax
jurisdictions.
VOTE REQUIRED AND RECOMMENDATION
The board of directors has directed that the incentive plan be submitted for
stockholder approval. The affirmative vote of a majority of the shares
represented at the special meeting, in person or by proxy, will be required for
approval. In the absence of approval, the plan will be without effect, and no
grants or awards will be made under the plan.
The board of directors recommends that the stockholders vote "FOR" the
proposed incentive plan. The persons named in the enclosed proxy intend to vote
"FOR" adoption of the plan unless otherwise directed. Even if the incentive plan
is approved by the stockholders, it will not take effect unless the merger is
also approved and the public offering takes place.
35
<PAGE>
PROPOSAL NO. 3--APPROVAL OF AMENDMENTS TO
CURRENT WATSON WYATT & COMPANY BYLAWS
Under Watson Wyatt & Company's current bylaws, Watson Wyatt shares only may
be transferred to trusts that meet specific requirements set forth in the
bylaws. In most cases, any trust that meets the requirements of the bylaws will
not be an effective vehicle for lifetime estate planning. For many associates,
their Watson Wyatt shares represent a significant portion of their total assets.
The board of directors has determined that it is desirable to amend the bylaws
prior to the initial public offering to allow stockholders to accomplish certain
estate planning objectives prior to any increase in share price that may result
in the initial public offering. The board therefore recommends amending the
Watson Wyatt & Company bylaws to allow stockholders to make transfers of the
company's common stock, under certain circumstances, including to trusts created
for the benefit of the stockholder, his or her spouse or descendants or to
custodial accounts for minor dependents to facilitate estate planning and that
could result in gift and estate tax savings for the stockholder. Any stockholder
desiring to make such transfers should consult with their personal advisor
regarding their individual tax and estate planning needs. This proposal is not
contingent upon any event or any other proposal.
SUMMARY OF PROPOSED AMENDMENT
If approved, Sections 9.1, 9.2 and 9.9 of our bylaws will be amended and
restated as set forth in ANNEX E to this proxy statement/prospectus. The
statements made in this proxy statement/prospectus with respect to this
amendment to the bylaws should be read in conjunction with and are qualified in
their entirety by reference to ANNEX E.
VOTE REQUIRED AND RECOMMENDATION
Under the terms of the current Watson Wyatt & Company certificate of
incorporation and bylaws, the affirmative vote of 80% of the votes entitled to
be cast is necessary to adopt this proposal.
The board of directors recommends that the stockholders vote "FOR" the
proposed amendment to the bylaws. The persons named in the enclosed proxy intend
to vote "FOR" adoption of the amendment unless otherwise directed. The bylaw
amendment would take effect immediately upon its approval by the stockholders.
GENERAL
RECORD DATE; VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
Our board has fixed the close of business on , 2000 as the record
date for determining stockholders entitled to receive notice of and to vote at
the special meeting. Only stockholders of record as of the close of business on
the record date will be entitled to vote at the special meeting.
We had shares of common stock outstanding and entitled to vote as of the
close of business on the record date. These shares are the only securities that
may be voted at the special meeting. Each share is entitled to one vote.
Holders of a majority of the issued and outstanding shares of our common
stock, present in person or by proxy, will constitute a quorum for the
transaction of business at the special meeting.
Votes Required:
- A majority of all shares entitled to vote is required to approve the
merger at the special meeting. In addition, we are requiring that the
merger also be approved by 80% of shares actually voting for or against
the proposal, if higher.
36
<PAGE>
- A majority of the shares present at the meeting, in person or by proxy, is
required to approve the 2000 long term incentive plan.
- A vote of 80% of shares entitled to vote is required to amend the bylaws
to permit certain stock transfers to facilitate estate planning.
Abstentions with regard to all matters are counted as shares present for
purposes of determining whether a quorum exists. With one exception as described
in the following sentence, abstentions will have the effect of a negative vote.
With regard to the merger proposal, an abstention will have the effect of a
negative vote insofar as approval of the merger requires the vote of a majority
of the outstanding shares entitled to vote, but will not have any effect with
respect to the requirement that the merger be approved by at least 80% of the
shares actually voting for or against the proposal.
COSTS OF SOLICITATION
We will pay the expenses of printing, assembling and mailing this proxy
statement/prospectus. In addition to the initial distribution of the proxies,
associates may assist with the solicitation of proxies personally, by telephone,
electronically or by facsimile.
VOTING AND REVOCATION OF PROXIES
All shares represented by valid proxies we receive before the special
meeting will be voted by the board-appointed proxies at the special meeting as
specified in the proxy, unless the proxy has been previously revoked. If no
specification is made on a proxy with respect to a proposal, the board-
appointed proxies will vote the related shares FOR that proposal.
Management knows of no other matter which may come up for action at the
meeting. Unless you indicate otherwise, your proxy card also will confer
discretionary authority on the board-appointed proxies to vote the shares
represented by the proxy on any matter that is properly presented for action at
the special meeting.
Whether or not you expect to be present at the meeting, you are urged to
register your vote on Insite or sign, date and PROMPTLY return the attached
proxy in a sealed envelope to your office administrator by , 2000
for forwarding to the corporate offices of Watson Wyatt. PLEASE RETURN YOUR
PROXY IN ACCORDANCE WITH THE DIRECTION ON THE BOTTOM OF THE PROXY FORM.
You have the right to revoke your proxy at any time before it is voted by
giving written notice of revocation to our secretary, by submitting a subsequent
later-dated proxy or by voting in person at the special meeting.
37
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data of Watson Wyatt & Company
Holdings should be read in conjunction with the consolidated financial
statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this proxy
statement/prospectus. The balance sheet data as of June 30, 1998 and 1999 and
the statement of operations data for the years ended June 30, 1997, 1998 and
1999 have been derived from the consolidated financial statements for such
years, which have been audited by PricewaterhouseCoopers LLP, independent
accountants. The balance sheet data as of June 30, 1995, 1996 and 1997 and the
statement of operations data for the years ended June 30, 1995 and 1996 are
derived from the audited consolidated financial statements for such years that
have been restated to reflect our discontinued operations.
The consolidated financial data as of and for the six months ended
December 31, 1998 and 1999 have been derived from our unaudited consolidated
financial statements, which management believes include all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation.
Results for the six months ended December 31, 1999 are not necessarily
indicative of results that may be achieved for the full year.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED DEC. 31,
----------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA (A):
Continuing operations:
Fees............................................... $465,788 $475,298 $486,502 $ 512,660 $556,860 $274,343 $298,734
Operating expenses:
Salaries and benefits............................ 250,507 250,103 252,302 268,611 298,925 148,868 160,753
Stock incentive bonus plan (b)................... 22,600 7,600 15,000
Non-recurring compensation charge related to
formula book value change (c).................. -- -- -- 69,906 -- -- --
Occupancy & communications....................... 71,173 60,566 72,155(d) 62,061 62,915 29,945 30,423
Professional and subcontracted services.......... 43,613 42,450 48,827 49,907 47,863 22,052 24,927
Other............................................ 25,135 23,637 23,871 26,779 29,753 11,586 16,300
-------- -------- -------- --------- -------- -------- --------
390,428 376,756 397,155 477,264 462,056 220,060 247,403
General & administrative expenses.................. 41,313 38,656 45,696 51,759 56,578 27,852 27,902
Depreciation & amortization........................ 21,103 25,541 22,094 24,994 15,248 7,824 9,517
-------- -------- -------- --------- -------- -------- --------
452,844 440,953 464,945 554,017 533,882 255,736 284,822
-------- -------- -------- --------- -------- -------- --------
Income (loss) from operations...................... 12,944 34,345 21,557 (41,357) 22,978 18,607 13,912
Other:
Net interest income.............................. 1,343 1,441 1,462 901 944 528 1,252
Net interest (expense)........................... (1,507) (930) (1,506) (2,768) (2,646) (1,721) (1,088)
Income (loss) from affiliates.................... (576) (820) 105 258 2,524 1,025 2,143
-------- -------- -------- --------- -------- -------- --------
Income (loss) before income taxes and minority
interest......................................... 12,204 34,036 21,618 (42,966) 23,800 18,439 16,219
Income taxes....................................... 6,369 14,071 9,070 13,134 11,448 8,917 7,835
Minority interest.................................. (127) (130) (167) (112) (217) (85) 176
Cumulative effect of change in accounting for
postemployment benefits, net of tax benefit of
$1,000........................................... (800) -- -- -- -- -- --
-------- -------- -------- --------- -------- -------- --------
Income (loss) from continuing operations........... 4,908 19,835 12,381 (56,212) 12,135 9,437 8,560
Discontinued operations (e)........................ (4,059) (10,480) (11,483) (69,906) 8,678 8,678 --
-------- -------- -------- --------- -------- -------- --------
Net income (loss).................................. $ 849 $ 9,355 $ 898 $(126,118) $ 20,813 $ 18,115 $ 8,560
======== ======== ======== ========= ======== ======== ========
Earnings (loss) per share, continuing operations,
basic and fully diluted.......................... $ 0.25 $ 1.07 $ 0.71 $ (3.27) $ 0.80 $ 0.63 $ 0.57
Earnings (loss) per share, basic and fully
diluted.......................................... $ 0.05 $ 0.51 $ 0.05 $ (7.34) $ 1.37 $ 1.21 $ 0.57
Weighted average shares outstanding................ 19,248 18,516 17,438 17,170 15,215 14,977 15,740
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF
---------------------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1999 1999
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 11,860 $ 21,694 $ 26,257 $ 13,405 $ 35,985 $ 13,688
Net working capital....................... 49,826 18,788 21,307 23,748 11,692 8,882
Total assets.............................. 286,622 320,819 331,778 268,310 313,960 301,024
Notes payable and book overdrafts......... -- -- 408 11,666 248 8,401
Redeemable common stock................... 86,275 90,214 96,091 96,296 107,631 99,398
Total stockholders' (deficit) (f)......... (6,562) (5,832) (12,205) (84,510) (74,351) (65,119)
Shares outstanding........................ 19,130 18,262 18,130 15,917 16,112 14,880
</TABLE>
- ------------------------------
(a) We believe that our income as an employee-owned company is not indicative of
the operating performance we will report as a publicly traded company due to
the significant impact of the following two non-recurring compensation
related expenses: (1) supplemental discretionary bonuses accrued under our
stock incentive bonus plan, described in more detail in footnote (b) below
and (2) a one-time charge in fiscal year 1998 related to a change in the way
we calculated our formula book value, the price at which we sold and
repurchased our restricted common stock in transactions with our employees
prior to the public offering, described in more detail in footnote
(c) below.
We believe that our results of operations in fiscal years 1998 and 1999 and
the six month periods ended December 31, 1998 and 1999 are more comparable
to, and a better indication of, our performance as a publicly traded company
if they are analyzed excluding the stock incentive bonus plan and the
non-recurring compensation charge described above. The continuing operations
loss before taxes and minority interest of $43.0 million for fiscal year
1998 would have improved by $69.9 million, and the continuing operations
income before taxes and minority interest of $23.8 million for fiscal year
1999 would have improved by $22.6 million without these items. Income before
taxes and minority interest from continuing operations for the three years
ended June 30, 1997, 1998 and 1999 would have been $21.6 million,
$26.9 million and $46.4 million, respectively. Income before taxes and
minority interest from continuing operations for the six month periods ended
December 31, 1998 and 1999 would have been $26.0 million and $31.2 million,
respectively, if bonuses were accrued under the compensation structure
management will adopt as a publicly traded company.
The proposed Watson Wyatt & Company Holding 2000 Long Term Incentive Plan
provides for non-qualified stock options with an exercise price equal to
fair market value at the date of the grant and no uncertainties that would
require variable accounting under generally accepted accounting principles.
Therefore, grants under the stock option program will not result in
compensation expense.
In a few foreign jurisdictions where option grants are impractical, we will
grant stock appreciation rights (SARs) which will require recognition of
compensation expense over a vesting period to the extent the market price of
the stock increases. However, it is anticipated that this expense will be
immaterial.
(b) Historically, we have paid incentive bonuses to associates under a fiscal
year-end bonus program. Beginning in fiscal year 1999, in addition to annual
fiscal year-end bonuses, we provided supplemental bonus compensation to our
employee shareholders pursuant to the stock incentive bonus plan in an
amount representing all income in excess of a targeted amount. Following the
public offering, we will terminate the stock incentive bonus plan and
replace it with equity based incentives more customary to publicly traded
companies.
39
<PAGE>
(c) As an employee-owned company without a public trading market, we sold and
repurchased shares of common stock in transactions with our employee
shareholders at a formula book value calculated in accordance with our
bylaws. In fiscal year 1998, we recorded a one-time non-cash compensation
charge against continuing operations of $69.9 million to reflect a change in
the method of calculating the formula book value. This change eliminated
from the calculation of formula book value the $69.9 million charge taken
for discontinued operations in fiscal year 1998 to reflect the
discontinuation of our benefits administration outsourcing business.
(d) Results of operations for fiscal year 1997 were reduced by a $12.1 million
sublease loss due to the relocation of the corporate and one operating
office.
(e) As discussed in footnotes (a) and (c) above, in fiscal year 1998 we
discontinued our benefits administration outsourcing business and recorded a
$69.9 million charge to earnings in the discontinued operations line. Fiscal
years 1995 through 1998 also include the operating losses of the benefits
administration outsourcing business prior to its discontinuation in 1998,
which are reflected in the discontinued operations line. In fiscal year
1999, the discontinued operations credit reflects the reduction of the
expected loss on disposal of the benefits administration outsourcing
business.
(f) The increase in Total Stockholders' Deficit from June 30, 1997 to June 30,
1998 includes the discontinued operations charge of $69.9 million mentioned
in note (e) above.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Watson Wyatt & Company Holdings, including its subsidiaries, is a global
provider of human capital consulting services. We operate on a geographic basis
from 59 offices in 18 countries throughout North America, Asia-Pacific and Latin
America. We provide services in three principal practice areas: employee
benefits, human resources technologies and human capital consulting.
Although we operate globally as an alliance with our affiliates, our
revenues and operating expenses 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/loss
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 are 60% and 40%,
respectively. Clients are typically invoiced on a monthly basis with revenue
recognized as services are provided. For the most recent three fiscal years,
fees from U.S. consulting operations have comprised approximately 80% of
consolidated revenues. No single client accounted for more than 3% of our
consolidated revenues for any of the most recent three fiscal years.
Our most significant expenses are salaries and benefits costs, including
incentive bonuses, which typically comprise over 60% of total costs of providing
services. In addition to payroll and related benefits and taxes, salaries and
benefits also include incentive bonus expense, which is linked to our operating
performance. Other significant costs of providing services include office rent
and related costs, communications and professional and subcontracted services.
Historically, we have paid incentive bonuses to associates under a fiscal
year-end bonus program. Beginning in fiscal year 1999, in addition to annual
fiscal year-end bonuses, we provided supplemental bonus compensation to our
employee shareholders pursuant to the stock incentive bonus plan in an amount
representing all income in excess of a targeted amount. Following this offering,
we will terminate our stock incentive bonus plan and replace it with
equity-based incentives more customary to publicly traded companies. Our results
of operations for fiscal year 1999 and the six month period ended December 31,
1999 include expenses for supplemental bonuses accrued under the stock incentive
bonus plan of $22.6 million and $15.0 million, respectively.
In addition, as an employee-owned company without a public trading market,
we sold and repurchased shares of common stock in transactions with our employee
shareholders at a formula book value calculated in accordance with our bylaws.
In fiscal year 1998, we recorded a one-time non-cash compensation charge against
continuing operations of $69.9 million to reflect a change in the method of
calculating the formula book value. This change eliminated from the calculation
of formula book value the $69.9 million charge taken for discontinued operations
in fiscal year 1998 to reflect the discontinuation of our benefits
administration outsourcing business.
Due to the stock incentive bonus plan and non-cash compensation charge
related to the change in formula book value described above, we believe that our
income as an employee-owned company is not indicative of the operating
performance we will report as a publicly traded company. We believe that our
results of operations in fiscal years 1998 and 1999 and the six month periods
ended December 31, 1998 and 1999 are more comparable to, and a better indication
of, our performance as a publicly traded company if they are analyzed excluding
the stock incentive bonus plan and the non-recurring compensation charge
described above, since the events giving rise to these charges are eliminated by
41
<PAGE>
the change in corporate structure and anticipated incentive compensation
following this offering. The continuing operations loss before taxes and
minority interest of $43.0 million for fiscal year 1998 would have improved by
$69.9 million, and the continuing operations income before taxes and minority
interest of $23.8 million for fiscal year 1999 would have improved by
$22.6 million without these items. Income before taxes and minority interest
from continuing operations for the three years ended June 30, 1997, 1998 and
1999 would have been $21.6 million, $26.9 million and $46.4 million,
respectively. Income before taxes and minority interest from continuing
operations for the six month periods ended December 31, 1998 and 1999 would have
been $26.0 million and $31.2 million, respectively, if bonuses were accrued
under the compensation structure management will adopt as a publicly traded
enterprise.
This compensation structure is based on the proposed Watson Wyatt & Company
Holdings 2000 Long Term Incentive Plan and anticipated incentive compensation,
which provides for non-qualified stock options with an exercise price equal to
fair market value at the date of the grant and no uncertainties that would
require variable accounting under generally accepted accounting principles.
Therefore, grants under the stock option program will not result in compensation
expense.
In a few foreign jurisdictions where option grants are impractical, we will
grant stock appreciation rights (SARs) which will require recognition of
compensation expense over a vesting period to the extent the market price of the
stock increases. However, it is anticipated that this expense will be
immaterial.
In connection with this offering, we have decided to reimburse the selling
stockholders for the underwriting commission on the shares sold by them in this
offering. In the fiscal quarter in which the offering is completed, our
operating results will be negatively affected by the resulting compensation
charge. We estimate that the reduction in income from operations will be
approximately $2.5 million and the reduction in net income would be
approximately $1.7 million due to this non-recurring compensation charge.
RESULTS OF OPERATIONS--SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX
MONTHS ENDED DECEMBER 31, 1998.
REVENUES. Fees for the six months ended December 31, 1999 were
$298.7 million, compared to $274.3 million for the six months ended
December 31, 1998, an increase of $24.4 million, or 9%. The revenue growth is
primarily due to an $11.2 million, or 11%, rise in fees generated by our U.S.
East region and a $9.0 million, or 12%, rise in fees generated by our U.S.
Central region. The fee increase in these regions can be attributed to increased
chargeable hours, accounting for approximately $7.0 million, and to the
realization of billing rate increases, accounting for approximately
$13.2 million. In addition to these amounts, our Asia-Pacific region generated
$3.8 million or 16% higher fees than in the previous six month period.
SALARIES AND EMPLOYEE BENEFITS. Salaries and employee benefit expenses for
the six months ended December 31, 1999 were $160.8 million, compared to
$148.9 million for the six months ended December 31, 1998, an increase of
$11.9 million, or 8%. The increase is due to an increase in compensation to
associates, partly the result of annual salary increases and a 3% increase in
headcount.
STOCK INCENTIVE BONUS PLAN. The accrued bonus under the stock incentive
bonus plan for the six months ended December 31, 1999 was $15.0 million,
compared to $7.6 million for the six months ended December 31, 1998, an increase
of $7.4 million, or 97%. This increase is due to higher operating results for
the six months ended December 31, 1999 compared to the operating results for the
six months ended December 31, 1998. Under the equity based compensation
structure we plan to implement as a publicly traded enterprise, the results of
operations for the six-month periods ended December 31, 1999 and 1998 would not
have included the accrual for bonuses under the stock incentive bonus plan.
42
<PAGE>
OCCUPANCY AND COMMUNICATIONS. Occupancy and communication expenses for the
six months ended December 31, 1999 were $30.4 million, compared to
$30.0 million for the six months ended December 31, 1998, an increase of
$0.4 million, or 1%. The increase can be attributed to higher telephone expenses
and office supplies.
PROFESSIONAL AND SUBCONTRACTED SERVICES. Professional and subcontracted
services for the six months ended December 31, 1999 were $24.9 million, compared
to $22.0 million for the six months ended December 31, 1998, an increase of
$2.9 million, or 13%. The increase is due to a $1.2 million actuarial and
strategic consulting expense from a sub-contractor and $0.9 million in
non-compete payments. The remaining $0.8 million increase is due to an increase
in recruiting fees and other outside services.
OTHER. Other costs of providing services for the six months ended
December 31, 1999 were $16.3 million, compared to $11.6 million for the six
months ended December 31, 1998, an increase of $4.7 million, or 41%. The
difference is attributable to a $3.7 million gain from the sale of our defined
contribution daily record-keeping software included in the six months ended
December 31, 1998. The remainder of the difference can be attributed to a
$0.5 million increase in travel expenses and a $0.3 million increase in
expenditures for the professional development for U.S. and international
consultants.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the six
months ended December 31, 1999 were $27.9 million, unchanged from the six months
ended December 31, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for
the six months ended December 31, 1999 was $9.5 million, compared to
$7.8 million for the six months ended December 31, 1998, an increase of
$1.7 million, or 22%. This increase is due to a higher depreciable capital base
and higher intangibles related to the acquisition of selected units of KPMG's
consulting business late in the first fiscal quarter of fiscal year 1999.
INTEREST INCOME. Interest income for the six months ended December 31, 1999
was $1.3 million, compared to $0.5 million for first six months ended
December 31, 1998, an increase of $0.8 million, or 160%. This increase can be
attributed to the receipt of interest of $0.5 million related to a federal tax
refund and to additional interest income of $0.3 million earned during the year
on a higher average investment balance.
INTEREST EXPENSE. Interest expense for the six months ended December 31,
1999 was $1.1 million, compared to $1.7 million for the six months ended
December 31, 1998, a decrease of $0.6 million, or 37%. The decrease can be
contributed to our borrowing less money against our revolving line of credit in
the first six months of fiscal year 2000 than in the first six months of fiscal
year 1999.
INCOME FROM AFFILIATES. Income from affiliates for the six months ended
December 31, 1999 was $2.1 million, compared to $1.0 million for the six months
ended December 31, 1998, an increase of $1.1 million, or 109%. The increase
reflects improvement in business operations by our affiliates in both
Continental Europe and the United Kingdom.
PROVISION FOR INCOME TAXES. Income taxes for the six months ended
December 31, 1999 were $7.8 million, compared to $8.9 million for the six months
ended December 31, 1998 due to lower income before income taxes and minority
interest. The effective tax rate of 48% for the six months ended December 31,
1999 remained unchanged from the comparable prior year period. Our tax rate is
affected by differing foreign tax rates in various jurisdictions. We do not
record a tax benefit on foreign net operating loss carryovers and foreign
deferred expenses unless it is more likely than not that a benefit will be
realized.
DISCONTINUED OPERATIONS. During the six months ended December 31, 1998, we
further resolved our future obligations related to the discontinuation of our
benefits administration outsourcing business
43
<PAGE>
and reduced the expected loss on disposal by $8.7 million, net of taxes.
Management believes we have adequate provision for any remaining costs related
to the discontinuation.
NET INCOME. Net income for the six months ended December 31, 1999 was
$8.6 million, compared to $18.1 million for the six months ended December 31,
1998, a decrease of $9.5 million, or 53%. The decrease is principally due to the
$8.7 million after-tax adjustment to reduce the loss on disposal of the
discontinued benefits administration outsourcing business recorded in fiscal
year 1999. Income from continuing operations for the six months ended
December 31, 1999 and 1998 also reflect the stock incentive bonus plan accruals
discussed above.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
REVENUES. Fee revenue from continuing operations reached $556.9 million in
fiscal year 1999, an increase of $44.2 million from $512.7 million in fiscal
year 1998. This represents 9% growth in revenue. This increase is attributable
to increases in various North American regions totaling $39.9 million and a
further $5.9 million, or 13%, increase in our Asia-Pacific region. The
individual regions within North America showed the following trends: U.S. East,
a $34.6 million, or 21% increase; U.S. Central, a $15.0 million, or 10%,
increase; and, U.S. West, a $9.7 million, or 11%, decline. Within North America
the following individual lines of business, not all inclusive, showed the
following trends: Benefits Group, a $42.4 million increase, including $11.5
million of additional revenues from the first fiscal quarter acquisition of
selected units of KPMG's benefits consulting business; HR Technologies Group, an
$18.9 million increase, despite the sale in early fiscal year 1999 of the
defined contribution recordkeeping business which had generated revenues in
fiscal year 1998 of $6.0 million; Human Capital Group, a $25.3 million decline
in revenues amid a reorganization of the practice; and, no risk and insurance
consulting revenues due to our sale of this practice in late fiscal year 1998,
which had generated $9.2 million in fiscal year 1998 revenues.
COMPENSATION AND BENEFITS. For fiscal year 1999, salaries and employee
benefits expenses were $298.9 million, an increase of $30.3 million, or 11%,
from fiscal year 1998. This increase is due primarily to a 6% increase in
headcount, and annual increases in compensation and benefits. In fiscal year
1999, we accrued, for the first time, a supplemental bonus under our stock
incentive bonus plan of $22.6 million, which amounts were paid in January 2000.
OCCUPANCY AND COMMUNICATIONS. Occupancy and communications expense
increased $0.9 million or 1% in fiscal year 1999. This low percentage increase
reflects our adoption of an office space standard as well as our success in
negotiating advantageous leases of office space.
PROFESSIONAL AND SUBCONTRACTED SERVICES. Professional and subcontracted
services were $47.9 million for fiscal year 1999, a decrease of $2.0 million, or
4%, from fiscal year 1998 due to reduced corporate expenses.
OTHER. Other costs of providing services increased $3.0 million in fiscal
year 1999, which is mainly attributable to increased travel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for fiscal
year 1999 were $56.6 million, an increase of $4.8 million, or 9%, from fiscal
year 1998. The increase was attributable to $4.8 million for providing
technology support to core consulting areas and $1.6 million for Year 2000
readiness. These increases were offset by a $1.6 million decrease in marketing
expenses for business strategy initiatives from fiscal year 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
$9.7 million in fiscal year 1999 to $15.2 million. This decrease is due to
higher amortization of internally developed software in fiscal year 1998 of
$11.6 million, primarily due to a reevaluation and subsequent reduction of the
useful lives of the related products. Without this item in fiscal year 1998,
depreciation and amortization expense increased $1.9 million in fiscal year 1999
related to purchases of capital assets.
44
<PAGE>
INCOME FROM AFFILIATES. Income from affiliates was $2.5 million in fiscal
year 1999 compared to $0.3 million in fiscal year 1998. The increase reflects
heightened synergies and focus within our affiliated European operations as well
as improved business operations in the United Kingdom.
PROVISION (BENEFIT) FOR INCOME TAXES. Income before income taxes, minority
interest and discontinued operations was $23.8 million in fiscal year 1999,
which, considering taxes of $11.4 million, reflects an effective tax rate of
48%. Income tax expense of $13.1 million in fiscal year 1998 relates to a loss
before taxes, minority interest and discontinued operations of $43.0 million,
for an effective tax rate of (30.6%). The reason for reporting a tax expense
when we had a pretax loss and the disparity in effective tax rates is the
non-recurring compensation charge of $69.9 million in fiscal year 1998, included
in the loss before taxes of $43.0 million, which is permanently non-deductible
for tax purposes.
DISCONTINUED OPERATIONS. In fiscal year 1999, we further resolved our
future obligations related to the discontinuation of our Benefits Administration
Outsourcing Business and reduced the expected loss on disposal by $8.7 million,
net of taxes. We believe we have adequate provisions for any remaining costs
related to the discontinuation.
NET INCOME (LOSS). We generated net income in fiscal year 1999 of
$20.8 million compared to a net loss in fiscal year 1998 of $126.1 million.
Continuing operations income before income taxes and minority interest in fiscal
year 1999 of $23.8 million compares to the loss of $43.0 million in fiscal year
1998, which includes the $69.9 million non-recurring compensation charge related
to the change in formula book value for stock repurchases. The fiscal year 1999
results reflect significantly improved operating performance and the accrual of
bonuses under the stock incentive bonus plan, at the discretion of our board of
directors.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
REVENUES. Fee revenue from continuing operations reached $512.7 million in
fiscal year 1998, an increase of $26.2 million, or 5%, from $486.5 million in
fiscal year 1997. This increase is primarily attributable to an increase in
various North American regions totaling $29.9 million. The individual regions
within North America showed the following trends: a $12.0 million, or 15%, rise
in fees generated by our U.S. West consulting region, a $12.0 million, or 8%,
increase in our U.S. East region, and a $5.9 million, or 4%, rise in fees in our
U.S. Central region. The increases are due to the realization of billing rate
increases. Within North America the following individual lines of business, not
all inclusive, showed the following trends; Benefit Group, an $11.2 million
increase; Human Capital Group, a $12.0 million increase; and HR Technologies
Group, an $8.5 million increase. These North American increases were partially
offset by a decline of $5.4 million, or 11%, in our Asia-Pacific region, largely
reflecting regional economic issues.
COMPENSATION AND BENEFITS. For fiscal year 1998, salaries and employee
benefits expenses were $268.6 million, an increase of $16.3 million, or 6%, from
fiscal year 1997. This is due primarily to a 2% increase in headcount and annual
salary increases.
NON-RECURRING COMPENSATION CHARGE. In fiscal year 1998, we recorded a
non-cash, non-recurring compensation charge of $69.9 million because we changed
the method of calculating the formula book value of our common stock to exclude
the effect of the discontinuance of our benefits administration outsourcing
business. There was no such charge in fiscal year 1997.
OCCUPANCY AND COMMUNICATIONS. Occupancy and communications expenses
decreased $10.1 million in fiscal year 1998. We relocated our corporate office
to a lower-cost suburban location in 1997, recognizing sublease losses of
$12.1 million. Excluding these lease losses, occupancy and communications
increased $2.0 million or 3%, with the largest growth occurring in
telecommunications expenses.
45
<PAGE>
PROFESSIONAL AND SUBCONTRACTED SERVICES. Professional and subcontracted
services were $49.9 million for fiscal year 1998, an increase of $1.1 million,
or 2%, from fiscal year 1997.
OTHER. Other costs of providing services increased $2.9 million in fiscal
year 1998 due to increased travel and local office promotion expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for fiscal
year 1998 were $51.8 million, an increase of $6.1 million, or 13%, from fiscal
year 1997. The increase is due to increased spending on corporate advertising
and promotional expenses of $4.0 million and business strategy initiatives of
$2.0 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$2.9 million in fiscal year 1998 to $25.0 million. This increase is primarily
due to our decision to accelerate the amortization of internally developed
software in fiscal year 1998 by $6.8 million based upon a reevaluation and
subsequent reduction of the useful lives of the related products. Without this
acceleration, depreciation and amortization expense declined 18% due to a
decrease in the base of capital assets of $16.4 million in fiscal year 1998 from
fiscal year 1997.
PROVISION (BENEFIT) FOR INCOME TAXES. Loss before income taxes, minority
interest and discontinued operations was $43.0 million in fiscal year 1998; the
provision for taxes was $13.1 million. The resulting effective tax rate of
(30.6%) compares with an effective tax rate of 42% for fiscal year 1997. The
major reason for the difference in effective tax rates is the fiscal year 1998
non-recurring compensation charge of $69.9 million included in the loss before
taxes of $43.0 million, which is permanently non-deductible for tax purposes.
Further, the effective tax rate increased in fiscal year 1998 by
seven percentage points due to changes in various tax jurisdictions with
differing rates, particularly foreign jurisdictions, and lower tax credits.
DISCONTINUED OPERATIONS. In the early 1990's we entered the employee
benefits administration outsourcing business and we took on long-term contracts
in this area. In 1996, recognizing the significant capital requirements needed
for expansion in this area, we formed a joint venture called Wellspring
Resources with State Street Bank and Trust Company. In 1996 and 1997, Wellspring
Resources continued to require significant cash outlays and suffered development
and implementation delays. The combination of Wellspring Resources' financial
performance, which failed to meet our expectations, as well as a strategy
evaluation that concluded that benefits administration outsourcing did not
leverage our consulting strengths, led the board of directors to approve a plan
of discontinuation of the benefits administration outsourcing business in fiscal
year 1998, the financial effect of which is further described below.
NET INCOME (LOSS). Although we incurred a net loss in fiscal year 1998 of
$126.1 million compared to net income in fiscal year 1997 of $0.9 million, these
results include aggregate charges totaling $139.8 million on an after-tax basis
for the special compensation charge and the discontinued operations charge.
