<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 17, 2000.
REGISTRATION NO. 333-94975
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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
<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.
------------------------------
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>
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
Corporate Information................. 14
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................. 32
Proposal No. 3--Approval of Amendments
to Current Watson Wyatt & Company
Bylaws.............................. 35
General............................... 35
Selected Consolidated Financial
Data................................ 37
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 40
Business.............................. 50
Management............................ 64
Common Stock Purchase Arrangements
Before the Merger and the Public
Offering............................ 71
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Transactions with Management and
Others.............................. 72
Security Ownership of Management and
Others.............................. 72
Legal Matters......................... 73
Transfer Agent and Registrar.......... 73
Submission of Stockholder Proposals... 73
Experts............................... 73
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. This proxy
statement/prospectus is current as of its date, and we are under no duty to
update any of the forward-looking statements contained in this proxy statement/
prospectus after the date of this proxy statement/prospectus or to conform these
statements to actual results or to changes in our expectations
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 "The Merger and the
Public Offering," 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 one of the world's leading human
capital consulting firms in terms of revenues, number of clients and number of
offices. 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 are leveraging our position with our clients as
recognized experts in employee benefits and human capital consulting to offer
them web-based technologies that transform the way they 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
HR expertise.
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. During the past two years, we have provided services
to over 70% of the Fortune 100. Our clients include Apple Computer, Cisco
Systems, 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 leveraging ongoing,
recurring engagements to identify and serve our clients' 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, leading research studies and
innovative 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 the
Stock Incentive Bonus Plan, referred to as "SIBP," 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 SIBP 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.
(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 SIBP in an amount representing all
income in excess of a targeted amount. Following the public offering, we
will terminate the SIBP 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
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. The
discontinuation is more fully described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(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 may 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.
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OUR FIXED FEE ENGAGEMENTS COULD HURT OUR FINANCIAL RESULTS IF NOT MANAGED
PROPERLY
We enter into some engagements on a negotiated fixed fee basis. Our
financial results could be adversely affected by our inability to manage such
engagements profitably.
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: (i) a client's assertion that actuarial
assumptions used in a pension plan were unreasonable, leading to plan
underfunding; (ii) a claim arising out of the use of inaccurate data, which
could lead to an underestimation of plan liabilities; or (iii) 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;
- 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
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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 OUR STRATEGIC ALLIANCE WITH WATSON WYATT PARTNERS FOR OUR BRAND
IN THE EUROPEAN MARKET; WE COULD LOSE OUR POSITION IN EUROPE IF OUR ALLIANCE
WERE TO TERMINATE
Since 1995 we have marketed our services globally as Watson Wyatt Worldwide
through our alliance with Watson Wyatt Partners. Under the alliance:
- 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, 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
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 ALLIANCE IN EUROPE 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 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,
which 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 from
operations.
OPERATIONAL READINESS OF OUR GLOBAL ADMINISTRATIVE INFRASTRUCTURE MIGHT NOT
BE AS COMPLETE AS REQUIRED TO EFFECTIVELY MANAGE INTERNATIONAL OPERATIONS
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
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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 QUICKLY
RESPOND TO THIS CHANGE 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.
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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.
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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.
Such shares are 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 and the selling stockholders have agreed,
in the underwriting agreement not to sell any shares for 180-days following the
offering.
The following chart identifies the number of shares that will become
available for resale at the time the 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
After the reorganization stockholders representing ten percent of the voting
power will no longer be able to call a special meeting of stockholders.
The Watson Wyatt & Company Holdings certificate of incorporation will allow
a special meeting of shareholders 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.
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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 ("SEC") 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
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
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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.
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 principal executive offices are located at 6707 Democracy Boulevard,
Suite 800, Bethesda, Maryland, 20817-1129, and our telephone number is
(301) 581-4600. We invite you to visit our web site at
http://www.watsonwyatt.com. The information contained on our web site is not
incorporated into this prospectus.
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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 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. 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.
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
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common stock instead of Watson Wyatt & Company common stock. 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]
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 &
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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; and
- 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 sell up to the equivalent of 500 of your present Watson Wyatt &
Company shares (as measured on a pre-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, 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 band levels to have
an investment in our company so that their interests are aligned with the
interests of our other stockholders.
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, 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.
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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 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.
One-half of the B shares will be restricted from resale for 12 months and the
other half 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 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.
- - 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. If the merger is not
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<PAGE>
approved, the public offering will not occur. If the public offering does not
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.
- - 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 & 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 that
institutional investors will be the predominant purchasers of our stock in the
public offering.
- - WHAT WILL HAPPEN TO OUR COMPANY IF THE PUBLIC OFFERING IS DELAYED OR NOT
CONSUMMATED?
Adoption of the proposed merger and approval of the proposed incentive plan is
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.
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
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<PAGE>
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.
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
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<PAGE>
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 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.
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<PAGE>
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.
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.
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<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>
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<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>
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<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.
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<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
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<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 2001. 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
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<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
certain unlawful dividends and the making of certain 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
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<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 certain 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.
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<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
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<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.
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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 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
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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.
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.
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<PAGE>
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.
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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 APPENDIX 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.
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- 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.
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SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data 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
SIBP (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>
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<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>
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(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 the
Stock Incentive Bonus Plan ("SIBP"), 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 SIBP 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.
(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 SIBP in an amount representing all
income in excess of a targeted amount. Following the public offering, we
will terminate the SIBP 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
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. The
discontinuation is more fully described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(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 certain operating
offices.
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(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. The
discontinuation is more fully described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations." 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 deficit from June 30, 1997 to June 30, 1998 includes the
discontinued operations charge of $69.9 million mentioned in note (e) above.
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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 60 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 ("SIBP") in an
amount representing all income in excess of a targeted amount. Following this
offering, we will terminate the SIBP 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 SIBP 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. The discontinuation is more fully described
under the section "Fiscal Year Ended June 30, 1998 Compared to Fiscal Year ended
June 30, 1997--Discontinued Operations."
Due to the SIBP 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
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they are analyzed excluding the SIBP and the non-recurring compensation charge
described above, since the events giving rise to these charges are eliminated by
the change in corporate structure and management's intent 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.
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
due to an $11.2 million, or 11%, rise in fees generated by our U.S. East region,
a $9.0 million, or 12%, rise in fees generated by our U.S. Central region and a
$3.8 million, or 16%, rise in fees in our Asia-Pacific region. The fee increase
can generally be attributed to the realization of billing rate increases and
increased chargeable hours.
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 ("SIBP") 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%. 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 SIBP.
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
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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 ("G&A") 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 certain 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 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 SIBP 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 a 9% growth in
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revenue. This increase is attributable to a $34.6 million, or 21%, rise in fees
generated by our U.S. East consulting region, a $15.0 million, or 10%, increase
in our U.S. Central region, and a $5.9 million, or 13%, rise in our Asia-Pacific
region, partially offset by a $9.7 million, or 11%, decline in our U.S. West
region. In North America, our Benefits Group and HR Technologies Group
experienced strong revenue growth of $42.4 million and $18.9 million,
respectively, and our Human Capital Group revenues declined $25.3 million amid a
reorganization of the practice. Revenues for fiscal year 1999 reflect the sale
late in fiscal year 1998 of our North American risk and insurance consulting
practice, and our exit from the defined contribution record-keeping business in
early fiscal year 1999, which generated revenues in fiscal year 1998 of
$9.2 million and $6.0 million, respectively. Fiscal year 1999 revenues also
reflect $11.5 million in added revenues from the first fiscal quarter
acquisition of selected units of KPMG's benefits consulting business.
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 SIBP 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.
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
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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 SIBP, 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 attributable to 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, and is due to the realization of billing rate increases. In
North America, the Benefits Group, Human Capital Group and HR Technologies Group
experienced strong revenue growth of $11.2 million, $12.0 million and
$8.5 million, respectively. These 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.
Also, 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.
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.
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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 certain long-term
contracts in this area. In 1996, recognizing the significant capital
requirements needed for expansion in this area, we formed a joint venture
("Wellspring") with State Street Bank and Trust Company. In 1996 and 1997,
Wellspring continued to require significant cash outlays and suffered
development and implementation delays. The combination of Wellspring's 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 Retained Clients (as defined
in Note 16 of Notes to the Consolidated Financial Statements) and a provision
for the completion of any obligations to clients, vendors or our former joint
venture partner.
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
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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 lower contingency payments associated with 1999 acquisitions
and lower current year purchases of fixed assets, partially offset by 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 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, and repurchased 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
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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.
Our indebtness under our credit facility creates interest rate risk. Due to
the short-term nature of the borrowings under the credit facility, we do not
need to enter into interest rate swap agreements for purposes of managing our
borrowing costs.
Due to the nature of our foreign operations--billing and collecting for
services within each country in the country's local currency, we historically
have had moderate foreign currency transaction risk. We have not implemented a
formal hedging policy or program. Any foreign currency risk would be primarily
associated with our investments in our non-U.S. subsidiaries. This risk is
mitigated by our historical business practice of leaving the investments in
place rather than repatriating them.
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<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
SIBP.................. -- -- -- -- 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
SIBP.................. 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>
48
<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.
49
<PAGE>
BUSINESS
INTRODUCTION
Founded in 1946, Watson Wyatt & Company is one of the world's leading human
capital consulting firms in terms of revenues, number of clients and number of
offices. 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.
During the past two years, we have provided services to over 70% of the Fortune
100. Our clients include Apple Computer, Cisco Systems, 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 and
innovation 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 60 offices located
in 18 countries. We generated approximately
50
<PAGE>
$580 million in revenues during the twelve months ended December 31, 1999, with
net income of $11.3 million during this same period.
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 significantly strengthen our European capabilities 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 86 offices in 31
countries and employs over 5,500 employees. Watson Wyatt & Company operates 60
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 agreement contains certain 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
agreement, 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.
The industry in which we compete directly is comprised of four dominant HR
consulting firms, based on revenues, such as 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.
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<PAGE>
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. It is frequently noted 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.
52
<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 the world's largest and
best-known corporations. In many cases these relationships have existed
continuously for several decades. During the past two years, we have provided
consulting services to over 70% of the Fortune 100, and we provide the actuarial
consulting services for the three largest corporate defined benefits pension
plans in the United States.
INNOVATIVE TECHNOLOGY-BASED APPROACHES
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 86 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.
INDUSTRY-LEADING RESEARCH
Our research 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.
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<PAGE>
We operate research and information centers in Bethesda and Toronto that are
staffed with more than 80 economists, analysts and attorneys who conduct
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 INNOVATIVE EHR-TM- SOLUTIONS
Our clients are increasingly demanding integrated, flexible approaches to
provide HR benefits information and access to their employees 24 hours per day,
7 days per 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 innovative and quality
service and 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.
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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 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 ("DB") and defined contribution ("DC") 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 DB or DC plans. A typical DB 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 DC 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 DC plan is a 401(k)
plan.
Our target market for DB 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 DB
plans in the United States. Our DB 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>
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<PAGE>
We also help companies design and implement DC 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 DB and DC areas, we emphasize research-based consulting to
design innovative 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 innovative
products and services include:
- PENSION EQUITY PLAN---an alternative retirement plan that combines the
lump sum portability of DC 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 DB 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.
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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 RFP responses from
health care vendors.
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
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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 believe that we are recognized as innovators in the area of human capital
consulting. For example, 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.
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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 the most 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.
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- 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.
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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--including over 70% of the Fortune 100 in
the past two years--leading 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:
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Asea Brown Boveri (ABB)
Apple Computer
Broken Hill Proprietary (BHP)
Canada Post
Cisco Systems
General Electric Company
General Motors
IBM
ICI Americas
Ingersoll-Rand
Jardine Matheson Group
Lockheed Martin Corporation
Mass Transit Railway Corporation (Hong Kong)
COMPETITION
The human capital consulting business is highly competitive. Although 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, 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 information 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 that 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 60 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
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earlier. We also evaluate office relocation on an ongoing basis to meet changing
needs in our markets while minimizing our occupancy expense.
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. See "Risk Factors."
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 ("ERB") 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 ERB. In response to the notice of claim, we filed a declaratory
judgment action against the City of Milwaukee and the ERB 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 $60 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.
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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
</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
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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
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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
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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, Charles E.
Smith Residential Real Estate Trust, Host Marriott Services and is Chairman of
Ecutel, Inc., a private Internet firm.
BOARD OF DIRECTORS
Watson Wyatt & Company directors have been elected at each annual
stockholders' meeting for a one-year term. Of the 15 seats, 12 are filled by
current employees of Watson Wyatt & Company, two
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<PAGE>
are filled by outside directors, and one by the Senior Partner of Watson Wyatt
Partners. Watson Wyatt anticipates changing the composition of the board to
increase the number of outside directors, probably by two, 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. The board
intends to add an additional outside director within one year of the initial
public offering.
Under the Watson Wyatt & Company Holdings certificate of incorporation, the
15 directorships are to be divided into three classes. At the next 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 separate agreements to be entered into between Watson Wyatt & Company
Holdings and each employee director, the director will be required to resign
from the board 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 shareholders' meeting.
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
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<PAGE>
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 SIBP
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 SIBP bonuses to eligible associates based on the
SIBP 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 SIBP following the completion of the public
offering. 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>
69
<PAGE>
(a) In 1996, Watson Wyatt & Company adopted the SIBP, a supplemental bonus plan.
Following the public offering, we will terminate the SIBP 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.
GENERAL EMPLOYMENT ARRANGEMENTS. Generally executive officers are not
parties to employment agreements with Watson Wyatt. Non-employee directors are
paid pursuant to a compensation plan approved on an annual basis. Executives and
other associates in bands 4, 5, 6 and higher are required to sign
non-competition and confidentiality agreements to protect the company's
proprietary information.
70
<PAGE>
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.
71
<PAGE>
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.
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
(22)...................................................... 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.
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<PAGE>
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.
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.
73
<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>
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:
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Name:
Title:
</TABLE>
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ANNEX B
FORM OF AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
WATSON WYATT & COMPANY HOLDINGS
Pursuant to Sections 242 and 245 of the General
Corporation Law of the State of Delaware
WATSON WYATT & COMPANY HOLDINGS, a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "CORPORATION"),
hereby certifies as follows:
A. The name of the Corporation is Watson Wyatt & Company Holdings. The
Corporation was originally incorporated by the filing of a Certificate of
Incorporation with the Secretary of State of Delaware on January 7, 2000.
B. This Amended and Restated Certificate of Incorporation was duly adopted
in accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware.
C. The text of the Certificate of Incorporation of the Corporation is
hereby amended and restated to read in full as follows:
1. NAME. The name of the corporation is Watson Wyatt & Company Holdings
(the "CORPORATION").
2. REGISTERED OFFICE; REGISTERED AGENT. The address of the
Corporation's registered office in the State of Delaware is 1209 Orange Street,
Wilmington, DE 1980l, in the County of New Castle. The name of its registered
agent at such address is The Corporation Trust Company.
3. PURPOSE. The purpose of the Corporation is to engage in any lawful
act or activity for which corporations may be organized under the Delaware
General Corporation Law.
4. CAPITAL STOCK.
4.1 The Corporation has the authority to issue an aggregate
of 100,000,000 shares, of which: (i) 69,000,000 are shares of Class A Common
Stock, par value $.01 per share ("CLASS A COMMON STOCK"), (ii) 15,000,000 are
shares of Class B-1 Common Stock, par value $.01 per share (the "CLASS B-1
COMMON STOCK"), (iii) 15,000,000 are shares of Class B-2 Common Stock, par
value $.01 per share (the "CLASS B-2 COMMON STOCK;" and the Class B-1 Common
Stock and Class B-2 Common Stock are referred to collectively as the "CLASS B
COMMON STOCK") and (iv) 1,000,000 are shares of Preferred Stock, no par value
per share (the "PREFERRED STOCK"). The Class A Common Stock, the Class B-1
Common Stock and the Class B-2 Common Stock are referred to collectively as
the "COMMON STOCK".
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4.2 The following is a description of the relative powers,
preferences and participating, optional or other special rights, and the
qualifications, limitations or restrictions of the Common Stock.
(a) GENERAL. Except as otherwise set forth in this
Article 4, the relative powers, preferences and participating, optional or other
special rights, and the qualifications, limitations or restrictions of each
class of Common Stock is identical in all respects.
(b) VOTING. At every meeting of the stockholders of
the Corporation in connection with the election of directors and all other
matters submitted to a vote of stockholders, every holder of Common Stock is
entitled to one vote in person or by proxy for each share of Common Stock
registered in the name of the holder on the transfer books of the Corporation.
Except as otherwise required by law, the holders of each class of Common Stock
shall vote together as a single class, subject to any right that may be
conferred upon holders of Preferred Stock to vote together with holders of
Common Stock on all matters submitted to a vote of stockholders of the
Corporation.
(c) RIGHTS OF HOLDERS OF CLASS B COMMON STOCK.
(i) DEFINITIONS.
"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.