Fiscal year 1997 results include $11.5 million in after-tax charges for the
results of operations of the benefits administration outsourcing business, prior
to its discontinuation in fiscal year 1998.
The charges totaling $139.8 million in fiscal year 1998 were both associated
with our discontinued operations in fiscal year 1998. The discontinuation of our
benefits administration outsourcing business resulted in a $69.9 million loss
net of taxes due to the withdrawal from this line of business and is reported as
a discontinued operation. Included in this amount is the $6.8 million loss from
operations prior to discontinuance and $63.1 million for the loss upon exit. The
loss upon exit includes the write-off of our investment in Wellspring Resources,
net capitalized software development costs for the benefits administration
outsourcing clients we did not include in the Wellspring Resources joint
venture, and a provision for the completion of any obligations to clients,
vendors or our former joint venture partner.
46
<PAGE>
In connection with the discontinuation, we changed our bylaws to modify the
formula book value repurchase price of our stock to exclude the effect of the
discontinued operations from the formula book value calculation. The applicable
accounting rules required us to take a $69.9 million non-cash, non-recurring
compensation charge for this. This charge was reported as a special compensation
expense as a component of continuing operations. The charge was measured by the
difference between what the formula book value per share was at June 30, 1998
and what it would have been at that date without the modification. The non-cash
charge had no effect on our liquidity or capital resources but significantly
reduced our income from continuing operations.
LIQUIDITY AND CAPITAL RESOURCES.
Cash and cash equivalents at December 31, 1999 totaled $13.7 million,
compared to $36.0 million at June 30, 1999 and $13.4 million at June 30, 1998.
The decrease in cash from June 30, 1999 to December 31, 1999 is mainly
attributable to the timing of the payment of corporate taxes in the amount of
$17.4 million and the purchases of $3.6 million in capital assets during the
first six months of fiscal year 2000. The increase in cash from June 30, 1998 to
June 30, 1999 was the result of our stock sale during fiscal year 1999 (we held
no such sale in fiscal year 1998) and from reduced operating and close down
costs associated with the discontinuation of the benefits administration
outsourcing business. We had $3.0 million in borrowings outstanding under our
line of credit as of December 31, 1999 compared to $0 at June 30, 1999 and
$9.0 million at June 30, 1998.
CASH USED FOR / PROVIDED BY OPERATING ACTIVITIES. Cash used for operating
activities for the six months ended December 31, 1999 was $16.7 million,
compared to $6.0 million for the six months ended December 31, 1998. The
increase in cash outflows is due to the timing of corporate tax payments and
accounts payable, and benefits payments to retirees in fiscal year 2000, net of
a lower increase in receivables and lower outflows in connection with the
discontinued benefits administration outsourcing business. Further, the
allowance for doubtful accounts increased $2.7 million from June 30, 1999 to
December 31, 1999. This increase is typical of our historical patterns, where
the receivables and allowance are substantially reduced at year end from an
increased emphasis on collections. Both the receivable balances and the related
allowance increase in the first six months of the following year. The number of
months of accounts receivable outstanding was 1.7 at both December 31, 1999 and
December 31, 1998.
Net cash provided by operating activities was $54.5 million for fiscal year
1999, an increase of $33.3 million over cash provided in fiscal year 1998. The
increase was due primarily to the $43.2 million increase in accounts payable and
accrued liabilities from fiscal year 1999 operating expenses that will be paid
in fiscal year 2000. This increase was augmented by the $13.0 million decrease
in the cash needed in the closedown of discontinued operations. The increase in
receivables from clients of $14.4 million decreased cash that would have been
provided by operations. The deferred income tax asset increased $7.3 million in
fiscal year 1999 in conjunction with the increase in accounts payable and
accrued liabilities, compared with a $2.0 million increase in fiscal year 1998.
CASH USED IN INVESTING ACTIVITIES. Cash used in investing activities for
the six months ended December 31, 1999 was $5.8 million, compared to
$10.2 million for the six months ended December 31, 1998. The decrease in cash
usage was due to $3.4 million in lower contingency payments associated with 1999
acquisitions and $2.7 million in lower current year purchases of fixed assets,
partially offset by $1.7 million of lower distributions from affiliates. For
fiscal year 1999, uses of cash for investing activities decreased $8.7 million
from fiscal year 1998, principally due to reduced cash needs of the discontinued
operations.
CASH FROM FINANCING ACTIVITIES. Cash flows used by financing activities
were $0.5 million for the six months ended December 31, 1999, compared to cash
provided by financing activities of $14.3 million for the six months ended
December 31, 1998. We borrowed $16.8 million less against our revolving line
47
<PAGE>
of credit in the first six months of fiscal year 2000 than we borrowed in the
first six months of fiscal year 1999, and repurchased $1.9 million less
redeemable common stock. For full fiscal year 1999, we paid down our outstanding
debt and net stock activity had virtually no impact on cash used by financing
activities in fiscal year 1999.
We have a $120.0 million senior secured revolving credit facility that
matures on June 30, 2003. Of the $95.0 million of the credit line that is
allocated for operating needs, $89.8 million was available as of December 31,
1999, compared to $92.8 million on June 30, 1999. Further, we had borrowings
outstanding of $3.0 million as of December 31, 1999. The remaining $2.2 million
is unavailable as a result of support required for letters of credit issued
under the credit line.
We rely primarily on funds from operations and short-term borrowings for
liquidity. We believe that we have access to ample financial resources to
finance anticipated growth, meet commitments to affiliates, as well as support
ongoing operations. Anticipated commitments of funds are estimated at
$23.3 million for the remainder of fiscal year 2000, mainly for computer
hardware purchases and for office relocations and renovations. We expect
operating cash flows to provide for these cash needs. In future fiscal years, we
would expect that our capital needs would be similar in nature to what we have
incurred in the past. Capital expenditures will be required in conjunction with
office lease renewals and relocations required to support our growth strategy.
Additionally, our consultants will need to have access to hardware and software
that will support servicing our client base. In a rapidly changing technological
environment, we anticipate we will need to make investments in our knowledge
sharing and financial systems infrastructure. We would expect cash from
operations in conjunction with the anticipated net proceeds from this offering
and our existing credit facility to adequately provide for these cash needs.
Our foreign operations do not materially impact liquidity or capital
resources. At June 30, 1999, $14.4 million of the total cash balance of
$36.0 million was held outside of North America, which we have the ability to
readily access, if necessary. There are no significant repatriation restrictions
other than local or U.S. taxes associated with repatriation. The foreign
operations in total are substantially self-sufficient for their working capital
needs.
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.
48
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly financial data for the
periods indicated. We obtained this information from unaudited quarterly
consolidated financial statements which, in our opinion, include all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the
financial results for the periods. Results of operations for any previous
quarters do not necessarily indicate results that may be achieved in any future
period.
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1998 1998 1998 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Fees.................... $125,553 $127,717 $124,558 $134,832 $133,985 $140,358
Cost of providing
services:
Salaries and
benefits............ 64,207 65,460 70,293 68,651 76,398 72,470
Stock incentive bonus
plan................ -- -- -- -- 2,100 5,500
Non-recurring
compensation charge
related to formula
book value change... -- -- -- 69,906 -- --
Occupancy and
communications...... 15,219 15,588 15,422 15,832 14,521 15,433
Professional and
subcontracted
services............ 11,177 14,896 11,626 12,208 8,714 13,338
Other................. 7,000 7,624 6,666 5,489 2,846 8,740
-------- -------- -------- -------- -------- --------
97,603 103,568 104,007 172,086 104,579 115,481
General & administrative
expenses.............. 10,378 13,330 12,849 15,202 11,160 16,692
Depreciation &
amortization.......... 4,687 4,534 5,576 10,197 3,853 3,971
-------- -------- -------- -------- -------- --------
112,668 121,432 122,432 197,485 119,592 136,144
-------- -------- -------- -------- -------- --------
Income (loss) from
operations............ 12,885 6,285 2,126 (62,653) 14,393 4,214
Other:
Interest income....... 249 237 119 296 124 404
Interest expense...... (409) (1,017) (1,168) (174) (553) (1,168)
Income (loss) from
affiliates............ (99) 95 (215) 477 160 865
-------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
minority interest..... 12,626 5,600 862 (62,054) 14,124 4,315
Income taxes............ 5,811 2,672 470 4,181 6,830 2,087
-------- -------- -------- -------- -------- --------
Income (loss) before
minority interest..... 6,815 2,928 392 (66,235) 7,294 2,228
Minority interest....... (44) (97) 86 (57) -- (85)
-------- -------- -------- -------- -------- --------
Income (loss) from
continuing
operations............ 6,771 2,831 478 (66,292) 7,294 2,143
Discontinued operations,
net................... (1,630) (3,808) (73,316) 8,848 -- 8,678
-------- -------- -------- -------- -------- --------
Net income (loss)....... $ 5,141 $ (977) $(72,838) $(57,444) $ 7,294 $ 10,821
======== ======== ======== ======== ======== ========
Earnings (loss) per
share, continuing
operations, basic and
fully diluted......... $ 0.38 $ 0.16 $ 0.03 $ (4.10) $ 0.47 $ 0.15
Earnings (loss) per
share, basic and fully
diluted............... $ 0.29 $ (0.06) $ (4.30) $ (3.55) $ 0.47 $ 0.74
<CAPTION>
QUARTERS ENDED
------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Fees.................... $135,573 $146,944 $146,323 $152,411
Cost of providing
services:
Salaries and
benefits............ 70,977 79,080 79,803 80,950
Stock incentive bonus
plan................ 6,900 8,100 6,000 9,000
Non-recurring
compensation charge
related to formula
book value change... -- -- -- --
Occupancy and
communications...... 16,412 16,549 14,742 15,681
Professional and
subcontracted
services............ 11,573 14,238 9,796 15,131
Other................. 9,303 8,864 7,274 9,026
-------- -------- -------- --------
115,165 126,831 117,615 129,788
General & administrative
expenses.............. 14,194 14,532 13,178 14,724
Depreciation &
amortization.......... 3,996 3,428 4,907 4,610
-------- -------- -------- --------
133,355 144,791 135,700 149,122
-------- -------- -------- --------
Income (loss) from
operations............ 2,218 2,153 10,623 3,289
Other:
Interest income....... 127 289 1,036 216
Interest expense...... (473) (452) (390) (698)
Income (loss) from
affiliates............ 583 916 988 1,155
-------- -------- -------- --------
Income (loss) before
income taxes and
minority interest..... 2,455 2,906 12,257 3,962
Income taxes............ 1,530 1,001 5,919 1,916
-------- -------- -------- --------
Income (loss) before
minority interest..... 925 1,905 6,338 2,046
Minority interest....... 54 (186) 18 158
-------- -------- -------- --------
Income (loss) from
continuing
operations............ 979 1,719 6,356 2,204
Discontinued operations,
net................... -- -- -- --
-------- -------- -------- --------
Net income (loss)....... $ 979 $ 1,719 $ 6,356 $ 2,204
======== ======== ======== ========
Earnings (loss) per
share, continuing
operations, basic and
fully diluted......... $ 0.07 $ 0.11 $ 0.41 $ 0.15
Earnings (loss) per
share, basic and fully
diluted............... $ 0.07 $ 0.11 $ 0.41 $ 0.15
</TABLE>
49
<PAGE>
YEAR 2000 ISSUE
We have substantially completed a program to address the Year 2000 issue as
it affects our business and we believe that the Year 2000 issue is not likely to
have a material adverse effect on our business, results of operations, or
financial condition. Nevertheless, since all the effects of the Year 2000 issue
are not predictable, we do not expect that our Year 2000 compliance program will
eliminate all risk to us associated with the Year 2000 issue.
We believe that the most significant risk facing us in connection with the
Year 2000 issue relates to software provided by us for use by, or on behalf of,
our clients. This software has been provided principally by the HR Technologies
Group, including benefit administration software and call center services, and
the retirement practice, principally spreadsheet-based benefit calculators. The
risks presented include the possibility of errors or contractual liability
caused by non-compliant software that is not identified or corrected and the
costs of replacing or repairing client systems. Testing and remediation have
been completed on approximately 80% of such systems. Virtually all of the
systems not yet repaired are used to support open enrollment in benefits plans
and any required Year 2000 remediation will be performed as a part of
modifications to such systems before they are next used.
Our cost to address Year 2000 compliance issues exceeded $4.0 million for
fiscal year 1999. Our principal expenditures were for repair and testing of
internal and client software, costs associated with managing and administering
our Year 2000 compliance program and costs of outside consultants. We expect
that our costs for Year 2000 compliance will be lower in fiscal year 2000. Funds
for costs associated with our Year 2000 compliance efforts will come from
operating cash flows for all areas of our operations and will be expensed as
incurred.
50
<PAGE>
BUSINESS
INTRODUCTION
Founded in 1946, Watson Wyatt & Company is a global human capital consulting
firm. We help our clients enhance business performance by improving their
ability to attract, retain and motivate qualified employees. As leading
economies worldwide become more services oriented, human capital has become
increasingly important to companies and organizations. The heightened
competition for skilled employees, unprecedented changes in workforce
demographics and rising employee-related costs have increased the importance of
effective human capital management. We help our clients address these issues by
combining our expertise in human capital management with web-based technologies
in order to improve the design and implementation of various human resources, or
HR, programs, including compensation, retirement and healthcare plans.
The Internet is dramatically accelerating the transition of human capital
management to a more strategic role within organizations. Through the use of
web-based technologies, we help our clients transform the way they implement and
deliver HR programs and improve communications with their employees. We help our
clients develop electronic networks that provide employees and managers with
greater access to their HR programs, allowing them to obtain HR-related
information and perform HR-related functions 24 hours a day, 7 days a week. We
refer to this web-based delivery of HR information and programs as eHR.-TM-
The rapid expansion of our eHR-TM- services is a natural outgrowth of our
longstanding leadership in employee benefits and human capital consulting. We
design, develop and implement HR strategies and programs through the following
three closely interrelated practice areas:
BENEFITS CONSULTING GROUP
- Retirement plans, including pension and 401(k) plans
- Healthcare, disability and other group benefits plans
- Actuarial services
- Investment consulting services to pension plans
HR TECHNOLOGIES GROUP
- eHR-TM-: Our web-based delivery of HR information and programs
- Employee self-service applications
- HR call centers
- Benefit administration systems and retirement planning tools
HUMAN CAPITAL GROUP
- Strategies to align workforces with business objectives
- Strategies for attracting, retaining and motivating employees
- Organizational effectiveness services
- Compensation plans, including executive compensation and stock option
programs
Our clients include many of the world's largest corporations as well as
emerging growth companies, public institutions and non-profit organizations. We
consult to General Electric Company, General Motors, IBM and Lockheed Martin
Corporation. Many of our client relationships have existed over several decades.
We believe that our extensive history, global presence, dedication to
long-term client relationships and recognized reputation for quality provide us
with significant competitive advantages. We focus on delivering value-added
consulting services that help our clients anticipate, identify and capitalize on
emerging opportunities in human capital management. We implement this strategy
through over 3,800 associates in 59 offices located in 18 countries. We
generated approximately $580 million in revenues during the twelve months ended
December 31, 1999, with net income of $11.3 million during this same period.
51
<PAGE>
CORPORATE INFORMATION
Watson Wyatt & Company was incorporated in Delaware on February 17, 1958.
Including predecessors, we have been in business since 1946. We conducted our
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. Watson Wyatt & Company Holdings was incorporated in Delaware
on January 7, 2000.
Our web site is at http://www.watsonwyatt.com. The information contained on
our web site is not incorporated into this prospectus.
WATSON WYATT WORLDWIDE ALLIANCE
Recognizing our clients' need for a global organization to service their
needs, we established operations throughout Europe in the late 1970s 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 with R. Watson & Sons (now Watson Wyatt
Partners), a leading United Kingdom-based actuarial, benefits and human
resources consulting partnership that was founded in 1878. Since 1995, we have
marketed our services globally under the Watson Wyatt Worldwide brand, sharing
resources, technologies, processes and business referrals.
The Watson Wyatt Worldwide global alliance maintains 85 offices in 31
countries and employs over 5,500 employees. Watson Wyatt & Company operates 59
offices in 18 countries in North America, Latin America and Asia-Pacific. Watson
Wyatt Partners operates 12 offices in the United Kingdom, Ireland, Africa and
the Caribbean. The alliance operates 14 offices in 9 continental European
countries principally through a jointly owned holding company, Watson Wyatt
(Holdings) Europe Limited, which is 25% owned by us and 75% owned by Watson
Wyatt Partners.
To establish the Watson Wyatt Worldwide global alliance, we transferred our
United Kingdom operations to Watson Wyatt Partners in return for a 10% interest
in a defined distribution pool of the partnership. In addition, Watson Wyatt
Partners purchased 300,000 shares, approximately 2%, of our common stock. The
alliance agreements contain buy/sell provisions that provide a mechanism to
maintain Watson Wyatt Partners' ownership of us at a level of between 300,000
shares and 500,000 shares. We also consolidated our individual European
operations into Watson Wyatt Holdings (Europe) Limited. Under the alliance
agreements, we generally will not operate in the United Kingdom, Ireland, Africa
or the Caribbean and Watson Wyatt Partners generally will not operate in North
America, Latin America or Asia-Pacific.
HUMAN RESOURCES CONSULTING INDUSTRY
OVERVIEW
The growing demand for employee benefits and human capital consulting
services is directly related to the size, complexity and rapid changes
associated with human resources programs. In the U.S. alone, companies spend
over $5 trillion annually on the direct costs of human capital such as
compensation and benefits, according to U.S. Department of Commerce, Bureau of
Economic Analysis Statistics. In 1998, U.S. employers contributed over
$120 billion to pension and profit sharing plans, and the assets of U.S.
retirement plans exceeded $8 trillion.
Employers, regardless of geography or industry, are facing unprecedented
challenges involving the management of their people. Changing technology,
critical skill shortages, and an aging population in many developed countries
have increased competition for talented employees. At the same time, employees'
expectations relating to compensation, benefits and other HR services are
growing. Employers must address these challenges effectively in order to remain
competitive.
52
<PAGE>
The industry in which we compete directly is comprised of four dominant HR
consulting firms, based on revenues: Watson Wyatt Worldwide, William M. Mercer,
Towers Perrin and Hewitt Associates. In addition to these firms, the industry
includes smaller benefits and compensation firms and the HR consulting divisions
of diversified professional service firms, such as the big five accounting
firms, Andersen Consulting, EDS, and Booz, Allen & Hamilton. The global HR
consulting industry is highly fragmented. There are approximately 950 firms
providing HR-related consulting services, with the four major HR consulting
firms accounting for approximately 40% of total industry revenue.
INDUSTRY TRENDS
Because of our long history and reputation, as well as our experienced
consulting professionals and the services we provide in the field of human
capital consulting, we believe that we are in a position to capitalize on a
number of favorable trends that will contribute to the growth of the HR
consulting industry, including:
GROWING STRATEGIC IMPORTANCE OF HUMAN CAPITAL
In today's knowledge-based economy, businesses are increasingly recognizing
that the effective management of human capital contributes to increased
shareholder value. As a result, companies are increasingly looking to HR
consulting firms to help them align their human capital programs with their
business strategies.
TECHNOLOGY REVOLUTION IN HR PROGRAMS
The Internet, corporate intranets and other e-business tools enable
companies to deliver HR information and services to employees more efficiently
and effectively than ever before. Many companies are moving to what we call an
eHR-TM- model that uses technology to make HR processes more flexible and
employee-friendly, such as online benefits enrollment. Companies increasingly
are looking to firms with expertise in human capital and information technology
to transform their HR processes.
CHANGING WORKFORCE DEMOGRAPHICS
As human capital becomes more important to business success, companies in
many developed countries today are faced with a critical shortage of talented
employees and an unprecedented aging of the workforce. These trends, along with
the changing mobility and needs of workers, are prompting companies to engage
experienced human capital consulting firms to redesign employee compensation and
benefits plans and to fundamentally rethink their workforce strategies so that
they can effectively attract and retain employees.
GROWING IMPORTANCE OF EMPLOYER-SPONSORED BENEFITS PROGRAMS
Assets in retirement plans are growing rapidly, and the need for effective
management of these plans--in terms of structuring benefits, managing
liabilities and maximizing the plans' value in attracting and retaining
employees--has never been greater. The combined effect of limited retirement
savings of baby boom employees, concerns regarding the continuing viability of
government-sponsored retirement and healthcare programs, and rising healthcare
costs increases the importance of benefits programs to both employers and
employees.
RECORD LEVEL OF MERGERS AND ACQUISITIONS
Mergers and acquisitions throughout the world are occurring at unprecedented
rates, prompting the need to combine corporate cultures and human resources
programs quickly and effectively. Mergers and acquisitions are becoming
increasingly complex and cross-border. Our research indicates that when business
combinations fail, it is often due to inadequate integration of human resources.
As a result, companies are expected to increasingly use human capital
consultants to assist them with pre-merger planning and post-merger integration.
53
<PAGE>
CONTINUING GLOBALIZATION OF ECONOMIES
As business becomes more global, corporations are seeking human capital
consultants with global resources and local expertise on benefits and human
resources issues. These companies are looking to HR consulting firms to help
them develop and implement global benefits and HR policies and establish
consistency in worldwide reporting and quality control.
COMPLEX AND CHANGING REGULATORY ENVIRONMENT
Employee benefits programs in most industrialized countries are subject to
complex government regulations. These regulations change as governments address
social and economic policy issues and as private employers implement changes in
plan designs. Employers throughout the world are increasingly seeking human
capital consultants to assist them with plan design, compliance and regulatory
advice.
COMPETITIVE STRENGTHS
Unlike several of our direct competitors that also have large benefits
administration operations or unrelated consulting practice lines, we focus
exclusively on providing human capital consulting services. We believe that our
competitive strengths include:
REPUTATION FOR QUALITY
We are recognized as one of the world's highest quality consulting firms.
For example, in a recent management consulting survey conducted by THE WALL
STREET JOURNAL of its subscribers and published in January 1999, we placed first
in the consulting industry in terms of delivering value to clients and first
among our human resources consulting peers for overall quality of reputation.
LONG-STANDING RELATIONSHIPS WITH BLUE-CHIP CLIENTS
We have built long-term relationships with many of our clients. In many
cases these relationships have existed continuously for several decades. We
provide the actuarial consulting services for the three largest corporate
defined benefits pension plans in the United States.
TECHNOLOGY-BASED SERVICES
Using our eHR-TM- approach, we design systems for clients that enable them
to offer cost-effective delivery of HR services to employees, such as web-based
self-service and call centers. Over the past decade, we have invested
extensively in proprietary technology to help solve our clients' human resources
needs.
GLOBAL REACH AND SCALE
We believe that our global presence through the Watson Wyatt Worldwide
alliance is among the most extensive in the human capital consulting business,
spanning 85 offices in 31 countries. We have a strong presence in major markets
across the United States, and the Watson Wyatt Worldwide alliance provides us
with significant depth in Europe. We have operated in Asia since 1979 and
currently have 15 offices in Asia-Pacific. We were named HR Consultancy of the
Year in Hong Kong for 1998 and 1999 by China Staff Magazine. We were the first
international human capital consulting firm to open a wholly-owned operation in
China, and we are building scale in other markets in order to meet the growing
demands of our local and multinational clients.
EXTENSIVE AND WIDELY-CITED RESEARCH
Our research is extensive and widely-cited and is a core part of our brand
identity, account penetration strategy and consulting process. Our research on
changing demographics in major economies is helping companies prepare for the
impact of these changes on costs, productivity and the ability to attract and
retain talented workers. We operate research and information centers in Bethesda
and Toronto that are staffed with more than 80 economists, analysts and
attorneys who conduct
54
<PAGE>
research and inform clients on legislative and regulatory developments. We also
produce proprietary studies and groundbreaking white papers on topics such as
executive pay, healthcare quality and costs, integrated disability management,
employee communications and workplace attitudes.
HIGHLY EDUCATED AND ACCREDITED CONSULTING STAFF
Watson Wyatt consultants are trusted advisors and experts in their fields.
Our consultants include over 400 accredited actuaries, as well as professionals
with M.B.A.s, Ph.D.s and law degrees. Our consultants frequently testify before
government and regulatory agencies, are regularly quoted in the business press
and have authored many HR-related books. Recent books by our consultants include
THE REAL DEAL: THE HISTORY AND FUTURE OF SOCIAL SECURITY, HEALTH OF NATIONS: AN
INTERNATIONAL PERSPECTIVE ON U.S. HEALTH CARE REFORM, THE COMPLETE GUIDE TO
MERGERS & ACQUISITIONS, HEALTHCARE.COM: RX FOR REFORM, CEO PAY AND SHAREHOLDER
VALUE, and FUNDAMENTALS OF PRIVATE PENSIONS.
GROWTH STRATEGY
In an environment that is characterized by changing workforce demographics,
rapid advances in technology and growing recognition of the importance of human
capital, our strategy is to expand our competitive position by providing
comprehensive, value-added human capital consulting services that help our
clients solve their human capital challenges. We plan to pursue growth by:
EXPANDING OUR RELATIONSHIPS WITH EXISTING CLIENTS
We believe there is significant opportunity to increase our share of our
clients' consulting expenditures by leveraging our recurring engagements. We
utilize dedicated account managers to identify and refer additional consulting
opportunities, and we believe that our ability to provide integrated services
will enable us to secure additional business from our existing client base.
CREATING EHR-TM- SYSTEMS
Our clients are increasingly demanding integrated, flexible approaches to
provide HR benefits information and access to their employees 24 hours a day,
7 days a week. By combining our human capital and technical expertise, we help
clients implement web-based systems in order to transform the way they deliver
HR services to managers and employees. Our eHR-TM- approach connects multiple
software applications and databases around web technologies. Through
user-friendly interfaces that run on company intranets, employees can access
their HR information directly and perform tasks ranging from enrolling in
benefits plans, to modeling 401(k) investments, to participating in online
career training.
LEVERAGING OUR GLOBAL CAPABILITIES
Multinational corporations increasingly require a total services capability,
regardless of where they operate. By drawing upon our global resources and local
execution capabilities, we are well-positioned to serve our clients' growing
needs for integrated human resources services throughout the world.
DEVELOPING NEW CLIENT RELATIONSHIPS
Our recognized brand name and global reputation for quality service and
extensive and widely-cited research enable us to promote our consulting services
effectively to new clients. We also believe that there are significant
opportunities to develop new relationships by proposing innovative, high-value
projects, such as our eHR-TM- systems, to corporations and other major
employers.
PURSUING STRATEGIC ACQUISITIONS
We will continue to explore strategic opportunities to expand our human
capital consulting capabilities and to expand geographically. Our recent
acquisition of selected units of KPMG's benefits
55
<PAGE>
consulting business provided us with additional senior consultants in New York,
Boston, Dallas and Cleveland, as well as additional Fortune 500 clients.
PROMOTING OUR ENTREPRENEURIAL CULTURE
We seek associates who strive to be innovators and to add value to their
clients' businesses through effective human capital programs and technologies.
Our training and compensation programs are aimed toward developing in our
consultants the specialized skills to advance our clients' interests.
CONSULTING SERVICES
We focus our consulting services into three practice groups: Benefits
Consulting, HR Technologies and Human Capital.
BENEFITS CONSULTING GROUP
Our Benefits Consulting Group is our largest and most established practice,
with a franchise dating to 1946. This group consists of over 1,600 consultants
and works with clients to create cost-effective benefits programs that help
attract, retain and motivate a talented workforce. We strive to provide tailored
benefits programs for our clients, and we base our recommendations on extensive
research. Our Benefits Consulting Group, which consists of Retirement
Consulting, Investment Consulting, and Group & Health Care Consulting, accounted
for approximately 66% of our North American consulting revenue in fiscal year
1999.
RETIREMENT CONSULTING
We believe we are one of the world's most respected advisers on retirement
plans, and we provide actuarial and consulting services for large defined
benefit and defined contribution retirement plans. Our consultants work with
clients to provide realistic assessments of the impact that the change in
workforce demographics will have on their retirement plans, corporate cash flow
requirements, and retiree benefits adequacy and security.
In North America, and increasingly throughout much of the developed world,
retirement security is provided through funded pension plans, most of which are
either defined benefit or defined contribution plans. A typical defined benefit
plan is characterized by employer contributions and a specified future benefit
to the employee. These plans typically involve large asset pools, complex
calculations to determine employer costs and funding requirements and
sophisticated analysis to match liabilities and assets over long periods of
time. These plans are commonly referred to as pension plans. A typical defined
contribution retirement plan is characterized by employee contributions,
possible employer matching contributions and an unspecified future benefit paid
to the employee which will ultimately be based on investment returns. In the
United States, the most common example of a defined contribution plan is a
401(k) plan.
Our target market for defined benefit plans consists of plans with more than
1,000 participants. Our consultants provide actuarial services to many of the
world's largest retirement plans, including the three largest
corporate-sponsored defined benefit plans in the United States. Our defined
benefit services include:
<TABLE>
<S> <C>
- STRATEGIC PLAN DESIGN - FINANCIAL REPORTING
- ACTUARIAL SERVICES - VALUATION AND DIAGNOSTIC SOFTWARE AND SYSTEMS
- FUNDING RECOMMENDATIONS - ASSISTANCE WITH MERGING, DIVESTING AND ACQUIRING
PLANS
- MULTINATIONAL ASSET POOLING CONSULTING
</TABLE>
56
<PAGE>
We also help companies design and implement defined contribution plans,
especially 401(k) plans in the United States. We assist clients with the
selection of asset managers and administrators and in communicating with their
employees concerning enrollment, plan provisions and investment alternatives.
In both the defined benefit and defined contribution areas, we emphasize
research-based consulting to design retirement programs that align our clients'
workforces with their business strategies. We believe that we have been at the
forefront of innovation in the retirement consulting industry. Examples of our
products and services include:
- PENSION EQUITY PLAN---an alternative retirement plan that combines the
lump sum portability of defined contribution and cash balance plans
desired by younger workers with a benefits formula based on the final few
years of earnings, providing benefits security typical to a traditional
defined benefit plan that older and long-service employees seek;
- FLEX PENSION PLUS-TM---a tax-effective Canadian supplemental retirement
plan for attracting and retaining key employees;
- PREPARE!-TM---a web-based tool that enables employees to model different
savings and retirement income scenarios;
- WATSON WYATT 401(K) VALUE INDEX-TM---a tool that looks beyond cost to
identify the total value that employers and their employees derive from
their 401(k) plans;
- PHASED RETIREMENT PROGRAMS--a combination of programs that help clients
attract and retain older workers by enabling them to balance work/life
needs through a gradual transition to retirement;
- CLIENTSITE-TM---a relationship management tool that allows web-based
communication between our clients and associates that can be updated
globally and instantaneously; and
- ELECTRONIC ACTUARY/ELECTRA-TM---a tool that performs immediate "what if"
scenarios so that different plan designs can be modeled and priced
interactively with clients.
To support our retirement consulting services, we invest heavily in
state-of-the-art technology, software, and systems to ensure seamless
consistency and efficiency of service delivery in all our offices worldwide. We
also maintain extensive proprietary databases, COMPARISON-TM- and BenTRACK,-TM-
that enable our clients to track and benchmark benefits plan provisions in the
United States and throughout the world, respectively.
INVESTMENT CONSULTING
Together with our retirement consulting services, we offer investment
consulting services that help private and public sector clients throughout the
world maximize the return on their retirement plan assets, develop governance
policies and strategies, and design investment structures to successfully manage
financial liabilities within the context of their overall business objectives.
Our services include:
- asset/liability modeling and asset allocation studies;
- governance and investment policy development;
- investment structure analysis;
- investment manager selection and evaluation; and
- performance evaluation and monitoring.
57
<PAGE>
GROUP AND HEALTH CARE CONSULTING
Health care premiums paid by US. employers are rising annually at
approximately 10%. In this environment, we help our clients with the design,
financing, administration and communication of medical, disability and other
group benefits plans. Clients seek our services to assist them in an environment
that is characterized by escalating costs, employee dissatisfaction with health
care programs and multiple vendor relationships. Our primary objective is to
establish a link between each element of an employers' benefits programs and its
desired cost, employee satisfaction and productivity goals. Our services
include:
- plan design;
- actuarial services;
- vendor management services;
- on- and off-shore funding analysis;
- benefits pricing;
- assistance with plan changes relating to mergers, acquisitions and
divestitures; and
- integrated disability management.