"PERMITTED TRANSFEREE" means any of the
following: (i) any revocable trust created for the benefit of the stockholder
during the lifetime of the stockholder of which the stockholder is the only
person (whether in the capacity as a trustee, settlor or otherwise) having
voting and dispositive control over the Class B Common Stock held by such trust,
(ii) any irrevocable trust created for the benefit of the stockholder and/or any
spouse of the stockholder and/or any descendant of the stockholder (which term
shall include any adopted child or stepchild of the stockholder) of which the
stockholder is the only trustee having voting and dispositive control over the
Class B Common Stock held by such trust, (iii) a custodianship for the benefit
of a minor who is a descendant of the stockholder (which term shall include any
adopted child or stepchild of the stockholder), 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, and of which the
stockholder is the only custodian having voting or dispositive control over the
Class B Common 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 stockholder alone, or by the stockholder and any spouse of
the stockholder and/or any descendant of the stockholder (which term shall
include any adopted child or stepchild of the stockholder) and/or any Person
referred to in clauses (i) - (iii) above, which is Controlled by the stockholder
and (v) any corporation (including, without limitation, any subsidiary or
sub-subsidiary of any such corporation) which is wholly-owned directly or
indirectly, by the stockholder alone or by the stockholder and any one or more
Persons referred to in clauses (i) - (iv) above and which is Controlled by the
stockholder.
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"PERSON" means an individual, partnership,
corporation, limited liability company, trust or other entity of whatever
nature.
"PUBLIC OFFERING DATE" means the date of the
offering of the Corporation's shares of Class A Common Stock in an underwritten
public offering.
(ii) TRANSFER RESTRICTIONS. Except for
transfers to Permitted Transferees and conversions under Section 4.2(c)(iii),
shares of Class B-1 Common Stock may not be transferred prior to twelve (12)
months after the Public Offering Date, and shares of Class B-2 Common Stock may
not be transferred prior to twenty four (24) months after the Public Offering
Date. Except as provided in this Section 4.2(c)(ii), any purported transfer of
shares of Class B-1 Common Stock or Class B-2 Common Stock prior to the
applicable date referred to in this Section 4.2(c)(ii) will be void. Shares of
Class B-1 Common Stock and Class B-2 Common Stock may be transferred to a
Permitted Transferee at any time, and such permitted transferee will take such
shares subject to the provisions of this Section 4.2(c)(ii).
(iii) CONVERSION TO CLASS A COMMON STOCK.
Each share of Class B-1 Common Stock will be converted automatically into an
equal number of shares of Class A Common Stock twelve (12) months after the
Public Offering Date. Each share of Class B-2 Common Stock will be converted
automatically into an equal number of shares of Class A Common Stock twenty four
(24) months after the Public Offering Date. Notwithstanding the foregoing,
shares of Class B-1 Common Stock and Class B-2 Common Stock may be converted to
Class A Common Stock prior to the expiration of the foregoing restricted periods
upon the prior consent of the Board of Directors. To the extent permitted by
law, such a voluntary conversion shall be deemed to have been effected at the
close of business on the date of surrender. Shares of Class A Common Stock may
not be converted into shares of Class B-1 Common Stock or Class B-2 Common
Stock.
(iv) PROCEDURE FOR TRANSFERS. Shares of
Class B-1 Common Stock and Class B-2 Common Stock which are uncertificated are
transferred on the books of the Corporation upon presentation at the office of
the Secretary of the Corporation (or at such additional place or places as may
from time to time be designated by the Secretary of the Corporation) of a
written request for transfer in such form as the Corporation requests. Shares of
Class B-1 Common Stock and Class B-2 Common Stock represented by certificates
are transferred on the books of the Corporation, and a new certificate therefor
issued, upon presentation at the office of the Secretary of the Corporation (or
at such additional place or places as may from time to time be designated by the
Secretary of the Corporation) of the certificate for the shares, in proper form
for transfer and accompanied by all requisite stock transfer tax stamps.
(v) LEGENDS. Shares of Class B-1 Common
Stock and Class B-2 Common Stock shall contain a legend reading as follows:
"Shares of Class B Common Stock may not be transferred (which term includes,
without limitation, buying a put option, selling a call option or entering into
any other hedging or insurance transaction relating to the shares), except
pursuant to a transfer that meets the qualifications set forth in Sections
4.2(c) of the Certificate of Incorporation of this Corporation, and no person
who receives the shares of Class B Common Stock in connection with a transfer
that does not meet the qualifications prescribed
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by such section is entitled to own or to be registered as the record holder of
the shares of Class B Common Stock."
(vi) RETIREMENT OF CLASS B SHARES. Any
shares of Class B-1 Common Stock or Class B-2 Common Stock that have been
converted into shares of Class A Common Stock will be retired with no further
action by the Corporation, may not be reissued as shares of Class B Common
Stock, and will have the status of authorized and unissued shares of Class A
Common Stock.
(vii) RESERVATION OF SHARES. The Corporation
at all times shall reserve and keep available, out of its authorized but
unissued Class A Common Stock, at least the number of shares of Class A Common
Stock that would become issuable upon the conversion of all shares of Class B
Common Stock then outstanding.
(d) RECLASSIFICATIONS, SUBDIVISIONS AND COMBINATIONS.
No class of Common Stock may be reclassified, subdivided or combined unless the
reclassification, subdivision or combination occurs simultaneously and in the
same proportion for each class of Common Stock, except that Class A Common
Stock, Class B-1 Common Stock and Class B-2 Common Stock may be reclassified as
a single class of common stock at any time following twenty four (24) months
after the Public Offering Date.
(e) DIVIDENDS AND OTHER DISTRIBUTIONS. Subject to the
rights of the holders of Preferred Stock, holders of each class of Common Stock
are entitled to receive such dividends and other distributions in cash, stock of
any corporation (other than Common Stock) or property of the Corporation as may
be declared thereon by the Board of Directors from time to time out of assets or
funds of the Corporation legally available therefor, and shall share equally on
a per share basis in all such dividends and other distributions. In the case of
dividends or other distributions payable in Common Stock, including
distributions pursuant to stock splits or divisions of Common Stock: (x) only
shares of Class A Common Stock are paid or distributed with respect to Class A
Common Stock, (y) only shares of Class B-1 Common Stock are paid or distributed
with respect to Class B-1 Common Stock and (z) only shares of Class B-2 Common
Stock are paid or distributed with respect to Class B-2 Common Stock.
(f) LIQUIDATION, DISSOLUTION AND WINDING UP. In the
event of any liquidation, dissolution or winding up of the affairs of the
Corporation, whether voluntary or involuntary, after payment in full of the
amounts required to be paid to the holders of Preferred Stock, the remaining
assets and funds of the Corporation are distributed pro rata to the holders of
shares of Common Stock. For purposes of this subsection (f), the voluntary sale,
conveyance, lease, exchange or transfer (for cash, shares of stock, securities
or other consideration) of all or substantially all of the assets of the
Corporation or a consolidation or merger of the Corporation with one or more
other corporations (whether or not the Corporation is the corporation surviving
the consolidation or merger) shall not be deemed to be a liquidation,
dissolution or winding up, voluntary or involuntary.
(g) REORGANIZATIONS AND CONSOLIDATIONS. In case of
any reorganization or any consolidation of the Corporation with one or more
other corporations or a merger of the Corporation with another corporation, each
holder of a share of Common Stock of any class are
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entitled to receive with respect to that share the same kind and amount of
shares of stock and other securities and property (including cash) receivable
upon the reorganization, consolidation or merger by a holder of a share of any
other class of Common Stock.
(h) CONVERSION OF OUTSTANDING SHARES. Upon the
effectiveness of the filing of this Amended and Restated Certificate of
Incorporation, any outstanding shares of common stock of the Corporation shall
be converted into shares of Class A Common Stock.
4.3 The number of authorized shares of any class or classes of
stock may be increased or decreased (but not below the number of shares thereof
then outstanding) by the affirmative vote of the holders of a majority of the
votes entitled to be cast by the holders of the Common Stock, voting together as
a single class, irrespective of the provisions of Section 242(b)(2) of the
Delaware General Corporation Law or any corresponding provision hereinafter
enacted.
4.4 To the full extent permitted by the Delaware General
Corporation Law, as the same exists or may hereafter be amended, the Board of
Directors is authorized by resolution to divide and issue the shares of
Preferred Stock in classes or series and to fix the voting powers and any
designations, preferences, and relative, participating, optional or other
special rights of any such class or series of Preferred Stock and any
qualifications, limitations or restrictions thereof as are stated and expressed
in the resolution or resolutions providing for the issue of such stock adopted
by the Board of Directors.
4.5 No holder of stock of any class of the Corporation has any
preemptive or preferential right of subscription to any shares of any class of
stock of the Corporation whether now or hereafter authorized, or to any
obligation convertible into stock of the Corporation, or any right of
subscription therefor, other than such rights, if any, as the Board of Directors
in its discretion from time to time determines.
5. BOARD OF DIRECTORS.
5.1 The business and affairs of the Corporation are managed by
or under the direction of a Board of Directors. The number of directors of the
Corporation constituting the whole board are fixed in the manner provided in the
by-laws. The election of directors need not be by ballot.
5.2 The directors are divided into three classes, Class I,
Class II and Class III. The initial term of office of the Class I, Class II
and Class III directors shall expire at the annual meeting of stockholders in
2001, 2002, and 2003, respectively. The number of directors are apportioned
among the classes by the Board of Directors so as to maintain the number of
directors in each class as nearly equal as reasonably possible, and any
additional director of any class elected to fill a vacancy resulting from an
increase in such class shall hold office for a term that shall coincide with
the remaining term of that class. Starting in 2001, at each annual meeting of
stockholders, directors elected to succeed the directors whose terms expire
at such annual meeting shall be elected to hold office for a term expiring at
the annual meeting of stockholders in the third year following the year of
their election and until their successors have been duly elected and
qualified. Notwithstanding the foregoing, for any director who is an employee
of the Corporation or any of its affiliates at the time of election to the
Board it is a qualification for service as a director that such director
remain so employed, so that the term of any such director automatically will
terminate upon termination of such director's employment with the Corporation
or such affiliate for any reason, unless the Board, by majority of the
members of the Board of Directors, otherwise determines.
5.3 If the number of directors is changed, any increase or
decrease shall be apportioned among the classes in such manner as the board
of directors of the Corporation shall determine, but no
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decrease in the number of directors may shorten the term of any incumbent
director.
5.4 No director who is part of any class of directors may
be removed except both for cause and with the affirmative vote of the holders
of not less than 67% of the voting power of all outstanding shares of stock
of the Corporation entitled to vote generally in the election of directors,
considered for this purpose as a single class.
5.5 Vacancies and newly created directorships resulting
from any increase in the authorized number of directors or from any other
cause (other than vacancies and newly created directorships which the holders
of any class or classes of stock or series thereof are expressly entitled by
this Amended and Restated Certificate of Incorporation to fill) shall be
filled by, and only by, a majority of the members of the board of directors,
although less than a quorum, or by the sole remaining director. Any director
appointed to fill a vacancy or a newly created directorship shall hold office
until the next election of the class of directors of the director which such
director replaced or the class of directors to which such director was
appointed, and until his or her successor is elected and qualified or until
his or her earlier resignation or removal.
5.6 Notwithstanding the foregoing, in the event that the
holders of any series of Preferred Stock of the Corporation shall be
entitled, voting separately as a class, to elect any directors of the
Corporation, then the number of directors that may be elected by such holders
voting separately as a class shall be in addition to the number fixed
pursuant to a resolution of a majority of the members of the board of
directors of the Corporation. Except as otherwise provided in the terms of
such class or series, (i) the terms of the directors elected by such holders
voting separately as a class shall expire at the annual meeting of
stockholders next succeeding their election without regard to the
classification of other directors and (ii) any director or directors elected
by such holders voting separately as a class may be removed, with or without
cause, by the holders of a majority of the voting power of all outstanding
shares of stock of the Corporation entitled to vote separately as a class in
an election of such directors.
5.7 Notwithstanding anything to the contrary contained in this
Amended and Restated Certificate of Incorporation, the affirmative vote of the
holders of at least 67% of the voting power of the shares entitled to vote
generally in the election of directors are required to amend, alter or repeal,
or to adopt any provision inconsistent with, this Article 5.
6. AMENDMENT OF BY-LAWS. In furtherance and not in limitation of the
powers conferred by the laws of the State of Delaware, the Board of Directors is
authorized to adopt, amend or repeal the by-laws of the Corporation. No
adoption, amendment or repeal of a by-law by action of stockholders shall be
effective unless approved by the affirmative vote of the holders of at least 67%
of the voting power of the shares entitled to vote generally in the election of
directors.
7. STOCKHOLDER MEETINGS. No action of stockholders of the
Corporation required or permitted to be taken at any annual or special
meeting of stockholders of the Corporation may be taken without a meeting of
stockholders, without prior notice and without a vote, and the power of
stockholders of the Corporation to consent in writing to the taking of any
action without a meeting is specifically denied. Notwithstanding this Article
7, the holders of any series of Preferred Stock of the Corporation shall be
entitled to take action by written consent to such extent, if any, as may be
provided in the terms of such series. Subject to the rights of holders of any
series of Preferred Stock, special meetings of stockholders of the
Corporation may be called only by the President or by the Board of Directors
pursuant to resolution adopted by a majority of the members of the Board of
Directors. Business transacted at any
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special meeting of stockholders are confined to the purpose or purposes of the
meeting as stated in the notice of the meeting. Notwithstanding anything
contained in this Amended and Restated Certificate of Incorporation to the
contrary, any amendment to or deletion of this Article 7 shall require the
affirmative vote of the holders of at least 67% of the voting power of all
outstanding shares of capital stock of the corporation entitled to vote
generally in the election of directors.
8. LIMITATION OF LIABILITY. A director of the Corporation shall not be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (a) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(b) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (c) under Section 174 of the Delaware
General Corporation Law or (d) for any transaction from which the director
derived an improper personal benefit. If the General Corporation Law of the
State of Delaware is amended after approval of this Article by the stockholders
to authorize the further elimination or limitation of the liability of
directors, then the liability of directors are eliminated or limited to the full
extent authorized
9. Subject to the provisions of this Amended and Restated Certificate
of Incorporation, the Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders in this Certificate of Incorporation are granted subject to this
reservation.
IN WITNESS WHEREOF, Watson Wyatt & Company Holdings has caused
this certificate to be signed by its President and Secretary, on _________,
2000.
By:
-------------------------------------------
President
By:
-------------------------------------------
Secretary
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ANNEX C
FORM OF AMENDED AND RESTATED
BY-LAWS
OF
WATSON WYATT & COMPANY HOLDINGS
ARTICLE 1
STOCKHOLDERS
Section 1.1 ANNUAL MEETINGS. An annual meeting of stockholders shall be
held for the election of directors at such date, time and place either within or
without the State of Delaware designated by the Board of Directors from time to
time. Any other business properly brought before the meeting may be transacted
at the annual meeting.
Section 1.2 SPECIAL MEETINGS. Special meetings of stockholders may be
called at any time by, and only by, the President or by the Board of Directors
pursuant to a resolution adopted by a majority of the members of the Board of
Directors, to be held at such date, time and place either within or without the
State of Delaware as is stated in the notice of the meeting.
Section 1.3 NOTICE OF MEETINGS. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting must
be given, stating the place, date and hour of the meeting, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called. Unless
otherwise required by law, the written notice of any meeting shall be given not
less than ten nor more than sixty days before the date of the meeting to each
stockholder entitled to vote at such meeting. If mailed, such notice shall be
deemed to be given when deposited in the United States mail, postage prepaid,
directed to the stockholder at such stockholder's address as it appears on the
records of the Corporation.
Section 1.4 ADJOURNMENTS. Any meeting of stockholders, annual or
special, may be adjourned from time to time, to reconvene at the same or some
other place, and notice need not be given of any such adjourned meeting if the
time and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting must be given to
each stockholder of record entitled to vote at the meeting.
Section 1.5 QUORUM. At each meeting of stockholders, except where
otherwise required by law, the certificate of incorporation or these by-laws,
the holders of a majority of the outstanding shares of stock entitled to vote on
a matter at the meeting, present in person or represented by proxy, shall
constitute a quorum. For purposes of the foregoing, where a separate vote by
class or classes is required for any matter, the holders of a majority of the
outstanding shares of such class or classes, present in person or represented by
proxy, shall constitute a quorum to take action with respect to that vote on
that matter. Two or more classes or series of
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stock shall be considered a single class if the holders of such classes or
series of stock are entitled to vote together as a single class at the meeting.
In the absence of a quorum of the holders of any class of stock entitled to vote
on a matter, the meeting of such class may be adjourned from time to time in the
manner provided by Sections 1.4 and 1.6 of these by-laws until a quorum of such
class is so present or represented.
Section 1.6 VOTING; PROXIES. Unless otherwise provided in the
certificate of incorporation, each stockholder entitled to vote at any meeting
of stockholders is entitled to one vote for each share of stock held by such
stockholder which has voting power upon the matter in question. Each stockholder
entitled to vote at a meeting of stockholders may authorize another person or
persons to act for such stockholder by proxy, but no such proxy shall be voted
or acted upon after three years from its date, unless the proxy provides for a
longer period. A duly executed proxy will be irrevocable if it states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power, regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally. A stockholder may revoke any proxy which
is not irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date with the Secretary. Voting at meetings of stockholders need not be
by written ballot unless so directed by the chairman of the meeting or the Board
of Directors. Directors must be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of directors. In all other matters, unless otherwise
required by law, the certificate of incorporation or these by-laws, the
affirmative vote of the holders of a majority of the shares present in person or
represented by proxy at the meeting and entitled to vote on the subject matter
will be the act of the stockholders. Where a separate vote by class or classes
is required, the affirmative vote of the holders of a majority (or, in the case
of an election of directors, a plurality) of the shares of such class or classes
present in person or represented by proxy at the meeting shall be the act of
such class or classes, except as otherwise required by law, the certificate of
incorporation or these by-laws.