Our approach to group benefits consulting is research-based and makes use of
sophisticated consulting tools such as:
- PREVIEW-TM---a medical benefits modeling system which accurately and
quickly models medical claims under alternative plan designs, covered
populations and managed care delivery systems;
- HEALTH PLAN VALUE LIBRARY-TM---software tools and a database of
information on the cost, quality and accessibility of health plans that
are used to screen and evaluate health plans; and
- AUTO-RFP-TM---a powerful software application that organizes and eases the
administrative process of gathering and evaluating the responses from
health care vendor to requests for proposals.
HR TECHNOLOGIES GROUP
Our HR Technologies Group helps clients select and implement technologies
that enhance the delivery of benefits and related information to employees. Our
HR Technologies Group consists of approximately 350 consultants and represented
approximately 14% of our North American consulting revenue in fiscal year 1999.
As human resources programs become more complex and important for recruiting
and retaining employees, organizations are seeking flexible, adaptable and
cost-effective ways to provide benefits information to their employees. We are
well-positioned to help clients address these challenges because of our with
eHR-TM- approach, which integrates HR-related data, computer systems and
transactions in a single employee accessible network. We help organizations that
have adopted Internet applications for external business strategies to employ
similar advanced technologies for internal applications such as HR. Our services
include assisting clients to implement employee self-service applications,
retirement plan administration systems, benefits enrollment, training programs,
time and attendance systems and applicant tracking systems.
Using our proprietary consulting methodology of "Discover, Invent and
Deliver," our consultants work with clients to evaluate existing HR
infrastructure and business strategy, identify the best sources of people,
process and technology, and design and implement tailored approaches. Our
consulting work frequently involves the development of web-based employee
self-service applications, the implementation of interactive call centers and
the integration of existing legacy systems. We also offer hosting
58
<PAGE>
services for companies who prefer to access applications from our servers rather
than host on their own intranets. In addition, we deliver state-of-the-art
applications in health and welfare enrollment, pension administration,
compensation planning and retirement planning.
HUMAN CAPITAL GROUP
Our Human Capital Group, which consists of over 300 consultants, helps
clients achieve competitive advantage by aligning their workforce with their
business strategy. This includes helping clients develop and implement
strategies for attracting, retaining and motivating their employees to maximize
the return on their investment in human capital. Our Human Capital Group
represented approximately 9% of our North American consulting revenue in fiscal
year 1999. Our Human Capital Group focuses in three principal areas:
STRATEGIC REWARDS
We help align an organization's rewards--including compensation, stock
programs, incentives, recognition programs and flexible work arrangements--with
its business strategies, cultural values, work design and human resources
strategy. We work together with our Benefits Consulting Group to develop optimal
total compensation programs for our clients.
ORGANIZATION EFFECTIVENESS
We help clients build high-performance organizations by working with them to
clarify and implement business strategy, recognizing the impact of employee
attitudes and commitment, as well as effective team and leadership development,
on business success. We provide a wide array of organization diagnostic
services--employee and customer surveys, human capital audits and cultural
assessments--as well as leadership development services that include assessment,
coaching, workshops and team building. We also provide process management
services to help organizations achieve their desired vision, strategy and
culture.
EXECUTIVE COMPENSATION
We counsel executives and boards of directors on executive pay programs,
including cash compensation, stock options and stock purchase plans, and on ways
to align pay-for-performance plans throughout the organization in order to
increase shareholder value.
We have developed the WATSON WYATT HUMAN CAPITAL INDEX,-TM- a proprietary
tool for demonstrating the relationship between the effectiveness of an
organization's human capital practices and the creation of superior shareholder
returns. In support of our human capital consulting we also maintain databases
of employee attitudes for client organization comparison. Our
WorkUSA-Registered Trademark-/WorkCanada-TM- database is regarded as the most
up-to-date survey in existence on the attitudes of North American workers. It
includes the opinions of 10,000 employees surveyed independently, reflecting a
large cross-section of jobs and industry types. Our clients compare their own
employee survey results against these norms to identify workplace perceptions
and satisfaction and commitment levels. Through our People Management Resources
division, we also provide an online best practices database of more than 300
in-depth case studies covering key people practices, such as culture
development, staffing and selection, leadership development, and employee
communication.
59
<PAGE>
OTHER CONSULTING SERVICES
While we focus our consulting services in the three areas described above,
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. Examples include:
MERGER & ACQUISITION SERVICES
Recognizing that many business combinations fail because of "people
problems," we help clients achieve better transactional success by assisting
with faster integration, cost containment, increased customer focus and greater
productivity. We assemble multi-disciplinary teams to provide key services that
include due diligence of pension and benefits plans, company cultures and human
resources strategies; integration of human resources processes and practices;
and enterprise-wide project management.
EMPLOYEE COMMUNICATIONS CONSULTING
We also have one of the most respected communications consulting groups in
the human resources consulting industry--a team that has won numerous awards for
innovative and effective communications. Our consultants combine strong creative
skills with technical excellence on human resources issues and solid research on
employee attitudes and communication effectiveness. We conduct communications
audits, research and focus groups, and provide communications planning and
implementation. In addition, our consultants assist employers in complying with
disclosure requirements.
WATSON WYATT DATA SERVICES
Watson Wyatt Data Services provides a comprehensive array of global
compensation, benefits and employment practices information that is often
studied and cited by many of our clients and competitors. In the United States,
we publish and market an extensive library of reports on human resources issues,
and more than 5,000 organizations participate in one or more of our annual
surveys. Our databases contain compensation information for more than one
million employees in virtually every industry sector and major metropolitan
area. Outside of the United States, our worldwide alliance offers more than 70
remuneration, benefits and employment practice references guides, covering more
than 50 countries and 6 continents. In addition to our annual survey references,
we also offer many reference works intended to assist practitioners in creating
or maintaining programs in a variety of subject areas such as variable pay,
performance management, and personnel policies.
EXAMPLES OF REPRESENTATIVE CLIENT ENGAGEMENTS
Some recent examples of our work with clients are described below:
EHR-TM- RE-ENGINEERING
- ENGAGEMENT: Assist a global oil field services company on a five-year,
multi-phased approach to transform a traditional personnel department into
a comprehensive eHR-TM- business unit.
- CHALLENGE: Our client's personnel function in North America was hindered
by decentralized administration practices, different benefits and payroll
systems for each product line and location, manual procedures for
processing benefits and services, and limited use of technology in
delivering services to employees. As a result, personnel managers and
employees expended significant time and effort contacting benefits
managers and obtaining benefits data, retirement and loan projections, and
performing benefits related transactions.
60
<PAGE>
- APPROACH: We formulated a strategy to develop web-based, employee
self-service systems to deliver HR services, transactions, and
communications via desktop computers and kiosks.
- RESULTS: Our client successfully migrated 98% of its U.S. employees to
web-based benefits enrollment. Today, 16,000 U.S. employees have
self-service access to real-time data, records, and transactions on their
profit sharing plan, pension and 401(k) plans. Through this system
employees can access daily account balances, model loans, and estimate
retirement income. This system also provides for health & welfare
enrollment, administration, and plan documentation. Additional launches
are planned to expand the eHR-TM- approach to regions outside North
America.
MERGER & ACQUISITION INTEGRATION AND DUE DILIGENCE
- ENGAGEMENT: Assist a global industrial company to complete cultural,
benefits and human capital due diligence on several target companies in
Asia-Pacific, including an evaluation of the future financial obligations
of the target's benefits plans, staff retention challenges, and ongoing
employee communications needs.
- CHALLENGE: Our client faced several key issues in evaluating potential
acquisitions, including staff retention, pension liabilities arising from
unfunded pension plans, transformation of the organizational cultures, and
the lack of uniform HR processes and systems.
- APPROACH: We conducted a post-transaction audit and review of the
competitiveness of the target companies' compensation and benefits
programs. We then identified position requirements, matched employees
having the desired backgrounds, defined job classifications and developed
salary structures that were consistent with our client's existing system.
We also developed comprehensive communication plans and materials and
designed cross-cultural training for expatriates.
- RESULTS: In addition to assuring a positive reception by the target
companies' employees, we limited potential liabilities, installed formal
HR programs and systems, and maintained compensation and benefits levels
during the ongoing review.
INTEGRATED DISABILITY MANAGEMENT
- ENGAGEMENT: Assist a computer hardware manufacturer to design and
implement a more flexible and comprehensive disability management program.
- CHALLENGE: Our client regularly had difficulty fulfilling customers orders
at year end. Our client employed a "just-in-time" inventory system, and
required a full staff to fill its orders, but seemed to suffer from
chronic shortages of product supply. However, an apparent production issue
was determined to be a benefits design issue. The design and reporting
system of the company's paid time off and disability programs were
encouraging employees to take time off at the end of the year.
- APPROACH: After benchmarking other firms in our client's industry, we
devised a more competitive plan design, established a tracking system for
data collection and identified best practices for better connecting all
components of the paid time-off program. We also installed a new data
collection system with the ability to track workplace absences for faster
and more efficient resolution.
- RESULTS: The first year of implementation resulted in total savings of
$800,000. A year later, our client acquired two manufacturing companies.
With the best practice processes already in place, the merging of the
three programs went smoothly, and as a result, our client reported savings
of approximately $11 million in direct and indirect costs.
61
<PAGE>
RETIREMENT PLAN ADMINISTRATION
- ENGAGEMENT: Assist a large high-tech company whose pension administration
outsourcing provider was exiting the business.
- CHALLENGE: Our client needed to assess the options of entering into
another outsourcing agreement or moving the pension administration
function to their North American HR service center. After evaluating
alternatives, our client selected a blended approach, expanding their own
internal call center capabilities through our expertise in pension
technology.
- APPROACH: We designed and built a retirement benefits administration
system that is an integral part of the client's North American HR service
center. The system is located at our site and accessed by the
organization's service center representatives. Employees can also access
the system for numerous self-service functions, including retirement plan
modeling.
- RESULTS: The new technology based delivery model improved the productivity
of the benefits administrative staff. The perception of our client's HR
department's role in the organization was also enhanced. The new system
rollout was highly successful, achieving a customer satisfaction rating of
well over 90%.
SALES AND MARKETING
Our growth strategy starts with ensuring the satisfaction of current clients
through our Account Management program. We have approximately 125 account
managers who focus on the effective delivery of services to clients and on
expanding our relationships across service lines, geographic boundaries and
divisions within client companies. A key element of this program is an approach
we call CLIENTFIRST.-TM- Using proprietary processes and tools ranging from
interview guides to satisfaction checklists to planning templates, we work with
clients to define their needs and expectations before an engagement begins and
then continually measure our performance according to the agreed upon standards.
We also pursue new clients using cross-disciplinary teams of consultants as
well as dedicated business developers to initiate relationships with carefully
selected companies. Our client expansion and new client acquisition efforts are
supported by market research, comprehensive sales training programs, and
extensive marketing databases.
Our sales efforts are also supported by a full array of marketing programs
designed to raise awareness of the Watson Wyatt Worldwide brand and our
reputation within our target markets. These programs promote our thought
leadership on key human resources issues and establish us as a preferred human
capital consulting firm to many of the world's largest companies.
CLIENTS
We work with major corporations, emerging growth companies, government
agencies and not-for-profit institutions in North America, Latin America and
Asia-Pacific across a wide variety of industries. Our client base is broad and
geographically diverse. In fiscal year 1999, our ten largest clients accounted
for approximately 12% of our consolidated revenues and no individual client
represented more than 3% of our consolidated revenues. Representative clients
include:
62
<PAGE>
Asea Brown Boveri (ABB)
Canada Post
General Electric Company
General Motors
IBM
ICI Americas
Ingersoll-Rand
Lockheed Martin Corporation
COMPETITION
The human capital consulting business is highly competitive. We believe that
there are several barriers to entry, such as the need to assemble specialized
intellectual capital to provide expertise on a global scale, and that we have
developed significant competitive advantages in providing human resources
consulting services. However, we face intense competition from several
difference sources.
Our current and anticipated competitors include:
- major human resources consulting firms, such as William M. Mercer and
Towers Perrin and the administration/consulting firm Hewitt Associates;
- smaller benefits and compensation consulting firms, such as Buck
Consultants, The Segal Company and Hay Group;
- the human resources consulting practices of public accounting and
consulting firms, such as PricewaterhouseCoopers and Booz, Allen &
Hamilton;
- information technology consulting firms, such as Andersen Consulting and
Internet/intranet development firms; and
- boutique consulting firms comprised primarily of professionals formerly
associated with the firms mentioned above.
Watson Wyatt is ranked fourth or fifth among the top HR consulting
companies, based on revenues, according to surveys of HR consulting companies
from the 1998 Kennedy Information Research Group report, June 1999 Consultants
News and December 1999 Business Insurance rankings.
The market for our services is subject to change as a result of regulatory,
legislative, competitive and technological developments and to increased
competition from established and new competitors. We believe that the primary
determinants of selecting a human resources consulting firm include reputation,
ability to provide measurable increases to shareholder value, global scale,
service quality, and the ability to tailor services to a clients' unique needs.
We believe we compete favorably with respect to these factors.
EMPLOYEES
Watson Wyatt & Company employs approximately 3,800 associates. None of our
associates is subject to collective bargaining agreements. We believe relations
with associates are good.
FACILITIES
Our principal executive offices are located at 6707 Democracy Boulevard,
Suite 800, Bethesda, Maryland 20817. We plan to move our principal executive
offices to 1717 H Street, N.W., Washington, D.C. later this year.
We operate in 59 offices in principal markets throughout the world.
Operations are carried out in leased offices under operating leases that
normally do not exceed 10 years in length. We do not anticipate difficulty in
meeting our space needs at lease expiration or if additional space is required
earlier. We also evaluate office relocation on an ongoing basis to meet changing
needs in our markets while minimizing our occupancy expense.
63
<PAGE>
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 employment matters or the rendering of
professional services. The four matters summarized below involve the most
significant pending or potential claims against us. We believe, 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, but claims which are possible in our business could be material to
our financial results for a particular period, depending, in part, upon the
operating results for that period.
REGINA, SASKATCHEWAN POLICE. The Administrative Board of the Regina Police
Superannuation and Benefit Plan filed an action against us and three individual
employees in 1994 alleging errors in valuation methods, assumptions and
calculations for the Plan during the course of work provided for the plan since
the 1970s. Discovery is concluded and the exchange of expert reports is
anticipated during 2000. The Administrative Board seeks approximately
$26 million in damages, plus interest.
CITY OF MILWAUKEE, WISCONSIN. The City of Milwaukee Employees Retirement
Board notified us of a potential claim involving an erroneously calculated cost
of living adjustment that was based on a formula provided by the staff of the
Employees Retirement Board. In response to the notice of claim, we filed a
declaratory judgment action against the City of Milwaukee and the Employees
Retirement Board in the U.S. District Court in Chicago. By mutual consent, the
parties agreed to dismiss the claim with leave to reinstate, pending settlement
discussions among other parties.
CONNECTICUT CARPENTERS PENSION FUND. The Connecticut Carpenters Pension
Fund has filed an action against us claiming errors in valuations from 1991
through 1998 that allegedly resulted in understated liabilities. The plaintiffs
are seeking damages of approximately $65 million, including punitive damages.
The case is in discovery.
CLAIM AGAINST WATSON WYATT PARTNERS. A law firm representing a client based
in Europe has notified Watson Wyatt Partners, our European alliance partner, of
a claim involving alleged errors in the design of a global employee stock option
plan which may include work performed by present or former subsidiaries of
Watson Wyatt & Company. The parties are informally exchanging information
pursuant to English legal procedures.
We carry substantial professional liability insurance with a self-insured
retention of $1 million per occurrence which provides coverage for professional
liability claims. We also carry employment practices liability insurance.
64
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of the
directors and executive officers of Watson Wyatt & Company as of the date of
this proxy statement/prospectus, all of whom have assumed, or will assume,
identical positions with Watson Wyatt & Company Holdings:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
John J. Haley........................ 50 President, Chief Executive Officer and Director
Walter W. Bardenwerper............... 49 Vice President, General Counsel and Secretary
Thomas W. Barratt.................... 57 Vice President, Regional Manager (U.S. Central) and
Director
Jorge V. Bou......................... 57 Vice President, Regional Manager (Latin America)
Paula A. DeLisle..................... 46 Vice President and Director
David B. Friend, M.D................. 43 Vice President, Regional Manager (U.S. East) and
Director
James A. Gargiulo.................... 40 Vice President, Human Resources
Ira T. Kay........................... 49 Vice President, N. America Practice Director-Human
Capital Group and Director
Brian E. Kennedy..................... 56 Vice President, Regional Manager (Canada) and Director
Eric P. Lofgren...................... 49 Vice President, Global Director-Benefits Consulting
Group and Director
David P. Marini...................... 43 Vice President, Global Director-H.R. Technologies Group
Carl D. Mautz........................ 52 Vice President, Chief Financial Officer
Gail E. McKee........................ 40 Vice President and Director
Kevin L. Meehan...................... 55 Vice President and Director
J.P. Orbeta.......................... 38 Vice President, Global Director-Human Capital Group
Sylvester J. Schieber................ 53 Vice President, Director of Research and Information
John A. Steinbrunner................. 49 Vice President and Director
A. Grahame Stott..................... 45 Vice President, Regional Manager (Asia-Pacific) and
Director
Charles P. Wood, Jr.................. 55 Vice President, Regional Manager (U.S. West) and
Director
John J. Gabarro...................... 60 Director
Robert D. Masding.................... 56 Director
R. Michael McCullough................ 61 Director
Gilbert T. Ray....................... 56 Director
</TABLE>
JOHN J. HALEY has served as President and Chief Executive Officer since
January 1, 1999 and as a Director since 1992, and is a member of the Partnership
Board of Watson Wyatt Partners. Mr. Haley joined Watson Wyatt in 1977. Prior to
becoming President and Chief Executive Officer, he was the Global Director of
the Benefits Consulting Group. Mr. Haley is a Fellow of the Society of Actuaries
and is a co-author oF FUNDAMENTALS OF PRIVATE PENSIONS (University of
Pennsylvania Press). He has an A.B. in Mathematics from Rutgers College and
studied under a Fellowship at the Graduate School of Mathematics at Yale
University.
WALTER W. BARDENWERPER has served as Vice President and General Counsel
since joining Watson Wyatt in 1987 and has served as Secretary since 1992.
Mr. Bardenwerper was a Director of Watson Wyatt from 1992 to 1997. He serves as
chairman of the Global Quality Committee of Watson Wyatt Worldwide, and is
President and a director of Professional Consultants Insurance Company. He has a
B.A. in Economics from the University of Virginia and a J.D. from the University
of Virginia Law School.
THOMAS W. BARRATT has served as Vice President and Regional Manager (U.S.
Central) since 1997 and has served as a Director since 1998. Mr. Barratt
rejoined Watson Wyatt in 1994 after serving as the Managing Consultant of the
Detroit office of Towers Perrin, a competing human resources consulting firm,
from 1987 through 1993. He began his career with Watson Wyatt in 1976 and was a
consultant
65
<PAGE>
with the Company through 1986. He has a B.B.A. from Western Michigan University
and was graduated from Northwestern University's National Trust School in 1966.
JORGE V. BOU has served as Vice President since 1998 and Regional Manager
(Latin America) since 1994. Prior to joining Watson Wyatt in 1986, Mr. Bou was a
Vice President with the Martin E. Segal Company, an actuarial and benefits
consulting firm, and was previously with the American International Group, an
insurance organization. He has been providing consulting services to various
clients in Latin America since 1969. Mr. Bou is an Associate of the Society of
Actuaries. He has a B.S. in Mathematics from Georgia State University.
PAULA A. DELISLE has served as Vice President and as a Director since 1997.
Ms. DeLisle joined Watson Wyatt in 1982 and is the Managing Consultant of our
Hong Kong office. Ms. DeLisle is responsible for Watson Wyatt's China
operations, for the Asia-Pacific operations of Watson Wyatt Data Services, and
is a frequent speaker at international conferences on human resources issues in
the Asia-Pacific region. She is the Vice-Chairman of the American Chamber of
Commerce in Hong Kong and is the Hong Kong representative to the Pacific
Economic Cooperation Council's Human Resources Development Task Force. She has a
B.A. from Saint Mary's College and a Master's degree from Loyola University of
Chicago.
DAVID B. FRIEND, M.D. has served as Vice President and Regional Manager
(U.S. East) since 1997 and has served as a Director since 1997. He formerly was
the Practice Director of Watson Wyatt's Group and Health Care Practice. Prior to
joining Watson Wyatt in 1995, Dr. Friend served on the medical staff at Malden
Hospital in Malden, Massachusetts. Prior to attending medical school,
Dr. Friend was an Executive Vice President with High Voltage Engineering, a
specialty industrial manufacturing conglomerate. Dr. Friend is the author of
HEALTHCARE.COM: RX FOR REFORM (St. Lucie Press), and also serves on the Advisory
Board of the Schneider Institute for Health Policy at Brandeis University. He
has an A.B. in Economics from Brandeis University, an M.D. from the University
of Connecticut and an M.B.A. from The Wharton School of the University of
Pennsylvania.
JAMES A. GARGIULO has served as Vice President, Human Resources since 1999.
Mr. Gargiulo has been an Account Manager in the Eastern Region for the past two
years. Prior to joining Watson Wyatt in 1997, he was the Regional Director for
the Compensation practice at Aon Corporation, an insurance and consulting
organization, and has held various human resources positions for the investment
banking firm of Salomon Brothers, The Gap, retailer, and Banque Paribas.
Mr. Gargiulo has a B.A. in Business Administration from Bernard Baruch College
in New York.
IRA T. KAY has served as Vice President and North America Practice Director
of the Human Capital Group since 1998 and as a Director since 1996. Prior to
joining Watson Wyatt in 1993, Mr. Kay was a Managing Director and served on the
Partnership Management Committee of The Hay Group, a competing human resources
consulting firm, and prior to that, he was a Managing Director in the Human
Resources Department of the investment banking firm of Kidder Peabody. Mr. Kay
is the author of CEO PAY AND SHAREHOLDER VALUE (St. Lucie Press). Mr. Kay has a
B.S. in Industrial and Labor Relations from Cornell University and a Ph.D. in
Economics from Wayne State University.
BRIAN E. KENNEDY has served as Vice President and Regional Manager (Canada)
since 1995 and as a Director since 1996. Prior to joining Watson Wyatt in 1995,
Mr. Kennedy spent 18 years with the Alexander Consulting Group, an insurance and
benefits consulting firm, most recently as Chairman and Chief Executive Officer
of Alexander Clay, their U.K. and European operations.
ERIC P. LOFGREN has served as Vice President, Global Director--Benefits
Consulting Group and as a Director since 1998. Prior to joining Watson Wyatt in
1989, Mr. Lofgren spent seven years with William M. Mercer, a competing human
resources consulting firm, and seven years at The Mutual of New York Insurance
Company. Mr. Lofgren is a recognized authority in the areas of retirement plan
design, the effects of demographics on benefit systems and asset liability
management. He is widely credited with developing the Pension Equity Plan (PEP),
one of the three primary families of defined benefit pension
66
<PAGE>
design. Mr. Lofgren is a Fellow of the Society of Actuaries, and holds a B.A. in
Mathematics from New College in Sarasota, Florida and studied at the Graduate
School of Logic at the University of California at Berkeley.
DAVID P. MARINI has served as Vice President since 1998 and Global
Director--HR Technologies Group since 1997. Prior to assuming his current
responsibilities, he led several of the firm's technology projects involving
reengineering administrative client services. Prior to joining Watson Wyatt in
1994, Mr. Marini spent 13 years at the insurance company CIGNA Corporation, most
recently as the President of the Iowa division of Trilog Inc., a wholly-owned
401(K) record keeping subsidiary, and he was previously a CPA with the
accounting firm Coopers & Lybrand. He has a B.S. in business administration from
Western New England College.
CARL D. MAUTZ has served as Vice President and Chief Financial Officer since
February 1999 and previously served as Controller. Prior to joining Watson Wyatt
in 1997, Mr. Mautz served as the Controller for Tactical Defense Systems, Loral
Corporation, which merged into defense contractor Lockheed Martin Corporation.
From 1990 to 1994, Mr. Mautz held operating and corporate finance positions at
the computer firm Unisys Corporation and from 1972 to 1984 was a CPA with the
accounting firm KPMG Peat Marwick. Mr. Mautz has a B.S. and an M.A.S. in
accounting from the University of Illinois.
GAIL E. MCKEE has served as Vice President and as a Director since 1997.
Prior to joining Watson Wyatt in 1992, Ms. McKee was with the Walt Disney
Company, an entertainment conglomerate, where she served as the Manager of
International Compensation and Benefits from 1991 to 1992. From 1982 to 1990,
she was an Account Manager with Hewitt Associates, a human resources consulting
firm, in New York and Los Angeles. She has a B.A. from the University of
Washington.
KEVIN L. MEEHAN has served as Vice President since 1994 and as a Director
since 1999. Mr. Meehan joined Watson Wyatt in 1983, and has been instrumental in
developing our flexible benefits operations, our Human Resources Technologies
Group and our Account Management system. Mr. Meehan is a frequent speaker on
employee benefits tax and legal issues, and regularly testifies before the IRS,
the Department of Labor and Committees of Congress on employee benefit plan
issues. Mr. Meehan has a B.A. from the College of the Holy Cross and a J.D. from
St. John's University Law School.
J.P. ORBETA has served as Vice President since 1998 and as Global Practice
Leader--Human Capital Group since 1998. Prior to joining Watson Wyatt in
April 1986, Mr. Orbeta was a faculty member of the Mathematics Department and
director of Computer Education and Services at the Ateneo de Manila University.
Mr. Orbeta is a member and Certified Compensation Professional (CCP) of the
American Compensation Association and is the first practitioner in the
Philippines to have earned this designation. He is a member of the Industrial
Relations Committees of the American Chamber of Commerce of the Philippines, the
Personnel Management Association of the Philippines and is currently the
President of the Compensation Management Society of the Philippines. Mr. Orbeta
has a B.S. in Economics from Ateneo de Manila University in the Philippines.
SYLVESTER J. SCHIEBER has served as Vice President and Director of the
Watson Wyatt Research and Information Center (RIC) since 1983, and as a director
of Watson Wyatt from 1989 to 1996. Mr. Schieber joined Watson Wyatt in 1983 as
Director of RIC, and from 1994-1996, he served on the Advisory Council on Social
Security for the Clinton Administration. He is currently serving a six-year term
on the Social Security Advisory Board, for which he was appointed by the U.S.
Senate Majority Leader. Mr. Schieber has served on the Board of the Pension
Research Council of the Wharton School, University of Pennsylvania since 1985.
He has authored or co-authored four books on retirement issues, including
FUNDAMENTALS OF PRIVATE PENSIONS (University of Pennsylvania Press), THE REAL
DEAL: THE HISTORY AND FUTURE OF SOCIAL SECURITY (Yale University Press, 1999),
and he has co-edited four other volumes on a broad range of human resources
issues. Mr. Schieber is a frequent speaker on
67
<PAGE>
pension and Social Security policy issues throughout the world. He has a Ph.D.
in Economics from the University of Notre Dame.
JOHN A. STEINBRUNNER has served as Vice President since 1996 and a Director
since 1996. Mr. Steinbrunner joined Watson Wyatt in 1974 and was formerly the
Retirement Practice Director of the Benefits Consulting Group. Mr. Steinbrunner
continues to consult with major corporate clients on a variety of strategic
benefits issues. He is a Fellow of the Society of Actuaries and has an M.S. in
Mathematics from Case Western Reserve University.
A. GRAHAME STOTT has served as Vice President since 1995 and Regional
Manager (Asia-Pacific) since 1995 and as a Director since 1995. Mr. Stott joined
Watson Wyatt in 1982 and is a member of the Hang Seng Index Advisory Committee,
a past President of the Actuarial Association of Hong Kong and has been a member
of a number of Hong Kong Government working parties in the areas of Social
Security and pension legislation. Mr. Stott, a Fellow of the Faculty of
Actuaries, has a B.Sc. in Mathematics from the University of Manchester
Institute of Science and Technology.
CHARLES P. WOOD, JR. has served as Vice President and Regional Manager (U.S.
West) since 1998 and as a Director since 1999. Mr. Wood joined Watson Wyatt in
1975 and is a specialist in matters relating to Retirement, Group and Health
Care, and Compensation consulting. Mr. Wood, a Fellow of the Society of
Actuaries and the Casualty Actuarial Society, has a B.S. in Engineering Science
and Mathematics from the U.S. Air Force Academy and an S.M. in Applied
Mathematics from Harvard University.
JOHN J. GABARRO has served as a Director since 1999 and was previously a
director from 1995 to 1998. Mr. Gabarro has been a professor at the Harvard
Business School since 1972. Mr. Gabarro is the UPS Foundation Professor of Human
Resource Management at the Harvard Business School, where he has taught in
Harvard's M.B.A., Advanced Management, and Owner-President Management Programs.
He has also served as faculty chairman of Harvard's International Senior
Management Program and as chairman of its Organization Behavior and Human
Resource Management faculty. Mr. Gabarro is the author of six books, the most
recent of which include BREAKING THROUGH: THE MAKING OF MINORITY EXECUTIVES IN
CORPORATE AMERICA (Harvard, 1999), MANAGING PEOPLE IN ORGANIZATIONS (Harvard,
1992) and THE DYNAMICS OF TAKING CHARGE (Harvard, 1987), which won the 1988 New
Directions in Leadership Award and was named one of the best business books of
the year by THE WALL STREET JOURNAL. Mr. Gabarro is also a recipient of the 1980
McKinsey Foundation Prize, the 1986 Center for Creative Leadership Distinguished
Scholar Colloquium and the 1988 Johnson Smith and Knisely Award for research on
leadership. Mr. Gabarro has an M.B.A. and a Ph.D. from Harvard University.
ROBERT D. MASDING has served as the Senior Partner of Watson Wyatt Partners,
our global alliance partner, since 1995 and as a Director since 1995 upon the
establishment of the global alliance. He joined the predecessor firm to Watson
Wyatt Partners in 1969 and became a partner in 1972. Mr. Masding is a former
Chairman of the International Association of Consulting Actuaries and is a
member of the Professional Affairs Board of the Institute of Actuaries.
Mr. Masding, a Fellow of the Institute of Actuaries, has an M.A. in Mathematics
from Cambridge University.
R. MICHAEL MCCULLOUGH has served as a Director since 1996. Mr. McCullough is
the retired Chairman of the management consulting firm of Booz, Allen &
Hamilton. He joined Booz, Allen & Hamilton in 1965 as a consultant, was elected
a Partner in the firm in 1971, became Managing Partner of the firm's Technology
Center and was elected to the position of Chairman in 1984. Mr. McCullough is a
member of the Boards of Capital Auto Real Estate Investment Trust, an automobile
property real estate investment trust, Charles E. Smith Residential Real Estate
Trust a residential property real estate investment trust and is Chairman of
Ecutel, Inc., a private Internet communications products and services firm.
GILBERT T. RAY was appointed as a Director in March 2000. Mr. Ray is senior
counsel of the law firm O'Melveny & Myers LLP. He joined O'Melveny & Myers in
1972, and was named a partner in
68
<PAGE>
1981. After practicing corporate law for over 28 years, Mr. Ray retired from
active practice in January, 2000. Mr. Ray is a member of the boards of Host
Marriott Services Corporation, a concessions provider, Automobile Club of
Southern California, a provider of emergency road and travel services and
insurance, and is Chair of the Board of Sierra Monolithics, Inc, a high speed
communications systems company. Mr. Ray is also the recipient of the Fred
Snowden Humanitarian Award -- Greater Los Angeles African American Chamber of
Commerce, the Outstanding Alumni Award -- Ashland University, the NAACP Legal
Defense Fund -- Civil Rights Advocate of the Year, and the Central City
Association -- Leadership and Achievement Award.
BOARD OF DIRECTORS
Watson Wyatt & Company directors have been elected at each annual
stockholders' meeting for a one-year term. Of the 16 seats, 12 are filled by
current employees of Watson Wyatt & Company, three are filled by outside
directors, and one by the Senior Partner of Watson Wyatt Partners. Watson Wyatt
anticipates increasing the number of outside directors, probably by one, during
the year 2000. Under the Watson Wyatt & Company bylaws, an employee stockholder
is qualified to hold a directorship only during the term of his or her
employment.