Section 1.7 ORGANIZATION. Meetings of stockholders shall be presided
over by the Chairman of the Board, if any, or in the absence of a Chairman of
the Board, by the President or other person designated by the President. The
Secretary, or in the absence of the Secretary an Assistant Secretary or other
person designated by the President, shall act as secretary of the meeting. The
order of business at each such meeting shall be as determined by the chairman of
the meeting. The chairman of the meeting shall have the right and authority to
adjourn a meeting of stockholders without a vote of stockholders and to
prescribe such rules, regulations and procedures and to do all such acts and
things as are necessary or desirable for the proper conduct of the meeting and
are not inconsistent with any rules or regulations adopted by the Board of
Directors pursuant to the provisions of the certificate of incorporation,
including the establishment of procedures for the maintenance of order and
safety, limitations on the time allotted to questions or comments on the affairs
of the Corporation, restrictions on entry to such meeting after the time
prescribed for the commencement thereof and the opening and closing of the
voting polls for each item upon which a vote is to be taken.
Section 1.8 INSPECTORS. Prior to any meeting of stockholders, the Board
of Directors, Chairman of the Board, President or any other officer designated
by the Board shall appoint one
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or more inspectors to act at such meeting and make a written report of the
meeting. If no inspector or alternate is able to act at the meeting of
stockholders, the person presiding at the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his or her duties, must take and sign an oath faithfully to execute
the duties of inspector with strict impartiality and according to the best of
his or her ability. The inspectors shall ascertain the number of shares
outstanding and the voting power of each, determine the shares represented at
the meeting and the validity of proxies and ballots, count all votes and
ballots, determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors and
certify their determination of the number of shares represented at the meeting
and their count of all votes and ballots. The inspectors may appoint or retain
other persons to assist them in the performance of their duties. The date and
time of the opening and closing of the polls for each matter upon which the
stockholders will vote at a meeting shall be announced at the meeting. No
ballot, proxy or vote, nor any revocation thereof or change thereto, may be
accepted by the inspectors after the closing of the polls. In determining the
validity and counting of proxies and ballots, the inspectors shall be limited to
an examination of the proxies, any envelopes submitted therewith, any
information provided by a stockholder who submits a proxy by telegram, cablegram
or other electronic transmission from which it can be determined that the proxy
was authorized by the stockholder, ballots and the regular books and records of
the Corporation, and they may also consider other reliable information for the
limited purpose of reconciling proxies and ballots submitted by or on behalf of
banks, brokers, their nominees or similar persons which represent more votes
than the holder of a proxy is authorized by the record owner to cast or more
votes than the stockholder holds of record.
Section 1.9. FIXING DATE FOR DETERMINING STOCKHOLDERS OF RECORD. In
order for the Corporation to determine the stockholders entitled to notice of or
to vote at any meeting of stockholders or any adjournment of the meeting, the
Board of Directors may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted by the
Board of Directors, and which record date must be no more than sixty nor less
than ten days before the date of such meeting. If no record date is fixed by the
Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders will apply to any adjournment
of the meeting, PROVIDED the Board of Directors may fix a new record date for
the adjourned meeting. In order for the Corporation to determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix a record date, which
record date may not precede the date upon which the resolution fixing the record
date is adopted, and which record date must be no more than sixty days prior to
the action for which a record date is being established. If no record date is
fixed, the record date for determining stockholders for any such purpose will be
at the close of business on the day on which the Board of Directors adopts the
related resolution.
Section 1.10 LIST OF STOCKHOLDERS ENTITLED TO VOTE. The Secretary will
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders
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entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list will be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting, either at a place within the
city where the meeting is to be held, which place must be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list also must be produced and kept at the time and place of
the meeting during the whole time thereof and may be inspected by any
stockholder who is present.
ARTICLE 2
DIRECTORS
Section 2.1 POWERS; NUMBER; QUALIFICATIONS. The business and affairs of
the Corporation shall be managed by or under the direction of the Board of
Directors, except as may be otherwise required by law or provided in the
certificate of incorporation. The number of directors which shall constitute the
whole Board of Directors shall not be less than 7 nor more than 25. The exact
number of directors of the Corporation and the number of directors in each class
of directors shall be fixed only by resolution of a majority of the members of
the Board of Directors from time to time. If the holders of any class or classes
of stock or series thereof are entitled by the certificate of incorporation to
elect one or more directors, the preceding sentence shall not apply to such
directors, and the number of such directors shall be as provided in the terms of
such stock. Directors need not be stockholders.
Section 2.2. ELECTION; TERM OF OFFICE; RESIGNATION; REMOVAL; VACANCIES.
(a) Each director shall hold office until the next election of
the class or category for which such director shall have been chosen, and until
his or her successor is elected and qualified or until his or her earlier
resignation or removal. Notwithstanding the foregoing, for any director who is
an employee of the Corporation or any of its affiliates at the time of election
to the Board it is a qualification for service as a director that such director
remain so employed, so that the term of any such director automatically will
terminate upon termination of such director's employment with the Corporation or
such affiliate for any reason, unless the Board, by majority of the members of
the Board of Directors, otherwise determines.
(b) Any director may resign at any time upon written notice to
the Board of Directors or to the Chairman of the Board, if any, or the
President. Such resignation shall take effect at the time specified in the
notice of resignation, and unless otherwise specified in the notice of
resignation, no acceptance of such resignation is necessary to make it
effective.
(c) No director may be removed except as provided in the
certificate of incorporation or as provided in Section 2.2(a) of these by-laws.
(d) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors (other than any directors
elected in the manner described in the next sentence) or from any other cause
shall be filled by, and only by, a majority of the directors then in office,
although less than a quorum, or by the sole remaining director.
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Whenever the holders of any class or classes of stock or series thereof are
entitled by the certificate of incorporation to elect one or more directors,
vacancies and newly created directorships of such class or classes or series may
be filled by, and only by, a majority of the directors elected by such class or
classes or series then in office, or by the sole remaining director so elected.
Any director elected or appointed to fill a vacancy or a newly created
directorship shall hold office until the next election of the class of directors
of the director which such director replaced or the class of directors to which
such director was appointed, and until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
Section 2.3 REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held at such places within or without the State of Delaware and
at such times as the Board may from time to time determine.
Section 2.4 SPECIAL MEETINGS. Special meetings of the Board of
Directors may be held at any time or place within or without the State of
Delaware whenever called by a Chairman of the Board, if any, by the President,
or at the request in writing of a majority of the members of the Board of
Directors.
Section 2.5 NOTICES OF BOARD OF DIRECTORS MEETINGS. Notice of any
regular or special meeting, unless waived, must be given by mail or facsimile or
courier to each director at his address as the same appears on the records of
the Corporation not less than one (1) day prior to the day on which such meeting
is to be held if such notice is by facsimile or courier, and not less than five
(5) business days prior to the day on which the meeting is to be held if such
notice is by mail. If the Secretary fails or refuses to give such notice, then
the notice may be given by the officer or any one of the directors making the
call. Any such meeting may be held at such place as the Board may fix from time
to time or as may be specified or fixed in such notice. Notice may be waived in
writing by any director, either before or after the meeting. Any meeting of the
Board of Directors will be a legal meeting without any notice having been given,
if all the directors shall be present at the meeting, and no notice of a meeting
is required to be given to any director who shall attend such meeting.
Section 2.6 QUORUM AND MANNER OF ACTING. Except as otherwise provided
in these by-laws, a majority of the members of the Board of Directors
constitutes a quorum at any regular or special meeting of the Board of
Directors. Except as otherwise provided by the Delaware General Corporation Law
("DGCL"), the certificate of incorporation or by these by-laws, the act of a
majority of the directors present at any meeting at which a quorum is present is
the act of the Board of Directors. In the absence of a quorum, a majority of the
directors present may adjourn the meeting from time to time until a quorum be
had. Notice of any adjourned meeting need not be given.
Section 2.7 PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE
PERMITTED. Members of the Board of Directors, or any committee designated by the
Board, may participate in a meeting of the Board or of such committee, as the
case may be, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this by-law shall
constitute presence in person at such meeting.
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Section 2.8 ORGANIZATION. Meetings of the Board of Directors will be
presided over by a Chairman of the Board, if any, or in the absence of a
Chairman of the Board by the President, or in the absence of the President, by a
chairman chosen at the meeting. The Secretary shall act as secretary of the
meeting, but in the absence of the Secretary the chairman of the meeting may
appoint any person to act as secretary of the meeting.
Section 2.9 COMMITTEES OF DIRECTORS. Any duly constituted and
authorized committee of the Board of Directors may exercise such powers as have
been delegated to it by the Board of Directors, without a meeting by the
unanimous execution of an instrument in writing. The Board of Directors may
designate one or more committees, each committee to consist of one or more of
the directors of the Corporation which, to the extent provided by resolution of
the Board of Directors, shall have and may exercise the powers of the Board of
Directors in the management of the business and affairs of the Corporation; but
no such committee shall have the power or authority in reference to the
following matters: (a) approving or adopting, or recommending to the
stockholders, any action or matter expressly required by the DGCL to be
submitted to stockholders for approval or (b) adopting, amending or repealing
any by-laws of the Corporation. Such committees shall have such name or names as
may be determined from time to time by resolution adopted by the Board of
Directors and, when required by the Board, shall keep regular minutes of their
proceedings and report the same to the Board. Subject to legal or other
requirements, Board committees may include one or more persons who are not
directors, PROVIDED that to the extent any such committee exercises powers of
the Board of Directors that have been specifically delegated to it, such
committee shall act solely by vote of members of the committee who are also
members of the Board of Directors.
Section 2.10 COMPENSATION OF DIRECTORS. Directors who are employees
shall not receive any stated salary for their services as directors, but,
pursuant to normal corporate expense reimbursement policies, shall receive
reimbursement for expenses of attendance at such meetings; provided that nothing
herein contained may be construed to preclude any Director from serving the
Corporation in any other capacity and receiving compensation therefore.
Directors who are not employees shall receive compensation for their services as
directors, in such amounts as the Board of Directors from time to time
determines.
ARTICLE 3
OFFICERS
Section 3.1 OFFICERS DESIGNATED. The officers of the Corporation shall
be elected by the Board of Directors at its annual meeting or any special
meeting. They may include a Chairman of the Board and shall include a President,
a Secretary, and such other officers as the Board of Directors may determine.
One person may hold any two offices except the offices of President and
Secretary.
Section 3.2 TENURE OF OFFICE. The officers of the Corporation will hold
office until the next annual meeting of the Board of Directors and until their
respective successors are elected and qualified, except (a) that the term of
office of any officer who is an employee of the Corporation automatically
terminates upon termination of such officer's employment by the Corporation for
any reason and (b) in case of the officer's prior resignation, death or removal.
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The Board of Directors also may remove any officer at any time with or without
cause by the vote of a majority of the members of the Board of Directors.
Additional officers appointed by the President in accordance with Section 3.4
may be removed by the President.
Section 3.3 POWERS AND DUTIES OF OFFICERS. The officers of the
Corporation will have such powers and duties in the management of the
Corporation as may be prescribed by the Board of Directors or delegated by the
President and, to the extent not so provided, as generally pertain to their
respective offices, subject to the control of the Board of Directors.
Section 3.4 ADDITIONAL OFFICERS. The President of the Corporation may
appoint such Assistant Vice Presidents, Assistant Secretaries, Assistant
Treasurers, or other Officers, and such agents as the President may determine,
to hold office for such period, and with such authority and to perform such
duties as the President from time to time determines.
Section 3.5 RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or the Secretary of
the Corporation. Any such resignation will take effect at the time specified in
the notice of resignation. Unless otherwise specified in the notice of
resignation, the acceptance of such resignation shall not be necessary to make
it effective.
Section 3.6 VACANCIES. A vacancy in the office of President or
Secretary for any reason must be filled. A vacancy in any other office may be
filled. Any vacancy which is filled will be filled for the unexpired portion of
the term in the same manner in which an officer to fill said office may be
chosen pursuant to Sections 3.1, 3.2 and 3.4.
ARTICLE 4
SHARES OF STOCK
Section 4.1. CERTIFICATES; UNCERTIFICATED SHARES.
(a) The shares of Class A Common Stock of the Corporation
shall be represented by certificates, and the shares of Class B Common Stock of
the Corporation shall be uncertificated.
(b) The Board of Directors of the Corporation may provide by
resolution or resolutions from time to time that some or all of any or all
classes or series of its stock shall be uncertificated shares, PROVIDED any such
resolution shall not apply to any such shares represented by a certificate
previously issued until such certificate is surrendered to the Corporation.
Notwithstanding the adoption of such a resolution or resolutions by the Board of
Directors of the Corporation, every holder of stock represented by certificates,
and upon request every holder of uncertificated shares, shall be entitled to
have a certificate signed by or in the name of the Corporation by a Chairman of
the Board or the President, and by the Treasurer, Secretary or Assistant
Secretary, representing the number of shares of stock in the Corporation owned
by such holder. If such certificate is manually signed by one officer or
manually countersigned by a transfer agent or by a registrar, any other
signature on the certificate may be a facsimile.
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(c) In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate ceases to
be such officer, transfer agent or registrar before such certificate is issued,
it may be issued by the Corporation with the same effect as if such person were
such officer, transfer agent or registrar at the date of issue.
(d) Certificates representing shares of stock of the
Corporation may bear such legends regarding restrictions on transfer or other
matters as any officer or officers of the Corporation may determine to be
appropriate and lawful.
(e) If the Corporation is authorized to issue more than one
class of stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications or restrictions of
such preferences and/or rights must be set forth in full or summarized on the
face or back of the certificate which the Corporation issues to represent such
class or series of stock, PROVIDED that, except as otherwise required by law, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the Corporation issues to represent such class or
series of stock a statement that the Corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of such class or
series of stock and the qualifications, limitations or restrictions of such
preferences and/or rights. Within a reasonable period of time after the issuance
or transfer of uncertificated shares of any class or series of stock, the
Corporation will send to the registered owner of such shares a written notice
containing the information required by law to be set forth or stated on
certificates representing shares of such class or series or a statement that the
Corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative, participating, optional or other
special rights of such class or series and the qualifications, limitations or
restrictions of such preferences and/or rights.
(f) Except as otherwise expressly provided by law, the rights
and obligations of the holders of uncertificated shares and the rights and
obligations of the holders of certificates representing stock of the same class
and series shall be identical.
Section 4.2 LOST, STOLEN OR DESTROYED STOCK CERTIFICATES; ISSUANCE OF
NEW CERTIFICATES. The Corporation may issue a new certificate of stock in the
place of any certificate previously issued by it, alleged to have been lost,
stolen or destroyed. The Corporation may require the owner of the lost, stolen
or destroyed certificate, or such owner's legal representative, to give the
Corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
ARTICLE 5
MISCELLANEOUS PROVISIONS
Section 5.1 FISCAL YEAR. The fiscal year of the Corporation will be
determined by the Board of Directors.
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Section 5.2 WAIVER OF NOTICE OF MEETINGS OF STOCKHOLDERS, DIRECTORS AND
COMMITTEES. Whenever notice is required to be given by law or under any
provision of the certificate of incorporation or these by-laws, a written waiver
thereof, signed by the person entitled to notice, whether before or after the
time stated therein, is deemed equivalent to notice. Attendance of a person at a
meeting constitutes a waiver of notice of such meeting, except when the person
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the stockholders, directors or members of
a committee of directors need be specified in any written waiver of notice
unless so required by the certificate of incorporation or these by-laws.
Section 5.3 FACSIMILES. Any copy, facsimile telecommunication or other
reliable reproduction of a writing, transmission or signature may be substituted
or used in lieu of the original writing, transmission or signature for any and
all purposes for which the original writing, transmission or signature could be
used, provided that such copy, facsimile telecommunication or other reproduction
shall be a complete reproduction of the entire original writing, transmission or
signature, as the case may be.
Section 5.4 BOOKS AND RECORDS. The books of the Corporation may be kept
(subject to any provision contained in the DGCL) within or without the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors.
Section 5.5 FORM OF RECORDS. Any records maintained by the Corporation
in the regular course of its business, including its stock ledger, books of
account and minute books, may be kept on, or be in the form of, magnetic tape,
photographs, microphotographs or any other information storage device, provided
that the records so kept can be converted into clearly legible form within a
reasonable time. The Corporation shall so convert any records so kept upon the
request of any person entitled to inspect the same.
Section 5.6 DEPOSITORIES. The Board of Directors, the Chairman of the
Board, if any, the President, and such other officers as may be delegated
authority by the Board of Directors or one of the foregoing officers, and each
of them, may designate the banks, trust companies, or other depositories in
which shall be deposited from time to time, the money or securities of the
Corporation. In the case of a designation by the aforementioned officers, any
such designation shall require the approval of two of such officers, one of whom
shall be the Treasurer or the Vice President and Chief Financial Officer.
Section 5.7 CHECKS, DRAFTS, NOTES, ETC. All checks, drafts or other
orders for the payment of money and all notes or other evidences of indebtedness
issued in the name of the Corporation shall be signed by such officer or
officers or agent or agents as from time to time is designated by the Board of
Directors or by any two of the Chairman of the Board, if any, the President, and
the Chief Financial Officer, or one of the foregoing officers and another
officer elected by the Board of Directors.
Section 5.8 CONTRACTS, ETC., HOW EXECUTED. The Board of Directors may
authorize any officer, agent or agents, to enter into any contract or execute
and deliver any instrument in
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the name and on behalf of the Corporation, and such authority may be general or
confined to specific instances.
Section 5.9 STOCK IN OTHER CORPORATIONS. Any shares of stock in any
other corporation which may from time to time be held by the Corporation may be
represented and voted at any meeting of stockholders of such other corporation
by the President, the Treasurer or the Secretary of the Corporation or by any
other person or persons thereunto authorized by the Board of Directors or
designated by the President, or by any proxy designated by written instrument of
appointment executed in the name of this Corporation by its President or by such
officers as may be designated by him and attested by the Secretary or Assistant
Secretary.
Section 5.10 INDEMNIFICATION.
(a) Each person who was or is a party or is threatened to be
made a party to or is involved in any action, suit or proceeding or alternative
dispute resolution procedure, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or
she, or a person of whom he or she is the legal representative, is or was a
director or officer of the Corporation or is or was a director or officer
serving at the request of the Corporation as a director, manager, officer,
partner, trustee, employee or agent of another corporation or of a partnership,
limited liability company, joint venture, trust or other enterprise, including
service with respect to employee benefit plans, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the laws of
Delaware as the same now or may hereafter exist (but, in the case of any change,
only to the extent that such change authorizes the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such change) against all costs, charges, expenses, liabilities
and losses (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of his or her heirs, executors and administrators. Until
such time as there has been a final judgment to the contrary, a person shall be
presumed to be entitled to be indemnified under this Section 5.10(a). The right
to indemnification conferred in this Section shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition upon receipt
by the Corporation of an undertaking, by or on behalf of such director or
officer, to repay all amounts so advanced if it shall ultimately be determined
that the director or officer is not entitled to be indemnified under this
Section or otherwise. The Corporation may, by action of its Board of Directors,
provide indemnification to employees and agents of the Corporation with the same
scope and effect as the foregoing indemnification of directors and officers.
Notwithstanding anything contained in this Section 5.10, except for proceedings
to enforce rights provided in this Section 5.10, the Corporation shall not be
obligated under this Section 5.10 to provide any indemnification or any payment
or reimbursement of expenses to any director, officer or other person in
connection with a proceeding (or part thereof) initiated by such person (which
shall not include counterclaims or crossclaims initiated by others) unless the
Board of Directors has authorized or consented to such proceeding (or part
thereof) in a resolution adopted by the Board.
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(b) If a claim under subsection (a) of this Section is not
paid in full by the Corporation within thirty days after a written claim has
been received by the Corporation the claimant may at any time thereafter bring
suit against the Corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall also be entitled to be paid
the expense of prosecuting such claim. It shall be a defense to any action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking has been tendered to the Corporation) that the claimant has failed
to meet a standard of conduct which makes it permissible to indemnify the
claimant for the amount claimed, but the burden of proving such defense shall be
on the Corporation. Neither the failure of the Corporation (including its Board
of Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is permissible in the circumstances because he or she has met such
standard of conduct, nor an actual determination by the Corporation (including
its Board of Directors, independent legal counsel, or its stockholders) that the
claimant has not met such standard of conduct, nor the termination of any
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, shall be a defense to the action or create a
presumption that the claimant has failed to meet the required standard of
conduct.
(c) The right to indemnification and the payment of expenses
incurred in defending a proceeding in advance of its final disposition conferred
in this Section shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, by-laws, agreement, vote of stockholders or disinterested
directors or otherwise.
(d) The Corporation may maintain insurance, at its expense, to
protect itself and any director, manager, officer, partner, trustee, employee or
agent of the Corporation or another corporation, partnership, limited liability
company, joint venture, trust or other enterprise against any expense, liability
or loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under Delaware law.
(e) To the extent that any director, officer, employee or
agent of the Corporation is by reason of such position, or a position with
another entity at the request of the Corporation, a witness in any proceeding,
he or she shall be indemnified against all costs and expenses actually and
reasonably incurred by him or her or on his or her behalf in connection
therewith.
(f) Notwithstanding any amendment of this section which may
have been approved by the stockholders, this section may be added to, altered,
amended or repealed pursuant to Section 5.11 of these by-laws.
(g) Any amendment, repeal or modification of any provision of
this Section by the stockholders or the directors of the Corporation shall not
adversely affect any right or protection of a director or officer of the
Corporation existing at the time of such amendment, repeal or modification.
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Section 5.11 AMENDMENT OF BY-LAWS. These by-laws may be amended,
modified or repealed, and new by-laws may be adopted at any time, by the Board
of Directors. Stockholders of the Corporation may adopt additional by-laws and
amend, modify or repeal any by-law whether or not adopted by them, but only in
accordance with Article 6 of the certificate of incorporation.
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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.
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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
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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;
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(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,
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<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;
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<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.
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<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.
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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,
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<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
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<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
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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.
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(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
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(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;
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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.
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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."
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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.
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(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.
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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
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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
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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. 1 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 March 17, 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>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 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 March 17, 2000
/s/ Carl D. Mautz* Chief Financial Officer
- ------------------------------------------- (Principal Financial Officer
Name: CARL D. MAUTZ and Principal Accounting
Officer) March 17, 2000
/s/ Thomas W. Barratt* Director
- -------------------------------------------
Name: THOMAS W. BARRATT March 17, 2000
/s/ Paula A. DeLisle* Director
- -------------------------------------------
Name: PAULA A. DELISLE March 17, 2000
/s/ David B. Friend, M.D.* Director
- -------------------------------------------
Name: DAVID B. FRIEND, M.D. March 17, 2000
/s/ John J. Gabarro* Director
- -------------------------------------------
Name: JOHN J. GABARRO March 17, 2000
/s/ Ira T. Kay* Director
- -------------------------------------------
Name: IRA T. KAY March 17, 2000
/s/ Brian E. Kennedy* Director
- -------------------------------------------
Name: BRIAN E. KENNEDY March 17, 2000
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Eric P. Lofgren* Director
- -------------------------------------------
Name: ERIC P. LOFGREN March 17, 2000
/s/ Robert D. Masding* Director
- -------------------------------------------
Name: ROBERT D. MASDING March 17, 2000
/s/ R. Michael McCullough* Director
- -------------------------------------------
Name: R. MICHAEL MCCULLOUGH March 17, 2000
/s/ Gail E. McKee* Director
- -------------------------------------------
Name: GAIL E. MCKEE March 17, 2000
/s/ Kevin L. Meehan* Director
- -------------------------------------------
Name: KEVIN L. MEEHAN March 17, 2000
/s/ John A. Steinbrunner* Director
- -------------------------------------------
Name: JOHN A. STEINBRUNNER March 17, 2000
/s/ A. Grahame Stott* Director
- -------------------------------------------
Name: A. GRAHAME STOTT March 17, 2000
/s/ Charles P. Wood, Jr.* Director
- -------------------------------------------
Name: CHARLES P. WOOD, JR. March 17, 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 4.1
NUMBER SHARES
CLASS A COMMON STOCK
[Logo]
WATSON WYATT & COMPANY HOLDINGS
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN DEFINITIONS
IN NEW YORK, N.Y. AND
CHARLOTTE, N.C.
CUSIP 942712
This Certifies That
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF CLASS A COMMON STOCK, $.01 PAR VALUE
PER SHARE, OF
WATSON WYATT & COMPANY HOLDINGS
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly endorsed
or accompanied by a properly signed power of attorney to transfer the same. This
certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
DATED:
/s/ Walter W. Bardenwerper [SEAL] /s/ John J. Haley
SECRETARY PRESIDENT AND CHIEF
EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
FIRST UNION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
2
WATSON WYATT & COMPANY HOLDINGS
The Corporation will furnish without charge to each stockholder who so requests
the powers, designations, preferences and relative, participating, optional, or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
Any such request should be addressed to the Secretary of Watson Wyatt & Company
Holdings.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants, with right of survivorship and not as tenants in
common
UNIF GIFT MIN ACT - ________ Custodian _________ under Uniform Gifts to
(Cust) (Minor)
Minors Act _________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _________________
X______________________________________
X______________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
<PAGE>
3
By_____________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 4.2
NUMBER SHARES
CLASS B-1 COMMON STOCK
[Logo]
WATSON WYATT & COMPANY HOLDINGS
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN DEFINITIONS
IN NEW YORK, N.Y. AND AND STOCKHOLDER RIGHTS LEGEND
CHARLOTTE, N.C.
CUSIP 942712
This Certifies That
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF CLASS B-1 COMMON STOCK, $.01 PAR
VALUE PER SHARE, OF
WATSON WYATT & COMPANY HOLDINGS
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly endorsed
or accompanied by a properly signed power of attorney to transfer the same. This
certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
DATED:
/s/ Walter W. Bardenwerper [SEAL] /s/ John J. Haley
SECRETARY PRESIDENT AND CHIEF
EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
FIRST UNION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
WATSON WYATT & COMPANY HOLDINGS
Shares of Class B-1 Common Stock may not be transferred (which term includes,
without limitation, buying a put option, selling a call option or entering into
any other hedging or insurance transaction relating to the shares), except
pursuant to a transfer that meets the qualifications set forth in Sections
4.2(c) of the Certificate of Incorporation of this Corporation, and no person
who receives the shares of Class B-1 Common Stock in connection with a transfer
that does not meet the qualifications prescribed by such section is entitled to
own or to be registered as the record holder of the shares of Class B-1 Common
Stock.
The Corporation will furnish without charge to each stockholder who so requests
the powers, designations, preferences and relative, participating, optional, or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
Any such request should be addressed to the Secretary of Watson Wyatt & Company
Holdings.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants, with right of survivorship and not as
tenants in common
UNIF GIFT MIN ACT - ________ Custodian _________ under Uniform Gifts to
(Cust) (Minor)
Minors Act _________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _________________
X______________________________________
X______________________________________
<PAGE>
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
By_________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 4.3
NUMBER SHARES
CLASS B-2 COMMON STOCK
[Logo]
WATSON WYATT & COMPANY HOLDINGS
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN DEFINITIONS
IN NEW YORK, N.Y. AND AND STOCKHOLDER RIGHTS LEGEND
CHARLOTTE, N.C.
CUSIP 942712
This Certifies That
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF CLASS B-2 COMMON STOCK, $.01 PAR
VALUE PER SHARE, OF
WATSON WYATT & COMPANY HOLDINGS
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly endorsed
or accompanied by a properly signed power of attorney to transfer the same. This
certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
DATED:
/s/ Walter W. Bardenwerper [SEAL] /s/ John J. Haley
SECRETARY PRESIDENT AND CHIEF
EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
FIRST UNION
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
WATSON WYATT & COMPANY HOLDINGS
Shares of Class B-2 Common Stock may not be transferred (which term includes,
without limitation, buying a put option, selling a call option or entering into
any other hedging or insurance transaction relating to the shares), except
pursuant to a transfer that meets the qualifications set forth in Sections
4.2(c) of the Certificate of Incorporation of this Corporation, and no person
who receives the shares of Class B-2 Common Stock in connection with a transfer
that does not meet the qualifications prescribed by such section is entitled to
own or to be registered as the record holder of the shares of Class B-2 Common
Stock.
The Corporation will furnish without charge to each stockholder who so requests
the powers, designations, preferences and relative, participating, optional, or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
Any such request should be addressed to the Secretary of Watson Wyatt & Company
Holdings.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants, with right of survivorship and not as tenants in
common
UNIF GIFT MIN ACT - ________ Custodian _________ under Uniform Gifts to
(Cust) (Minor)
Minors Act _________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _________________
X______________________________________
X______________________________________
<PAGE>
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
By_____________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
Exhibit 5.1
[Letterhead of Cadwalader, Wickersham & Taft]
March 17, 2000
Watson Wyatt & Company Holdings
6707 Democracy Boulevard, Suite 800
Bethesda, Maryland 20817
Re: Watson Wyatt & Company Holdings
REGISTRATION STATEMENT ON FORM S-4 (FILE NO. 333-94975)
Ladies and Gentlemen:
This opinion is being delivered by us, as counsel to Watson
Wyatt & Company Holdings, a Delaware corporation (the "Company"), in connection
with the Registration Statement on Form S-4, File No. 333-94975, as amended (the
"Registration Statement"), of the Company filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"). The Registration Statement relates to the offering by the
Company to stockholders of Watson Wyatt & Company ("WW&Co.") of the Company's
class B-1 common stock, par value $.01 per share, and the Company's class B-2
common stock, par value $.01 per share (collectively, the "Shares") in
connection with the proposed merger of WW Merger Subsidiary, Inc., the Company's
wholly-owned subsidiary, with and into WW&Co. (the "Merger")
In rendering the opinion set forth below, we examined and
relied upon such certificates, corporate and public records, agreements,
instruments and other documents we considered appropriate as a basis for the
opinion.
Based upon and subject to the foregoing, we are of the opinion
that when the Registration Statement has become effective under the Securities
Act, the Merger occurs and the Shares are issued as contemplated by the
Registration Statement, the Shares will be validly issued, fully paid and
nonassessable.
The foregoing opinion is limited to the federal laws of the
United States and the General Corporation Law of the State of Delaware, and we
are expressing no opinion as to the effect of the laws of any other
jurisdiction. While we are not licensed to practice law in the State of
Delaware, we have reviewed applicable provisions of the Delaware General
Corporation Law as we have deemed appropriate in connection with the opinion.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to us under the caption
"Legal Matters" in the Registration Statement. In giving such consent, we do not
thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act or the rules and regulations of
the Commission.
Very truly yours,
/s/ Cadwalader, Wickersham & Taft
<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 solely 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 or relied upon by any other person without our express written
permission.
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 10.2
WATSON WYATT WORLDWIDE
WATSON WYATT & COMPANY
Office of the President
Suite 800
6707 Democracy Boulevard
Bethesda, MD 20814-1129
Telephone 301-581-4600
Fax 301-581-4883
October 22, 1999
Dr. David Friend
Watson Wyatt and Company
80 William Street
Wellesley Hills, MA 02181
Dear David,
The purpose of this letter is to summarize our recent discussions regarding your
supplemental pension. In his letter of December 6, 1996, Paul Daoust set forth
the following supplements to your pension:
First, in recognition that you worked one year for Watson Wyatt prior to joining
full time, Watson Wyatt would treat your hire date and credit your service for
pension purposes as of June 15, 1994. Second, you would receive a supplemental
pension on a non-qualified basis which adds 50% to your service credited (this
also applies to your June 1994 to June 1995 year). You are vested on the earlier
of June 15, 2000 or on the date of your termination, if it is initiated by the
company for reasons other than cause.
For clarity sake, the formula for calculating credited service = ((Actual
Service + 1 year) *1.5). For example, if you terminate on June 15, 2002, you
would have worked at WWW for seven years. Your credited service for pension
purposes = ((7 plus 1) * 1.5) = 12 years. The sum of your actual service plus
the supplemental service credit will, of course, be subject to the plan maximum
of 25 years.
As you and I have discussed, we will also vest you in early retirement rights if
you leave Watson Wyatt & Company within six months of a change of control
(neither a public offering of Watson Wyatt & Company stock nor a
merger/reorganization with WW Partners will be deemed a changed in control).
These early retirement rights are valuable because they include the right to
receive your benefits as early as age 50. If one of the events described in this
paragraph occurs before you reach age 50, your retirement benefits will be
calculated using the same early retirement factors that apply to a person age 50
(50% reduction) retiring directly from the company, regardless of your actual
age if you retire before age 50.
As an example of how this calculation would be done, if you leave the company on
June 15, 2004, you would be 48 years old and have 15 years of credited service,
((9 actual + 1) * 1.5) = 15. In calculating your retirement benefit, per Watson
Wyatt's retirement plan, those 15 years of service would be multiplied by
approximately 2% to equal approximately 30% of your final three-year average pay
(base pay plus fiscal year end bonus but not including SIBP). That 30% would
then be reduced by the factors applying for a person retiring at age 50 (50%),
resulting in a pension equal to approximately 15% of final average three year
pay. (Of course, this is just an illustration - the Plan documents themselves
shall be definitive as to all terms not supplemented by this letter.) Thus, by
being treated as if you had attained age 50, you would receive the benefits of
the "cliff." For the sake of clarity, the "cliff" significantly increases the
net present value of the retirement benefit, and thus is a valuable right.
<PAGE>
Should you be at or over age 50 when you retire from WWW, your supplemental
service credit will, of course, still apply. However, these special early
retirement rights should be moot since all plan participants over age 50
automatically receive them. To protect and preserve the value of all of your
supplemental pension rights from unforeseen future changes in the pension plan
that could be financially harmful to you, we will offer you the "most favored
nation" status with respect to the choices offered to any other subset of WWW
employees. For example, if a cash balance plan was put in place and WWW offered
a choice to employees age 45 and over with ten years of service to stay in the
old plan or accept the new plan, you would be given the same chance to choose
whichever plan was more favorable to you, regardless of your actual age or
service.
David, I trust this summarized our discussions accurately. I look forward to
continuing to work with you in the years ahead to make Watson Wyatt the best
firm possible.
/s/ John J. Haley
John J. Haley
<PAGE>
WATSON WYATT WORLDWIDE
WATSON WYATT & COMPANY
80 William Street
Wellesley Hills, MA 02181-3713
December 6, 1996 Telephone 617-237-3900
Fax 617-235-0311
Dr. David Friend
Watson Wyatt and Company
80 William Street
Wellesley Hills, MA 02181
Dear David,
The purpose of this letter is to summarize our recent discussions regarding the
provision of a supplemental pension to you. We have decided to grant this
supplemental pension in view of the fact that you were a mid-career hire who
joined Watson Wyatt after significant business experiences in various
capacities, which have added substantially to your value as Practice Director
for the Group & Health Care Practice.