Under the Watson Wyatt & Company Holdings certificate of incorporation, the
16 directorships are to be divided into three classes. At the regularly
scheduled stockholders' meeting in 2000, stockholders will elect three classes
of directors. The directorships in the first class will expire as of the
stockholders meeting in 2001 and every three years thereafter, the directorships
in the second class will expire as of the stockholders meeting in 2002 and every
three years thereafter, and the directorships in the third class will expire as
of the stockholders meeting in 2003 and every three years thereafter. Pursuant
to the Watson Wyatt & Company Holdings certificate of incorporation and bylaws,
each employee director automatically ceases to be a director upon termination of
his or her employment.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Audit Committee assesses and monitors the control of
financial transactions and oversees financial reporting to shareholders and
others. It also reviews (in cooperation with our internal auditors, independent
accountants and management) our internal accounting procedures and controls, and
the adequacy of the accounting services provided by our Finance and
Administration office. The members of the Audit Committee are John Gabarro and
Michael McCullough.
COMPENSATION AND STOCK COMMITTEE. The Compensation and Stock Committee
oversees executive compensation policies and practices and makes recommendations
and decisions regarding the administration of common stock transactions. The
Compensation Committee members are John Gabarro and Michael McCullough.
EXECUTIVE COMMITTEE. The Executive Committee oversees and reviews our
long-range corporate and strategic planning. Additionally, it meets throughout
the year between meetings of the board of directors to review, consider and make
decisions affecting general management policies of our company, to approve
significant business decisions not requiring full board approval and to make
recommendations to the executive officers and the board. The members of the
Executive Committee are John Haley, Brian Kennedy, Ira Kay, Eric Lofgren and
Grahame Stott.
FINANCE COMMITTEE. The Finance Committee reviews and considers issues
relating to our capital structure. This includes strategic determinations
regarding the financing of our future growth and development. The members of the
Finance Committee are David Friend, Elizabeth Caflisch, Carl Mautz, John
Steinbrunner, Charles Wood and Grahame Stott.
Members of these committees may, but will not necessarily, change after the
next annual stockholders' meeting.
69
<PAGE>
COMPENSATION OF DIRECTORS
Directors who are employees of Watson Wyatt & Company are not compensated
separately for their services as directors or as members of any committee of the
board. Outside directors in fiscal year 1999 were paid a quarterly retainer of
$6,250 plus $1,500 per day for board meetings, $1,000 per day for regular
committee meetings, $750 if held in conjunction with a board meeting, and $2,000
per day for committee meetings if the outside director chaired that committee,
$1,000 if held in conjunction with a board meeting. Telephone meetings of less
than four hours duration were compensated at 50% of the applicable per day fee.
These fees have been paid in shares of Watson Wyatt & Company common stock up to
7,500 shares, and the balance paid in cash. We established the Voluntary
Deferred Compensation Plan to enable outside directors, at their election, to
defer receipt of any or all of their director's fees until they are no longer
serving as a director of the company. We intend to continue to compensate
outside directors for services rendered to WW Holdings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of our Compensation and Stock Committee, predecessor to the
current Compensation Committee, for the last completed fiscal year were: Thomas
W. Barratt, Paula A. DeLisle, Ira T. Kay, Kevin L. Meehan and John A.
Steinbrunner. All are officers of the company. The committee members did not
participate in decisions regarding their own compensation. No interlocking
relationship exists between our board of directors or our Compensation Committee
and any member of any other company's board of directors or their compensation
committee, nor has any interlocking relationship existed in the past.
EXECUTIVE COMPENSATION
For the fiscal year ended June 30, 1999, the compensation of the executive
officers, and all other associates eligible to receive a bonus, was comprised
primarily of three elements: base salary, fiscal year-end bonus, and stock
incentive bonus plan payment. The compensation system establishes target bonuses
for all associates eligible to receive a bonus, based on their compensation band
level. Target bonuses range from 5% of base salary for more junior associates to
70% of base salary for the Chief Executive Officer. After the end of each fiscal
year, the board of directors determines the funding of the fiscal year-end bonus
pool, which may be more or less than 100% of target bonuses, and associates
eligible to receive a bonus are awarded bonuses based on individual, practice,
region and company performance.
In January 2000 we paid stock incentive bonus plan bonuses to eligible
associates based on the stock incentive bonus plan funding level approved by the
board, an individual's actual fiscal year bonus and their actual stock ownership
as compared to their target stock ownership. We will terminate the stock
incentive bonus plan following the completion of the public offering.
70
<PAGE>
The following table sets forth annual compensation for the President, Chief
Executive Officer and the other four most highly compensated executive officers
for the fiscal years ended June 30, 1999, 1998 and 1997 by those persons who
were, on June 30, 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FISCAL TOTAL SALARY/ OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SIBP(A) BONUS/SIBP COMPENSATION(B) COMPENSATION(C)
<S> <C> <C> <C> <C> <C> <C> <C>
John J. Haley.................... 1999 $543,750 $422,625 $491,000 $1,457,375 -$- $ 25,255
President, 1998 440,000 320,000 -- 760,000 -- 19,300
Chief Executive 1997 403,790 215,000 -- 618,790 -- 17,350
Officer and Director
A.W. Smith, Jr................... 1999 635,000 380,800 432,970 1,448,770 -- 220,120
Chairman and 1998 615,000 375,000 -- 990,000 -- 28,300
Director (retired) 1997 591,230 330,000 -- 921,230 -- 23,950
Eric P. Lofgren.................. 1999 390,000 290,000 260,960 940,960 -- 19,170
Vice President, 1998 331,500 250,000 -- 581,500 -- 15,035
Global Director, 1997 314,500 180,000 -- 494,500 7,500 11,250
Benefits Consulting
Group and Director
Kevin L. Meehan.................. 1999 326,250 300,000 290,425 916,675 -- 17,690
Vice President and 1998 280,150 250,000 -- 530,150 -- 5,110
Director 1997 263,670 180,000 -- 443,670 3,000 10,470
David B. Friend, M.D............. 1999 415,000 315,000 175,270 905,270 -- 21,380
Vice President, 1998 387,500 270,000 -- 657,500 -- 17,125
Eastern Regional 1997 314,167 200,000 -- 514,170 12,000 6,000
Manager and
Director
</TABLE>
(a) In 1996, Watson Wyatt & Company adopted, a supplemental bonus plan called
the stock incentive bonus plan. Following the public offering, we will
terminate the stock incentive bonus plan and replace it with equity based
incentives more customary to publicly traded companies.
(b) "Other Annual Compensation" consists of a cash bonus of $0.50 per share for
each share purchased in 1997 under the Stock Purchase Plan. This bonus was
also available to all participating associates. There were no stock
purchases under the Stock Purchase Plan in 1998. Messrs. Friend, Meehan and
Lofgren were the only named executive officers purchasing shares in 1997
since all others are above the 200,000 share maximum.
(c) "All Other Compensation" consists of the following: (1) for fiscal year 1997
only, a one-time non-compete bonus equal to 5% of each named executive's
fiscal year 1996 bonus; (2) company matching contributions of 50% of the
first 6% of total compensation contributed to our 401(k) plan as a 401(k)
salary deferral by the named executive up to the IRS maximum; (3) an
additional company matching contribution to a non-qualified savings plan of
3% of total compensation above the IRS compensation limit of $160,000 if
individual 401(k) contributions equal the IRS maximum; and (4) for fiscal
year 1999 for Mr. Smith, a payment of $188,140 for accrued, but unused, paid
time-off.
Concurrent with the public offering we will grant options to our associates
pursuant to the long term incentive plan to purchase approximately 1,600,000
shares of class A common stock at an exercise price equal to the public offering
price. As part of this grant, Messrs. Haley, Lofgren, Meehan and Friend will be
granted options to purchase , , , and
shares, respectively.
PENSION ARRANGEMENTS WITH NAMED EXECUTIVE OFFICER. Watson Wyatt & Company
has an agreement with Dr. Friend to provide a supplemental pension benefit if he
remains continuously employed by the company until June 15, 2000. At the time of
his retirement, Dr. Friend will receive an additional service credit (for the
purposes of calculating benefits only) so that his total service credit will be
calculated as follows: (actual years of service + 1) multiplied by 1.5. In
addition, if, prior to the date on which Dr. Friend would be entitled to receive
an early retirement benefit, there is a change in control of the company and
Dr. Friend leaves the employ of the company within six months of the change in
control, his pension will be calculated as if he had reached early retirement.
71
<PAGE>
GENERAL EMPLOYMENT ARRANGEMENTS. Generally executive officers are not
parties to employment agreements with us. Non-employee directors are paid
pursuant to a compensation plan approved on an annual basis. Executives and
other associates in salary bands 4, 5, 6 and higher are required to sign
non-competition and confidentiality agreements to protect the company's
proprietary information.
COMMON STOCK PURCHASE ARRANGEMENTS BEFORE THE MERGER
AND THE PUBLIC OFFERING
STOCK PURCHASE PLAN. To encourage ownership of common stock by associates,
we had historically maintained a stock purchase plan. Under the stock purchase
plan, we regularly sold common stock to associates on or about March 1 of each
year, except in 1998. Historically, ownership of the common stock has been
spread widely among associates, with no individual stockholder owning more than
2% of the total number of shares outstanding. Prior to 1996, it was our policy
not to sell shares to stockholders who, as a result of such sales, would have
purchased more than 300,000 shares under the stock purchase plan. In 1996, we
reduced this number to 200,000. The stock purchase plan will be terminated upon
completion of this offering.
The stock purchase plan permitted associates to borrow up to the full amount
of the purchase price of the common stock from our lenders, and we guaranteed
repayment of all such loans. The loans provided for full recourse to the
individual borrower and were secured by a pledge of the stock purchased.
Officers, directors and executive officers had access to this credit facility on
the same basis as other associates. As of March 1, 2000, 3,370,536 shares of
common stock were pledged to Watson Wyatt's lenders to secure loans to
stockholders, representing approximately 24% of the outstanding shares of common
stock. As of the same date, the aggregate amount of outstanding loans was
approximately $14.5 million. This loan program will continue in effect to
accomodate the amortization of existing loans after the offering, but will be
amended and will not be used to create new loans.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
On April 1, 1995, we transferred our United Kingdom operations to R.
Watson & Sons, subsequently renamed Watson Wyatt Partners, and received a
beneficial interest and a 10% interest in a defined profit pool of the
partnership. We also transferred our Continental European operations to a newly
formed holding company owned by our company and Watson Wyatt Partners in
exchange for 50.1% of its shares. Effective July 1, 1998, we sold one-half of
our investment in the holding company to Watson Wyatt Partners. Mr. Robert D.
Masding, a senior partner of Watson Wyatt Partners, is a member of our board of
directors, and Mr. Haley is a member of the Watson Wyatt Partners Partnership
Board. Watson Wyatt Partners and Watson Wyatt & Company provide various services
to and on behalf of each other in the ordinary course of business.
72
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS
The following table sets forth information known to us with respect to
beneficial ownership of Watson Wyatt & Company common stock as of March 1, 2000,
without giving effect to our corporate reorganization or sales made in
connection with the public offering, of all directors, named officers and
directors and executive officers as a group:
<TABLE>
<CAPTION>
NUMBER PERCENT
NAME OF BENEFICIAL OWNER --------- --------
<S> <C> <C>
John J. Haley............................................... 227,749 1.5%
Charles P. Wood, Jr......................................... 200,934 1.4
A. Grahame Stott............................................ 134,000 *
Eric P. Lofgren............................................. 109,365 *
John A. Steinbrunner........................................ 103,191 *
Kevin L. Meehan............................................. 100,011 *
Thomas W. Barratt........................................... 89,000 *
Ira T. Kay.................................................. 80,525 *
David B. Friend, M.D........................................ 71,000 *
Paula A. DeLisle............................................ 53,900 *
Brian E. Kennedy............................................ 50,000 *
Gail E. McKee............................................... 27,375 *
John J. Gabarro............................................. 7,500 *
R. Michael McCullough....................................... 7,500 *
Robert D. Masding........................................... 363,000(a) 2.4%
A.W. Smith, Jr.............................................. 0(b) *
All current directors and executive officers as a group
(23)...................................................... 2,023,492 13.7%
</TABLE>
- ------------------------
* Beneficial ownership of 1% or less of all of the outstanding common stock is
indicated with an asterisk.
(a) Watson Wyatt Partners, in which Mr. Masding is Senior Partner, beneficially
owns 363,000 shares (2.4%) of Watson Wyatt & Company common stock.
Mr. Masding does not own any shares in his individual capacity and disclaims
beneficial ownership of the Watson Wyatt Partners shares. Pursuant to our
alliance agreement, if Watson Wyatt Partners holds more than 400,000 shares
of our common stock, it has an option to sell to us any number of shares
that exceed 300,000. We, in turn, have an option to purchase from Watson
Wyatt Partners any number of shares of our common stock in excess of 400,000
shares if Watson Wyatt Partners holds more than 500,000 shares of our common
stock.
(b) Mr. Smith's shares were repurchased in connection with his retirement in
June 1999 in accordance with our bylaws.
LEGAL MATTERS
The validity of the issuance of the shares of class B common stock offered
by this proxy statement/ prospectus will be passed on for us by Cadwalader,
Wickersham & Taft.
TRANSFER AGENT AND REGISTRAR
Watson Wyatt & Company is the Transfer Agent and Registrar of its own common
stock. First Union National Bank will be the Transfer Agent and Registrar for
Watson Wyatt & Company Holdings' class A common stock and class B common stock.
73
<PAGE>
SUBMISSION OF STOCKHOLDER PROPOSALS
If the merger and public offering are completed, Watson Wyatt & Company
Holdings expects to hold its 2000 annual meeting on November 16, 2000. If the
public offering is not completed, Watson Wyatt & Company would hold its 2000
annual meeting at such time. If you intend to submit a proposal for inclusion in
the proxy materials for the annual meeting, you must submit the proposal in
writing to Watson Wyatt & Company, Office of the Secretary, 6707 Democracy
Boulevard, Suite 800, Bethesda, Maryland 20817, by June 30, 2000. Securities and
Exchange Commission rules set forth standards as to what stockholder proposals
we are required to include in our proxy statement for an annual meeting.
If a stockholder fails to provide notice prior to September 12, 2000 of such
stockholder's intention to present a proposal at the meeting, then the
board-appointed proxies will be entitled to use their discretionary voting
authority if such proposal is raised at the 2000 annual meeting of stockholders.
EXPERTS
The consolidated financial statements of Watson Wyatt & Company as of
June 30, 1999, and 1998 and for each of the three years in the period ended
June 30, 1999, included in and incorporated by reference in this prospectus have
been so included or incorporated by reference in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
such firm as experts in accounting and auditing. The financial statements for
Wellspring Resources LLC as of June 30, 1997, and 1996 and for the year ended
June 30, 1997 and the three months ended June 30, 1996 appearing in Watson Wyatt
& Company Annual Report on Form 10-K for the year ended June 30, 1999 have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
incorporated therein and incorporated herein by reference. Such financial
statements are incorporated herein by reference in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
74
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Consolidated Financial Statements of Watson Wyatt & Company
Report of Independent Accountants......................... F-2
Financial Statements:
Consolidated Statements of Operations for each of the
three years
ended June 30, 1999................................... F-3
Consolidated Balance Sheets at June 30, 1999 and 1998... F-4
Consolidated Statements of Cash Flows for each of the
three years
ended June 30, 1999................................... F-5
Consolidated Statements of Changes in Permanent
Shareholders' Equity for each of the three years ended
June 30, 1999......................................... F-6
Notes to the Consolidated Financial Statements.......... F-7 to F-26
Valuation and Qualifying Accounts and Reserves (Schedule
II)..................................................... F-27
Consolidated Statements of Operations for the six month
periods ended December 31, 1999 and December 31, 1998
(unaudited)........................................... F-28
Consolidated Balance Sheets at December 31, 1999
(unaudited) and June 30, 1999......................... F-29
Consolidated Statements of Cash Flows for the six month
periods
ended December 31, 1999 and December 31, 1998
(unaudited)........................................... F-30
Consolidated Statements of Changes in Permanent
Shareholders' Equity for
the six month period ended December 31, 1999
(unaudited)........................................... F-31
Notes to the Consolidated Financial Statements
(unaudited)........................................... F-32 to F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Watson Wyatt & Company
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Watson
Wyatt & Company and its subsidiaries at June 30, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1999, in conformity with the accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information, set forth therein when read in
connection with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Washington, D.C.
September 8, 1999, except as to the
information presented in Notes 5 and 6,
for which the date is December 9, 1999.
F-2
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Fees........................................................ $556,860 $ 512,660 $486,502
Costs of providing services:
Salaries and employee benefits............................ 298,915 268,611 252,302
Stock incentive bonus..................................... 22,610 -- --
Non-recurring compensation charge (see Note 12)........... -- 69,906 --
Occupancy and communications.............................. 62,915 62,061 72,155
Professional and subcontracted services................... 47,863 49,907 48,827
Other..................................................... 29,753 26,779 23,871
-------- --------- --------
462,056 477,264 397,155
General and administrative expenses......................... 56,578 51,759 45,696
Depreciation and amortization............................... 15,248 24,994 22,094
-------- --------- --------
533,882 554,017 464,945
Income (loss) from operations (see Note 12)................. 22,978 (41,357) 21,557
Other:
Interest income........................................... 944 901 1,462
Interest expense.......................................... (2,646) (2,768) (1,506)
Income from affiliates...................................... 2,524 258 105
-------- --------- --------
Income (loss) before income taxes and minority interest
(see Note 12)............................................. 23,800 (42,966) 21,618
Provision for (benefit from) income taxes:
Current................................................... 18,744 15,116 12,627
Deferred.................................................. (7,296) (1,982) (3,557)
-------- --------- --------
11,448 13,134 9,070
-------- --------- --------
Income (loss) before minority interest (see Note 12)........ 12,352 (56,100) 12,548
Minority interest in net (income) loss of consolidated
subsidiaries.............................................. (217) (112) (167)
-------- --------- --------
Income (loss) from continuing operations (see Note 12)...... 12,135 (56,212) 12,381
Discontinued operations:
Loss from operations of discontinued Outsourcing Business
(less applicable income tax benefit of $0, $5,053 and
$8,181 respectively)...................................... -- (6,821) (11,483)
Adjustment (loss) on disposal of discontinued Outsourcing
Business (1999 adjustment is net of applicable income tax
expense of $6,322; 1998 loss is net of applicable income
tax benefit of $46,715)................................... 8,678 (63,085) --
-------- --------- --------
Net income (loss) (see Note 12)............................. $ 20,813 $(126,118) $ 898
======== ========= ========
Earnings (loss) per share, continuing operations, basic and
fully diluted............................................. $ 0.80 $ (3.27) $ 0.71
======== ========= ========
Earnings (loss) per share, discontinued operations, basic
and fully diluted......................................... $ 0.57 $ (4.07) $ (0.66)
======== ========= ========
Earnings (loss) per share, net income (loss), basic and
fully diluted............................................. $ 1.37 $ (7.34) $ 0.05
======== ========= ========
</TABLE>
See accompanying notes
F-3
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 35,985 $ 13,405
Receivables from clients:
Billed, net of allowances of $3,701 and $2,142............ 72,798 69,671
Unbilled.................................................. 63,068 59,725
-------- --------
135,866 129,396
Income taxes receivable..................................... -- 2,216
Other current assets........................................ 10,834 6,945
-------- --------
Total current assets...................................... 182,685 151,962
Investment in affiliates.................................... 15,306 17,666
Fixed assets................................................ 42,797 37,368
Deferred income taxes....................................... 56,206 48,911
Intangible assets........................................... 7,455 2,412
Other assets................................................ 9,511 9,991
-------- --------
$313,960 $268,310
======== ========
LIABILITIES, REDEEMABLE COMMON STOCK, AND PERMANENT SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $152,371 $116,548
Note payable and book overdrafts............................ 248 11,666
Income taxes payable........................................ 18,374 --
-------- --------
Total current liabilities................................. 170,993 128,214
Accrued retirement benefits................................. 77,140 82,528
Deferred rent and accrued lease losses...................... 9,270 12,676
Other noncurrent liabilities................................ 22,608 32,784
Minority interest in subsidiaries........................... 669 322
Redeemable Common Stock--$1 par value: 25,000,000 shares
authorized; 16,112,416 and 15,916,757 issued and
outstanding; at redemption value.......................... 107,631 96,296
Permanent shareholders' equity:
Adjustment for redemption value less than amounts paid in by
shareholders.............................................. 11,420 25,240
Retained deficit............................................ (83,209) (106,834)
Cumulative translation adjustment (accumulated other
comprehensive loss)....................................... (2,562) (2,916)
Commitments and contingencies...............................
-------- --------
$313,960 $268,310
======== ========
</TABLE>
See accompanying notes
F-4
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Cash flows from (used for) operating activities:
Net income (loss)......................................... $ 20,813 $(126,118) $ 898
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Non-cash non-recurring compensation charge.............. -- 69,906 --
Net (adjustment) loss from Discontinued Operations...... (8,678) 69,906 11,483
Provision for doubtful receivables from clients......... 9,503 5,613 6,853
Depreciation............................................ 13,680 12,849 13,816
Amortization of deferred software and development costs
and other intangible assets........................... 1,568 12,143 8,277
Provision for deferred income taxes..................... (7,295) (1,982) (3,557)
Income from affiliates.................................. (2,524) (258) (105)
Minority interest in net income of consolidated
subsidiaries.......................................... 217 112 167
(Increase) decrease in assets (net of discontinued
operations):
Receivables from clients.............................. (25,488) (11,115) (2,794)
Income taxes receivable............................... 2,216 4,558 3,327
Other current assets.................................. (3,889) 342 (351)
Other assets.......................................... 480 76 (1,930)
Increase (decrease) in liabilities (net of discontinued
operations):
Accounts payable and accrued liabilities.............. 54,567 11,318 1,300
Income taxes payable.................................. 12,052 (3,563) (7,799)
Accrued retirement benefits........................... (5,388) (4,169) 5,556
Deferred rent and accrued lease losses................ (3,406) (2,262) 5,034
Other noncurrent liabilities.......................... 1,132 840 687
Other, net.............................................. 514 1,603 656
Discontinued operations, net............................ (5,537) (18,554) 7,530
-------- --------- --------
Net cash provided by operating activities............... 54,537 21,245 49,048
======== ========= ========
Cash flows (used in) from investing activities:
Purchases of fixed assets................................. (19,684) (16,034) (15,548)
Proceeds from sales of fixed assets and investments....... 237 623 446
Acquisitions.............................................. (6,207) -- (1,169)
Investment in software and development costs.............. -- (3,000) (4,554)
Investment in affiliates.................................. 4,220 3,076 (1,385)
Discontinued operations................................... -- (14,750) (20,062)
-------- --------- --------
Net cash used in investing activities................... (21,434) (30,085) (42,272)
-------- --------- --------
Cash flows (used by) from financing activities:
Borrowings and bank overdrafts............................ (11,418) 11,258 --
Issuances of Redeemable Common Stock...................... 15,451 1,005 15,414
Repurchases of Redeemable Common Stock.................... (15,124) (13,141) (16,604)
-------- --------- --------
Net cash used by financing activities................... (11,091) (878) (1,190)
-------- --------- --------
Effect of exchange rates on cash............................ 568 (3,134) (1,023)
-------- --------- --------
Increase (decrease) in cash and cash equivalents............ 22,580 (12,852) 4,563
Cash and cash equivalents at beginning of period............ 13,405 26,257 21,694
-------- --------- --------
Cash and cash equivalents at end of period.................. $ 35,985 $ 13,405 $ 26,257
======== ========= ========
</TABLE>
See accompanying notes
F-5
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN PERMANENT SHAREHOLDERS' EQUITY
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
ADJUSTMENT FOR
REDEMPTION
VALUE
CUMULATIVE (GREATER) LESS
RETAINED TRANSLATION THAN AMOUNTS
EARNINGS GAIN PAID IN BY
(DEFICIT) (LOSS) SHAREHOLDERS TOTAL
--------- ----------- -------------- --------
<S> <C> <C> <C> <C>
Balance at June 30, 1996...................... $ 30,677 $ 1,040 $(37,549) $ (5,832)
Comprehensive income:
Net income.................................. 898 -- -- 898
Foreign currency translation adjustment..... -- (204) -- (204)
--------- ------- -------- --------
Total comprehensive income.................... 898 (204) -- 694
Effect of repurchases of 3,258,203 shares of
common stock (various prices per share)..... (6,942) -- 6,942 --
Adjustment of redemption value for change in
formula book value per share................ -- -- (7,067) (7,067)
--------- ------- -------- --------
Balance at June 30, 1997...................... $ 24,633 $ 836 $(37,674) $(12,205)
Comprehensive loss:
Net loss.................................... (126,118) -- -- (126,118)
Foreign currency translation adjustment..... -- (3,752) -- (3,752)
--------- ------- -------- --------
Total comprehensive loss...................... (126,118) (3,752) -- (129,870)
Effect of repurchases of 2,410,425 shares of
common stock (various prices per share)..... (5,349) -- 5,349 --
Adjustment of redemption value for change in
formula book value per share................ -- -- (12,341) (12,341)
Adjustment of redemption value for
non-recurring compensation charge (see Note
12)......................................... -- -- 69,906 69,906
--------- ------- -------- --------
Balance at June 30, 1998...................... $(106,834) $(2,916) $ 25,240 (84,510)
Comprehensive income:
Net income.................................. 20,813 -- -- 20,813
Foreign currency translation adjustment..... -- 354 -- 354
--------- ------- -------- --------
Total comprehensive income.................... 20,813 354 -- 21,167
Effect of repurchases of 2,361,542 shares of
common stock (various prices per share)..... 2,812 -- (2,812) --
Adjustment of redemption value for change in
formula book value per share................ -- -- (11,008) (11,008)
--------- ------- -------- --------
Balance at June 30, 1999...................... $ (83,209) $(2,562) $ 11,420 $(74,351)
========= ======= ======== ========
</TABLE>
See accompanying notes
F-6
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS--Watson Wyatt & Company ("Watson Wyatt" or the
"Company"), together with its subsidiaries, is an international company engaged
in the business of providing professional consultative services on a fee basis,
primarily in the human resource areas of employee benefits and compensation, but
also in other areas of specialization such as human capital consulting and human
resource related technology consulting. Substantially all of the Company's stock
is held by or for the benefit of employees. On July 1, 1996, The Wyatt Company
changed its name to Watson Wyatt & Company.
In 1998, the Company discontinued its Benefits Administration Outsourcing
Business as further described in Note 16. The Consolidated Statements of
Operations in 1999 and 1998 reflect the charges recorded for that
discontinuation as well as for the operating results of the discontinued
operations in 1998 and 1997.
USE OF ESTIMATES--Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used when accounting for revenue, allowances for uncollectible receivables,
investments in affiliates, depreciation and amortization, profits on long-term
contracts, asset write-downs, employee benefit plans, taxes, discontinued
operations and Year 2000 costs.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements of the
Company include the accounts of the Company and its majority-owned and
controlled subsidiaries after elimination of inter-company accounts and
transactions. Investments in affiliated companies over which the Company has the
ability to exercise significant influence are accounted for using the equity
method.
RECLASSIFICATIONS--Certain amounts previously presented have been
reclassified to conform to the current presentation.
CASH AND CASH EQUIVALENTS--The Company considers short-term, highly liquid
investments with original maturities of 90 days or less to be cash equivalents.
Such investments were $21,700,000 at June 30, 1999.
RECEIVABLES FROM CLIENTS--Billed receivables from clients are presented at
their billed amount less an allowance for doubtful accounts. Services rendered
are generally billed on a monthly basis using fee arrangements defined at the
inception of the project. Unbilled receivables are stated at their estimated net
realizable value.
REVENUE RECOGNITION--For consulting services, fees from clients are recorded
as services are performed and are presented net of write-offs and uncollectible
amounts. Revenues from long-term contracts are recognized on the percentage of
completion basis. Anticipated contract losses are recognized as they become
known. Fees for administrative and recordkeeping operations are recognized as
earned by the Company.
INTANGIBLE ASSETS--Intangible assets consist primarily of goodwill related
to the excess cost over net assets of purchased companies. Goodwill is generally
amortized on a straight-line basis over seven to fifteen years. The Company
regularly assesses the recoverability of unamortized goodwill and other
F-7
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
long-lived assets by comparing the probable undiscounted future cash flows with
the net book value of the underlying assets. Losses so identified are then
measured as the difference between the net book value of the asset and the
discounted present value of the cash flows and are recorded as identified.
EMPLOYEE RECEIVABLES--The Company had outstanding employee receivables
included in other current and noncurrent assets of $2,440,000 and $3,165,000 at
June 30, 1999 and June 30, 1998, respectively, related primarily to employee
relocations.
FOREIGN CURRENCY TRANSLATION--Gains and losses on foreign currency
transactions are recognized currently in the consolidated statements of
operations. Assets and liabilities of the Company's subsidiaries outside the
United States are translated into the reporting currency, the U.S. dollar, based
on exchange rates at the balance sheet date. Revenue and expenses of the
Company's subsidiaries outside the United States are translated into U.S.
dollars at the average exchange rates during the year. Gains and losses on
translation of the Company's equity interests in its subsidiaries outside the
United States are not included in the consolidated statements of operations but
are reported separately and accumulated as the cumulative translation gain or
loss within permanent shareholders' equity in the consolidated balance sheets.
Foreign currency translation gains or losses on inter-company receivables and
payables are generally not recognized because such amounts are usually
considered to be permanent and are not expected to be liquidated.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amount of the Company's
cash and cash equivalents, short-term investments, receivables from clients and
notes and accounts payable and accrued liabilities approximates fair value
because of the short maturity and ready liquidity of those instruments. At
June 30, 1999, the outstanding balance under its revolving credit agreement was
zero, while at June 30, 1998 the Company had $9,000,000 outstanding. The Company
knows of no event of default that would require it to satisfy the guarantees
described in Notes 9 and 15 other than as reflected in the Consolidated
Financial Statements.
CONCENTRATION OF CREDIT RISK--Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
certain cash and cash equivalents, short-term investments and receivables from
clients. The Company invests its excess cash with high-credit quality financial
institutions. Concentrations of credit risk with respect to receivables from
clients are limited due to the Company's large number of customers and their
dispersion across many industries and geographic regions.
EARNINGS PER SHARE--The computation of earnings per share is based upon the
weighted average number of shares of Redeemable Common Stock outstanding. The
number of shares (in thousands) used in the computation is 15,215 in fiscal year
1999, 17,170 in fiscal year 1998, and 17,438 in fiscal year 1997 (see Note 10).
COMPREHENSIVE INCOME--In fiscal year 1999, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income." Comprehensive income includes net income and changes in the cumulative
foreign currency translation gain or loss. For the years ended June 30, 1999,
1998 and 1997, comprehensive income (loss) totaled $21,167,000, $(129,870,000),
and $694,000, respectively.
F-8
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 2--CASH FLOW INFORMATION
Net cash provided by operating activities in the consolidated statements of
cash flows includes cash payments for:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest expense.................................. $1,889 $ 2,639 $ 1,506
Income taxes paid................................. $5,462 $18,679 $11,947
</TABLE>
NOTE 3--INVESTMENTS IN AFFILIATES
Entities accounted for under the equity method are:
<TABLE>
<CAPTION>
JUNE 30
OWNERSHIP -------------------
INTEREST 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Watson Wyatt Partners........................... 10.0% $ 9,265 $11,040
Watson Wyatt Holdings (Europe) Limited.......... 25.0% 6,041 6,626
Professional Consultants Insurance Company,
Inc........................................... 27.4% -- --
------- -------
Total Investment in Affiliates.................. $15,306 $17,666
======= =======
</TABLE>
On April 1, 1995, the Company transferred its United Kingdom ("U.K.")
operations to Watson Wyatt Partners, formerly R. Watson & Sons ("Watsons"), an
actuarial partnership based in the U.K., and received a beneficial interest in
Watsons and a 10% interest in a defined profit pool of Watsons. The Company also
transferred its Continental European operations to a newly-formed holding
company, Watson Wyatt Holdings (Europe) Limited ("WWHE"), jointly owned and
controlled by the Company and Watsons, in exchange for 50.1% of its shares. The
Company's historical basis in the assets and liabilities carried over. Effective
July 1, 1998, the Company sold one half of its investment in WWHE to Watsons; no
gain or loss was recognized on the transaction.