We will provide you with a supplemental pension on a non-qualified basis which
would, in essence, add 50% to your service credited for benefit calculation
purposes under both our qualified and non-qualified pension plans, with all of
the other usual plan provisions, including vesting, applicable. Also, in
recognition of the fact that you worked for us prior to joining us full time in
June of 1995, we will treat your hire date for pension purposes only as June,
1994 (the 50% add-on will also apply to this year of service).
You will become vested in the 50% add-on for service and the prior year of
service mentioned above only if you meet the usual five-year 100% vesting
schedule without regard to these provisions. Thus you will be 100% vested in
this additional service if you remain continuously employed with Watson Wyatt
until June 15, 2000.
Finally, in the event you are terminated by us for reasons other than cause
prior to the date you are 100% vested, we will vest you in your accrued
benefits under our qualified and non-qualified plans, calculated including
the service credits outlined above.
I trust this summarizes our discussion accurately. If not, please let me know.
I look forward to continuing to work with you, David, as a key member of our
senior management team that is building the best global firm in our business.
Sincerely,
/s/ Paul R. Daoust
Paul R. Daoust
Chief Operating Officer
cc: Pete Smith
<PAGE>
Exhibit 10.3
OFFICE LEASE
Between
THE OWNERS OF 1717 H STREET,
N.W., WASHINGTON, D.C.
LANDLORD,
and
WATSON WYATT & COMPANY
d/b/a
WATSON WYATT WORLDWIDE,
TENANT,
for
SEVENTH, EIGHTH AND NINTH FLOORS
1717 H Street, N.W.
Washington, D.C.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Paragraph Number and Heading Page
- ---------------------------- ----
<C> <S>
1. Premises...................................................... 1
2. Term.......................................................... 2
3. Acceptance of Premises and Tenant Improvement Work............ 3
4. Base Rent; Additional Rent.................................... 4
5. Operating Expenses............................................ 7
6. Real Estate Taxes............................................. 13
7. Late Charges; Interest........................................ 16
8. Services...................................................... 16
9. Personal Property Taxes....................................... 24
10. Tenant's Default.............................................. 24
11. Landlord's Remedies for Tenant's Default...................... 25
12. Landlord Defaults............................................. 27
13. Security Deposit.............................................. 28
14. Use........................................................... 28
15. Assignment and Subletting..................................... 28
16. Condition of Premises......................................... 31
17. Entry by Landlord............................................. 31
18. Liability; Indemnity.......................................... 31
19. Insurance..................................................... 31
20. Improvements.................................................. 33
21. Rules and Regulations......................................... 34
22. Hazardous Materials........................................... 34
23. Limitation on Liability; Tenant's Property.................... 35
24. Damage to Premises............................................ 36
25. Condemnation.................................................. 37
26. Subordination................................................. 38
27. Estoppel Certificates......................................... 39
28. No Personal Liability of Landlord............................. 39
29. No Waiver..................................................... 39
30. Holding Over.................................................. 40
31. (Intentionally Deleted)....................................... 40
32. Covenant of Quiet Enjoyment................................... 40
33. Notices....................................................... 40
34. Broker's Commission........................................... 41
35. Maintenance................................................... 41
36. Parking....................................................... 43
37. Rule Against Perpetuities..................................... 43
38. Renewal....................................................... 43
39. Expansion Option.............................................. 46
40. First Right to Lease.......................................... 48
41. Termination Option............................................ 49
42. Storage Space................................................. 50
43. Waiver of Jury Trial.......................................... 51
45. Signs......................................................... 51
46. Exterior/Landscaping.......................................... 52
47. Exclusivity................................................... 52
49. Miscellaneous................................................. 52
</TABLE>
<PAGE>
Exhibit A - Outline of Premises
Exhibit B - Work Agreement and Allowance
Exhibit C - Char Service Schedule
Exhibit D - Rules and Regulations
Exhibit E - SNDA
Exhibit F - Competitors List
Exhibit G - Signage
<PAGE>
OFFICE LEASE
THIS OFFICE LEASE (the "Lease") is made and executed this 9th
day of January 1998, by and between (i) the Owners of 1717 H Street, N.W.,
Washington, D.C., the Building (defined below), being Marvin M. Robertson and
Katheryn M. Robertson, Trustees under Trust Indenture made by Mathilda M.
Kirchner dated November 28, 1953, Marvin M. Robertson and Katheryn M. Robertson,
Trustees under Trust Indenture made by Cecelia E. Goodman dated November 28,
1953, Marvin M. Robertson, Katheryn M. Robertson and George W. Lemm, Trustees
under the Will of Katheryn Lemm (Trust Estates 2 through 4), Marvin M.
Robertson, Katheryn M. Robertson and George W. Lemm, Trustees under Trust
Indenture made by John C. Goodman dated August 14, 1959 (Trust Estates 1 through
4), Marvin M. Robertson, Katheryn M. Robertson and George W. Lemm, Trustees
under Trust Indenture made by Mathilda M. Kirchner dated August 14, 1959 (Trust
Estates 4, 5 and 6), Marvin M. Robertson, Katheryn M. Robertson and George W.
Lemm, Trustees under Trust Indenture made by Cecelia E. Goodman dated August 14,
1959 (Trust Estates 1 through 6), Marvin M. Robertson, Katheryn M. Robertson and
George W. Lemm, as Trustees under the Trust Indenture made by Katheryn E. Lemm
(Trust Estates 4 and 5), dated August 14, 1959, Marvin M. Robertson, Michael A.
Maiatico and Ann T. Maiatico, Trustees under Trust Indenture No. I made by
Walter M. Macnichol dated September 21, 1959 (Trust Estates 1 through 8), Marvin
M. Robertson, Katheryn M. Robertson and George W. Lemm, Trustees under Trust
Indenture No. II made by Walter M. Macnichol dated September 21, 1959, and
Marvin M. Robertson and George W. Lemm, Trustees under Trust Indenture made by
William F. Glockner dated May 7, 1965 (Trust Estates 3 through 9 and 11),
("Landlord"), and (ii) WATSON WYATT & COMPANY, a Delaware corporation doing
business as WATSON WYATT WORLDWIDE ("Tenant").
1. PREMISES.
(a) Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, all of the office space on the Seventh (7th) Eighth (8th) , and Ninth
(9th) Floors of the office building located at 1717 H Street, N.W., Washington,
D.C. (the "Building"), comprising a total of approximately 87,327 rentable
square feet as measured in accordance with the Washington D.C. Association of
Realtors Method of Measurement dated as of June 13, 1995 (the "Premises" or the
"initial Premises" when referring to the initially leased approximately 87,327
rentable square feet). The Premises are outlined in red on EXHIBIT A attached
hereto. "Expansion Space" (as defined below) and "Additional Expansion Space"
(as defined below) shall become part of the Premises as and when leased by
Tenant, and the amount of rentable square feet of the Premises shall be
increased accordingly.
1
<PAGE>
(b) The Building comprises a total of approximately 318,085 rentable
square feet of office space measured in accordance with the Washington D.C.
Association of Realtors Method of Measurement dated as of June 13, 1995 (the
"Building Rentable Area").
2. TERM.
(a) The term of this Lease (the "Lease Term") shall be the period
commencing on February 1, 1998 (the "Lease Commencement Date") and continuing
thereafter through July 31, 2008. Except as otherwise provided in this Lease, if
Tenant exercises the First Renewal Option in accordance with the provisions of
Paragraph 38, below, all references herein to the "Lease Term" shall include the
Extended Term (as defined below), and if Tenant exercises the Second Renewal
Option in accordance with the provisions of Paragraph 38, below, all references
herein to the "Lease Term" shall include the Second Extended Term (as defined
below).
(b) The "Tenant Build-out Period" shall be the period commencing on the
date Landlord delivers possession of the Premises to Tenant and continuing
through the date the "Tenant Improvement Work" (hereinafter defined) is
substantially completed (hereinafter defined). Tenant shall be provided with
complete access to the Premises during the Tenant Build-out Period to commence
demolition and construction of the Tenant Improvement Work (as defined below) .
(c) The first "Lease Year" shall be the period commencing on July 15,
1998, and ending on July 31, 1999. Each subsequent Lease Year during the Lease
Term shall commence on the day immediately following the last day of the
preceding Lease Year, and shall continue for a period of twelve (12) full
calendar months.
(d) The "Rent Commencement Date" shall be July 15, 1998, whether or not
Landlord has delivered the Premises to Tenant or Tenant has performed or
completed the Tenant Improvement Work; or for any other reason.
(e) Unless the Lease Term is extended in accordance with the provisions
of Paragraph 38, below, the "Lease Expiration Date" shall be July 31, 2008.
(f) Landlord shall use commercially reasonable efforts to deliver the
Premises to Tenant on February 1, 1998, or as soon thereafter as possible, by
taking all reasonably practicable steps to recover possession of the Premises
from The International Bank for Reconstruction and Development, which is the
tenant of the Premises as of the date of execution of this Lease (the "Current
Tenant"). If Landlord does not deliver the Premises to Tenant by February 1,
1998, then Landlord shall pay Tenant all of the rent received by Landlord from
the Current Tenant pursuant to its current lease (dated December 11, 1995) after
February 1, 1998, minus all amounts that are attributable to operating expenses
for the
2
<PAGE>
Current Tenant after February 1, 1998, (the "net rents") , which net rents shall
be deemed income to the Tenant and not to the Landlord, and Tenant shall be
liable for all taxes attributable to the receipt of said net rents. The net
rents shall be paid to Tenant within ten (10) days of receipt by Landlord from
the Current Tenant. In the event the current Tenant fails to pay its rent as and
when due under its lease, Landlord agrees that it will pursue recovery of said
sums and the costs and expenses (including reasonable attorneys' fees) of doing
so shall be deducted from the net rents due Tenant. Landlord agrees that it
shall not waive any net rents due from the Current Tenant.
3. ACCEPTANCE OF PREMISES AND TENANT IMPROVEMENT WORK.
(a) Tenant accepts the existing condition of the Premises and agrees
that Landlord shall not be required to make or pay for any "Improvements" (as
defined in Paragraph 20, below) to the Premises, except for the payment of the
"Tenant Allowance," the "Expansion Space Improvement Allowance," and each
"Renewal Allowance," all as defined below, and as may be provided in EXHIBIT B
hereto. Tenant agrees to accept the initial demised Premises and all Expansion
Space and Additional Expansion Space hereafter leased by Tenant, with all tenant
improvements existing therein at the time said space is leased in their "as is"
condition, provided however, that Landlord agrees that upon delivery to Tenant
that the then existing sprinkler system, VAV boxes and window blinds (which all
shall be of the same color) shall be operational and in good working condition
(Tenant shall be responsible for any damage thereto caused by Tenant's
demolition of the then existing tenant improvements or installation of Tenant's
new Tenant Improvements). Tenant agrees it shall be responsible for modifying
and expanding the then existing sprinkler system (including adding and
relocating sprinkler loops and heads beyond those then existing in the Premises
as of the date the Premises are delivered to Tenant), the HVAC system in the
Premises (including installing VAV boxes beyond those then existing in the
Premises as of the date the Premises are delivered to Tenant) , and that
Landlord shall not be responsible for making or paying for (other than by
providing the foregoing allowances) any changes, additions or improvements to
the then existing tenant improvements, the Building or base Building systems
with regard to Tenant's demolition of the then existing tenant improvements or
the construction and installation of Tenant's new Tenant Improvements.
(b) Tenant will perform the demolition of the tenant improvements
then existing in the Premises at the time of delivery, and complete
construction and installation of Tenant's new Tenant Improvements in the
Premises in accordance with the provisions of EXHIBIT B hereto (hereinafter
the "Tenant Improvement Work"), and Paragraph 19 as to Expansion Space,
Additional Expansion Space and any other Improvements to the Premises.
Throughout the Lease Term, Tenant shall engage any and all general
contractors and subcontractors necessary
3
<PAGE>
to perform any and all of the Tenant Improvement Work and to construct any other
or subsequent Improvements within the Premises. Tenant must obtain the written
consent of Landlord, which shall not be unreasonably withheld, delayed or
conditioned, prior to engaging any architect, engineer, general contractor or
major subcontractor to construct any Improvements within the Premises or to
perform any work in connection with construction of any such Improvements.
(c) Provided that Landlord complies with its obligations with respect
to the payment of the Tenant Allowance (hereinafter defined) in accordance with
the terms of this Lease, Tenant shall construct in the Premises, including any
Expansion Space or Additional Expansion Space, Improvements having a total cost
of not less than Thirty-Five Dollars ($35.00) per rentable square foot of the
Premises, including without limitation Twenty-Seven and 50/100 Dollars ($27.50)
per rentable square foot of the Premises for the costs to Tenant of all design,
architectural and engineering work, construction costs, construction
supervision, contractors' overhead and profit, licenses and permits, and other
hard costs incurred by Tenant in connection with the Improvements.
(d) Landlord shall provide Tenant with a "Tenant Allowance" of Two
Million Four Hundred One Thousand, Four Hundred Ninety Two Dollars ($2,401,492),
an amount equal to Twenty-Seven and 50/100 Dollars per rentable square foot of
the initial Premises, which Tenant may use for construction of Improvements to
the initial Premises, for space planning and architectural fees and moving
expenses, and which shall be paid by Landlord in accordance with the provisions
of EXHIBIT B hereto. If the total cost of construction of the Premises,
including design, architectural and engineering services and other hard costs
incurred in connection with the Improvements, is less than the total of the
Tenant Allowance, the unexpended portion shall be applied to Tenant's Base Rent
obligations for the initial months of the Lease for which Base Rent shall be
due.
(e) Landlord's fee for supervision and oversight of the construction of
the Tenant Improvement Work in the initial Premises shall be Ten Thousand
Dollars ($10,000). If Tenant exercises the Expansion Option, Landlord's fee for
supervision and oversight of the construction of the Tenant Improvement Work in
the Expansion Space shall be Five Thousand Dollars ($5,000). If Tenant leases
any Additional Expansion Space, Landlord's fee for supervision and oversight of
the construction of the Tenant Improvement Work in each Additional Expansion
Space shall be the lesser of (i) Five Thousand Dollars ($5,000) or (ii) $0.12
per rentable square foot.
4. BASE RENT; ADDITIONAL RENT.
(a) Tenant shall pay to Landlord "Base Rent" and "Additional Rent."
Base Rent is the rent due from Tenant to Landlord that is fixed pursuant to the
terms hereof at the commencement of each Lease Year during the Lease Term. Base
Rent does not include
4
<PAGE>
increases in Operating Expenses (as defined below) or in Real Estate Taxes
(as defined below). Additional Rent is any and all rent, payments or other
charges (E.G., increases in Operating Expenses) other than Base Rent that
Tenant is required to pay under the provisions of this Lease. Base Rent and
Additional Rent shall be made payable to "The Owners of 1717 H Street, c/o
Stoladi Property Group" at 1636 Connecticut Avenue, N.W., Washington, D.C.
20009, Suite 400, unless otherwise specified by Landlord pursuant to a prior
written notice delivered to Tenant.
(b) Tenant shall be obligated to pay Base Rent beginning on the Rent
Commencement Date. For the first Lease Year there shall be due and owing from
Tenant to Landlord as annual Base Rent the total sum of Two Million Six Hundred
Two Thousand Five Hundred Fifty Five and 88/100 Dollars ($2,602,555.88),
comprising (i) one Hundred Thirteen Thousand Seven Hundred Thirty Six and 38/100
Dollars ($113,736.38) for the period July 15, 1998 through July 31, 1998, and
(ii) Two Million Four Hundred Eighty Eight Thousand Eight Hundred Nineteen and
50/100 Dollars ($2,488,819.50) for the period August 1, 1998 through July 31,
1999. For the Second Lease Year and each Lease Year thereafter, the annual Base
Rent for the Premises shall be Two Million Four Hundred Eighty-Eight Thousand
Eight Hundred Nineteen and 50/100 Dollars ($2,488,819.50) (i.e., 87,327 rentable
square feet x $28.50 per rentable square foot), as adjusted pursuant to
Paragraph 4 (d), (e) and (f), and Paragraphs 38, 39 and 40. Notwithstanding the
foregoing, if Tenant occupies, and conducts its business in, all or any part of
the Premises for any period before July 15, 1998, or before the rent
commencement dates for the Expansion Space (hereinafter defined) or Additional
Expansion Space (hereinafter defined), Tenant shall reimburse Landlord, within
ten (10) days of Landlord's demand, for the cost of all utilities attributable
to Tenant's occupancy of the Premises during the aforesaid period(s). Tenant's
proportionate share of the cost of such utilities shall be based upon the amount
of rentable square feet of the Premises Tenant occupies during the aforesaid
period.
(c) Tenant's first payment of Base Rent, for the period July 15, 1998
through July 31, 1998, shall be due on the Rent Commencement Date. For the
remainder of the Lease Term and during any extension of the Lease Term, Tenant
shall pay its annual Base Rent in 12 equal monthly installments. Commencing on
August 1, 1998, all monthly installments of Base Rent shall be payable in
advance on the first day of each calendar month during the Lease Term. (For the
first Lease Year, each monthly installment due after July 1998 shall be Two
Hundred Seven Thousand Four Hundred One and 63/100 Dollars ($207,401.63)). All
rent due under this Lease shall be payable, without demand and without setoff or
other reduction, except as expressly provided in this Lease, at the office
within the Building of the property management company engaged by the Landlord
for the Building, or at such other place as Landlord designates by written
notice to Tenant.
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(d) Upon the commencement of the second Lease Year and upon the
commencement of each Lease Year thereafter during the Lease Term, OTHER THAN the
sixth Lease Year, and effective simultaneously with such dates (the "Adjustment
Dates"), the annual Base Rent per rentable square foot shall be increased by an
amount equal to the product of (1) fifty percent (50%) of the increase in the
CPI (as defined below) multiplied by (2) Eighteen and 50/100 Dollars ($18.50),
but said increase shall not exceed two percent (2.0%) of the sum of (i) Eighteen
and 50/100 Dollars ($18.50) and (ii) the amount by which Base Rent was increased
upon commencement of the immediately preceding Lease Year pursuant to this
Paragraph 4(d). The increase in the CPI shall be determined by subtracting the
CPI for the month that is three months prior to the commencement of the first
Lease Year (the "Base Index") from the CPI for the month that is three months
prior to the Adjustment Date and dividing the result by the Base Index.
Notwithstanding the foregoing, however, in no event shall the Base Rent payable
during the second Lease Year or any Lease Year thereafter during the first ten
(10) Lease Years of the Lease Term be less than the Base Rent payable during the
immediately preceding Lease Year. The "CPI" is hereby defined to be the index
for the Washington, D.C.-Maryland-Virginia area, now known as the United States
Bureau of Labor Statistics Consumer Price Index for Urban Wage Earners and
Clerical Workers, all items (1982-84 = 100). In the event the CPI is not in
effect at any time during the Lease Term, Landlord and Tenant shall attempt to
agree upon a substitute formula, but if the parties are unable to agree upon a
substitute formula, then the matter shall be determined by arbitration in
accordance with the rules of the American Arbitration Association then
prevailing.
(e) The following sets forth an example of how increases in Base Rent
shall be determined in accordance with Paragraph 4(d):
ASSUME: (1) Base Rent per rentable square foot for the first Lease Year is
$28.50; (2) CPI for the first Lease Year is 100; (3) CPI for the second Lease
Year is 105; (4) CPI for third Lease Year is 110. Employing the formula set
forth in Paragraph 4(d), the Base Rent per rentable square foot for the second
Lease Year would be the lesser of:
(i) $18.50 x (((105-100)/100) x 0.50) = $0.46; $28.50 + $.46 = $28.96
or
(ii) $18.50 x 0.02 = $0.37; $28.50 + $.37 = $28.87
Accordingly, Base Rent per rentable square foot for the Second Lease
Year would be $28.87. The Base Rent per rentable square foot for the third Lease
Year would be the lesser of:
(i) $18 . 50 x (((110-100) /100) x 0. 50) = $0.93; $28 . 50 + $.93 = $29.43
or
(ii) ($18.50 + $0.37) x 0.02 = $0.38; $28.87 + $.38 = $29.25
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Accordingly, Base Rent per rentable square foot for the Third Lease
Year would be $29.25.
(f) In addition to the increases in Base Rent provided for in
Paragraph 4(d), Base Rent shall be increased, above the escalated Base Rent
in effect at the end of the fifth Lease Year, by an amount equal to Two and
50/100 Dollars ($2.50) per rentable square foot of the Premises (including
any Expansion Space and Additional Expansion Space leased to Tenant),
effective upon the commencement of the sixth Lease Year. Notwithstanding the
foregoing, Landlord shall abate, and Tenant shall not be required to pay, one
half (1/2) of the Base Rent that otherwise would be due during the first
month of the Sixth Lease Year.
5. OPERATING EXPENSES.
(a) "Operating Expenses" shall be all reasonable costs and expenses
(including, without limitation, the cost of liability, casualty, business income
and other insurance reasonably allocated to Landlord's operation of the
Building) incurred by Landlord in the operation, maintenance, and repair of the
Building, and in the provision of services to Building tenants, (other than
retail tenants of the Building), including Tenant. The accounting of the
Operating Expenses shall be performed in accordance with generally accepted
accounting principles. Operating Expenses shall be appropriate for the prudent
management, operation, maintenance, servicing and repair of the Building and
shall be reduced by all cash discounts, trade discounts or quantity discounts
received by Landlord or Landlord's managing agent in the purchase of any goods,
utilities or services in connection with the prudent operation of the Building.
Landlord shall equitably prorate bills for services rendered to the Building and
to any other property owned by Landlord. Landlord shall use reasonable efforts
to pursue all insurance, breach of warranty or other claims that might result in
a reduction in Operating Expenses payable by Tenant. As of the date of execution
of this Lease, there is no space in the Building used for retail. If any space
in the Building is, in the future, used for retail, all retail space located in
the Building shall be separately metered for utilities, and the cost of
utilities consumed in such retail space shall not be included in the Operating
Expenses.
(b) The following costs and expenses shall be excluded from Operating
Expenses:
(1) Costs in connection with any structural repair or major
change in the Building;
(2) Costs of correcting defects in the initial design,
construction, reconstruction or renovation of the Building, including the
parking garage;
(3) Costs, including permit, license and inspection costs,
associated with alterations or improvements of the Premises, the premises of
other tenants or occupants of the Building or vacant retail space in the
Building or incurred in renovating or otherwise
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improving, decorating, painting or redecorating vacant space for tenants or
other occupants of the Building;
(4) Depreciation of the Building, fixtures or equipment;
(5) Interest points, fees and principal payments on mortgages
and other debt costs, if any, or amortization on any mortgage or mortgages or
any other debt instrument encumbering the Building or the Land;
(6) Payments made to any ground lessor or master space lessor;
(7) Expenses directly resulting from the breach of this Lease
by Landlord, or the negligence of Landlord, its agents, contractors or
employees, or other tenants;
(8) Reimbursable costs for which Landlord is reimbursed by its
insurance carrier, any tenant's carrier, any tenant, any warrantor or any other
third party;
(9) Any bad debt loss, rent loss, reserves for bad debts or
rent loss or legal fees incurred in collecting rent or other obligations from
other Building tenants;
(10) The cost of services provided to other tenants of the
Building beyond those provided to all Building Tenants, and costs incurred by
Landlord in respect of breaches of other leases in the Building;
(11) Costs associated with the operation of the business of
the person or entity which constitutes Landlord, as distinguished from the costs
of operation of the Building, including accounting and legal matters, costs of
defending any lawsuits with any mortgagee, costs of selling, syndicating,
financing, mortgaging or hypothecating any of Landlord's interest in the
Building, costs of any disputes between Landlord and its employees, disputes of
Landlord with Building management, and outside fees paid in connection with
disputes with other tenants;
(12) The wages of any employee of Landlord who does not devote
substantially all of his or her time to the Building or common areas of the
Building, except to the extent such wages are reasonable, and properly and
equitably allocable to time spent by such employee in directly servicing the
Building or common areas thereof;
(13) Fees for services rendered to the Building or common
areas by entities controlled by or under common control with Landlord to the
extent such fees exceed the market rate payable for comparable services if
rendered by unrelated third parties;
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(14) Any expenditures which under normal accounting rules
should be treated as capital expenditures, EXCEPT amortization (at the prime
rate of interest reported in The Wall Street Journal ("Prime Rate")) of capital
expenditures made by Landlord for the purpose of reducing Operating Expenses of
the Building, (amortization shall be on a straight-line basis over Landlord's
reasonable estimate of the useful life of the particular improvement or
equipment);
(15) Fines, penalties, late payment charges and interest
arising from the acts or inaction of Landlord or failure timely to make tax
and/or other payments, except that interest on assessments described in clause
(27) shall be included and deemed incurred as if Landlord has elected to pay
such assessments in the maximum number of permitted installments);
(16) Capital costs incurred by Landlord in restoring all or
any portion of the Building after the occurrence of a casualty and any other
costs reimbursed by insurance proceeds;
(17) Legal fees, court costs, and consultants' fees not
related to the general welfare of Building tenants;
(18) Costs of remediation or cleanup of any asbestos or
Hazardous Materials (as defined below) near, in, on or under the Building;
(19) Any operating expenses, including maintenance,
attributable to the parking garage;
(20) Costs of repairs or replacements caused by the exercise
of any condemnation rights by any public or quasi-public authority;
(21) Taxes, including Real Estate Taxes (which shall be paid
in accordance with the provisions of Paragraph 6 of the Lease);
(22) Salaries and the cost of other compensation paid to
executive employees above the grade of manager (including profit sharing,
bonuses and other employee benefit plans);
(23) The rent or expenses in lieu of rent for Landlord's
on-site management or leasing office to the extent such rent or expenses in lieu
of rent exceeds market rent;
(24) Costs and expenses of utilities directly metered to
tenants of the Building and payable separately by such tenants;
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(25) Increased insurance premiums caused by Landlord's or any
other tenant's hazardous, reckless, willful or negligent acts;
(26) Interest incurred on amounts by which any tenant's
estimated payments exceed such tenant's proper share of Operating Expenses or
Real Estate Taxes;
(27) Assessments and Real Estate Taxes to the extent paid in
less than the maximum permitted number of installments;
(28) Charitable and political contributions, advertising and
promotional expenditures, including costs of staging special events (unless
consistently provided to or applied for the benefit of all tenants, or as
necessary to provide service in accordance with a first-class standard, e.g.,
expenses for the annual Building Holiday party).
(29) The costs associated with any concessions or incentives
granted to tenants in the Building (such as moving expense allowances or
reimbursements);
(30) Costs and expenses of janitorial or other services
payable separately by tenants of the Building (but Operating Expenses shall be
deemed to include the costs and expenses of such services deemed furnished to
such tenants based on the assumption that the provision of such services to such
tenants (per rentable square foot) equals the cost of providing such services to
all other tenants (per rentable square foot);
(31) Rental for items (except when needed in connection with
normal repairs and maintenance of permanent systems typically rented for such
purposes), which, if purchased, rather than rented, would constitute a capital
improvement which is specifically excluded in clause (14);
(32) Marketing costs including rent or expenses in lieu of
rent for a marketing office, leasing commissions, space planners' fees,
attorneys' fees, advertising expenses, expenses incurred in connection with the
negotiation and preparation of letters, deal memos, letters of intent, leases,
subleases and/or assignments, space planning costs and other costs and expenses
incurred in connection with lease, sublease and/or assignment negotiations and
transactions with present or prospective tenants or other occupants of the
Building;
(33) Costs of bringing the common areas of the Building or the
Land into compliance with existing or future laws or other legal requirements,
including without limitation federal, state or local environmental laws and
Title III of the Americans with Disabilities Act of 1990, as amended ("ADA")
except as provided in Paragraph 35; and
(34) Costs of acquiring any antiquities or works of art.
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(c) "Base Year Operating Expenses" shall be the greater of (A) the
Operating Expenses incurred during calendar year 1999 or (B) the Operating
Expenses incurred during the first 12 months in which Tenant occupies all or
part of the Premises.
(d) "Operating Expense Increases" shall be the operating Expenses that
are incurred during the fifth and each subsequent Lease Year during the Lease
Term that are in excess of the amount of the Base Year Operating Expenses.
(e) Tenant's "Proportionate Share" shall be the percentage that the
total rentable square feet contained within the Premises at any time bears to
the total Building Rentable Area. Tenant's Proportionate Share percentage as of
the Lease Commencement Date is 27.62%.
(f) Beginning with the fifth Lease Year, Tenant shall pay to Landlord,
as Additional Rent, Tenant's Proportionate Share of Operating Expense Increases.
(g) Notwithstanding the foregoing provisions of this Paragraph 5,
the amount of Tenant's Proportionate Share of Operating Expense Increases
that Tenant is required to pay during and with respect to the fifth Lease
Year shall not exceed twelve and one-half percent (12 1/2%) of the Base Year
Operating Expenses. The Base Year Operating Expenses shall be increased by
the amount by which the Operating Expenses incurred during the fifth Lease
Year exceed one hundred twelve and one half percent (112 1/2%) of Tenant's
Proportionate Share of the Base Year Operating Expenses. For the sixth Lease
Year through the tenth Lease Year, the amount of Tenant's Proportionate Share
of Operating Expense Increases that Tenant is required to pay shall not
exceed one-hundred and four percent (104%) of Tenant's Proportionate Share of
Operating Expense Increases for the previous Lease Year.
(h) Landlord shall notify Tenant, at least 30 days in advance of the
fifth and each subsequent Lease Year during the Lease Term, of Landlord's
reasonable estimate of Tenant's Proportionate Share of Operating Expense
Increases for each such Lease Year, and Tenant shall pay one-twelfth (1/12) of
these estimated amounts on the first day of each month after the date of such
notice until the estimated Tenant's Proportionate Share of Operating Expense
Increases is again adjusted by notice from Landlord. Landlord's estimate of
Tenant's Proportionate Share of Operating Expense Increases shall not be
adjusted more than once with respect to any Lease Year. If Landlord does not
notify Tenant in advance of the beginning of a Lease Year as provided above,
Tenant shall continue to make monthly payments of one-twelfth (1/12) of the most
recently estimated amount of its Proportionate Share of Operating Expense
Increases until the first full calendar month that is 30 days after Tenant's
receipt of notice of a new estimated amount from Landlord. Within 120 days after
the end of the fifth and each subsequent Lease Year during the Lease Term,
Landlord shall submit to Tenant a statement prepared by a certified public
accountant employed or engaged by the Landlord's management company for the
Building ("Statement") showing Tenant's
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actual Proportionate Share of Operating Expense Increases for the previous
Lease Year itemized as to major categories of expenses, the amount thereof
paid by Tenant, and the balance due or the overpayment. The balance due shall
be paid by Tenant to Landlord, or the overpayment shall be paid by Landlord
to Tenant, without interest, within thirty (30) days after the date of the
Statement. Tenant or its designee may, upon reasonable notice, examine or
audit Landlord's records pertaining to all amounts payable by Tenant under
the terms of this Lease, at the office of Landlord during ordinary business
hours not more than once during the sixth and each subsequent Lease Year to
verify the matters in the Statement for the Base Year and the immediately
preceding three (3) Lease Years (Landlord agrees to maintain said records and
the records for the Base Year) , provided that such examination shall not
excuse or delay the timely payment of Tenant's Proportionate Share of
Operating Expense Increases. For the purpose of Tenant's examination or audit
only, Tenant shall have the right to make copies of said records at its
expense. Tenant shall maintain the appropriate confidentiality of said
copies. If Tenant's inspection of Landlord's records correctly shows that
Tenant's Proportionate Share of Operating Expense Increases has been
overstated in the Statement by more than five percent (5%) of the entire
Tenant's Proportionate Share of Operating Expense Increases, Landlord shall
pay said excess Operating Expense payments made by Tenant and reimburse
Tenant for the reasonable cost of the examination or audit within ten (10)
days of Landlord's receipt of Tenant's examination or audit report.
(i) If the average occupancy rate of the Building Rentable Area shall
be less than one-hundred percent (100%) for the period during which the Base
Year Operating Expenses are calculated or for the fifth or any subsequent Lease
Year, for purposes of calculating Operating Expenses, the Operating Expenses for
such period that vary with the level of occupancy of the Building (for example,
char services, management fees, and elevator costs) shall be increased by the
additional costs and expenses that Landlord reasonably estimates would have been
incurred if the average occupancy rate had been one-hundred percent (100%) for
such period. In no event shall the Building tenants be required to pay, in the
aggregate, more than 100% of the actual Operating Expenses of the Building for
any calendar year, and Tenant shall not be required to pay more than 100% of its
Proportionate Share of the total Operating Expenses actually incurred for any
Lease Year, with such actual Operating Expenses to be determined and payments
reconciled through the process described in Paragraph 5 (h). At Tenant's written
request, Landlord will provide information sufficient to disclose or quantify
adjustments made to each category of Operating Expenses increased pursuant to
the provisions of this Paragraph 5.
(j) In addition to the payment of Operating Expense Increases required
by the provisions of this Paragraph 5, Tenant shall pay for all use of HVAC
services other than during Building Operating Hours (as hereinafter defined).
Non-Building-Operating Hours HVAC usage must be arranged by Tenant with the
Building management. If Tenant delivers to Building management a written request
for Non-Building-Operating-Hours HVAC service
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(i) before 10 a.m. on the Friday before weekend service is requested, (ii) by 10
a.m. on the day before service on a Holiday (as defined below) is requested, and
(iii) by noon on the day before weekday evening service is requested, Tenant
shall be required to pay Eight Dollars ($8.00) per hour per floor for such
service. If Non-Building-Operating Hours HVAC is requested, but not in
accordance with the requirements of the preceding sentence, Landlord shall have
the right to require Tenant to pay Thirty-Five Dollars ($35) per hour per floor
for such service.