The Company accounts for its interest in Watsons using the equity method of
accounting because it is an investment in a general partnership. The Company
accounts for its interest in WWHE using the equity method of accounting because
it has the ability to exercise significant influence over the operations of the
entity.
At June 30, 1999, the Company's investment in WWHE and Watsons exceeded the
Company's share of the underlying net assets by $2,257,000 due primarily to the
capitalization of external transaction costs incurred by the Company. This basis
differential is being amortized over periods of 10 to 15 years.
F-9
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 3--INVESTMENTS IN AFFILIATES (CONTINUED)
The Company's pre-tax income from affiliates includes the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Equity investment income............................. $2,760 $724 $1,019
Amortization of basis differential................... (236) (466) (914)
------ ---- ------
Income from affiliates............................... $2,524 $258 $ 105
====== ==== ======
</TABLE>
Combined summarized balance sheet information at June 30 for the Company's
affiliates follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Current assets.......................................... $117,717 $118,116
Noncurrent assets....................................... 17,286 10,886
-------- --------
Total assets............................................ $135,003 $129,002
======== ========
Current liabilities..................................... $ 65,171 $ 54,278
Noncurrent liabilities.................................. 30,810 39,344
Shareholders' equity.................................... 39,022 35,380
-------- --------
Total liabilities & shareholders' equity................ $135,003 $129,002
======== ========
</TABLE>
The Company's operating results include its proportionate share of income
from equity investments from the dates of investment. Combined summarized
operating results for the years ended June 30, reported by the affiliates
follow:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue....................................... $206,463 $173,012 $166,851
Operating expenses............................ 155,330 135,577 126,338
-------- -------- --------
Income before tax............................. $ 51,133 $ 37,435 $ 40,513
======== ======== ========
Net income.................................... $ 51,116 $ 38,176 $ 39,996
======== ======== ========
</TABLE>
NOTE 4--FIXED ASSETS
Furniture, fixtures, equipment, and leasehold improvements are recorded at
cost, and presented net of accumulated depreciation or amortization. Furniture,
fixtures and equipment are depreciated using straight-line and accelerated
methods over lives ranging from three to seven years. Leasehold improvements are
amortized on a straight-line basis over the shorter of the assets' lives or
lease terms.
F-10
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 4--FIXED ASSETS (CONTINUED)
The components of fixed assets are:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Furniture, fixtures and equipment....................... $ 96,096 $ 90,727
Leasehold improvements.................................. 27,069 22,294
-------- --------
123,165 113,021
Less: accumulated depreciation and amortization......... (80,368) (75,653)
-------- --------
Net fixed assets........................................ $ 42,797 $ 37,368
======== ========
</TABLE>
NOTE 5--PENSION AND SAVINGS PLANS
In fiscal year 1999, the Company adopted the revised disclosure requirements
of SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS 132 standardized the disclosure of pensions and other
postretirement benefits but did not change the accounting for these benefits.
Prior years' information has been reclassified to conform to the 1999 disclosure
format.
The noncurrent portions of accrued costs related to the Company's principal
retirement plans are:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Defined benefit retirement plans.......................... $28,149 $35,263
Canadian Separation Allowance Plan........................ 5,953 6,264
Postretirement benefits other than pensions............... 43,038 41,001
------- -------
Accrued retirement benefits............................... $77,140 $82,528
======= =======
</TABLE>
DEFINED BENEFIT PLANS
The Company sponsors both qualified and non-qualified non-contributory
defined benefit pension plans covering substantially all of its associates.
Under the Company's principal plans (U.S., Canada, and Hong Kong), benefits are
based on the number of years of service and the associate's compensation during
the three highest paid consecutive years of service.
Contributions are limited to amounts that are currently deductible for tax
purposes, and the excess of expense over such contributions and direct payments
under non-qualified plan provisions is accrued. As of January 1, 1997, changes
were made to the U.S. pension program. The pension plan definition of
compensation was revised to include overtime and annual bonuses. The pension
benefit formula was changed to integrate with Social Security benefits on a
step-rate basis. The total years of service included in the benefit calculation
were reduced from 28 1/3 years to 25 years.
F-11
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 5--PENSION AND SAVINGS PLANS (CONTINUED)
Net periodic pension cost consists of the following components:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost..................................... $22,976 $18,340 $16,962
Interest cost.................................... 23,909 22,302 19,651
Expected return on plan assets................... (37,437) (31,910) (26,828)
Amortization of transition obligation............ 201 201 199
Amortization of net unrecognized gains........... (5,979) (6,316) (4,740)
Amortization of prior service cost............... 1,841 1,794 1,352
------- ------- -------
Net periodic pension cost........................ 5,511 4,411 6,596
Settlement loss.................................. -- -- 708
------- ------- -------
Net periodic pension cost including
settlements.................................... $ 5,511 $ 4,411 $ 7,304
======= ======= =======
</TABLE>
During fiscal year 1999, the Company acquired a portion of KPMG's actuarial
consulting services. In connection with this transaction, the Company recognized
additional pension expense of $665,000.
The following tables set forth the changes in the projected pension benefit
obligation and fair value of the pension plan assets:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Benefit obligation at beginning of year................. $353,658 $295,245
Service cost............................................ 22,976 18,340
Interest cost........................................... 23,909 22,302
Participant contributions............................... 54 --
Actuarial losses gains.................................. (8,503) 34,610
Benefit payments........................................ (14,593) (16,042)
Plan amendments......................................... -- 647
Foreign currency adjustment............................. (94) (1,444)
-------- --------
Benefit obligation at end of year....................... $377,407 $353,658
======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Fair value of plan assets at beginning of year.......... $381,398 $322,533
Actual return on plan assets............................ 36,473 67,275
Company contributions................................... 7,889 9,311
Participant contributions............................... 54 --
Benefit payments........................................ (14,593) (16,042)
Foreign currency adjustment............................. (119) (1,679)
-------- --------
Fair value of plan assets at end of year................ $411,102 $381,398
======== ========
</TABLE>
F-12
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 5--PENSION AND SAVINGS PLANS (CONTINUED)
The following table sets forth selected information for plans with
accumulated benefit obligations in excess of plan assets:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Projected benefit obligation.............................. $86,703 $78,519
Accumulated benefit obligation............................ 42,740 38,474
Fair value of plan assets................................. -- --
</TABLE>
The accrued pension benefit cost recognized in our consolidated balance
sheets is computed as follows:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Funded status at end of year............................ $ 33,695 $ 27,740
Unrecognized prior service cost......................... 9,255 11,101
Unrecognized net gain................................... (75,579) (74,030)
Unrecognized transition obligation...................... 793 993
-------- --------
Net accrued pension liability........................... $(31,836) $(34,196)
======== ========
Prepaid pension benefit cost............................ $ 26,691 $ 13,778
Accrued pension benefit liability....................... (58,527) (47,974)
Intangible assets....................................... -- --
Accumulated other comprehensive income.................. -- --
-------- --------
Net accrued pension liability........................... $(31,836) $(34,196)
======== ========
</TABLE>
Assumptions used in the valuation for the U.S. plan, which comprises the
majority of the principal defined benefit pension plans, include:
<TABLE>
<CAPTION>
JUNE 30
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Discount rate, projected benefit obligation............... 7.0% 6.8% 7.5%
Discount rate, net periodic pension cost.................. 6.8% 7.5% 7.5%
Expected long-term rate of return on assets............... 10.0% 10.0% 10.0%
Rate of increase in compensation levels................... 5.3% 5.8% 5.8%
</TABLE>
DEFINED CONTRIBUTION PLANS
The Company sponsors a savings plan which provides benefits to substantially
all U.S. associates and under which the Company matches employee contributions
at 50% of the first 6% of total pay, which includes base salary, overtime and
annual performance-based bonuses. Vesting of the Company match occurs after
three years for new employees and is 100% for all employees hired before
January 1, 1997. The expense in fiscal years 1999, 1998 and 1997 for the match
was $4.5 million,
F-13
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 5--PENSION AND SAVINGS PLANS (CONTINUED)
$5.1 million and $2.0 million, respectively. Under the plan, the Company also
has the ability to make discretionary profit-sharing contributions. The Company
made no profit sharing contributions during fiscal years 1999, 1998 or 1997. The
Company also sponsors a Canadian Separation Allowance Plan (CSAP) which provides
benefits to substantially all Canadian associates. The CSAP is an unfunded book
reserve arrangement; as such, the amounts due to associates are recorded as a
liability in the consolidated balance sheets of the Company. CSAP expense for
fiscal years 1999, 1998 and 1997 amounted to $377,000, $293,000 and $414,000,
respectively.
NOTE 6--BENEFITS OTHER THAN PENSIONS
HEALTH CARE BENEFITS
The Company sponsors a contributory health care plan that provides
hospitalization, medical and dental benefits to substantially all U.S.
associates. The Company accrues a liability for estimated incurred but
unreported claims based on projected use of the plan as well as paid claims of
prior periods. The liability totaled $2,495,000 at June 30, 1999 and 1998, and
is included in accounts payable and accrued liabilities in the consolidated
balance sheets.
POSTRETIREMENT BENEFITS
The Company provides certain health care and life insurance benefits for
retired associates. The principal plans cover associates in the U.S. and Canada
who have met certain eligibility requirements. The Company's principal plans are
unfunded.
Effective January 1, 1997, premiums paid on the retiree medical plan are
tied to the retiree's years of service. The Company contribution is capped at
200% of 1997 per capita claims cost. Benefits have been redefined to ensure a
retiree benefit comparable to the Watson Wyatt Plan for active employees.
Net periodic postretirement benefit cost consists of the following
components:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost........................................ $1,898 $1,848 $1,891
Interest cost....................................... 2,178 2,133 1,987
Amortization of transition obligation............... 46 46 50
Amortization of net unrecognized gains.............. (488) (584) (559)
Amortization of prior service cost.................. (127) (127) (126)
------ ------ ------
Net periodic postretirement benefit cost............ $3,507 $3,316 $3,243
====== ====== ======
</TABLE>
F-14
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 6--BENEFITS OTHER THAN PENSIONS (CONTINUED)
The following tables set forth the changes in the accumulated postretirement
benefit obligation, company contributions and benefit payments:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Benefit obligation at beginning of year................... $32,326 $30,031
Service cost.............................................. 1,898 1,848
Interest cost............................................. 2,178 2,133
Participant contributions................................. 175 189
Actuarial losses/(gains).................................. (563) (883)
Acquisitions/(divestitures)............................... 245 --
Benefit payments.......................................... (1,267) (849)
Foreign currency adjustment............................... (11) (143)
------- -------
Benefit obligation at end of year......................... $34,981 $32,326
======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Fair value of plan assets at beginning of year.............. $ -- $ --
Company contributions....................................... 1,092 660
Participant contributions................................... 175 189
Benefit payments............................................ (1,267) (849)
------- -----
Fair value of plan assets at end of year.................... $ -- $ --
======= =====
</TABLE>
The accrued other postretirement benefit cost recognized in our consolidated
balance sheets is computed as follows:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Funded status at end of year............................ $(34,981) $(32,326)
Unrecognized prior service cost......................... (1,325) (1,451)
Unrecognized net gain................................... (8,763) (8,664)
Unrecognized transition obligation...................... 650 698
-------- --------
Net accrued postretirement liability.................... $(44,419) $(41,743)
======== ========
Prepaid pension benefit cost............................ $ -- $ --
Accrued postretirement benefit liability................ (44,419) (41,743)
Intangible assets....................................... -- --
Accumulated other comprehensive income.................. -- --
-------- --------
Net accrued postretirement liability.................... $(44,419) $(41,743)
======== ========
</TABLE>
F-15
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 6--BENEFITS OTHER THAN PENSIONS (CONTINUED)
Assumptions used in the valuation for the U.S. plan, which comprises the
majority of the principal postretirement plans, include:
<TABLE>
<CAPTION>
JUNE 30
-------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Health care cost trend, accumulated benefit
obligation:
Pre-65 benefits
(decreasing to 5.0% for 2004 and thereafter)..... 7.7% 8.4% 9.1%
Post-65 benefits
(decreasing to 5.0% for 2007 and thereafter)..... 7.1% 7.7% 8.3%
Discount rate, accumulated benefit obligation
postretirement benefit........................... 7.0% 6.8% 7.5%
Discount rate, net periodic cost................... 7.0% 6.8% 7.5%
</TABLE>
A one percentage point change in the assumed health care cost trend rates
would have the following effect:
<TABLE>
<CAPTION>
1% INCREASE 1% DECREASE
----------- -----------
<S> <C> <C>
Effect on net periodic postretirement benefit cost in
fiscal 1999......................................... $ 233 $ (283)
Effect on accumulated postretirement benefit
obligation as of June 30, 1999...................... 1,925 (2,189)
</TABLE>
NOTE 7--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Accounts payable and accrued liabilities................ $ 53,586 $ 55,865
Accrued salaries and bonuses............................ 68,405 37,567
Current portion of defined benefit retirement plans and
postretirement benefits other than pensions........... 9,948 4,191
Accrued vacation........................................ 13,578 13,300
Advance billings........................................ 6,854 5,625
-------- --------
Total accounts payable and accrued liabilities.......... $152,371 $116,548
======== ========
</TABLE>
NOTE 8--LEASES
The Company leases office space and various computer equipment under
operating lease agreements with terms generally ranging from one to ten years.
The Company has entered into sublease agreements for some of its leased space.
The rental expense was $43,631,000, $43,133,000 and $42,079,000 for fiscal years
1999, 1998 and 1997, respectively. Sublease income was $4,208,000, $3,905,000
and $1,702,000 for fiscal years 1999, 1998 and 1997, respectively.
F-16
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 8--LEASES (CONTINUED)
Future cash outlays for operating lease commitments and cash inflows for
sublease income are:
<TABLE>
<CAPTION>
LEASE SUBLEASE
COMMITMENTS INCOME
----------- --------
<S> <C> <C>
2000................................................... $ 43,771 $3,388
2001................................................... 38,709 3,315
2002................................................... 30,614 2,963
2003................................................... 18,074 115
2004................................................... 14,043 --
thereafter............................................. 25,770 --
-------- ------
$170,981 $9,781
======== ======
</TABLE>
As a result of relocations and the subleasing of excess office space, the
Company recognized lease termination losses of $341,000, $790,000 and
$12,107,000 in fiscal years 1999, 1998 and 1997, respectively.
NOTE 9--NOTE PAYABLE
The Company has a $120,000,000 credit facility with a group of banks at an
interest rate that varies with LIBOR and/or the Prime Rate, plus an annual
commitment fee that varies with the Company's financial leverage and is paid on
the unused portion of the credit facility. No amounts were outstanding under the
revolving portion of the credit facility as of June 30, 1999; $9,000,000 was
outstanding at June 30, 1998. The credit facility requires the Company to
observe certain covenants (including requirements as to minimum net worth and
other financial and restrictive covenants) and is secured by a blanket lien on
all assets. At June 30, 1999 the Company was in compliance with all covenants
under the credit facility. The revolving portion of the credit facility is
scheduled to mature on June 30, 2003.
Of the total credit line, $95,000,000 is available to the Company as
revolving credit for operating needs. The remaining $25,000,000 is available to
secure loans to associates for the purchase of Redeemable Common Stock made
available under the Company's Stock Purchase Program. The Company guarantees
these loans to its shareholders, the aggregate outstanding balances of which
totaled $20,316,000 and $15,617,000 at June 30, 1999 and 1998, respectively.
Shares totaling 4,735,000 and 4,897,000 of the Company's Redeemable Common Stock
were pledged by shareholders to secure these loans at June 30, 1999 and 1998,
respectively.
NOTE 10--REDEEMABLE COMMON STOCK
Substantially all of the Company's Redeemable Common Stock is held by or for
the benefit of its employees and, pursuant to the Company's bylaws, is subject
to certain restrictions. In connection with these restrictions, the Company has
the following rights and obligations regarding purchases and sales of its common
stock:
a) The Company has the first option to purchase, or to designate associates who
are eligible to purchase, any shares offered for sale by a shareholder.
Shares not purchased by the Company or
F-17
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 10--REDEEMABLE COMMON STOCK (CONTINUED)
its designees may be sold to identified transferees, subject to the
restrictions contained in the bylaws.
b) Upon the termination of employment, bankruptcy of a shareholder, or the
imposition of a lien or attachment on any stock, the shares held by the
shareholder or subject to attachment are considered to be offered for sale.
In these circumstances, the Company is obligated to purchase any such
shares.
Pursuant to the Company's bylaws, the price for all sales by the Company of
Redeemable Common Stock is the Formula Book Value per share (defined in the
bylaws as "Formula Book Value") of such stock as of the last day of the
preceding year. Amounts paid by the Company to repurchase Redeemable Common
Stock are equal to the Formula Book Value as of the prior year end, adjusted to
reflect the pro rata appreciation in the Formula Book Value per share from the
last day of the preceding year to the end of the current year and pro rata
dividends paid during the year.
Formula Book Value as used herein means the Net Book Value of the Company's
Redeemable Common Stock as of June 30, 1996, increased or decreased by net
income or losses, and all other Generally Accepted Accounting Principals
("GAAP") basis increases or decreases to Net Book Value occurring after
June 30, 1996, adjusted to (i) spread the economic impact of certain real estate
sublease losses over the remaining life of the sublease, (ii) eliminate annual
changes in the Currency Translation Adjustment occurring after June 30, 1996,
and (iii) eliminate the after tax increases or decreases in Net Book Value
recorded in accordance with GAAP as a result of the discontinuation of the
Benefits Administration Outsourcing Business. The Formula Book Value was $6.68
at June 30, 1999 and $6.05 at June 30, 1998.
The following schedule computes the Formula Book Value per share at
June 30:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Consolidated net worth[1]................................... $ 36,882 $15,742
Adjustment for the compensation survey items:
50% of consolidated income received from compensation
survey business........................................... 5,915 5,915
Add: Adjustment for after-tax effect of discontinuation of
Benefits Administration Outsourcing Business.............. 61,228 69,906
Add: Adjustment for after-tax effect of lease losses........ 3,606 4,733
-------- -------
Formula Book Value of Redeemable Common Stock............... $107,631 $96,296
======== =======
Number of shares of Redeemable Common Stock outstanding..... 16,112 15,917
======== =======
Formula Book Value per share of Redeemable Common Stock..... $ 6.68 $ 6.05
======== =======
</TABLE>
- ------------------------
[1] After adjusting for currency translation as specified in the Company's
bylaws of $3,602 in 1999 and $3,956 in 1998.
In view of the Company's obligation to repurchase its Redeemable Common
Stock, the Securities and Exchange Commission requires that the redemption value
of outstanding shares be classified as Redeemable Common Stock and not be
portrayed as permanent capital. The amount presented as
F-18
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 10--REDEEMABLE COMMON STOCK (CONTINUED)
Redeemable Common Stock outside the permanent shareholders' equity section is
stated at the amount at which the Company would be required to repurchase the
shares, or the most recent fiscal year end Formula Book Value per share. In the
permanent shareholders' equity section, the "adjustment for redemption value
less (greater) than amounts paid/deemed paid in by shareholders" represents the
amount that the Redeemable Value is less than (exceeds) the cost of the stock.
<TABLE>
<CAPTION>
NUMBER OF REDEEMABLE
SHARES COMMON STOCK
---------- ------------
<S> <C> <C>
Balance at June 30, 1996.................................... 18,261,963 $ 90,214
Redemption of shares........................................ (3,258,203) (16,604)
Issuance of shares.......................................... 3,126,670 15,414
Adjustment of redemption value for
change in Formula Book Value per share.................... -- 7,067
---------- --------
Balance at June 30, 1997.................................... 18,130,430 $ 96,091
Redemption of shares........................................ (2,410,425) (13,141)
Issuance of shares.......................................... 196,752 1,005
Adjustment of redemption value for
change in Formula Book Value per share.................... -- 12,341
---------- --------
Balance at June 30, 1998.................................... 15,916,757 $ 96,296
Redemption of shares........................................ (2,361,542) (15,124)
Issuance of shares.......................................... 2,557,201 15,451
Adjustment of redemption value for
change in Formula Book Value per share.................... -- 11,008
---------- --------
Balance at June 30, 1999.................................... 16,112,416 $107,631
========== ========
</TABLE>
The Company sponsors a Stock Purchase Plan ("SPP") which allows virtually
all associates to become shareholders. During 1999, the Company received
$15,451,000 from the sale of 2,557,201 shares of stock under the SPP. There was
no formal stock sale in fiscal year 1998, although for the fiscal year ended
June 30, 1998, the Company received $1,005,000 from the sale of 196,752 shares
of stock outside of the SPP. During fiscal year 1997, the Company received
$15,414,000 from the sale of 3,126,670 shares of stock under the SPP. During
1997, the Company paid each associate purchasing stock $0.50 per share,
resulting in expense of $1,300,000.
NOTE 11--INCOME TAXES
The provision for income taxes is based upon reported income before income
taxes and includes deferred income taxes resulting from differences between
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for income tax purposes. The Company measures deferred taxes
by applying currently enacted tax laws, recognizes deferred tax assets if it is
more likely than not that a benefit will be realized, and provides a valuation
allowance on deferred tax assets to the extent that it is more likely than not
that a benefit will not be realized.
F-19
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 11--INCOME TAXES (CONTINUED)
The components of the continuing operations income tax provision before
minority interest and discontinued operations include:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current tax expense:
U.S....................................................... $10,817 $ 9,972 $ 8,370
State and local........................................... 4,050 3,324 2,773
Foreign................................................... 3,877 1,820 1,484
------- ------- -------
18,744 15,116 12,627
------- ------- -------
Deferred tax (benefit) expense:
U.S....................................................... (5,776) (337) (4,188)
State and local........................................... (1,407) (1,706) (1,507)
Foreign................................................... (113) 61 2,138
------- ------- -------
(7,296) (1,982) (3,557)
------- ------- -------
Total provision for income taxes............................ $11,448 $13,134 $ 9,070
======= ======= =======
</TABLE>
Deferred income tax assets (liabilities) included in the consolidated
balance sheets at June 30, 1999 and June 30, 1998 are comprised of the
following:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1999 1998
-------- --------
<S> <C> <C>
Cash method of accounting for U.S. income tax purposes...... $ -- $(15,561)
Difference between book and tax depreciation................ -- (1,987)
Foreign temporary difference................................ (2,595) (914)
------- --------
Gross deferred tax liabilities............................ (2,595) (18,462)
Cash method of accounting for U.S. income tax purposes...... 3,744 --
Difference between book and tax depreciation................ 3,202 --
Accrued retirement benefits................................. 37,137 39,255
Amortization of deferred rent............................... 5,697 6,794
Foreign temporary difference................................ 6,367 3,092
Foreign net operating loss carryforwards.................... 1,989 4,942
Discontinued operations exit costs.......................... 7,230 19,559
Other....................................................... 317 2
------- --------
Gross deferred tax assets................................. 65,683 73,644
------- --------
Deferred tax assets valuation allowance................... (6,882) (6,271)
------- --------
Net deferred tax asset.................................... $56,206 $ 48,911
======= ========
</TABLE>
The Company has foreign tax credit carryforwards for U.S. tax purposes of
$305,000. At June 30, 1999, the Company has unused loss carryforwards for tax
purposes in various jurisdictions outside the
F-20
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 11--INCOME TAXES (CONTINUED)
U.S. amounting to $6,352,000, of which $4,350,000 can be indefinitely carried
forward under local statutes. The majority of the remaining loss carryforwards
will expire, if unused, after the end of fiscal year 2002. The valuation
allowance applies to the tax effect of the foreign net operating loss
carryforwards ($1,944,000), the tax effect of certain foreign temporary expenses
($4,563,000) and foreign tax credit carryforwards and other items ($375,000) for
which realizability is considered uncertain.
The net change in the valuation allowance of $611,000 in fiscal year 1999
and $2,569,000 in fiscal year 1998 is due primarily to the tax effect of the
change in realizable foreign net operating losses, foreign tax credits and
non-deductible foreign expenses.
Domestic and foreign components of income before taxes, minority interest
and discontinued operations for each of the three years ended June 30 are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Domestic........................................ $15,203 $(47,435) $14,861
Foreign......................................... 8,597 4,469 6,757
------- -------- -------
$23,800 $(42,966) $21,618
======= ======== =======
</TABLE>
The reported income tax provision for continuing operations differs from the
amounts that would have resulted had the reported income before income taxes
been taxed at the U.S. federal statutory rate. The principal reasons for the
differences between the actual amounts provided and those which would have
resulted from the application of the U.S. federal statutory tax rate are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Calculated income tax provision at U.S. federal statutory
tax rate of 35%........................................... $ 8,330 $(15,038) $7,507
Increase (reduction) resulting from:
Non-deductible compensation expense....................... -- 24,467 --
Results of non-U.S. affiliates taxed at other than
statutory rates......................................... (377) (324) (463)
Losses of non-U.S. affiliates for which no current benefit
is available............................................ 881 852 599
State income taxes, net of federal tax benefit............ 1,207 1,618 1,266
Non-deductible amortization and other expenses............ 849 758 700
Tax credits............................................... -- (353) (888)
Other..................................................... 558 1,154 349
------- -------- ------
Income tax provision........................................ $11,448 $ 13,134 $9,070
======= ======== ======
</TABLE>
NOTE 12--NON-RECURRING COMPENSATION CHARGE
In accordance with generally accepted accounting principles, the Company has
recorded a charge against operating results of $69,906,000 in 1998 as
compensation expense. This charge arises because the Company changed the method
of calculation of its Formula Book Value during 1998, through a shareholder
vote, to eliminate from the Formula Book Value calculation the effect of the
charge taken
F-21
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 12--NON-RECURRING COMPENSATION CHARGE (CONTINUED)
for discontinued operations resulting from the discontinuation of the Company's
Benefits Administration Outsourcing Business.
The non-recurring compensation charge does not represent a call against
Company resources and will not recur unless the Company modifies its Formula
Book Value calculation again. The Company has separately disclosed in the
Statement of Operations the amount of the charge so that readers of the
financial statements may consider its effect on earnings and infrequent nature.
NOTE 13--SEGMENT INFORMATION
In fiscal year 1999, the Company adopted SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." The Company is primarily
organized geographically and has seven reportable segments:
(1) U.S. East
(2) U.S. Central
(3) U.S. West
(4) Asia/Pacific
(5) Canada
(6) Latin America
(7) Data Services
The Company evaluates the performance of its segments and allocates
resources to them based on net operating income. Prior year data has been
restated to be consistent with current year classifications for comparative
purposes.
The table below presents specified information about reported segments as of
and for the year ended June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. U.S. ASIA/ LATIN DATA
EAST CENTRAL WEST PACIFIC CANADA AMERICA SERVICES TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External fees............... $150,959 $130,568 $54,496 $44,404 $36,515 $5,691 $12,796 $435,429
Intersegment fees........... 37,738 24,369 18,957 4,284 5,010 1,424 329 92,111
Net operating income........ 45,287 27,087 1,236 7,085 3,488 223 3,736 88,142
Interest expense............ 1,158 856 471 17 300 98 5 2,905
Depreciation &
amortization.............. 5,950 4,414 3,351 1,281 1,186 143 185 16,510
Receivables................. 47,198 39,905 18,730 12,729 12,491 2,527 -- 133,580
Income from affiliates...... -- -- -- -- -- -- -- 2,524
</TABLE>
F-22
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 13--SEGMENT INFORMATION (CONTINUED)
The table below presents specified information about reported segments as of
and for the year ended June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. U.S. ASIA/ LATIN DATA
EAST CENTRAL WEST PACIFIC CANADA AMERICA SERVICES TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External fees............... $129,337 $125,639 $68,076 $38,429 $36,221 $6,062 $13,004 $416,768
Intersegment fees........... 28,187 15,296 14,210 3,945 4,443 1,153 249 67,483
Net operating income........ 28,286 25,127 10,476 65 4,315 574 3,742 72,585
Interest expense............ 963 710 494 33 314 68 14 2,596
Depreciation &
amortization.............. 5,801 3,758 2,822 1,458 1,077 149 166 15,231
Receivables................. 36,044 33,113 21,375 11,719 11,992 2,097 -- 116,340
Income from affiliates...... -- -- -- -- -- -- -- 258
</TABLE>
The table below presents specified information about reported segments as of
and for the year ended June 30, 1997 (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. U.S. ASIA/ LATIN DATA
EAST CENTRAL WEST PACIFIC CANADA AMERICA SERVICES TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
External fees............... $126,077 $121,613 $63,989 $45,468 $34,743 $5,024 $12,062 $408,976
Intersegment fees........... 17,518 12,739 8,002 2,851 2,789 784 573 45,256
Net operating income........ 18,169 26,797 11,595 5,162 2,595 225 3,146 67,689
Interest expense............ 1,165 799 322 10 262 35 17 2,610
Depreciation &
amortization.............. 5,838 3,555 2,353 1,599 1,006 132 193 14,676
Receivables................. 34,042 32,416 15,134 17,821 10,812 2,345 -- 112,570
Income from affiliates...... -- -- -- -- -- -- -- 105
</TABLE>
F-23
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 13--SEGMENT INFORMATION (CONTINUED)
Information about interest income and tax expense is not presented as it is
not produced internally.
A reconciliation of the information reported by segment to the consolidated
amounts follows for the years ended June 30:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
FEES:
Total segment external and intersegment fees................ $527,540 $484,251 $454,232
Reimbursable expenses not included in segment fees.......... 30,426 28,686 30,091
Other, net.................................................. (1,106) (277) 2,179
-------- -------- --------
Consolidated fees........................................... $556,860 $512,660 $486,502
======== ======== ========
NET OPERATING INCOME:
Total segment income........................................ $ 88,142 $ 72,585 $ 67,689
Non-recurring compensation charge........................... -- (69,906) --
Sublease loss............................................... (341) (790) (12,107)
Income from affiliates...................................... 2,524 258 105
Differences in allocation methods for depreciation, G&A and
pension costs............................................. 1,277 (6,208) 3,913
Gain on sale of business units.............................. 2,723 3,093 --
Discretionary payments...................................... (67,194) (37,400) (34,703)
Other, net.................................................. (3,331) (4,598) (3,279)
-------- -------- --------
Consolidated pretax income (loss) from continuing
operations................................................ $ 23,800 $(42,966) $ 21,618
======== ======== ========
INTEREST EXPENSE:
Total segment expense....................................... $ 2,905 $ 2,596 $ 2,610
Differences in allocation method............................ (259) 172 (1,104)
-------- -------- --------
Consolidated interest expense............................... $ 2,646 $ 2,768 $ 1,506
======== ======== ========
DEPRECIATION & AMORTIZATION:
Total segment expense....................................... $ 16,510 $ 15,231 $ 14,676
Capitalized software amortization, not allocated to
segments.................................................. -- 12,267 9,451
Goodwill amortization, not allocated to segments............ 1,568 549 695
Differences in allocation method and other.................. (2,830) (3,053) (2,728)
-------- -------- --------
Consolidated depreciation and amortization expense.......... $ 15,248 $ 24,994 $ 22,094
======== ======== ========
RECEIVABLES:
Total segment receivables................................... $133,580 $116,340 $112,570
Net valuation differences and receivables of discontinued
operations................................................ 2,286 13,056 11,191
-------- -------- --------
Total billed and unbilled receivables....................... 135,866 129,396 123,761
Assets not reported by segment.............................. 178,094 138,914 208,017
-------- -------- --------
Consolidated assets......................................... $313,960 $268,310 $331,778
======== ======== ========
</TABLE>
F-24
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 13--SEGMENT INFORMATION (CONTINUED)
The following represents total fees and long lived assets information by
geographic area as of and for the years ended June 30:
<TABLE>
<CAPTION>
FEES LONG LIVED ASSETS
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
United States.......................... $464,521 $424,246 $395,351 $105,481 $ 95,617 $156,692
Foreign................................ 92,339 88,414 91,151 25,794 20,731 17,781
-------- -------- -------- -------- -------- --------
$556,860 $512,660 $486,502 $131,275 $116,348 $174,473
======== ======== ======== ======== ======== ========
</TABLE>
Fee revenue is based on the country of domicile for the legal entity which
originated the fees. Exclusive of the United States, fees from no single country
constituted more than 10% of consolidated revenues. Fees from no single customer
constituted more than 10% of consolidated revenues.