6. REAL ESTATE TAXES.
(a) (i) "Real Estate Taxes" shall be all taxes (including special
assessments) for the Building that are payable within a particular calendar
year, including all taxes imposed on the Building and the land upon which it is
situated, as well as all reasonable costs incurred by Landlord, including
reasonable attorneys' fees and consultants' fees in connection with any real
estate tax contest or appeal. Real Estate Taxes shall include, without
limitation, real estate taxes, personal property taxes applicable to the
personalty of Landlord, whether used by Landlord or its agent, related to or
used in the management or operation of the Building, (other than such taxes
based upon Landlord's net income), public space rentals, including but not
limited to vault rentals, any taxes, assessments or other levies which may at
any time be imposed and/or collected by any federal, state, county, municipal,
quasi-governmental or corporate entity in respect of bus, subway or other public
transportation facilities operating in the metropolitan area of the District of
Columbia, and including also any assessment or levy for any business improvement
district duly formed in accordance with applicable law, and any tax assessment
or other charges in the nature of a sales, use or other tax upon Landlord, the
Premises, the Building, the Land and/or the rents payable hereunder (except
income taxes, franchise taxes calculated upon Landlord's net income, estate or
inheritance taxes of Landlord). If the levy shall be levied or imposed on the
Building, and/or Land and/or Landlord, in substitution for real estate taxes
and/or personal property taxes presently levied or imposed on immovables in the
District of Columbia, and including also without limitation any taxes on rents,
then any such new tax or levy shall be included within the amount of Real Estate
Taxes of which Tenant shall pay its Proportionate Share. If the amount of the
Real Estate Taxes is not ascertainable because such Real Estate Taxes or
substitute levies or taxes relate to one or more properties other than the
Building and the Land or to rents received by Landlord in addition to those
received from the Building, then Tenant shall pay its Proportionate Share of
Real Estate Tax Increases of said items to be paid by Tenant forming a part of
the Real Estate Taxes shall be reasonably allocable to the Building as
reasonably determined by Landlord. If any Real Estate Taxes levied against the
Land, Building or improvements covered hereby or the rents reserved therefrom,
shall be evidenced by improvement bonds or other bonds, or in any other form,
which may be paid in annual installments, only the amount payable for a Real
Estate Tax Year elapsing during the Lease Term shall be included as Real Estate
Taxes for purposes of this definition. Real Estate Taxes
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shall not include, nor shall Tenant be obligated to pay pursuant to this Lease,
such taxes as capital gains, corporation, unincorporated business, income,
profit, excess profit, inheritance, transfer, recordation, estate, gift or
franchise taxes, or any fines, penalties and/or interest on late payments of any
Real Estate Taxes (unless such late payment is caused by Tenant's failure to
make timely payment of any installments of its Proportionate Share of Real
Estate Taxes, in which case Tenant shall be solely liable to reimburse Landlord
for the entirety of any such fine, penalty and/or interest).
(ii) "Base Year Real Estate Taxes" shall be the greater of (A)
the Real Estate Taxes due and payable during calendar year 1999 or (B) the Real
Estate Taxes due and payable during the first 12 months after the Tenant
Build-out Period.
(iii) "Real Estate Tax Increases" shall be the Real Estate
Taxes for the third and each subsequent Lease Year during the Lease Term that
are in excess of the amount of the Base Year Real Estate Taxes.
(iv) Beginning with the third Lease Year, Tenant shall pay to
Landlord, as Additional Rent, Tenant's Proportionate Share (as defined in
Paragraph 5 (e) above) of Real Estate Tax Increases.
(b) Landlord shall notify Tenant, at least thirty (30) days in advance
of the third and each subsequent Lease Year during the Lease Term, of Landlord's
reasonable estimate of Tenant's Proportionate Share of Real Estate Tax Increases
for each such Lease Year, and Tenant shall pay one-twelfth (1/12) of these
estimated amounts on the first day of each month after the date of such notice
until the estimated Tenant's Proportionate Share of Real Estate Tax Increases is
again adjusted by notice from Landlord. Landlord's estimate of Tenant's
Proportionate Share of Real Estate Tax Increases shall not be adjusted more than
once with respect to any Lease Year. If Landlord does not notify Tenant in
advance of the beginning of a Lease Year as provided above, Tenant shall
continue to make monthly payments of one-twelfth (1/12) of the most recently
estimated amount of its Proportionate Share of Real Estate Tax Increases until
the first full calendar month that is 30 days after Tenant's receipt of notice
of a new estimated amount from Landlord. Within 120 days after the end of the
third and each subsequent Lease Year during the Lease Term, Landlord shall
submit to Tenant a statement prepared by a certified public accountant employed
or engaged by the Landlord's management company for the Building ("Statement")
showing Tenant's actual Proportionate Share of Real Estate Tax Increases for the
previous Lease Year, the amount thereof paid by Tenant, and the balance due or
the overpayment. The balance due shall be paid by Tenant to Landlord, or the
overpayment shall be paid by Landlord to Tenant, without interest, within thirty
(30) days after the date of the Statement. Tenant may, upon reasonable notice,
examine or audit Landlord's records at the office of Landlord during ordinary
business hours not more than once during the fourth and each subsequent Lease
Year to verify the matters in the
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Statement for the Base Year Real Estate Taxes and for the immediately preceding
three (3) Lease Years (Landlord agrees to maintain said records and the records
for the Base Year), provided that such examination shall not excuse or delay the
timely payment of Tenant's Proportionate Share of Real Estate Tax Increases. For
the purpose of Tenant's examination or audit only, Tenant shall have the right
to make copies of said records at its expense. Tenant shall maintain the
appropriate confidentiality of said copies. If Tenant's inspection of Landlord's
records correctly shows that Tenant's Proportionate Share of Real Estate Tax
Increases has been overstated in the Statement by more than five percent (5%) of
the entire Tenant's Proportionate Share of Real Estate Tax Increases, Landlord
shall reimburse Tenant for the reasonable cost of the examination or audit.
(c) Tenant shall receive its proportionate share of any tax refund
attributable to any period for which Tenant has paid its Proportionate Share of
Real Estate Taxes Increases, within ten (10) days of the receipt of same by
Landlord, provided that Tenant first cures any then-existing breach of this
Lease or default by Tenant. Notwithstanding the foregoing, Tenant shall not be
required to pay any portion of costs incurred to contest or appeal any real
estate taxes imposed for any period during which Tenant did not occupy (or have
the right to occupy) the Premises, and Tenant shall not be entitled to share in
any refund applicable to any period during which Tenant did not occupy (or have
the right to occupy) the Premises. Tenant shall have the right twice during the
first ten (10) Lease Years of the Lease Term, once during the Extended Term (as
defined below) and once during the Second Extended Term (as defined below) to
require Landlord to contest an increase in the Real Estate Tax assessment for
the Building which Landlord has decided not to contest, provided, however, if
Tenant has not obtained the agreement of the other major tenants (i.e. tenants
leasing space equal to one floor of the building) to pursue the appeal prior to
Tenant exercising its aforesaid right to require Landlord to pursue an appeal,
then Tenant shall be liable for the full amount, not just its, Proportionate
Share, of any increase in the Real Estate Tax assessment resulting from such an
appeal, and, if there is such an increase, all costs and attorneys' fees
relating to such appeal.
7. LATE CHARGES; INTEREST. Any rental or other payment required to be
made by Tenant hereunder that is not received by Landlord within five (5)
days after its due date (a) shall be subject to a late charge equal to three
percent (3%) of the amount due, which amount shall be paid by Tenant, as
Additional Rent, with the next monthly payment of Base Rent, and (b) also
shall bear interest from the due date until paid at the rate of eighteen
percent (18%) per annum (1 1/2%) per month). Once during each Lease Year, an
unintentional late payment by the Tenant shall not be subject to the
aforesaid late charge and interest unless and until said payment will have
been received by Landlord within ten (10) days after its due date or within
three (3) days after the date Landlord notifies Tenant that the payment has
not been received by Landlord within the five (5) days of its original due
date.
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8. SERVICES. The Building Operating Hours shall be 7:00 a.m. to 6:00 p.m.
Monday through Friday, and 9:00 a.m. to 1:00 p.m. Saturday, except New Year's
Day, Martin Luther King's Birthday, President's Day, Memorial Day, Independence
Day, Labor Day, Veteran's Day, Thanksgiving and Christmas Day ("Holidays").
Tenant shall have access to the Premises 24 hours a day each day of the year.
Landlord shall provide the following facilities and services in accordance with
standards employed by other landlords of comparable modern first-class
commercial office buildings in the downtown Washington, D.C. central business
district:
(a) Elevator service from 7:00 a.m. to 6:00 p.m. except Saturdays,
Sundays and Holidays, and from 9:00 a.m. to 1:00 p.m. Saturdays, with one
elevator subject to call at all times, including every day after Building
Operating Hours, Saturdays, Sundays and Holidays.
(b) (i) A lobby concierge or lobby attendant on duty 24 hours a
day, every day of the year except Holidays, and (ii) the existing operating
proximity card reader and surveillance system, and a guard every day of the
year, all of which systems and services shall be operated and performed
consistent with standards employed by other landlords of comparable modern
first-class commercial office buildings in the downtown Washington, D.C. central
business districts (including, but not limited to, the guard, upon reasonable
request, escorting employees of Tenant after Building Operating Hours to their
vehicles in the garage). In the event Landlord installs an elevator locking
system for all floors of the Building, Tenant shall be entitled to use such
system for the floor of the Building on which the Premises are located.
Notwithstanding the foregoing, Landlord shall not be responsible for the
performance of the lobby concierge or lobby attendant, the proximity card
reader, or the guard and surveillance system or for damage or injury to Tenant,
its employees, invitees or others due to the failure, action or inaction of any
lobby concierge, lobby attendant, proximity card reader, guard or surveillance
system that is provided.
(c) (i) A modern, electronic security system, as currently
installed in the Building, that will control external ingress to the Building
and internal ingress to the Premises at all points, including controls in the
main lobby, elevators, and programmable selective access to secured areas of the
Building, which shall be activated during other than Building Operating Hours
and all day Saturdays, Sundays, and Holidays; (ii) an elevator control system,
as currently installed in the Building, that will provide for Tenant-only
elevator access; (iii) continuous camera surveillance of areas of ingress and
egress to the Building, as currently installed in the Building. Tenant shall
have the right to install, at its expense, and with the prior written approval
of Landlord, which shall not be unreasonably withheld, conditioned or delayed, a
system providing for Tenant-only access from the fire stairwells to floors of
the Building occupied solely by Tenant. In addition, Tenant shall have the right
to use stairwells to walk between floors occupied solely by Tenant, with secure,
electronically controlled access to such floors through such stairwells,
provided that any such electronically controlled
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access shall be installed by Tenant, at its expense, and only with the prior
written approval of Landlord, which shall not be unreasonably withheld,
conditioned or delayed.
(d) Landlord shall initially supply one (1) electronic security card to
Tenant for the Premises to be used by employees of Tenant who work in the
Premises, not to exceed three-hundred and thirty (330) cards, with the cost
thereof to be included in Operating Expenses. Landlord shall issue additional
and replacements for lost cards only upon the payment of a reasonable cost for
each additional card or key. Tenant shall provide Landlord with the name of each
employee who has been given a card and the card number. Tenant shall ensure that
all employees of Tenant shall return their cards at the end of their employment,
and Tenant shall promptly report to Landlord any lost or stolen cards.
(e) Tenant shall have access to the roof, without being required to pay
any additional Base Rent, to place a satellite dish or antenna, if Tenant
obtains the prior written consent of Landlord, which consent shall not be
unreasonably delayed, conditioned or denied, and in accordance with the
following restrictions and conditions:
(i) Tenant, at its sole cost and expense, may install and
maintain one satellite dish having a diameter of not more than thirty inches
(30") and one antenna thirty-six inches 36" high (the "Roof Installations") on
the roof of the Building in a location designated by Landlord; provided,
however, that Tenant's Roof Installations shall not interfere with any other
satellite dishes or other roof installations located on the roof of the
Building.
(ii) If, at any time during the Lease Term, in Landlord's
reasonable judgment, it is necessary or desirable for the Roof Installations to
be moved to another location designated by Landlord, Tenant shall relocate the
Roof Installations at Landlord's cost and expense.
(iii) Tenant shall submit to Landlord detailed plans and
specifications for installing the Roof Installations and Tenant shall not
commence installation of the Roof Installations without first obtaining
Landlord's approval of Tenant's contractor and Tenant's plans and
specifications.
(iv) The Roof Installations shall comply with all applicable
laws, codes, regulations, and other requirements ("Requirements"). If at any
time during the Lease Term, the Roof Installations do not comply with all
Requirements, Tenant shall immediately modify the Roof Installations, with
Landlord's approval, to bring them into compliance with such Requirements, or,
at Tenant's option, remove said Roof Installation. Tenant's failure to obtain
any permit required in order to install the Roof Installations for any reason
whatsoever shall not have any effect on this Lease other than to nullify the
right given to Tenant to install and use the Roof Installations until said
permit is obtained.
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(vi) Landlord is under no duty to maintain the Roof
Installations and in no event shall Landlord be liable to Tenant for damage to
Tenant, its employees, contractors or agents, or to the Roof Installations,
unless the damage is caused by Landlord's negligent or willful act.
(vii) Notwithstanding anything to the contrary in the Lease,
upon installation of the Roof Installations, Tenant, at its sole cost and
expense, shall be responsible for performing any and all repairs to the
Building, including the roof, the need for which arises out of or is in any way
related to the Roof Installations.
(viii) Except as otherwise expressly provided in this Section,
all of the terms and conditions of Paragraph 20 of the Lease shall apply with
respect to the Roof Installations.
(ix) Tenant shall defend Landlord, and hereby does indemnify
and hold harmless Landlord, from and against any and all liabilities, damages,
causes of action, suits, claims, judgments, costs and expenses (including
reasonable attorney's fees) arising from any claimed or asserted injury, loss or
damage to any persons or property arising from the installation, operation or
maintenance of the Roof Installations, or from any act or omission of Tenant or
any person acting on behalf of Tenant with respect to the Roof Installations.
Furthermore, if the installation, operation or maintenance of the Roof
Installations, or any act or omission of Tenant or any person acting on behalf
of Tenant with respect to the Roof Installations, results in the full or partial
impairment of any warranty relating to the Building roof, Tenant shall be
responsible to reimburse Landlord for all resulting damages sustained by
Landlord.
(f) Tenant's use of electrical services furnished by Landlord shall be
subject to the following:
(i) Landlord will provide the necessary facilities to supply
(A) two (2) watts per rentable square foot within the Premises for Tenant's
fluorescent ceiling lighting and (B) four (4) watts per rentable square foot
within the Premises for Tenant's receptacle/equipment loads. Collectively,
Tenant's fluorescent lighting and receptacles/equipment shall not have a total
electrical design load greater than an average of six (6) watts per rentable
square foot per floor within the Premises (the "Standard Building Capacity").
(ii) Tenant shall notify Landlord, in writing, of any
equipment Tenant desires to install or maintain within the Premises that has a
rated electrical load greater than 500 watts and/or that requires a service
voltage other than 120 volts, and Landlord's written approval shall be required
with respect to the installation of any such high electrical consumption
equipment in the Premises, provided that Landlord's approval shall not be
unreasonably withheld.
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(iii) Tenant shall pay for all costs of meters, submeters,
wiring, risers, transformers, electrical panels, air conditioning and other
items required by Landlord, in Landlord's reasonable discretion, to accommodate
Tenant's design loads and capacities that exceed Standard Building Capacity,
including, without limitation, the installation and maintenance thereof,
provided that before installation of such items, Landlord shall have given
Tenant at least ten (10) business days prior written notice of Landlord's intent
to install the same. Notwithstanding the foregoing, Landlord may, in its
reasonable discretion, refuse to install, and withhold consent for Tenant's
installation of, any wiring, risers, transformers, electrical panels, or air
conditioning, if, in Landlord's reasonable judgment after consulting with its
electrical engineers, the same are not necessary or would cause damage or injury
to the Building or the Premises or cause or create a dangerous or hazardous
condition or entail excessive or unreasonable alterations or repairs to the
Building or the Premises, or would interfere with or create or constitute a
disturbance to other tenants or occupants of the Building. In no event shall
Landlord be liable for Landlord's refusal to install any such electrical
facility or equipment, or for withholding consent for Tenant to install any such
electrical facility or equipment.
(iv) Tenant shall pay to Landlord, as Additional Rent, within
thirty (30) days of Tenant's receipt of demand therefor by Landlord, the cost of
consumption of electrical service within the Premises in excess of the Standard
Building Capacity ("Extraordinary Electrical Service") as such cost is
reasonably determined by Landlord.
(v) Landlord may, at its option, upon not less than forty-five
(45) days, prior written notice to Tenant, discontinue the availability
through Landlord to Tenant of Extraordinary Electrical Service to the
Premises. If Landlord gives such notice, Tenant may, at its option, contract
directly with the applicable public utility for the supplying of Extraordinary
Electrical Service to the Premises, subject to the provisions of this
Paragraph 8 and all other provisions of the Lease.
(g) Landlord shall provide and replace, as necessary, building standard
electric bulbs and fluorescent tubes in light fixtures in the Building.
(h) Tenant shall have the right, without being required to pay any
additional rent or other charges, to place in the Premises or on the roof of the
Building at a location mutually agreed upon by Landlord and Tenant a backup
power supply generator. Tenant may install, operate and maintain, such generator
and related equipment (the "Equipment"), subject to the following conditions:
(i) Tenant, at its cost, shall procure all necessary
governmental permits and licenses for the installation, maintenance or use of
the Equipment, and shall at all times comply with all requirements of laws,
ordinances and rules of all public authorities and insurance companies and all
orders, rules and regulations of any public authority, which shall
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impose any order or duty upon Landlord or Tenant with respect to or affecting
the Equipment or arising out of Tenant's use or manner of use thereof.
(ii) Tenant shall promptly pay and discharge all out-of pocket
costs and expenses incidental to and/or connected with the furnishing,
installation, maintenance and operation of the Equipment.
(iii) Installation of the Equipment shall be at Tenant's
expense. Tenant shall obtain Landlord's prior written consent as to the location
of the Equipment and the manner in which such installation work is to be done.
All plans and specifications concerning such installation shall be subject to
Landlord's prior written approval. Landlord shall have the right to refuse to
give its approval if any structural analysis of the proposed location of the
Equipment indicates the proposed location could damage or weaken any part of the
Building or cause or create a dangerous or hazardous condition or adversely
affect the aesthetics or value of the Building. If, at any time during the Lease
Term, in Landlord's reasonable judgment, it is necessary or desirable for the
Equipment to be moved to another location designated by Landlord, Tenant shall
relocate the Equipment at Landlord's cost and expense.