NOTE 14--RELATED PARTY TRANSACTIONS
In connection with the contractual servicing of the Retained Clients (as
defined in Note 16 of this report) which continued through September 1998,
Wellspring provided the services to those clients on behalf of the Company.
Expenses charged to the Company by Wellspring for such services for fiscal 1999,
1998 and 1997 were $11,600,000, $41,811,000 and $40,313,000, respectively. The
Company's obligation to service the Retained Clients ceased in fiscal year 1999
and there were no amounts due to Wellspring at June 30, 1999, compared with
$1,186,000 at June 30, 1998.
NOTE 15--COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a defendant in certain lawsuits arising in the normal course
of business, some of which are in their earliest stages. Management currently
foresees no material liability to the Company resulting from such litigation,
and management believes that the Company carries adequate insurance, above
reasonable deductibles, or has appropriately accrued against any foreseeable
outcome of such litigation.
As of June 30, 1999, the Company and its affiliates had outstanding letters
of credit of $2,225,000.
The Company continues to guarantee certain leases for office premises and
equipment for Wellspring. Minimum remaining payments guaranteed under these
leases at June 30, 1999 total $59,800,000, which expire at various dates through
2007. These leases are also jointly and severally guaranteed by the Company's
former partner in Wellspring, State Street. The estimated loss from the
potential exercise of these guarantees has been included in the loss on disposal
of the Benefits Administration Outsourcing Business.
Anticipated commitments of funds for fiscal year 2000 are estimated at
$30,100,000, which includes expected purchases of fixed assets and an
installment payment during the fiscal year related to the purchase of one
consulting operation. The Company expects operating cash flows to provide for
the Company's cash needs.
F-25
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABULAR AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PERCENTAGE DATA)
NOTE 16--DISCONTINUED OPERATIONS
During the third quarter of fiscal year 1998, the Company discontinued its
Benefits Administration Outsourcing Business, including its investment in its
affiliate Wellspring Resources LLC ("Wellspring"), pursuant to a Redemption,
Restructuring, and Indemnity Agreement ("the Restructuring Agreement") by which
Wellspring redeemed the Company's 50% interest in Wellspring effective April 1,
1998. The restructuring effected, pursuant to the Restructuring Agreement, the
implementation of a discontinuation plan approved by the Company's Board of
Directors on February 18, 1998. Under the Restructuring Agreement, certain
outsourcing contracts retained by the Company when Wellspring was initially
formed in 1996 ("Retained Clients") would continue to be performed until their
respective contract expirations.
In connection with the restructuring, the Company agreed to indemnify
Wellspring for certain costs and losses as a result of services provided by
Wellspring on the Company's behalf. Further, the Company was released from
certain liabilities relating to the Wellspring business in connection with the
redemption.
In 1998, the Company recorded a pre-tax loss on discontinuation of
$109,800,000, which included the $45,200,000 write-off of its investment in
Wellspring, a $14,000,000 write-off of net capitalized software development
costs for the Retained Clients and a $50,600,000 provision for completion of any
obligations to clients, vendors or its former venture partner.
In October 1998, the Company consummated agreements with the remaining
Retained Clients, Wellspring, and its former venture partner to transfer
operating responsibility for these clients to Wellspring, clarifying the
remaining future obligations and costs related to the discontinuation.
Management believes that savings of $25,000,000 compared with initial estimates
made in the third quarter of fiscal 1998 and $15,000,000 from the amount
provided at June 30, 1998 will be realized from these events. The Company
reduced the amount of its provision for losses from disposal of the Benefits
Administration Outsourcing Business in the second quarter of fiscal year 1999. A
credit to income of $15,000,000, less the associated tax expense of $6,322,000,
is reflected in the Consolidated Statement of Operations for fiscal year 1999 in
the line "Adjustment (loss) on disposal of discontinued Outsourcing Business".
F-26
<PAGE>
WATSON WYATT & COMPANY
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING ADDITIONS CHARGED ADDITIONS CHARGED END OF
DESCRIPTION OF YEAR AGAINST FEES TO OTHER ACCOUNTS DEDUCTIONS YEAR
- ----------- ---------- ----------------- ----------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1999
----------------------------------------------------------------------------
Allowance for doubtful
accounts..................... $2,142 $9,503 $ -- $(7,944) $3,701
Valuation allowance for
deferred tax assets.......... 6,271 -- 611(1) -- 6,882
YEAR ENDED JUNE 30, 1998
----------------------------------------------------------------------------
Allowance for doubtful
accounts..................... $2,525 $5,613 $ -- $(5,996) $2,142
Valuation allowance for
deferred tax assets.......... 3,702 -- 2,569(1) -- 6,271
YEAR ENDED JUNE 30, 1997
----------------------------------------------------------------------------
Allowance for doubtful
accounts..................... $5,161 $6,853 $ -- $(9,489) $2,525
Valuation allowance for
deferred tax assets.......... 3,331 -- 371(1) -- 3,702
</TABLE>
- ------------------------
(1) Represents current year net operating loss carryforwards and the
nondeductible foreign expenses for which realizability is considered
uncertain.
F-27
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Fees........................................................ $298,734 $274,343
-------- --------
Costs of providing services:
Salaries and employee benefits............................ 160,753 148,868
Stock incentive bonus plan................................ 15,000 7,600
Occupancy and communications.............................. 30,423 29,954
Professional and subcontracted services................... 24,927 22,052
Other..................................................... 16,300 11,586
-------- --------
247,403 220,060
General and administrative expenses......................... 27,902 27,852
Depreciation and amortization............................... 9,517 7,824
-------- --------
284,822 255,736
-------- --------
Income from operations...................................... 13,912 18,607
Other:
Interest income........................................... 1,252 528
Interest expense.......................................... (1,088) (1,721)
Income from affiliates...................................... 2,143 1,025
-------- --------
Income before income taxes and minority interest............ 16,219 18,439
Provision for income taxes.................................. 7,835 8,917
Income before minority interest............................. 8,384 9,522
Minority interest in net loss/(income) of consolidated
subsidiaries.............................................. 176 (85)
-------- --------
Income from continuing operations........................... 8,560 9,437
Discontinued operations:
Adjustment to reduce loss on disposal of discontinued
Outsourcing Business [less applicable income tax expense
of $0, $6,322, $0 and $6,322 respectively]................ -- 8,678
-------- --------
Net income.................................................. $ 8,560 $ 18,115
======== ========
Earnings per share, continuing operations, basic and fully
diluted................................................... $ 0.57 $ 0.63
======== ========
Earnings per share, discontinued operations, basic and fully
diluted................................................... $ -- $ 0.58
======== ========
Earnings per share, net income, basic and fully diluted..... $ 0.57 $ 1.21
======== ========
Weighted average shares of Redeemable Common Stock, basic
and fully diluted......................................... 15,140 14,977
======== ========
</TABLE>
See accompanying notes
F-28
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 13,688 $ 35,985
Receivables from clients:
Billed, net of allowances of $6,436 and $3,701............ 82,838 72,798
Unbilled.................................................. 64,707 63,068
-------- --------
147,545 135,866
Other current assets........................................ 9,734 10,834
-------- --------
Total current assets...................................... 170,967 182,685
Investment in affiliates.................................... 17,109 15,306
Fixed assets, net........................................... 38,381 42,797
Deferred income taxes....................................... 56,206 56,206
Intangible assets, net...................................... 9,484 7,455
Other assets................................................ 8,877 9,511
-------- --------
$301,024 $313,960
======== ========
LIABILITIES, REDEEMABLE COMMON STOCK AND PERMANENT SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities.................... $143,821 $152,371
Note payable and book overdrafts............................ 8,401 248
Income taxes payable........................................ 9,863 18,374
-------- --------
Total current liabilities................................. 162,085 170,993
Accrued retirement benefits................................. 74,233 77,140
Deferred rent and accrued lease losses...................... 7,628 9,270
Other noncurrent liabilities................................ 22,249 22,608
Minority interest in subsidiaries........................... 550 669
Redeemable Common Stock--$1 par value:
25,000,000 shares authorized; 14,879,886 and 16,112,416
issued and outstanding; at redemption value............. 99,398 107,631
Permanent shareholders' equity:
Adjustment for redemption value less than amounts paid in by
shareholders.............................................. 10,547 11,420
Retained deficit............................................ (74,198) (83,209)
Cumulative translation adjustment (accumulated other
comprehensive loss)....................................... (1,468) (2,562)
Commitments and contingencies...............................
-------- --------
$301,024 $313,960
======== ========
</TABLE>
See accompanying notes
F-29
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from (used for) operating activities:
Net income................................................ $ 8,560 $ 18,115
Adjustments to reconcile net income to net cash provided
by operating activities:
Adjustment to reduce loss on discontinued operations.... -- (8,678)
Provision for doubtful receivables from clients......... 6,203 6,423
Depreciation............................................ 8,651 7,184
Amortization of intangible assets....................... 866 641
Income from affiliates.................................. (2,143) (1,025)
Minority interest in net (loss) income of consolidated
subsidiaries.......................................... (176) 85
(Increase) decrease in assets (net of discontinued
operations):
Receivables from clients.............................. (17,882) (27,822)
Income taxes receivable............................... -- 2,216
Other current assets.................................. 1,100 (1,900)
Other assets.......................................... 634 1,133
(Decrease) increase in liabilities (net of discontinued
operations):
Accounts payable and accrued liabilities.............. (8,550) (4,093)
Income taxes payable.................................. (8,511) 5,177
Accrued retirement benefits........................... (2,907) 1,783
Deferred rent and accrued lease losses................ (1,642) (1,498)
Other noncurrent liabilities.......................... 279 870
Other, net.............................................. (584) (138)
Discontinued operations, net............................ (637) (4,466)
-------- --------
Net cash used for operating activities.................. (16,739) (5,993)
-------- --------
Cash flows from (used in) investing activities:
Purchases of fixed assets................................. (3,636) (6,297)
Acquisitions.............................................. (2,800) (6,158)
Investment in affiliates.................................. 594 2,257
-------- --------
Net cash used in investing activities................... (5,842) (10,198)
-------- --------
Cash flows from (used by) financing activities:
Net borrowings and book overdrafts........................ 8,153 24,906
Issuances of Redeemable Common Stock...................... -- --
Repurchases of Redeemable Common Stock.................... (8,656) (10,584)
-------- --------
Net cash (used by) from financing activities............ (503) 14,322
-------- --------
Effect of exchange rates on cash............................ 787 283
-------- --------
Decrease in cash and cash equivalents....................... (22,297) (1,586)
Cash and cash equivalents at beginning of period............ 35,985 13,405
-------- --------
Cash and cash equivalents at end of period.................. $ 13,688 $ 11,819
======== ========
</TABLE>
See accompanying notes
F-30
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN PERMANENT SHAREHOLDERS' EQUITY
(THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADJUSTMENT FOR
REDEMPTION VALUE
CUMULATIVE LESS THAN AMOUNTS
RETAINED TRANSLATION PAID IN BY
DEFICIT LOSS SHAREHOLDERS TOTAL
-------- ----------- ----------------- --------
<S> <C> <C> <C> <C>
Balance at June 30, 1999..................... $(83,209) $(2,562) $11,420 $(74,351)
Comprehensive Income:
Net income................................. 8,560 -- -- 8,560
Foreign currency translation adjustment.... -- 1,094 -- 1,094
-------- ------- ------- --------
Total Comprehensive Income................... 8,560 1,094 -- 9,654
Effect of repurchases of 1,232,530 shares of
common stock............................... 451 -- (451) --
Adjustment of redemption value for change in
Formula Book Value per share............... -- -- (422) (422)
-------- ------- ------- --------
Balance at December 31, 1999................. $(74,198) $(1,468) $10,547 $(65,119)
======== ======= ======= ========
</TABLE>
See accompanying notes
F-31
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited consolidated financial statements of Watson
Wyatt & Company and its subsidiaries, (collectively, "Watson Wyatt" or the
"Company"), are presented in accordance with the rules and regulations of
the Securities and Exchange Commission ("SEC") and do not include all of the
disclosures normally required by Generally Accepted Accounting Principles.
In the opinion of management, these statements reflect all adjustments,
consisting only of normal recurring adjustments, which are necessary for a
fair presentation of the consolidated financial statements for the interim
periods. The consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1999.
The results of operations for the six months ended December 31, 1999 are not
necessarily indicative of the results that can be expected for the entire
fiscal year ending June 30, 2000. The results reflect prorata growth in
share value, anticipated tax rates and potential distributions at the
discretion of the Company's Board of Directors. Certain prior year amounts
have been reclassified to conform to the current year presentation.
2. On January 19, 2000, the Company filed registration statements on Form S-3
and Form S-4 with the Securities and Exchange Commission to offer its common
stock to the public through a corporate reorganization and Initial Public
Offering ("IPO"). As a part of this proposed transaction, the current
operating company, Watson Wyatt & Company, will merge with an indirect
wholly-owned subsidiary to become a wholly-owned subsidiary of Watson
Wyatt & Company Holdings.
3. Under the Company's current Bylaws, the Company is obligated to repurchase
its Redeemable Common Stock, except in certain circumstances. Accordingly,
the redemption value of outstanding shares is classified as Redeemable
Common Stock and not as permanent shareholders' equity. Redeemable Common
Stock is equal to the number of shares outstanding multiplied by the Formula
Book Value per share, which was $6.68 per share at December 31, 1999 and
June 30, 1999. Permanent shareholders' equity includes an adjustment for the
difference between the redemption value of the Redeemable Common Stock and
the amounts actually paid or deemed paid by shareholders for the shares.
4. During the six months ended December 31, 1999, the Company repurchased
1,232,530 shares of Redeemable Common Stock. The computation of earnings per
share, basic and fully diluted, is based upon the weighted average number of
shares of Redeemable Common Stock outstanding during the period. The number
of shares (in thousands) used in the computation is 15,140 and 14,977 for
the six months ended December 31, 1999 and 1998, respectively.
5. In the third quarter of fiscal year 1998, the Company discontinued its
Benefits Administration Outsourcing Business, including its investment in
its affiliate Wellspring Resources, LLC ("Wellspring") and recorded an
after-tax loss of $69.9 million related thereto. In October 1998, the
Company consummated agreements with certain clients, Wellspring, and its
former venture partner to transfer operating responsibility for these
clients to Wellspring, clarifying the remaining future obligations and costs
related to the discontinuation. The Company reduced the amount of its
provision for losses from disposal of the Outsourcing Business in the second
quarter of fiscal year 1999 by $8.7 million, net of tax, and believes it has
adequate provisions for any remaining costs.
F-32
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. Subsequent to the end of its second fiscal quarter, the Company approved an
anticipated restructuring plan for its Canadian operations. Costs for the
plan will be included in subsequent operating results.
7. The Company has adopted SFAS No. 130 "Reporting Comprehensive Income."
Comprehensive Income includes net income and changes in the cumulative
translation gain or loss. For the six months ended December 31, 1999 and
1998, Comprehensive Income totaled $9.7 million and $18.5 million,
respectively.
8. In fiscal year 1999, the Company adopted SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." The Company is primarily
organized geographically and has seven reportable segments:
(1) U.S. East
(2) U.S. Central
(3) U.S. West
(4) Asia/Pacific
(5) Canada
(6) Latin America
(7) Data Services
The Company evaluates the performance of its segments and allocates
resources to them based on net operating income. Prior year and first quarter
fiscal year 2000 data have 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 six months ended December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. U.S. ASIA/ LATIN DATA
EAST CENTRAL WEST PACIFIC CANADA AMERICA SERVICES TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fees.......................... $104,658 $83,184 $39,192 $26,838 $19,668 $3,288 $6,903 $283,731
Net operating income/(loss)... 27,995 14,205 4,029 2,960 (784) (514) 2,943 50,834
Receivables................... 57,480 45,724 18,338 14,141 10,661 2,229 -- 148,573
</TABLE>
The table below presents specified information about reported segments as of
and for the six months ended December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
U.S. U.S. U.S. ASIA/ LATIN DATA
EAST CENTRAL WEST PACIFIC CANADA AMERICA SERVICES TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fees........................... $93,565 $74,113 $40,299 $23,635 $19,672 $2,699 $7,971 $261,954
Net operating income/(loss).... 25,396 12,367 4,866 2,562 491 (710) 3,206 48,178
Receivables.................... 48,795 44,439 21,708 12,436 11,896 1,718 -- 140,992
</TABLE>
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.
F-33
<PAGE>
WATSON WYATT & COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
A reconciliation of the information reported by segment to the consolidated
amounts follows for the six month periods ended December 31:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Fees:
Total segment fees.......................................... $283,731 $261,954
Reimbursable expenses not included in total segment fees.... 15,381 14,284
Other, net.................................................. (378) (1,895)
-------- --------
Consolidated fees........................................... $298,734 $274,343
======== ========
Net Operating Income:
Total segment net operating income.......................... $ 50,834 $ 48,178
Income from affiliates...................................... 2,143 1,025
Differences in allocation methods for depreciation, G&A and
pension costs............................................. 2,515 (1,396)
Gain on sale of business units.............................. -- 3,822
Discretionary bonuses and SIBP.............................. (41,750) (31,548)
Other, net.................................................. 2,477 (1,642)
-------- --------
Consolidated pretax income from continuing operations....... $ 16,219 $ 18,439
======== ========
Receivables:
Total segment receivables--billed and unbilled.............. $148,573 $140,992
Net valuation differences and receivables of discontinued
operations................................................ (1,028) 1,406
-------- --------
Total billed and unbilled receivables....................... 147,545 142,398
Assets not reported by segment.............................. 153,479 139,621
-------- --------
Consolidated assets......................................... $301,024 $282,019
======== ========
</TABLE>
9. In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" (SAB 101) which summarizes certain of
the staff's views on revenue recognition. The Company's revenue recognition
policies have been and continue to be in accordance with SAB 101.
F-34
<PAGE>
ANNEX A
FORM OF AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of , among Watson
Wyatt & Company ("WATSON WYATT & COMPANY"), Watson Wyatt & Company Holdings ("WW
HOLDINGS") and WW Merger Subsidiary, Inc. ("MERGER SUB"), each a Delaware
corporation.
RECITALS
Watson Wyatt & Company is a corporation duly organized and existing under
the laws of the State of Delaware.
WW Holdings is a corporation duly organized and existing under the laws of
the State of Delaware and a wholly owned subsidiary of Watson Wyatt & Company.
Merger Sub is a corporation duly organized and existing under the laws of
the State of Delaware and a wholly owned subsidiary of WW Holdings.
The respective boards of directors of Watson Wyatt & Company, WW Holdings
and Merger Sub have determined that it is advisable and in the best interests of
each corporation that Merger Sub merge with and into Watson Wyatt & Company (the
"MERGER") on the terms, and subject to the conditions, of this Agreement and the
Delaware General Corporation Law ("DGCL"). As a result of the Merger and related
transactions, Watson Wyatt & Company will become a wholly-owned subsidiary of WW
Holdings, and the separate existence of Merger Sub will cease.
The respective boards of directors of Watson Wyatt & Company, WW Holdings
and Merger Sub have been duly advised of the terms and conditions of the Merger
and, by resolutions duly adopted, have authorized, approved and adopted this
Agreement. The stockholders of Watson Wyatt & Company will approve and adopt
this Agreement at a special meeting of stockholders on , 2000. The
sole stockholder of each of WW Holdings and Merger Sub will approve and adopt
this Agreement by written consent without a meeting.
The parties intend by this Agreement to effect a "reorganization" under
Section 361 of the Internal Revenue Code of 1986, as amended.
NOW, THEREFORE, on the terms, and subject to the conditions, of this
Agreement, Watson Wyatt & Company, WW Holdings and Merger Sub agree as follows.
ARTICLE 1
THE MERGER; RELATED TRANSACTIONS
1.1 EFFECTIVE DATE. As soon as practicable following the satisfaction or
waiver of the conditions set forth in Article 2, the Merger will be consummated
by WW Holdings' filing a certificate of merger (the "CERTIFICATE OF MERGER")
with the Secretary of State of the State of Delaware in accordance with
Section 251 of the DGCL. The Merger will become effective when the Certificate
of Merger is filed or such later time as is set forth in the Certificate of
Merger. The date and time when the Merger becomes effective is called the
"EFFECTIVE DATE."
1.2 MERGER.
(a) On the Effective Date:
(i) Merger Sub will merge with and into Watson Wyatt & Company, and
Watson Wyatt & Company will be the surviving corporation in the
Merger (the "SURVIVING CORPORATION");
A-1
<PAGE>
(ii) the separate existence of Merger Sub will cease, and the Surviving
Corporation will succeed, without other transfer, to all of the
rights and property of Merger Sub, and will be subject to all of the
debts and liabilities of Merger Sub, as provided for in Section 259
of the DGCL.
(b) On and after the Effective Date, the Surviving Corporation will carry on
its business with the assets of Merger Sub, as well as with the assets of
the Surviving Corporation.
1.3 EFFECT ON WATSON WYATT & COMPANY AND MERGER SUB CAPITAL STOCK. At the
Effective Date, by virtue of the Merger and without any action on the part of
the holders of capital stock of Watson Wyatt & Company:
(a) each share of common stock, par value $1.00 per share, of Watson
Wyatt & Company issued and outstanding immediately before the Effective
Date will convert into the right to receive:
(i) one (1) share of validly issued, fully paid and non-assessable
class B-1 common stock, par value $.01 per share, of WW Holdings; and
(ii) one (1) share of validly issued, fully paid and non-assessable
class B-2 common stock, par value $.01 per share, of WW Holdings;
(b) all such converted shares of Watson Wyatt & Company common stock will no
longer be outstanding and automatically will be canceled and retired and
will cease to exist. Each holder of a certificate representing any such
converted shares of Watson Wyatt & Company common stock, or each person
listed on the stock transfer books of Watson Wyatt & Company as owning
any such shares of Watson Wyatt & Company common stock, will cease to
have any rights with respect to such converted shares, except the right
to receive the shares of class B-1 common stock and class B-2 common
stock of WW Holdings to be issued in consideration for such shares; and
(c) each share of Merger Sub common stock outstanding immediately before the
Effective Date will convert into one validly issued, fully paid and
non-assessable share of common stock, par value $1.00 per share, of the
Surviving Corporation.
1.4 FRACTIONAL SHARES. No holder of Watson Wyatt & Company common stock on
the Effective Date will receive fractional shares. Instead, any such holder will
receive cash equal to the fair value of such fractional shares or Watson
Wyatt & Company will arrange for the disposition of such fractional interests.
1.5 CERTIFICATE OF INCORPORATION AND BYLAWS. The certificate of
incorporation of Watson Wyatt & Company in effect at the Effective Date will be
the certificate of incorporation of the Surviving Corporation until changed or
amended as provided therein or by applicable law.
1.5 COVENANT TO CONTRIBUTE CAPITAL. On the Effective Date, Watson Wyatt &
Company will contribute to the capital of WW Holdings each issued and
outstanding share of common stock of WW Holdings that is owned by Watson
Wyatt & Company immediately prior to the Effective Date.
ARTICLE 2
CONDITIONS TO CONSUMMATION OF THE MERGER
2.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger are subject to the
satisfaction or waiver, where permissible, prior to the Effective Date, of the
following conditions:
(a) the registration statement filed on Form S-4 with respect to the
issuance of shares of class B common stock of WW Holdings has been
declared effective by the Securities and Exchange Commission (the
"COMMISSION");
A-2
<PAGE>
(b) more than 50% of the outstanding shares of common stock of Watson
Wyatt & Company entitled to vote have voted to adopt this Agreement;
(c) more than 80% of outstanding shares of common stock of Watson Wyatt &
Company actually voting for or against the proposal, have voted to adopt
this Agreement, if more than the votes required under clause (b) above;
(d) the registration statement filed on Form S-3 with respect to the
issuance of shares of class A common stock of WW Holdings has been
declared effective by the Commissioner;
(e) no statute, rule, regulation, executive order, decree, injunction or
other order has been enacted, entered, promulgated or enforced by any
court or governmental authority that is in effect and has the effect of
prohibiting the consummation of the Merger; and
(f) all approvals and consents necessary or desirable, if any, in connection
with consummation of the Merger have been obtained.
ARTICLE 3
MISCELLANEOUS
3.1 AMENDMENT; WAIVER. At any time before the Effective Date, Watson
Wyatt & Company and Merger Sub may, to the extent permitted by the DGCL, by
written agreement amend, modify or supplement any provision of this Agreement.
3.2 ABANDONMENT. At any time before the Effective Date, this Agreement may
be terminated and the Merger may be abandoned by the board of directors of
Watson Wyatt & Company.
3.3 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof. Neither
this Agreement nor any right, interest or obligation under this Agreement may be
assigned, in whole or in part, by operation of law or otherwise, without the
prior written consent of the other parties.
3.4 GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the substantive laws of the State of Delaware, regardless of the
laws that might otherwise govern under principles of conflicts of laws
applicable thereto.
3.5 PARTIES IN INTEREST. Nothing in this Agreement, express or implied, is
intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement.
3.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original, but all of which
will constitute one and the same agreement, and will become effective when one
or more counterparts have been signed by each of the parties and delivered to
the other parties.
A-3
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its respective officers thereunto duly authorized, all
as of the date set forth above.
<TABLE>
<S> <C> <C>
WATSON WYATT & COMPANY
By:
----------------------------------------
Name:
Title:
WATSON WYATT & COMPANY HOLDINGS
By:
----------------------------------------
Name:
Title:
WW MERGER SUBSIDIARY, INC.
By:
----------------------------------------
Name:
Title:
</TABLE>
A-4
<PAGE>
ANNEX D
WATSON WYATT & COMPANY HOLDINGS
2000 LONG-TERM INCENTIVE PLAN
1. <*>PURPOSE.</*> The purpose of the Watson Wyatt & Company Holdings 2000
Long-Term Incentive Plan (the "Plan") is to secure for Watson Wyatt & Company
Holdings and its successors and assigns (the "Company") and its stockholders the
benefits of the additional incentive inherent in the ownership of the Company's
class A common stock, par value $.01 per share (the "Common Stock"), by selected
employees of the Company and its subsidiaries who are important to the success
and growth of the business of the Company and its subsidiaries and to help the
Company and its subsidiaries secure and retain the services of such persons.
Compensation awarded under the Plan is intended to qualify for tax deductibility
pursuant to the requirements of Section 162(m) of the Internal Revenue Code of
1986, as amended from time to time or any successor statute or statutes (the
"Code"), to the extent deemed appropriate by the Committee (as defined in
Paragraph 2.1).
Pursuant to the Plan, such employees will be offered the opportunity to
acquire Common Stock through the grant of options, or to receive similar
economic benefit through the grant of stock appreciation rights (such options
and stock appreciation rights collectively referred to as "Awards"). Options
granted under the Plan will be "nonqualified stock options" for purposes of the
Code. For purposes of the Plan, the terms "parent" and "subsidiary" shall mean
"parent corporation" and "subsidiary corporation," respectively, as such terms
are defined in Sections 424(e) and (f) of the Code; provided, however, that with
respect to any jurisdiction where the Company is prohibited by law from owning
50% of the voting shares of an entity, any entity formed in such jurisdiction
shall be deemed a "subsidiary" if the Company holds the maximum percentage of
voting shares permitted to be held under the laws of such jurisdiction.
2. <*>COMMITTEE.</*>
2.1 <*>ADMINISTRATION.</*> The Plan shall be administered by a Committee
appointed by the Board of Directors of the Company (the "Committee"). The
Committee shall consist of two or more directors who are "non-employee
directors", within the meaning of Rule 16b-3 under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and "outside directors" within the
meaning of Section 162(m) of the Code. Any vacancy on the Committee, whether due
to action of the Board of Directors or due to any other cause, may be filled,
and shall be filled if required to maintain a Committee of at least two such
persons, by resolution adopted by the Board of Directors.
2.2 <*>PROCEDURES.</*> The Committee shall select one of its members as
Chairman and shall adopt such rules and regulations as it shall deem appropriate
concerning the holding of its meetings and the administration of the Plan. A
majority of the whole Committee shall constitute a quorum, and the acts of a
majority of the members of the Committee present at a meeting at which a quorum
is present, or acts approved in writing by all of the members of the Committee,
shall be the acts of the Committee.
2.3 <*>INTERPRETATION.</*> The Committee shall have full power and
authority to interpret the provisions of the Plan and any agreement evidencing
options granted under the Plan, and to determine any and all questions arising
under the Plan, and its decisions shall be final and binding on all participants
in the Plan.
2.4 <*>DELEGATION.</*> The Committee may delegate, to the chief executive
officer of the Company, the authority to grant Awards under this Plan in such
circumstances as the Committee shall deem appropriate.
D-1
<PAGE>
3. <*>SHARES SUBJECT TO GRANTS.</*>
3.1 <*>NUMBER OF SHARES.</*> Subject to the provisions of Paragraph 16
(relating to adjustments upon changes in capitalization), the number of shares
of Common Stock with respect to which Awards may be granted under the Plan shall
be 4,500,000 shares. If and to the extent that (i) Awards granted under the Plan
terminate, expire or are cancelled without having been exercised, or
(ii) shares of Common Stock are tendered or delivered by a Participant to pay
the option price of an option upon exercise thereof or to satisfy the tax
withholding requirement relating to such exercise, the number of shares of
Common Stock covered by such terminated, expired or cancelled Awards or tendered
or delivered by the Participant shall be added to the number of authorized
shares remaining.
3.2 <*>CHARACTER OF SHARES.</*> Shares of Common Stock delivered under the
Plan may be authorized and unissued Common Stock, issued Common Stock held in
the Company's treasury, or both.
3.3 <*>RESERVATION OF SHARES.</*> There shall be reserved at all times for
sale or award under the Plan a number of shares of Common Stock (authorized and
unissued Common Stock, issued Common Stock held in the Company's treasury, or
both) equal to the number of shares provided in Paragraph 3.1 from time to time.
4. <*>EMPLOYEES ELIGIBLE.</*> Awards may be granted under the Plan to any
employee of the Company or any of its subsidiaries (each an "eligible
employee"), or to any prospective employee of the Company or any of its
subsidiaries, conditioned upon, and effective not earlier than, such person's
becoming an eligible employee. Members of the Board of Directors of the Company
who are not employees of the Company or any of its subsidiaries shall also be
eligible to receive grants under the Plan. Notwithstanding the foregoing, in
each calendar year during any part of which the Plan is in effect, no
Participant (as defined below) may be granted Awards relating in the aggregate
to more than 200,000 shares of Common Stock, subject to adjustment as provided
in Paragraph 16.
An individual receiving a grant of an Award under the Plan is hereinafter
referred to as a "Participant." Any reference herein to the "employment" of a
Participant by the Company shall include (i) his or her employment by the
Company or any of its subsidiaries, and (ii) with respect to a Participant who
was not an employee of the Company or any of its subsidiaries at the time of
grant of his or her Award, his or her period of service in the capacity for
which the Award was granted. For all purposes of this Plan, the time at which an
Award is granted shall be deemed to be the effective date of such grant.
5. <*>GRANT OF OPTIONS.</*> The Committee shall determine, within the
limitations of the Plan, the persons to whom options are to be granted, the
number of shares that may be purchased under each option, and the option price.
In determining the persons to whom options shall be granted and the number of
shares to be covered by each option, the Committee shall take into consideration
the person's present and potential contribution to the success of the Company
and its subsidiaries and such other factors as the Committee may deem proper and
relevant. Each option granted under the Plan shall be evidenced by a written
agreement ("Award Agreement") between the Company and the Participant containing
such terms and conditions and in such form, not inconsistent with the provisions
of the Plan, as the Committee shall provide.
6. <*>OPTION PRICE.</*> Subject to Paragraph 16, the option price of each
share of Common Stock purchasable under any option granted under the Plan shall
not be less than the fair market value of such share of Common Stock at the time
the option is granted, and may not be changed while such option is outstanding.
The option price of an option issued in a transaction described in
Section 424(a) of the Code shall be an amount which conforms to the requirements
of that Section and the regulations thereunder.
For purposes of this Plan, the "fair market value" of the Common Stock on
any date means (i) if the Common Stock is listed on a national securities
exchange or quotation system, the closing sales
D-2
<PAGE>
price on such exchange or quotation system on such date or, in the absence of
reported sales on such date, the closing sales price on the immediately
preceding date on which sales were reported, (ii) if the Common Stock is not
listed on a national securities exchange or quotation system, the mean between
the bid and offered prices as quoted by the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ") for such date or (iii) if
the Common Stock is neither listed on a national securities exchange or
quotation system nor quoted by NASDAQ, the fair value as determined by such
other method as the Committee determines in good faith to be reasonable.
7. <*>STOCK APPRECIATION RIGHTS.</*> The Committee, in its sole
discretion, may grant to an eligible employee a stock appreciation right with
respect to a stated number of shares of Common Stock. Each stock appreciation
right granted under the Plan shall be evidenced by an Award Agreement between
the Company and the Participant containing such terms and conditions and in such
form, not inconsistent with the provisions of the Plan, as the Committee shall
provide. A stock appreciation right shall be exercised in the manner provided in
Paragraph 9, and, upon such exercise, the Company shall pay to the Participant
an amount equal to the excess of (i) the fair market value, as of the exercise
date, of the number of shares with respect to which the stock appreciation right
is being exercised over (ii) the fair market value of such shares determined on
the date of grant of such stock appreciation right. Payment upon the exercise of
stock appreciation rights shall be made by the Company in cash to the
Participant as soon as practicable following exercise; provided, however, that
in the discretion of the Committee, such payment may be made by distributing to
the Participant a number of shares of Common Stock having a fair market value,
as of the date of exercise, equal to the amount otherwise payable, with the
value of any fractional shares paid in cash.
8. <*>EXERCISABILITY AND DURATION OF AWARDS.</*>
8.1 <*>DETERMINATION OF COMMITTEE; ACCELERATION.</*> Each Award granted
under the Plan shall be exercisable at such time or times, or upon the
occurrence of such event or events, and in such amounts, as the Committee shall
specify in the Award Agreement. Subsequent to the grant of an Award which is not
immediately exercisable in full, the Committee, at any time before complete
termination of such option, may accelerate the time or times at which such Award
may be exercised in whole or in part. Notwithstanding the foregoing, unless
provided otherwise in the Award Agreement, an Award shall become exercisable in
full upon the death or disability of the Participant to whom the Award was
granted while he or she is an employee of the Company or any of its
subsidiaries.
8.2 <*>AUTOMATIC TERMINATION.</*>
(a) An Award shall terminate and become null and void upon the
expiration of seven years from the date on which such Award was granted (or
upon such later date as may be prescribed by clause (c)(iii), below);
(b) An unexercised Award shall terminate and become null and void upon a
Participant's failure to comply with the requirements of Paragraph 17;
(c) Upon termination of the Participant's employment, an Award shall
automatically and without notice terminate and become null and void to the
extent that the Award is not then exercisable (and has not become
exercisable by reason of such termination). The unexercised portion of any
Award granted under the Plan which is then exercisable (or which has become
exercisable by reason of the termination of employment) shall automatically
and without notice terminate and become null and void upon the earliest to
occur of the following:
(i) The date prescribed in clause (a), above;
(ii) The expiration of three years from the date of termination of
the Participant's employment by reason of retirement, disability, or
other reason specified by the Committee in the Award Agreement;
D-3
<PAGE>
(iii) The expiration of one year following the death of a
Participant, if the Participant's death occurs during his or her
employment by the Company or any of its subsidiaries;
(iv) Subject to (vi) below, the expiration of one year following the
involuntary termination of the Participant's employment;
(v) The voluntary termination of the Participant's employment;
(vi) The termination of the Participant's employment if such
termination constitutes or is attributable to a breach by the Participant
of an employment or consulting agreement with the Company or any of its
subsidiaries, or if the Participant is discharged or his or her services
are terminated for cause; or
(vii) The expiration of such period of time or the occurrence of such
event as the Committee in its discretion may provide upon the granting
thereof.
The Committee shall have the right to determine what constitutes cause for
discharge or termination of services, whether the Participant has been
discharged or his or her services terminated for cause and the date of such
discharge or termination of services, and such determination of the Committee
shall be final and conclusive.
9. <*>EXERCISE OF AWARDS.</*> Awards granted under the Plan shall be
exercised by the Participant (or by his or her executors or administrators, as
provided in Paragraph 10) as to all or part of the shares covered thereby, by
the giving of written notice of exercise to the Company, specifying the number
of shares to be purchased or the number of shares with respect to which stock
appreciation rights are being exercised, accompanied, in the case of an option,
by payment of the full purchase price for the shares being purchased. Payment of
such purchase price shall be made (a) by check payable to the Company, (b) with
the consent of the Committee, by delivery of shares of Common Stock already
owned by the Participant for at least six months (which may include shares
received as the result of a prior exercise of an option) having a fair market
value (determined as of the date such option is exercised) equal to all or part
of the aggregate purchase price, (c) in accordance with a "cashless exercise"
program established by the Committee in its sole discretion under which if so
instructed by the Participant, shares may be issued directly to the
Participant's broker or dealer upon receipt of the purchase price in cash from
the broker or dealer, (d) by any combination of (a), (b), or (c) above, or
(e) by other means that the Committee deems appropriate. Such notice of
exercise, accompanied by such payment, if applicable, shall be delivered to the
Company at its principal business office or such other office as the Committee
may from time to time direct, and shall be in such form, containing such further
provisions consistent with the provisions of the Plan, as the Committee may from
time to time prescribe. The date of exercise shall be the date of the Company's
receipt of such notice. Upon exercise of an option, the Company shall effect the
transfer of the shares so purchased to the Participant (or such other person
exercising the option pursuant to Paragraph 10 hereof) as soon as practicable.
No Participant or other person exercising an option shall have any of the rights
of a stockholder of the Company with respect to shares subject to an option
granted under the Plan until due exercise and full payment has been made as
provided above. No adjustment shall be made for cash dividends or other rights
for which the record date is prior to the date of such due exercise and full
payment. In no event may any Award granted hereunder be exercised for a fraction
of a share.
Exercise of an Award shall be deemed to be certification by the Participant
that he or she complies with the terms and conditions of the Plan, including
Paragraph 17. Failure to comply with the provisions of Paragraph 17 prior to, or
during the twenty-four (24) months immediately following, exercise of an Award
shall cause such Award to be cancelled and such exercise to be rescinded. The
Company shall notify the Participant, in writing, within thirty (30) months
after such exercise, of any such rescission. Within sixty days after receiving
such a notification, the Participant shall pay to the Company the amount of any
compensation received, or any gain realized, upon the rescinded exercise,
D-4
<PAGE>
either in cash or by returning to the Company shares of Common Stock received by
the Participant upon such exercise.
10. <*>NON-TRANSFERABILITY OF AWARDS.</*> Except as provided herein, no
Award granted under the Plan or any right evidenced thereby shall be
transferable by the Participant other than by will or by the laws of descent and
distribution, and an Award may be exercised, during the lifetime of a
Participant, only by such Participant. Notwithstanding the preceding sentence:
(a) in the event of a Participant's death during his or her employment by the
Company, its parent, if any, or any of its subsidiaries, his or her Awards shall
thereafter be exercisable, during the period specified in Paragraph 8.2(c), by
his or her executors or administrators; and (b) the Participant, with the
approval of the Committee, may transfer Awards for no consideration to or for
the benefit of the Participant's spouse, parents, children (including
stepchildren or adoptive children), grandchildren, or siblings, or to a trust
for the benefit of any of such persons.
11. <*>WITHHOLDING TAX.</*> Whenever under the Plan shares of stock are to
be delivered upon exercise of an option, the Company shall be entitled to
require as a condition of delivery that the Participant remit or, in appropriate
cases, agree to remit when due the amount necessary to satisfy all federal,
state and local withholding tax requirements relating thereto. At the option of
the Company, such amount may be remitted by check payable to the Company, in
shares of Common Stock (which may include shares received as the result of a
prior exercise of an option), by the Company's withholding of shares of Common
Stock issuable upon the exercise of the option, or any combination thereof.
Whenever an amount shall become payable to a Participant in connection with the
exercise of a stock appreciation right, the Company shall be entitled to
withhold therefrom the amount necessary to satisfy any federal, state and local
withholding tax requirements relating to such amount.
12. <*>RESTRICTIONS ON DELIVERY AND SALE OF SHARES.</*> Each option
granted under the Plan is subject to the condition that if at any time the
Committee, in its discretion, shall determine that the listing, registration or
qualification of the shares covered by such option upon any securities exchange
or under any state or federal law is necessary or desirable as a condition of or
in connection with the granting of such option or the purchase or delivery of
shares thereunder, the delivery of any or all shares pursuant to exercise of the
option may be withheld unless and until such listing, registration or
qualification shall have been effected. The Committee may require, as a
condition of exercise of any option that the Participant represent, in writing,
that the shares received are being acquired for investment and not with a view
to distribution and agree that the shares will not be disposed of except
pursuant to an effective registration statement, unless the Company shall have
received an opinion of counsel satisfactory to the Company that such disposition
is exempt from such requirement under the Securities Act of 1933 (the
"Securities Act"). The Committee may require that the sale or other disposition
of any shares acquired upon exercise of an option hereunder shall be subject to
a right of first refusal in favor of the Company, which right shall permit the
Company to repurchase such shares from the Participant or his or her
representative prior to their sale or other disposition at their then current
fair market value in accordance with such terms and conditions as shall be
specified in the agreement evidencing the grant of the option. The Company may
endorse on certificates representing shares issued upon the exercise of an
option such legends referring to the foregoing representations or restrictions
or any other applicable restrictions on resale as the Company, in its
discretion, shall deem appropriate.
13. <*>CHANGE IN CONTROL.</*>
(a) In the event of a Change in Control of the Company, as defined
below, the Committee may, in its sole discretion, provide that any of the
following applicable actions be taken as a result, or in anticipation, of
any such event to assure fair and equitable treatment of Participants:
(i) accelerate the exercisability of any outstanding Awards granted
pursuant to this Plan;
D-5
<PAGE>
(ii) offer to purchase any outstanding options granted pursuant to
this Plan from the holder for its equivalent cash value, as determined by
the Committee, as of the date of the Change in Control; or
(iii) make adjustments or modifications to outstanding Awards as the
Committee deems appropriate to maintain and protect the rights and
interests of the Participants following such Change in Control. In no
event, however, may any option be exercised after the date provided in
Paragraph 8.2(a).
Any such action approved by the Committee shall be conclusive and binding on
the Company, its subsidiaries and all Participants.
(b) "Change in Control" shall mean the occurrence of any of the
following:
(i) the sale, lease, transfer, conveyance or other disposition, in
one or a series of related transactions, of all or substantially all of
the assets of the Company to any "person" or "group" (as such terms are
used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act,
(ii) any person or group is or becomes the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a
person shall be deemed to have "beneficial ownership" of all shares that
any such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total voting power of the voting
stock of the Company, including by way of merger, consolidation or
otherwise, or
(iii) during any period of two consecutive years, individuals who at
that beginning of such period constituted the Board of Directors
(together with any new directors whose election by such Board or whose
nomination for election by the shareholders of the Company was approved
by a majority of the directors of the Company then still in office who
were either directors at the beginning of such period or whose election
or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors;
provided that in no event shall the initial public offering of the Common Stock
pursuant to an effective registration statement under the Securities Act be
deemed to constitute a Change in Control.
14. <*>RIGHT TO TERMINATE EMPLOYMENT.</*> Nothing in the Plan or in the
agreement evidencing any Award granted under the Plan shall confer upon any
Participant the right to continue as an employee or a director of the Company or
affect the right of the Company or any of its subsidiaries, to terminate the
Participant's employment at any time, subject, however, to the provisions of any
agreement of employment between the Participant and the Company, its parent, if
any, or any of its subsidiaries.
15. <*>TRANSFER, LEAVE OF ABSENCE.</*> For purposes of this Plan, neither
(i) a transfer of an employee from the Company to a subsidiary or other
affiliate of the Company, or vice versa, or from one subsidiary or affiliate of
the Company to another, nor (ii) a duly authorized leave of absence, shall be
deemed a termination of employment.
16. <*>ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.</*> In the event of
any stock split, stock dividend, reclassification or recapitalization which
changes the character or amount of the Company's outstanding Common Stock while
any portion of any Award theretofore granted under the Plan is outstanding but
unexercised, the Committee shall make such adjustments in the character and
number of shares subject to such Award and in the option price, as shall be
equitable and appropriate in order to make the Award, as nearly as may be
practicable, equivalent to such Award immediately prior to such change;
PROVIDED, HOWEVER, that no such adjustment shall give any Participant any
additional benefits under his or her Award.
D-6
<PAGE>
If any transaction (other than a change specified in the preceding
paragraph) described in Section 424(a) of the Code affects the Company's Common
Stock subject to any unexercised option theretofore granted under the Plan
(hereinafter for purposes of this Paragraph 16 referred to as the "old option"),
the Board of Directors or any surviving or acquiring corporation may take such
action as it deems appropriate, and in conformity with the requirements of that
Section and the regulations thereunder, to substitute a new option for the old
option, in order to make the new option, as nearly as may be practicable,
equivalent to the old option, or to assume the old option.
If any such change or transaction shall occur, the number and kind of shares
for which Awards may thereafter be granted under the Plan shall be adjusted to
give effect thereto.
17. <*>CANCELLATION OF AWARDS.</*> Notwithstanding any other provision of
the Plan, unless the agreement governing an Award specifies otherwise, the
Committee may cancel and rescind any unexercised portion of an Award (whether or
not then exercisable) at any time if the Participant is not in compliance with
the following:
(a) For two (2) years after leaving the employ of the Company, a
Participant may not solicit from or perform for any Client (as defined
below) any type of business carried on by the Company at the time his or her
employment terminates and during the two-year period thereafter. In
addition, for two years after leaving the employ of the Company, a
Participant may not hire any employee of the Company or solicit or induce
any such employee to leave the Company to work for a competitor. For
purposes of this paragraph, the term "Client" shall mean (i) any
organization for which the Participant provided services on behalf of the
Company, or (ii) any organization that the Participant solicited and which
subsequently hired the Company (and, in the case of the Company's research
or survey functions, with which the Participant had a personal working
relationship) during the two-year period preceding the Participant's
termination of service with the Company.
(b) Participants shall not, without the prior written consent of the
Company, disclose to anyone outside the Company, or use in other than the
Company's business, any confidential information or material relating to the
business of the Company or its clients, acquired by the Participant either
during or after his or her employment with the Company.
18. <*>EXPIRATION, AMENDMENT AND TERMINATION OF THE PLAN.</*> Awards may
be granted under the Plan at any time and from time to time on or prior to the
tenth anniversary of the effective date of the Plan as set forth in
Paragraph 20 (the "Expiration Date"), on which date the Plan will expire except
as to Awards then outstanding under the Plan. Such outstanding Awards shall
remain in effect until they have been exercised, terminated or have expired. The
Plan may be terminated, modified or amended by the Board of Directors at any
time on or prior to the Expiration Date, except with respect to any Awards then
outstanding under the Plan; PROVIDED, HOWEVER, that the approval of the
Company's stockholders will be required for any amendment which (i) increases
the maximum number of shares subject to grants, as specified in Paragraph 3
(unless made pursuant to the provisions of Paragraph 16) or (ii) materially
increases the benefits accruing to participants under the Plan, within the
meaning of Rule 16b-3 promulgated under the Exchange Act.
19. <*>GOVERNING LAW.</*> The laws of the State of Delaware will govern
all matters relating to this Plan except to the extent superseded by the laws of
the United States.
20. <*>EFFECTIVE DATE OF PLAN.</*> The Plan shall be effective upon its
approval by stockholders of the Company, and further subject to the
effectiveness of Watson Wyatt & Company Holdings' proposed public offering.
D-7
<PAGE>
ANNEX E
AMENDMENT TO WATSON WYATT & COMPANY BYLAWS
(NEW LANGUAGE IS UNDERLINED; DELETED LANGUAGE IS CROSSED OUT)
SECTION 9.1 RESTRICTION ON STOCK. Except for <#>(i)</#> transfers to the
Corporation or <#>to trusts, personal holding companies' or other entities</#>
<*>transfers to Persons</*> satisfying the terms and conditions of
Section<*>s</*> 9.2 or 9.3 below, <#>(ii) reversions from trusts described in
Section 9.2 to the grantors thereof or their estates, or (iii) transfers from
personal holding companies or similar entities described in Section 9.2 to the
sole shareholders thereof,</#> no present or future shareholder shall transfer,
whether by way of sale, gift, hypothecation, trust distribution, will, intestacy
or any other disposition, any shares of any class of capital stock ("Stock") in
the Corporation now owned <*>beneficially and of record</*> or hereafter
acquired by such shareholder (including, without limitation, shares of Stock
acquired upon conversion or exchange of other shares of Stock), without first
giving the Corporation prior written notice of his intention to so dispose of
such Stock. Said notice to the Corporation ("Disposition Notice") shall state
the terms and conditions of the proposed disposition, including the names of the
transferees, the purchase price and payment terms, if any, the type of
disposition, and the number of shares to be transferred ("Offered Shares"). A
shareholder giving a Disposition Notice is herein sometimes called an "Offering
Stockholder".
(a) The Corporation shall have the option for a period of thirty days following
the receipt of a Disposition Notice from an Offering Stockholder to buy on
such Closing Date, as is determined by the President or Secretary, part or
all of the Offered Shares at the price per share determined in accordance
with Section 9.5 of this Section 9, provided that the Corporation may buy
less than all of the Offered Shares if the balance of the Offered Shares is
contemporaneously purchased by Eligible Purchasers (or otherwise disposed of
in accordance with these Bylaws) or if the Offering Stockholder elects to
accept offers by the Corporation and/or Eligible Purchasers to purchase less
than all of the Offered Shares and to retain the balance of the Offered
Shares. If the Corporation does not elect to purchase all Offered Shares,
within thirty days after receipt of the Offering Stockholder's Disposition
Notice, it shall forward to the Offering Stockholder a list of the names and
addresses of all Eligible Purchasers together with a description of their
respective rights to purchase Offered Shares not initially purchased by the
Corporation.
The Offering Stockholder shall within fifteen days after receipt of such
list of Eligible Purchasers offer to sell the balance of the Offered Shares
to such Eligible Purchasers in accordance with their respective rights to
purchase set forth in such list.
(b) Elections by Eligible Purchasers to purchase Offered Shares under subsection
(a) hereof shall be by written notice delivered both to the Corporation and
to the Offering Stockholder within thirty days following the receipt of the
offer to sell from the Offering Stockholder as provided in Section 9.1(a)
hereof.
(c) The Corporation shall have the further option to buy or furnish Eligible
Purchasers for any Offered Shares not initially to be purchased by the
Corporation or by Eligible Purchasers under subsections (a) or (b) hereof
within 120 days following receipt by the Corporation of the Disposition
Notice.
(d) The Offered Shares, if any, not purchased under subsections (a), (b), or
(c) of this Section 9.1 may be disposed of within 150 days after receipt by
the Corporation of the Disposition Notice, but only to persons and only on
the terms and conditions set forth in the Disposition Notice. Any Offered
Shares not so transferred within such 150-day period may not thereafter be
transferred, except upon compliance with the terms of this Section 9 of the
Bylaws and as if they had not been previously offered hereunder. Any attempt
to transfer any Stock of the Corporation in contravention of the provisions
of this Section 9 shall be null and void and without legal effect,
E-1
<PAGE>
except that such attempted transfer shall constitute a continuing offer to
sell all such Stock under Section 9.1(a) hereof. The price at which such
Stock may be purchased by the Corporation or Eligible Purchasers shall be
determined pursuant to Section 9.5 of this Section 9; such Stock will be
deemed to have been offered at the date of the attempted transfer; and, for
purposes hereof, such attempted transfer shall be deemed to constitute the
giving of a Disposition Notice under Section 9.1, but there shall be no
limitations on the time periods within which the Corporation and/or Eligible
Purchasers shall be required to exercise their rights hereunder.
SECTION 9.2 <#>REVOCABLE</#> TRUSTS AND OTHER PERMITTED TRANSFEREES; PERSONAL
HOLDING CORPORATIONS.
(a) Anything in this Section 9 to the contrary notwithstanding, any shareholder
may, with the approval of the Board of Directors or such officer(s) as may
be designated by the Board of Directors for such purpose, transfer any or
all Stock of the Corporation now owned or hereafter acquired by him to a
<#>revocable trust for the sole benefit of himself during his lifetime,
provided that:</#> <*>Permitted Transferee</*>, provided that <*>the terms
of clauses (i), (ii) or (iii), as applicable, are complied with</*>.
(i) <*>in the case of a Permitted Transferee that is a trust or
custodianship,</*>
(A) the trust instrument<*>, or the instrument by which any stock is
transferred to the custodianship, as the case may be, by its
terms,</*> acknowledges that the Stock is held subject to the terms
and conditions of these Bylaws;
(B) the trust <*>instrument</*>, or the instrument by which any stock is
transferred to the custodianship, as the case may be, by its terms,
provides that on the first to occur of:
(1) the termination of the trust or custodianship;
(2) the ceasing of the shareholder to act as <#>sole trustee of the
trust</#> <*>the person (whether in the capacity as a trustee,
settlor, custodian or otherwise) having sole dispositive and
voting control over the Stock held by such trust or
custodianship; or</*>
(3) any event described in Section 9.4 with respect to the
<#>settler</#> shareholder, <*>whether in the capacity as
settlor, trustee or beneficiary of such trust</*> or custodian of
such custodianship, as the case may be;
all Stock of the Corporation then held by the trust or pursuant to
the custodianship will (i) <*>in the case of a revocable trust</*>,
either revert to the shareholder or be offered for sale by the same
procedure as set forth in Section 9.1 hereof <*>or (ii) in the case
of an irrevocable trust or a custodianship, be offered for sale by
the same procedure as set forth in Section 9.1 hereof</*>
(C) the shareholder is the sole <#>trustee of said trust</#> <*>person
(whether in the capacity as a trustee, settlor, custodian or
otherwise) having voting and dispositive control over any Stock held
by such trust</*> or custodianship, as the case may be, and the trust
or custodianship grants to the shareholder and to no other person,
corporation or other entity full powers with respect to all Stock of
the Corporation at any time held by the trust or custodianship, as
the case may be, including powers to attend all meetings of
shareholders, vote <*>or direct the voting of</*> such stock and give
proxies with respect thereto, make all decisions with respect to the
trust's or custodian's sale or purchase thereof, including the power
to direct the sale of some or all of the Stock of the Corporation at
any time for any reason deemed valid by said shareholder;
(D) a copy of the trust <*>instrument</*>, as from time to time amended,
or the instrument by which any stock is transferred to a
custodianship and a copy of the statutory act governing such
custodianship, as from time to time amended, is at all times kept on
file by the trustee or custodian thereof with the Secretary of the
Corporation; and
E-2
<PAGE>
(E) the trust, by its terms, provides that any amendment that in any way
affects the Stock of the Corporation held by the trust or any of the
provisions relating to such Stock set forth in subparagraphs (i) (A)
through (D) above, must be approved in advance by the President,
Treasurer or Secretary of the Corporation or shall be null and void
and of no effect with respect to such Stock.
(ii) <*>in the case of a Permitted Transferee that is a partnership, limited
liability company or similar entity,</*>
<*>(A)</*> <*>the partnership, limited liability company or other
governing agreement acknowledges that the Stock is held subject to
the terms and conditions of these Bylaws;</*>
<*>(B)</*> <*>the partnership, limited liability company or other
governing agreement, by its terms, provides that on the first to
occur of:</*>
<*>(1)</*> <*>the termination of the partnership, limited liability
company or other entity;</*>
<*>(2)</*> <*>the ceasing of the shareholder to Control the
partnership, limited liability company or other entity; or</*>
<*>(3)</*> <*>any event described in Section 9.4 with respect to the
shareholder;</*>
<*>all Stock of the Corporation then held by the partnership, limited
liability company or other entity will either revert to the
shareholder or be offered for sale by the same procedure as set forth
in Section 9.1 hereof;</*>
<*>(C)</*> <*>the partnership, limited liability company or other
governing agreement grants to the shareholder and to no other Person
full powers with respect to voting and disposition of all Stock of
the Corporation at any time held by the partnership, limited
liability company or other entity, including powers to attend all
meetings of partners, members or other owners, as applicable, vote
such Stock and give proxies with respect thereto, make all decisions
with respect to the partnership, limited liability company or other
entity's sale or purchase thereof, including the power to direct the
sale of some or all of the Stock of the Corporation at any time for
any reason deemed valid by said shareholder;</*>
<*>(D)</*> <*>a copy of the partnership, limited liability company or
other governing agreement, as from time to time amended, is at all
times kept on file by the managing or general partner, managing
member or other manager thereof with the Secretary of the
Corporation; and</*>
<*>(E)</*> <*>the partnership, limited liability company or other
governing agreement, by its terms, provides that any amendment that
in any way affects the Stock of the Corporation held by the
partnership, limited liability company or other entity or any of the
provisions relating to such Stock set forth in subparagraphs
(ii) (A) through (D) above, must be approved in advance by the
President, Treasurer or Secretary of the Corporation or shall be null
and void and of no effect with respect to such Stock.</*>
<*>(iii)</*> <*>in the case of a Permitted Transferee that is a
corporation,</*>
<*>(A)</*> <*>One hundred percent (100%) of the stock of such corporation
is owned solely by the shareholder, and/or any spouse of the
shareholder and/or any descendant of the shareholder and no person,
corporation or other entity other than the shareholder shall have any
rights or powers with respect to the Control of such corporation or
the voting and disposition of any Stock of the Corporation at any
time held by such corporation, including, without limitation, any
right to attend meetings of shareholders, vote such stock or give
proxies with respect thereto;</*>
<*>(B)</*> <*>the Articles of Incorporation, Bylaws and any other charter
or governing documents of such corporation contain restrictions on
the transfer of its stock which have substantially
E-3
<PAGE>
the same effect as the stock transfer restrictions contained in these
Bylaws, and are approved in writing by the General Counsel of the
Corporation, are not amended without such approval, and certified or
notarized copies thereof are at all times kept on file with the
Secretary of the Corporation;</*>
<*>(C)</*> <*>all stock certificates of the corporation contain a legend
identifying the existence of such transfer restrictions;</*>
<*>(D)</*> <*>the corporation shall agree in writing with the Corporation
not to issue or allot any additional stock of any class to anyone
other than the shareholder and/or any spouse of the shareholder
and/or descendant of the shareholder;</*>
<*>(E)</*> <*>the shareholder and the corporation agree with the
Corporation in writing, in a form approved by the General Counsel of
the Corporation, that they will abide by all of the terms restricting
the transfer of the Corporation's Stock as set forth in these Bylaws
(as they may be amended from time to time) and that they will take or
cause to be taken all steps which may be required in order to assure
compliance with the stock transfer restrictions contained in these
Bylaws, including an agreement not to transfer the stock of the
corporation; and</*>
<*>(F)</*> <*>the corporation and the shareholder shall agree in writing
with each other and the Corporation that, upon the first to occur
of:</*>
<*>(1)</*> <*>any event described in Section 9.4 with respect to the
shareholder;</*>
<*>(2)</*> <*>the bankruptcy, insolvency, dissolution (either
voluntary or involuntary), sale or merger of the corporation; or
the sale or attempted sale of any of its stock, other than in
accordance with these Bylaws, or its assets, or the imposition of
any lien upon the Stock of the Corporation or other assets owned
by the corporation; or</*>
<*>(3)</*> <*>the amendment of the Articles of Incorporation, Bylaws,
or other charter or governing documents of such corporation,
which amendment is not approved in writing by the General Counsel
of the Corporation, or any breach of any of the provisions of
subparagraphs (iii) (A) through (E) above;</*>
<*>all Stock of the Corporation then owned by the corporation shall
be deemed to be offered for sale by the same procedure as set forth
in Section 9.1 hereof.</*>
(b) PERSONAL HOLDING CORPORATIONS. Anything in this section 9 to the contrary
notwithstanding, any non-U.S. resident shareholder of the Corporation's
Stock (for purposes of this paragraph, the "Shareholder") may, with the
approval of the Board of Directors or such officer(s) as may be designated
by the Board of Directors for such purpose, transfer any or all Stock of the
Corporation now issued or hereafter acquired by him (or direct the
Corporation to issue Stock allocated by the Corporation to him) to a
personal holding corporation incorporated under the laws of a jurisdiction
outside of the United States which corporation is wholly-owned by such
Shareholder (or such similar entity under the laws of the jurisdiction in
which such Shareholder is domiciled which is wholly-owned by such
Shareholder and which is approved by the General Counsel of the Corporation
in his discretion), provided that:
(i) One hundred percent (100%) of the stock of such personal holding
corporation is owned solely by the Shareholder (or the ownership of such
other similar approved entity is one hundred percent (100%) vested in
the Shareholder) and no person, corporation or other entity other than
the Shareholder shall have any rights or powers with respect to the
ownership, control or direction of any stock of such personal holding
corporation or other similar approved entity or any Stock of the
Corporation at any time held by such personal holding corporation or
other similar approved entity, including, without limitation, any right
to attend meetings of shareholders, vote such shares or give proxies
with respect thereto.
E-4
<PAGE>
(ii) the Articles of Incorporation, Bylaws and any other charter or
governing documents of such personal holding corporation or other
similar approved entity contain restrictions on the transfer of its
stock which have substantially the same effect as the stock transfer
restrictions contained in these Bylaws, and are approved in writing by
the General Counsel of the Corporation, are not amended without such
approval, and certified or notarized copies thereof are at all times
kept on file with the Secretary of the Corporation;
(iii) all stock certificates of the personal holding corporation (or similar
documents evidencing ownership of such other similar approved entity)
contain a legend identifying the existence of such transfer
restrictions;
(iv) such personal holding corporation or similar approved entity shall
agree in writing with the Corporation not to issue or allot any
additional stock of any class to anyone other than the Shareholder;
(v) the Shareholder and the personal holding corporation or other similar
approved entity agree with the Corporation in writing, in a form
approved by the General Counsel of the Corporation, that they will abide
by all of the terms restricting the transfer of the Corporation's stock
as set forth in these Bylaws (as they may be amended from time to time)
and that they will take or cause to be taken all steps which may be
required in order to assure compliance with the stock transfer
restrictions contained in these Bylaws, including an agreement not to
transfer the stock of the personal holding corporation (or other
evidence of ownership of a similar approved entity); and
(vi) the personal holding corporation (or similar approved entity) and the
Shareholder shall agree in writing with each other and the Corporation
that, upon the first to occur of:
(A) any event described in Section 9.4 with respect to the Shareholder;
(B) the bankruptcy, insolvency, dissolution (either voluntary or
involuntary), sale or merger of the personal holding corporation or
other similar approved entity, or the sale or attempted sale of any
of its stock, other than in accordance with these Bylaws, or its
assets, or the imposition of any lien upon the stock of the
Corporation or other assets owned by the personal holding corporation
or other similar approved entity; or
(C) the amendment of the Articles of Incorporation, Bylaws, or other
charter or governing documents of such personal holding corporation
or other similar approved entity, which amendment is not approved in
writing by the General Counsel of the Corporation, or any breach of
any of the provisions of subparagraphs (i) through (v) of this
subsection;
all Stock of the Corporation then owned by the personal holding
corporation or other similar approved entity will be deemed to be offered
for sale by the same procedure as set forth in Section 9.1 hereof.
SECTION 9.3 EMPLOYEE TRUSTS. Anything in this Section 9 to the contrary
notwithstanding, Stock of the corporation may be owned by one or more trusts
maintained exclusively for the benefit of employees of the corporation and/or
any of its present or future subsidiaries and either qualified under
Section 401(a) or 501(a) of the Internal Revenue Code of 1986 (or any successor
statute), or approved by the Board of Directors of the corporation, provided
that:
(a) upon the occurrence of any event specified in Section 9.4 with respect to
any employee who is then a beneficiary of such trust, the trust shall offer
for sale in accordance with the terms and provisions of Section 9.4 hereof:
(i) all Stock of the Corporation, if any, allocated to the separate account
of such employee under the trust's terms; and
E-5
<PAGE>
(ii) a pro rata portion of all Stock of the Corporation held by such trust
and not allocated to the separate accounts of beneficiaries, such pro
rata portion to be based upon such actuarial and other considerations
as the trustees of the trust and the Board of Directors of the
Corporation shall, in their absolute discretion, deem appropriate.
SECTION 9.4 DEATH, TERMINATION OF EMPLOYMENT, BANKRUPTCY, LIENS. On the death of
a shareholder, or upon the termination of a shareholder's employment with the
Corporation or any subsidiary of the Corporation, whether said termination be by
retirement, voluntary or involuntary termination, or for any other reason, or
upon the Corporation receiving actual knowledge that a shareholder or any
personal holding corporation or similar approved entity as described in
Section 9.2 has become bankrupt or suffered or permitted the imposition of any
lien or attachment on any Stock of the Corporation owned by such shareholder or
any trust, personal holding company or other similar approved entity holding
Stock for his benefit (except any permitted lien arising from a loan program
established by the Board of Directors to facilitate the financing of purchases
of Stock by Eligible Purchasers), whichever first occurs ("Determination Date"),
all Stock of the Corporation then owned by such shareholder or his
representative or held for his benefit in any trust, personal holding company or
other entity permitted hereunder shall be deemed offered for sale and to
constitute Offered Shares subject to purchase by the same procedure as set forth
in Section 9.1 of this Section 9, excepting that, purchase of such shares shall
occur on such Closing Date (not more than 245 days after the Determination
Date), as the President or Secretary shall determine with payment to be made in
accordance with Section 9.6 hereof. Any of such shares of Stock not elected to
be purchased by the Corporation or by Eligible Purchasers within 245 days after
the Determination Date shall be purchased by the Corporation unless and to the
extent that the Corporation is prohibited from doing so by the DGCL. For
purposes of this Section 9.4, notwithstanding any other provision of this Bylaw,
a shareholder shall be deemed to own all Stock transferred by him to a trust
satisfying the terms and conditions of Section 9.2 hereof and such trust shall
have the same obligations with respect to the sale of such Stock hereunder as
the shareholder would have had if the Stock had not been transferred to said
trust.
SECTION 9.5 PURCHASE PRICE.
(a) The Purchase Price for any Stock of the Corporation shall be determined in
accordance with this Section 9.5, excepting that if a Disposition Notice
given under Section 9.1 indicates an intention to make a bona fide sale of
Stock for value, then the Purchase Price for any Stock which is the subject
of such notice (including Stock which is being offered pursuant to the terms
of Section 9.2 or 9.3) shall equal the price set forth in such notice, if
such price is lower than the Purchase Price determined hereunder.
(b) Except as provided in subparagraph (a) hereof and subject to subparagraph
(e) hereof, the Purchase Price for any Stock purchased by an Eligible
Purchaser on or after July 1, 1996 shall be the Formula Book Value of such
Stock as of the last day of the Corporation's fiscal year coincident with or
next preceding the Closing Date with respect to such purchase.
(c) Except as provided in subparagraph (a) hereof, the Purchase Price for any
Stock purchased by the Corporation hereunder shall be determined as follows
(subject to appropriate adjustment to reflect stock splits, stock dividends,
combinations of shares and similar recapitalizations):
The Purchase Price (P) per share for purchases by the Corporation
with a date of Disposition Notice or a Determination Date on or after
July 1, 1990 shall be determined by the following formula:
P= [B x(l +(r X n/12))] +(d X n/12)
B = Formula Book Value of such Stock as of the last day of the
Corporation's fiscal year coincident with or next preceding the date
of Disposition Notice under Section 9.1 or a Determination Date under
Section 9.4, whichever is applicable;
E-6
<PAGE>
r = the actual percentage increase, if any, in the Formula Book Value
of such Stock as of the last day of the Corporation's fiscal year
during which such Disposition Notice or Determination Date occurs
over the Formula Book Value as of the last day of the Corporation's
prior fiscal year;
n = the number of completed months between (1) the last day of the
Corporation's fiscal year coincident with or next preceding such
Disposition Notice or Determination Date, and (2) the date of such
Disposition Notice or such Determination Date, whichever is
applicable; and
d = The dividend, if any, per share declared for such Stock for the
fiscal year during which such Disposition Notice or Determination
Date occurs (unless the shareholder actually receives the dividend
for such year, in which case d = 0).
(d) If, and only if, the Closing Date for the purchase by the Corporation or an
Eligible Purchaser of any Stock under Section 9.4 hereof is more than thirty
(30) days after the Determination Date, the Corporation will pay the selling
shareholder interest on the amount of the Net Book Value denoted as "B" in
the formula set forth in subparagraph (c) hereof at the Loan Rate (as
described in Section 9.6(b)(iii) hereof) from the Determination Date to the
Closing Date.
(e) Except as provided in subparagraph (a) hereof, with respect to any purchases
of Stock by an Eligible Purchaser from a shareholder other than the
Corporation, the Corporation will pay the selling shareholder an amount
which is equal to "P" minus "B" in the formula set forth in subparagraph
(c) hereof.
SECTION 9.6 PAYMENT.
(a) The Purchase Price for Stock of the Corporation purchased hereunder by an
Eligible Purchaser shall be paid in cash on the Closing Date, subject to
Section 9.5(e) hereof, except as the purchaser and seller may otherwise
agree.
(b.i) Payments by the Corporation of the portion of the Purchase Price
representing the pro rata increase, if any, in the Net Book Value of
the Stock and the pro rata dividend may be made in multiple
installments as may be determined by the President or Secretary from
time-to-time, but no such installment shall be made later than eighteen
(18) months after the Closing Date except as provided in subparagraph
(b)(ii) hereof.
(b.ii) Notwithstanding the provisions of subparagraph (b)(i) hereof, the
Purchase Price for Stock of the Corporation purchased hereunder by the
Corporation may be paid, at the option of the Corporation, (i) all in
cash, or (ii) twenty-five percent (25%) in cash and the balance in a
non-negotiable promissory note of the Corporation payable over a period
of not more than three (3) years following the Closing Date, no part of
such note to be paid in the same calendar year in which the stock is
purchased unless such note is paid in full within such calendar year,
such note to bear interest on the unpaid balance thereof at the Loan
Rate (as hereinafter defined), or (iii) on such other terms as seller
and the Corporation may agree in writing.
(b.iii) "Loan Rate" shall mean the interest rate for Wyatt shareholder loans
in effect at such bank or banks as the Board of Directors, the
President or the President's designee shall have approved for such
loans on the date of issue of a note pursuant to subparagraph
(b)(ii) hereof, or the Determination Date pursuant to Section 9.5(d)
hereof, or 10% per annum, whichever is lower.
E-7
<PAGE>
SECTION 9.7 ENDORSEMENT ON STOCK CERTIFICATES. All certificates representing
Stock of the Corporation shall be conspicuously endorsed with a legend
substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, HYPOTHECATED OR
OTHERWISE DISPOSED OF EXCEPT UNDER THE CIRCUMSTANCES SPECIFIED IN SECTION 9.
OF THE BYLAWS OF THE CORPORATION, A COPY OF WHICH MAY BE OBTAINED FROM THE
SECRETARY OF WATSON WYATT & COMPANY WHO WILL MAIL A COPY THEREOF WITHOUT
CHARGE TO THE HOLDER HEREOF WITHIN 5 DAYS OF A WRITTEN REQUEST THEREFOR."
E-8
<PAGE>
SECTION 9.8 [RESERVED]
SECTION 9.9 DEFINITIONS.
(a) The term "Eligible Purchasers", as used herein, shall mean any of the
following persons or entities:
(i) full-time employees or regular part-time employees of the Corporation or
its subsidiaries who satisfy criteria approved from time-to-time by the
Board of Directors;
(ii) a partner engaged full-time in a partnership practice of any affiliate
or subsidiary, if applicable, of the Corporation;
(iii) a director of the Corporation or any subsidiary of the Corporation;
(iv) a corporation, partnership, association, or other entity with which the
Corporation has an affiliated business relationship, as designated from
time to time by the Board of Directors; or
(v) full-time employees or regular part-time employees of any corporation,
partnership, association, or other entity with which the Corporation has
an affiliated business relationship as designated from time to time by
the Board of Directors and who satisfy criteria approved from time to
time by the Board of Directors.
The Board of Directors shall designate which persons in the categories of
persons set forth above shall be deemed to be Eligible Purchasers with
respect to any particular transaction. Designation as an Eligible Purchaser
in connection with any offer and sale shall not create or imply any right to
be so designated in connection with any other offer or sale or, if so
designated, to be designated on the same terms and conditions.
(b) Net Book Value of Common Stock as used herein shall mean the consolidated
net book value (defined as the sum of Redeemable Common Stock and Permanent
Shareholders' Equity on the Corporation's Consolidated Balance Sheet as of
the fiscal year end) of the Common Stock of the Corporation determined, on
an accrual basis, by generally accepted accounting principles ("GAAP")
except that in computing such Net Book Value as of June 30, 1984, or any
subsequent fiscal year end, consolidated assets of the Corporation
consisting of subscriber lists, computer software and data banks used
principally in compensation survey or related businesses carried on by the
Corporation or any subsidiary shall be valued at 50% of the Consolidated
income received by the Corporation in respect of such business during the
fiscal year then ended. Formula Book Value as used herein shall mean the Net
Book Value of the Corporation's Common Stock as of June 30, 1996, increased
or decreased by net income or losses, and all other GAAP basis increases or
decreases to Net Book Value occurring after June 30, 1996, and adjusted to
(i) spread the economic impact of certain real estate sublease losses over
the remaining life of the sublease; and (ii) eliminate annual changes in the
Currency Translation Adjustment ("CTA") occurring after June 30, 1996; and
(iii) eliminate the after-tax increases or decreases in Net Book Value
recorded in accordance with GAAP as a result of the Discontinuation of the
Outsourcing Business. The Discontinuation of the Outsourcing Business as
used herein means the discontinuation of the outsourcing business of the
Corporation and Wellspring Resources, LLC pursuant to the Discontinuation
Plan adopted by the Board of Directors of the Corporation on February 18,
1998, as set forth in the minutes of the meeting of the Board of Directors
of the Corporation held on February 18, 1998. Formula Book Value shall be
determined by the independent certified public accountants of the
Corporation from the Corporation's consolidated financial statement prepared
on an accrual basis in accordance with generally accepted accounting
principles as certified by such accountants, except as described above. Such
determinations shall be conclusive and binding upon the Corporation and all
holders of stock.
(c) The term "Closing Date" hereunder shall mean the time established by the
President or Secretary pursuant to Section 9.1, 9.4 or 9.5 hereof.
E-9
<PAGE>
(d) The term "Corporation" as used herein in Section 9 shall mean the
Corporation, a Subsidiary, or an Affiliate as defined in ARTICLE FOURTEENTH
of the Restated Certificate of Incorporation.
<*>(e)</*> <*>The term "Permitted Transferee" shall mean any of the following:
(i) any revocable trust created for the benefit of the shareholder during
the lifetime of the shareholder of which the shareholder is the only person
(whether in the capacity as a trustee, settlor or otherwise) having voting
and dispositive control over the Stock held by such trust, (ii) any
irrevocable trust created for the benefit of the shareholder and/or any
spouse of the shareholder and/or any descendant of the shareholder (which
term shall include any adopted child or stepchild of the shareholder) of
which the shareholder is the only trustee having voting and dispositive
control over the Stock held by such trust, (iii) a custodianship for the
benefit of a minor who is a descendant of the shareholder (which term shall
include any adopted child or stepchild of the shareholder), to which any
transfer is made pursuant to and which is valid under the Uniform Transfers
to Minors Act, the Uniform Gifts to Minors Act or a substantially similar
act, of which the shareholder is the only custodian having voting or
dispositive control over the Stock held pursuant to such custodianship,
(iv) any partnership, limited liability company or similar entity all of the
ownership interests in which are held by the shareholder alone, or by the
shareholder and any spouse of the shareholder and/or any descendant of the
shareholder (which term shall include any adopted child or stepchild of the
shareholder) and/or and Person referred to in clauses (i) and (iii) above,
which is Controlled by the shareholder and (<#>i</#>v) any corporation
(including, without limitation, any subsidiary or sub-subsidiary of any such
corporation) which is wholly-owned directly or indirectly, by the
shareholder alone or by the shareholder and any one or more Persons referred
to in clauses (i) and (iv<#>ii</#>) above and which is Controlled by the
shareholder.</*>
<*>(f)</*> <*>The term "Control" means, with respect to any Person, the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities or other beneficial
interest, or by contract or otherwise.</*>
<*>(g)</*> <*>The term "Person" means an individual, partnership, corporation,
limited liability company, trust or other entity of whatever nature.</*>
SECTION 9.10 BENEFIT. The rights and restrictions contained herein shall be
binding upon and inure to the benefit of all present and future shareholders of
the Corporation, their heirs, executors, administrators, successors and assigns.
SECTION 9.11 AMENDMENT. Except as provided below, this Section 9 of the Bylaws
of the Corporation may be altered, amended or repealed only upon the affirmative
vote of the holders of Stock possessing at least 80% of the outstanding voting
rights of the capital stock of the Corporation, voting as one aggregate class.
If any such alteration, amendment or repeal affects any class or classes
adversely, then, in addition to the affirmative vote required above, the
affirmative vote of holders of at least a majority of the outstanding shares of
each class so affected, voting separately as a class, shall be required, unless
the effect of such alteration, amendment or repeal is adverse to all classes on
a substantially equivalent basis. Notwithstanding the foregoing, any amendment
to this Section 9 of the Bylaws of the Corporation describing the Purchase Price
of any class of Stock hereafter authorized shall require only such affirmative
vote of shareholders as Section 242 of the DGCL, as then in effect, requires to
amend the Corporation's Restated Certificate of Incorporation to authorize the
issuance of such class.
E-10
<PAGE>
ANNEX F
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW--APPRAISAL RIGHTS
1. Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing
pursuant to sec. 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock
under the circumstances described in subsections (b) and (c) of this
section. As used in this section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a
nonstock corporation; the words "stock" and "share" mean and include what is
ordinarily meant by those words and also membership or membership interest
of a member of a nonstock corporation; and the words "depository receipt"
mean a receipt or other instrument issued by a depository representing an
interest in one or more shares, or fractions thereof, solely of stock of a
corporation, which stock is deposited with the depository.
(a) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation
to be effected pursuant to sec. 251 (other than a merger effected
pursuant to sec. 251(g) of this title), sec. 252, sec 254, sec. 257, sec.
258, sec. 263 or sec. 264 of this title:
i. Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of
and to vote at the meeting of stockholders to act upon the agreement
of merger or consolidation, were either (i) listed on a national
securities exchange or designated as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or (ii) held of record by
more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
ii. Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class
or series of stock of a constituent corporation if the holders
thereof are required by the terms of an agreement of merger or
consolidation pursuant to sections 251, 252, 254, 257, 258, 263 and
264 of this title to accept for such stock anything except:
a) Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b) Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts
in respect thereof) or depository receipts at the effective date
of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market
system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
c) Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of
this paragraph; or
F-1
<PAGE>
d) Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and c.
of this paragraph.
iii. In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not
owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the
subsidiary Delaware corporation.
2. Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the
assets of the corporation. If the certificate of incorporation contains such
a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
3. Appraisal rights shall be perfected as follows:
i. If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall notify each of its stockholders who was
such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsection (b) or
(c) hereof that appraisal rights are available for any or all of the
shares of the constituent corporations, and shall include in such
notice a copy of this section. Each stockholder electing to demand
the appraisal of such stockholder's shares shall deliver to the
corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such
stockholder's shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder
electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation
shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the merger
or consolidation has become effective; or
ii. If the merger or consolidation was approved pursuant to sec. 228 or
sec. 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten
days thereafter, shall notify each of the holders of any class or
series of stock of such constituent corporation who are entitled to
appraisal rights of the approval of the merger or consolidation and
that appraisal rights are available for any or all shares of such
class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if
the notice is given on or after the effective date of the merger or
consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders of any class or series of
stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation.
Any stockholder entitled to appraisal rights may, within 20 days
after the date of mailing of such notice, demand in writing from
the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of
F-2
<PAGE>
the stockholder and that the stockholder intends thereby to demand
the appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall
send a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series
of stock of such constituent corporation that are entitled to
appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall
send such a second notice to all such holders on or within 10 days
after such effective date; provided, however, that if such second
notice is sent more than 20 days following the sending of the first
notice, such second notice need only be sent to each stockholder
who is entitled to appraisal rights and who has demanded appraisal
of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of
fraud, be PRIMA FACIE evidence of the facts stated therein. For
purposes of determining the stockholders entitled to receive either
notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or after
the effective date of the merger or consolidation, the record date
shall be such effective date. If no record date is fixed and the
notice is given prior to the effective date, the record date shall
be the close of business on the day next proceeding the day on
which the notice is given.
(b) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise
entitled to appraisal rights, may file a petition in the Court of
Chancery demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days
after the effective date of the merger or consolidation, any stockholder
shall have the right to withdraw such stockholder's demand for appraisal
and to accept the terms offered upon the merger or consolidation. Within
120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections
(a) and (d) hereof, upon written request, shall be entitled to receive
from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares
not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number
of holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after such stockholder's written request for
such a statement is received by the surviving or resulting corporation or
within 10 days after expiration of the period for delivery of demands for
appraisal under subsection (d) hereof, whichever is later.
(c) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of
their shares have not been reached by the surviving or resulting
corporation. If the petition shall be filed by the surviving or resulting
corporation, the petition shall be accompanied by such a duly verified
list. The Register in Chancery, if so ordered by the Court, shall give
notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation
and to the stockholders shown on the list at the addresses therein
stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by
mail and by publication
F-3
<PAGE>
shall be approved by the Court, and the costs thereof shall be borne by
the surviving or resulting corporation.
(d) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock
represented by certificates to submit their certificates of stock to the
Register in Chancery for notation thereon of the pendency of the
appraisal proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such stockholder.
(e) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any,
to be paid upon the amount determined to be the fair value. In
determining such fair value, the Court shall take into account all
relevant factors. In determining the fair rate of interest, the Court may
consider all relevant factors, including the rate of interest which the
surviving or resulting corporation would have had to pay to borrow money
during the pendency of the proceeding. Upon application by the surviving
or resulting corporation or by any stockholder entitled to participate in
the appraisal proceeding, the Court may, in its discretion, permit
discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to
an appraisal. Any stockholder whose name appears on the list filed by the
surviving or resulting corporation pursuant to subsection (f) of this
section and who has submitted such stockholder's certificates of stock to
the Register in Chancery, if such is required, may participate fully in
all proceedings until it is finally determined that such stockholder is
not entitled to appraisal rights under this section.
(f) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation
to the stockholders entitled thereto. Interest may be simple or compound,
as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith,
and the case of holders of shares represented by certificates upon the
surrender to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court of
Chancery may be enforced, whether such surviving or resulting corporation
be a corporation of this State or of any state.
(g) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the
value of all the shares entitled to an appraisal.
(h) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose
or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of
record at a date which is prior to the effective date of the merger or
consolidation); provided, however, that if no petition for an appraisal
shall be filed within the time provided in subsection (e) of this
section, or if such stockholder shall deliver to the surviving or
resulting corporation a written withdrawal of such stockholder's demand
for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the
F-4
<PAGE>
corporation, then the right of such stockholder to an appraisal shall
cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such
terms as the Court deems just.
(i) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of
authorized and unissued shares of the surviving or resulting corporation.
F-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection (a) of Section 145 of the Delaware General Corporation Law (the
"DGCL") empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or complete action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no cause
to believe his conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 of the DGCL further provides that to the extent a director,
officer, employee or agent of a corporation has been successful in the defense
of any action, suit or proceeding referred to in subsections (a) and (b) or in
the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification or advancement of expenses
provided for by Section 145 shall not be deemed exclusive of any other rights to
which the indemnified party may be entitled; and empowers the corporation to
purchase and maintain insurance on behalf of a director, officer, employee or
agent of the corporation against any liability asserted against him or incurred
by him in any such capacity or arising out of his status as such whether or not
the corporation would have the power to indemnify him against such liabilities
under Section 145.
The Watson Wyatt & Company certificate of incorporation provides, and the
Watson Wyatt & Company Holdings certificate of incorporation will provide that
no director, or person serving on a committee of the board of directors, shall
be personally liable to the company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability:
- for any breach of that director's duty of loyalty to Watson Wyatt &
Company or its stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the DGCL; or
- for any transaction from which the director derived an improper personal
benefit.
Both certificates of incorporation provide that we must indemnify our
directors, officers and employees against any liability incurred in connection
with any proceeding in which they may be involved as a party or otherwise, by
reason of the fact that he or she is or was a director, officer, employee, or
agent of the company or is or was serving at the request of the company as a
director,
II-1
<PAGE>
officer, employee, agent, fiduciary or trustee of another corporation,
partnership, joint venture, trust, employee benefit plan, or other entity or
enterprise, except:
- to the extent that such indemnification against a particular liability is
expressly prohibited by applicable law;
- for a breach of such person's duty of loyalty to Watson Wyatt & Company or
its stockholders;
- for acts or omission not in good faith;
- for intentional misconduct or a knowing violation of law; or
- for any transaction resulting in receipt by such person of an improper
personal benefit.
Such indemnification may include advances of expenses prior to the final
disposition of such proceeding..
ITEM 21. EXHIBITS AND FINANCIAL SCHEDULES
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
2.1* Form of Agreement and Plan of Merger (included in Annex A to
the proxy statement/prospectus forming a part of this
registration statement)
3.1* Form of amended and restated certificate of incorporation of
Watson Wyatt & Company Holdings (included in Annex B to the
proxy statement/prospectus forming a part of this
registration statement)
3.2* Form of amended and restated bylaws of Watson Wyatt &
Company Holdings (included in Annex C to the proxy
statement/prospectus forming a part of this registration
statement)
4.1* Specimen certificate for the registrant's class A common
stock
4.2* Specimen certificate of registrant's class B-1 common stock
4.3* Specimen certificate of registrant's class B-2 common stock
5.1* Opinion of Cadwalader, Wickersham & Taft, counsel to the
registrant
8.1 Opinion of Cadwalader, Wickersham & Taft on tax matters
10.1* Credit Agreement between Watson Wyatt & Company and
NationsBank, N.A. dated June 30, 1998. (Incorporated by
Reference to Watson Wyatt & Company Form 10K for fiscal year
ended June 30, 1998 (File No. 0-20724))
10.2* Agreement with David B. Friend, M.D., dated October 22,
1999.
10.3* Lease between Watson Wyatt & Company and Marvin M.
Robertson, et al., dated January 9, 1998.
13* Annual report to security holders
21.1* Subsidiaries of Watson Wyatt & Company Holdings
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ernst & Young LLP
23.3* Consent of Cadwalader, Wickersham & Taft (included in
Exhibit 5.1)
24.1* Power of Attorney
27.1* Financial Data Schedule
99.1* Form of Proxy
</TABLE>
- ------------------------
* Previously filed.
II-2
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted because the information required to be set
forth in those schedules is not applicable or is shown in the combined financial
statements or notes thereto.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 2 to this Registration Statement
(No. 333-94975) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Bethesda, State of Maryland, on April 18, 2000.
<TABLE>
<S> <C> <C>
WATSON WYATT & COMPANY HOLDINGS
BY: /s/ John J. Haley*
--------------------------------------
NAME: JOHN J. HALEY
TITLE: President and Chief Executive Officer
</TABLE>
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ John J. Haley* President and Chief Executive
- ------------------------------------------- Officer
Name: JOHN J. HALEY April 18, 2000
/s/ Carl D. Mautz* Chief Financial Officer
- ------------------------------------------- (Principal Financial Officer
Name: CARL D. MAUTZ and Principal Accounting
Officer) April 18, 2000
/s/ Thomas W. Barratt* Director
- -------------------------------------------
Name: THOMAS W. BARRATT April 18, 2000
/s/ Paula A. DeLisle* Director
- -------------------------------------------
Name: PAULA A. DELISLE April 18, 2000
/s/ David B. Friend, M.D.* Director
- -------------------------------------------
Name: DAVID B. FRIEND, M.D. April 18, 2000
/s/ John J. Gabarro* Director
- -------------------------------------------
Name: JOHN J. GABARRO April 18, 2000
/s/ Ira T. Kay* Director
- -------------------------------------------
Name: IRA T. KAY April 18, 2000
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Brian E. Kennedy* Director
- -------------------------------------------
Name: BRIAN E. KENNEDY April 18, 2000
/s/ Eric P. Lofgren* Director
- -------------------------------------------
Name: ERIC P. LOFGREN April 18, 2000
/s/ Robert D. Masding* Director
- -------------------------------------------
Name: ROBERT D. MASDING April 18, 2000
/s/ R. Michael McCullough* Director
- -------------------------------------------
Name: R. MICHAEL MCCULLOUGH April 18, 2000
/s/ Gail E. McKee* Director
- -------------------------------------------
Name: GAIL E. MCKEE April 18, 2000
/s/ Kevin L. Meehan* Director
- -------------------------------------------
Name: KEVIN L. MEEHAN April 18, 2000
Director
- -------------------------------------------
Name: GILBERT T. RAY
/s/ John A. Steinbrunner* Director
- -------------------------------------------
Name: JOHN A. STEINBRUNNER April 18, 2000
/s/ A. Grahame Stott* Director
- -------------------------------------------
Name: A. GRAHAME STOTT April 18, 2000
/s/ Charles P. Wood, Jr.* Director
- -------------------------------------------
Name: CHARLES P. WOOD, JR. April 18, 2000
*By: /s/ Walter W. Bardenwerper
- -------------------------------------------
Walter W. Bardenwerper
Attorney-in-fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
2.1* Form of Agreement and Plan of Merger (included in Annex A to
the proxy statement/prospectus forming a part of this
registration statement)
3.1* Form of amended and restated certificate of incorporation of
Watson Wyatt & Company Holdings (included in Annex B to the
proxy statement/prospectus forming a part of this
registration statement)
3.2* Form of amended and restated bylaws of Watson Wyatt &
Company Holdings (included in Annex C to the proxy
statement/prospectus forming a part of this registration
statement)
4.1* Specimen certificate for the registrant's class A common
stock
4.2* Specimen certificate of registrant's class B-1 common stock
4.3* Specimen certificate of registrant's class B-2 common stock
5.1* Opinion of Cadwalader, Wickersham & Taft, counsel to the
registrant
8.1 Opinion of Cadwalader, Wickersham & Taft on tax matters
10.1* Credit Agreement between Watson Wyatt & Company and
NationsBank, N.A. dated June 30, 1998. (Incorporated by
Reference to Watson Wyatt & Company Form 10K for fiscal year
ended June 30, 1998 (File No. 0-20724))
10.2* Agreement with David B. Friend, M.D., dated October 22,
1999.
10.3* Lease between Watson Wyatt & Company and Marvin M.
Robertson, et al., dated January 9, 1998.
13* Annual report to security holders
21.1* Subsidiaries of Watson Wyatt & Company Holdings
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ernst & Young LLP
23.3* Consent of Cadwalader, Wickersham & Taft (included in
Exhibit 5.1)
24.1* Power of Attorney
27.1* Financial Data Schedule
99.1* Form of Proxy
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
Exhibit 8.1
[Letterhead of
Cadwalader, Wickersham & Taft]
_______________, 2000
Watson Wyatt & Company Holdings
6707 Democracy Boulevard, Suite 800
Bethesda, MD 20817
Re: MERGER OF WW MERGER SUBSIDIARY, INC. WITH AND INTO WATSON WYATT & COMPANY
Ladies and Gentlemen:
You have asked us for our opinion regarding certain U.S.
federal income tax matters in connection with the merger (the "Merger") of WW
Merger Subsidiary, Inc., a Delaware corporation ("Merger Sub"), which is a
direct, wholly owned subsidiary of Watson Wyatt & Company Holdings, a
Delaware corporation ("Holdings"), with and into Watson Wyatt & Company, a
Delaware corporation ("WW & Co."), to be accomplished pursuant to an
Agreement and Plan of Merger by and among Merger Sub, Holdings, and WW & Co.,
dated _________, 2000 (the "Merger Agreement").
In arriving at the opinions expressed below, we have
examined and relied upon (i) the Merger Agreement, (ii) the Registration
Statement on Form S-4, as filed by Holdings with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended
(the "Act") (the "Registration Statement"), (iii) documents delivered in
connection with the transactions contemplated by the Merger Agreement
including, without limitation, the representation letters made by an
authorized officer of WW & Co. and Holdings, dated as of the date hereof and
addressed to us (the "Representation Letters"), and (iv) all such documents,
instruments and other certificates as we have deemed appropriate as a basis
for the opinions expressed below (collectively with all documents referred to
in this sentence, the "Transaction Documents").
<PAGE>
In rendering the opinions set forth below, we have relied upon
all statements, facts and representations in the Transaction Documents, and
assumed that all such documents are complete and authentic and have been duly
authorized, executed and delivered. We have further assumed that all statements,
facts and representations made in such documents are true (without regard to any
qualifications stated therein and without undertaking to verify such statements,
facts and representations by independent investigation), that the respective
parties thereto and all parties referred to therein will act in all respects at
all relevant times in conformity with the requirements and provisions of such
documents, that none of the terms and conditions contained therein has been or
will be waived or modified in any respect, and that the Merger will be
consummated in a manner contemplated by, and in accordance with, the terms of
the Merger Agreement and the Registration Statement. We have made such other
investigations of fact and law as we have deemed appropriate as a basis for the
opinions expressed below.
The following opinions are based upon the Internal Revenue
Code of 1986, as amended (the "Code"), applicable Treasury regulations, and
rulings and decisions thereunder, each as in effect on the date hereof, and may
be affected by amendments to the Code or to Treasury regulations thereunder or
by subsequent judicial or administrative interpretation thereof, any of which
may have retroactive effect. We express no opinions other than as to the federal
income tax law of the United States of America. This opinion letter does not
address the various state, local, or foreign tax consequences that may result
from the transactions contemplated by the Merger Agreement.
On the basis of and subject to the foregoing, it is our
opinion, as of the date hereof and under existing law, that:
1. the consummation of the Merger will be treated for
U.S. federal income tax purposes as a
reorganization within the meaning of Section
368(a) of the Code,
2. WW & Co., Holdings, and Merger Sub will each be a
party to the reorganization within the meaning of
Section 368(b) of the Code,
3. subject to the qualifications set forth therein, the
statements of law and conclusions of law set forth in
the Registration Statement under the heading "U.S.
Federal Income Tax Consequences of Merger Transaction
To Stockholders," constitute a fair summary of the
material U.S. federal income tax consequences of the
Merger.
The statements in the Registration Statement under the
heading "U.S. Federal Income Tax Consequences of Merger Transaction to
Stockholders," summarizing the material U.S. federal income tax consequences
of the Merger, may not be applicable to WW & Co. stockholders who receive
stock in Holdings pursuant to the exercise of employee stock options, or that
are not citizens or residents of the United States for federal income tax
purposes.
We hereby consent to the filing of this opinion letter with
the Commission as an exhibit to the Registration Statement. We also consent to
the reference to our firm under the
<PAGE>
heading "U.S. Federal Income Tax Consequences of Merger Transaction To
Stockholders" in the Registration Proxy Statement. In giving this consent, we do
not admit that we are within the category of persons whose consent is required
under Section 7 of the Act or the General Rules and Regulations of the
Commission.
This opinion letter is furnished to you for your benefit in
connection with the preparation of the Registration Statement and is not to be
used, circulated, quoted or otherwise referred to for any other purpose.
We expressly disclaim any obligation or undertaking to update
or modify this opinion letter as a consequence of any future changes in
applicable laws or Treasury regulations or the facts bearing upon this opinion
letter, any of which could affect our conclusions.
Very truly yours,
CADWALADER, WICKERSHAM & TAFT
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of
Watson Wyatt & Company of our report dated September 8, 1999, except as to
the information presented in Notes 5 and 6 for which the date is December 9,
1999, relating to the financial statements and financial statement schedule
of Watson Wyatt & Company, which appear in such Registration Statement. We
also consent to the references to us under the headings "Experts" and
"Selected Financial Data" in such Registration Statement.
PricewaterhouseCoopers LLP
Washington, DC
April 18, 2000
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 2 to the Registration Statement (Form S-4 No. 333-94975) and
related Prospectus of Watson Wyatt & Company Holdings pertaining to the
registration of its Class B-1 and B-2 Common Stock and to the
incorporation by reference therein of our report dated July 18, 1997, with
respect to the financial statements of Wellspring Resources LLC included in
Form 10-K of Watson Wyatt & Company for the year ended June 30, 1999,
filed with the Securities and Exchange Commission.
Ernst & Young LLP
Jacksonville, Florida
April 18, 2000