(iv) Tenant, at its cost, shall maintain the Equipment in a
clean and safe manner throughout the Lease Term, and shall comply with all
applicable laws, ordinances and regulations. In addition, all repairs to the
Building made necessary by reason of the furnishing, installation, maintenance,
operation or removal of the Equipment or any replacements thereof shall be at
Tenant's sole cost. Upon expiration or termination of this Lease, Tenant agrees
that it will promptly remove the Equipment and any wiring, conduit or
accessories associated with the Equipment and shall promptly repair any damage
to the Building or the Project caused by the installation or removal of the
Equipment and related equipment, all at its cost.
(v) If the Equipment is located on the roof of the Building,
the Roof Installation provisions of this Lease shall apply thereto, including
the provision that Tenant shall have a right to access to the roof only upon
reasonable prior written notice to Landlord, except that Tenant may have access
to the roof in an emergency for the purpose of repairing or maintaining the
Equipment by contacting the management office (emergency telephone number).
(vi) Tenant, at its cost, shall maintain such insurance as is
appropriate with respect to the installation, operation and maintenance of the
Equipment and shall provide Landlord with evidence of such insurance prior to
installation. Landlord shall have no liability on account of any damage to or
interference with the operation of the Equipment, except that which is caused by
the negligence or willful misconduct by Landlord or its Agents or by the failure
of Landlord to observe any of the terms and conditions of the Lease.
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(vii) Tenant, at its cost, shall cause the utilities used by
the Equipment to be separately metered and shall pay for such utilities.
(viii) Tenant shall defend Landlord, and hereby does indemnify
and hold harmless Landlord, from and against any and all liabilities, damages,
causes of action, suits, claims, judgments, costs and expenses (including
reasonable attorney's fees) arising from any claimed or asserted injury, loss or
damage to any persons or property arising from the installation, operation or
maintenance of the Equipment, or from any act or omission of Tenant or any
person acting on behalf of Tenant with respect to the Equipment. Furthermore, if
the installation, operation or maintenance of the Equipment, or any act or
omission of Tenant or any person acting on behalf of Tenant with respect to the
Equipment, results in the full or partial impairment of any warranty relating to
the Building roof, Tenant shall be responsible to reimburse Landlord for all
resulting damages sustained by Landlord.
(i) Char service five (5) nights per week, excluding Holidays, as
specified on EXHIBIT C attached hereto.
(j) Landlord agrees that Building maintenance personnel or outside
service contractors, as appropriate, during the period 7:00 a.m. to 5:30 p.m.
shall respond within one (1) hour to any request by Tenant made during Building
Operating Hours to repair HVAC and major electrical or plumbing problems and
within a reasonable period of time to Tenant's request to repair other Building
equipment malfunctions and such personnel shall promptly repair or replace any
such damaged equipment subject to availability of parts. Landlord shall take the
foregoing requirement into account in procuring warranties and service contracts
for the Building.
(k) Landlord will furnish air-conditioning or heat, as reasonably
determined by Landlord, during Building Operating Hours. At all times during the
Lease Term, temperatures in the Premises during Building Operating Hours shall
be maintained at 72 degrees Fahrenheit (+ or - 2 degrees Fahrenheit) , year
round, provided that (i) when the outside temperature is 20 degrees Fahrenheit
or lower, temperatures in the Premises during Building Operating Hours shall be
maintained at not less than 70 degrees Fahrenheit and (ii) when the outside
temperature is 92 degrees Fahrenheit or higher, temperatures in the Premises
during Building Operating Hours shall be maintained at not more than 74 degrees
Fahrenheit (+ or - 2 degrees Fahrenheit). The supply air temperature serving the
Premises shall be maintained at 56 degrees Fahrenheit at the point of departure
from the chiller during the summer months throughout the Lease Term. The base
Building HVAC will deliver outside air in compliance with ASHRAE standards
promulgated in any given year, which standard currently is 20 cfm per person
based upon 150 square feet per person. Condenser water supply shall be available
for Tenant's supplemental HVAC system on a 24 hours per day every day of the
Lease Term, at no additional cost above Base Rent. The Landlord's
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obligations to maintain the foregoing HVAC temperature requirements are
conditional upon Tenant, at its expense, installing, maintaining, and operating
its supplemental HVAC system for its computer room (as shall be set forth on the
approved Plans and Specifications for the Improvements) or any other
supplemental HVAC system Tenant may at any time install in the Premises, or if
Tenant causes heat loading conditions to exist in the Premises beyond what is
standard in office usage in first-class office buildings in the metropolitan
Washington, D.C. area (e.g. training rooms containing numerous computers, for
which supplemental HVAC units in the Premises have not been provided by Tenant
to accommodate such additional heat loads). Landlord shall diligently and
promptly commence repair of any malfunction in the Building HVAC system. Tenant
shall diligently and promptly commence repair of any malfunction in its
supplemental HVAC system in the Premises. Landlord shall not be required to meet
the standards set forth in this Paragraph 7(k) between 7:00 a.m. and 7:30 a.m.
On weekdays other than Holidays, the temperatures in the Building between 7:00
a.m. and 7:30 a.m. shall be reasonably habitable.
(1) Exercise facilities will be located within the Building and shall
be available for exclusive use by Tenant's officers, directors and employees, by
other tenants of the Building, and by officers, directors and employees of
Landlord, during Building Operating Hours, in accordance with rules and
regulations reasonably promulgated by Landlord from time to time. Landlord shall
maintain the exercise facilities and replace worn equipment as reasonably
necessary in accordance with the standards applied by building managers with
respect to similar exercise facilities located in first class office buildings
in downtown Washington, D.C. Landlord shall have no liability for any injury of
any type sustained by any person in the course of, or as a result of, the use of
the exercise facilities. Users of the facilities shall be required to execute a
full and complete release prior to their use of the facilities.
(m) The Building shall be managed, operated and maintained consistent
with standards employed by other landlords of other modern first-class
commercial office buildings in the downtown Washington, D.C. central business
district.
(n) The Landlord will provide hot and cold water for drinking, lavatory,
toilet and kitchen purposes drawn through fixtures located in common areas of
the Building and installed in the Premises by or with the consent of the
Landlord.
The cost of providing all of the foregoing facilities and services
shall be included in Operating Expenses to the extent not otherwise excluded in
accordance with the terms of this Lease.
(o) Notwithstanding anything contained herein to the contrary, if ten
percent (10%) or more of the Premises is rendered unusable for the "Use"
described in Paragraph 14 of this Lease as a result of an interruption of
services or as a result of any renovation, alteration or repair performed or
required to be performed by Landlord, for five (5) consecutive days or for
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a total of twenty (20) days in any Lease Year, Tenant shall be entitled to abate
that percentage of its Base Rent and Additional Rent that the unusable portion
of the Premises bears to the whole of the Premises, for any period of
unusability subsequent to the five-day or 20-day periods to which reference is
made above. If more than fifty percent (50%) of the Premises remains unusable
(as defined above) for more than ninety (90) consecutive days or more than 210
days in any Lease Year, Tenant may terminate the Lease by giving written notice
to Landlord of its election to terminate, which shall be effective thirty (30)
days after the aforementioned 90-day period or 210-day period, as the case may
be.
9. PERSONAL PROPERTY TAXES. Tenant shall be solely liable for payment of
all personal property taxes and assessments on its personalty and other property
located in the Premises.
10. TENANT'S DEFAULT. It shall be a default by Tenant, and Tenant shall be
in default, if Tenant: (a) fails to pay when due any Base Rent or Additional
Rent required hereunder and does not make such payment within five (5) business
days after Landlord gives Tenant notice of such failure; or (b) abandons the
Premises (ceases to occupy the Premises and fails to pay rent when due); or (c)
files for relief under the United States Bankruptcy Code (the "Bankruptcy Code")
or under any other state or federal bankruptcy or insolvency law, or files an
assignment for the benefit of creditors, or if an involuntary proceeding under
the Bankruptcy Code or under any other federal or state bankruptcy or insolvency
law is commenced against Tenant and not discharged within 30 days; or (d) fails
to perform, discharge or satisfy any other obligation imposed by this Lease and
does not remedy the same within thirty (30) days after receipt of written notice
from Landlord specifying such failure, provided that if any non-monetary default
shall reasonably require more than 30 days to cure, Tenant shall be allowed such
longer period, not to exceed 90 days, as is necessary to effect such cure, so
long as efforts to cure are commenced within the aforesaid 30-day period and are
diligently pursued to completion.
11. LANDLORD'S REMEDIES FOR TENANT'S DEFAULT.
(a) At any time after a default by Tenant, Landlord may terminate this
Lease by written notice to Tenant or by any available judicial process.
(b) If Landlord terminates this Lease after a default by Tenant:
(i) Landlord shall be entitled to recover from Tenant, and
Tenant within thirty (30) days of termination shall pay to Landlord, all Base
Rent and Additional Rent accrued to the time of such termination;
(ii) Landlord shall be entitled to recover from Tenant, and
within thirty (30) days of demand therefore Tenant shall pay to Landlord (A) all
expenses incurred by Landlord in regaining possession of the Premises (including
legal fees), (B) all costs of preparing the
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Premises for reletting, and (C) that percentage of all brokerage fees which that
portion of the Lease Term remaining at the time of Tenant's default shall bear
to the lease term of the successor tenant;
(iii) Landlord shall have the right to re-enter the Premises
by any legal process then in force;
(iv) Landlord hereby waives its right of distraint with
respect to all of Tenant's personal property (including, but not limited to,
computers, computer files, client files, office equipment and artwork, but not
including anything that is affixed to or made a part of the Building) that is or
was within the Premises, provided however, that Landlord may demand that Tenant
remove all such personal property within the Premises that is owned by Tenant,
at Tenant's expense; provided that, in the event Tenant fails to remove such
property within a reasonable time, Landlord may remove such property at Tenant's
expense and dispose of it in the manner Landlord, in its reasonable discretion,
determines is appropriate and shall have no liability to Tenant or any other
person for doing so;
(v) Landlord may take all steps, including repair or
alteration of the Premises, that Landlord, in its sole reasonable discretion,
deems necessary or advisable, to prepare the Premises for reletting;
(vi) Landlord may relet all or any part of the Premises for
such term, at such rental, and upon such terms and conditions as Landlord, in
its sole discretion, deems advisable;
(vii) Tenant shall pay to Landlord, as liquidated damages, for
each month during the balance of the Lease Term (which would remain but for
termination of the Lease by Landlord), on the first day of each such month, (A)
an amount equal to all Base Rent and Additional Rent due under the Lease for
each such month, in the event Landlord is unable to relet the Premises on
reasonable terms, or, (B) in the event Landlord is able to relet the Premises on
reasonable terms, an amount equal to any deficiency between (1) all Base Rent
and Additional Rent due under the Lease for each such month, and (2) the net
Base Rent and Additional Rent for each such month collected upon reletting; and
(viii) If Landlord terminates this Lease after a default by
Tenant, then, in addition to the remedies described in Paragraph 11(b)(i)-(vi),
and as an alternative to the continued application of the remedy described in
Paragraph 11(b)(vii), at any time after termination, at Landlord's election by
written notice to Tenant, Landlord shall be entitled to recover from Tenant, and
Tenant shall pay to Landlord, an amount equal to the value at the time of
Landlord's election of the excess, if any, of (A) all Base Rent and Additional
Rent due under this Lease for the remainder of the Lease Term (which would
remain but for termination of the Lease by Landlord) over (B) the reasonable
rental value of the Premises for
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the remainder of the Lease Term (which would remain but for termination of the
Lease by Landlord) which value shall not include any amount attributable to (y)
market-rate tenant concessions including but not limited to tenant improvement
allowances or rent abatement or (z) market-rate brokerage commissions, (C) which
excess amount shall be discounted to present value by application of the
interest rate applicable at the time of Landlord's election to 10-year United
States Treasury obligations maturing on that date that is the midpoint of the
remainder of the Lease Term (but for Landlord's termination of the Lease) as of
the date of Landlord's election.
(c) If Landlord does not elect to terminate this Lease after any
default by Tenant, Landlord shall be entitled to recover from Tenant, and Tenant
shall be obligated to pay to Landlord, immediately upon Landlord's written
demand therefor, all damages, costs and expenses (including reasonable attorneys
fees) sustained or incurred by Landlord that arise or result from Tenant's
default, and Tenant shall continue to be liable for all Base Rent and Additional
Rent due hereunder, and for the performance of all other obligations imposed by
this Lease. Landlord shall use reasonable efforts to mitigate its damages.
Landlord's election not to terminate the Lease upon any default by Tenant shall
not impair Landlord's right to terminate the Lease later for that default if
Tenant does not make full payment in accordance with this Paragraph 11(c), or
upon any other default by Tenant.
(d) If Tenant abandons the Premises (ceases to occupy the Premises and
fails to pay rent when due), Landlord shall have the right to re-enter the
Premises without judicial process, to change the locks to all entrances to the
Premises, and to take all steps, including repair or alteration of the Premises,
that Landlord, in its sole reasonable discretion, deems advisable or necessary
to prepare the Premises for reletting, and to relet the Premises at such rental
and upon such terms and conditions as Landlord, in its sole reasonable
discretion, deems advisable; and such re-entry, change of locks, repair,
alteration and/or reletting shall not terminate this Lease. In the event of
abandonment of the Premises by Tenant, Tenant shall continue to be liable for
all Base Rent and Additional Rent due under the Lease, in addition to all
reasonable costs incurred in regaining possession of the Premises and preparing
the Premises for reletting, including all reasonable brokers, fees, which shall
be calculated solely with respect to that portion of the Lease Term remaining at
the time of Tenant's abandonment, and all reasonable legal fees, less any
amounts realized as a result of any reletting.
(e) The rights and remedies provided to Landlord herein are cumulative
and not exclusive, and are in addition to, not in substitution for, any and all
rights Landlord has or may have at law or in equity, all of which rights
Landlord expressly retains.
(f) Tenant waives all rights of redemption granted by law.
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12. LANDLORD DEFAULTS. The occurrence of any of the following shall
constitute a "Landlord Default" hereunder:
(a) Landlord shall have failed to pay when due any sum owing from
Landlord to the Tenant hereunder, and such failure shall continue for a period
of more than fifteen (15) business days after Tenant delivers notice to Landlord
and Landlord's lender of such failure; or
(b) There shall be a failure by Landlord to comply with any condition,
covenant, agreement or other obligation on the part of Landlord to be kept,
observed or performed hereunder (other than a condition, covenant, agreement or
other obligation to pay any sum of money owing from Landlord to Tenant
hereunder) and such failure shall continue for a period of more than thirty (30)
days after delivery of notice by Tenant to Landlord and Landlord's lender
specifying the default and requiring that it discontinue; provided that, for any
default which cannot reasonably be cured within said thirty (30) day period, the
cure period therefor shall be extended for such time as is reasonably necessary
to effect a cure of such default (but in no event beyond ninety (90) days after
delivery of such notice for any default which is due or attributable to the
negligence or intentional acts of Landlord or Landlord's agents), on the
conditions that Landlord promptly commences and diligently pursues such cure to
completion.
13. SECURITY DEPOSIT. [Intentionally deleted.]
14. USE. Tenant shall use and occupy the Premises for office purposes only,
and for no other purpose. Such use shall be consistent with office use in
first-class commercial office buildings in downtown Washington, D.C. Tenant
shall not use or allow the Premises or any part thereof to be used for any
unlawful purpose.
15. ASSIGNMENT AND SUBLETTING.
(a) Tenant will not transfer or assign the Lease, nor sublet the whole
or any part of the Premises, nor permit the Premises to be used or occupied in
whole or in part by others, without the prior written consent of Landlord, which
consent shall not be unreasonably withheld, conditioned or delayed, provided,
however, that Tenant shall have no right to assign the Lease or to sublet if
Tenant is then in default. Simultaneously with any request to assign the Lease
or sublet any part of the Premises, Tenant shall provide to Landlord financial
statements of the proposed assignee or sublessee prepared not more than six
months prior to the date of Tenant's request to sublet or assign, together with
any other information regarding the proposed assignee or sublessee reasonably
required by Landlord. Landlord may withhold its consent to any assignment or
sublease if the proposed assignee or sublessee, in Landlord's reasonable
judgment, (i) has a reputation for dishonesty and unfair dealing, or (ii) will
not operate a business compatible with a first-class office building in downtown
Washington,
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D.C., or (iii) in the case of a proposed assignment, the proposed
assignee is not sufficiently responsible financially to meet all obligations of
Tenant under the Lease, or (iv) in the case of a proposed assignment, Landlord's
lender does not consent to the assignment, or (v) in the case of a proposed
sublease, the proposed subtenant is not sufficiently responsible financially to
meet all obligations of subtenant under the proposed sublease. Landlord shall
give its consent, or notify the Tenant of its refusal to consent, to any
proposed sublease, or shall request of Tenant further information regarding the
proposed sublessee reasonably required by Landlord, within fifteen (15) business
days of Landlord's receipt of Tenant's written request to sublease. Within
fifteen (15) business days of Landlord's receipt of all information requested of
Tenant regarding the proposed sublessee, Landlord shall give its consent, or
notify the Tenant of its refusal to consent, to the proposed sublease. Landlord
shall give its consent, or notify the Tenant of its refusal to consent, to any
proposed assignment, or shall request of Tenant further information regarding
the proposed assignee reasonably required by Landlord, within thirty (30)
business days of Landlord's receipt of Tenant's written request to assign the
lease. Within thirty (30) business days of Landlord's receipt of all information
requested of Tenant regarding the proposed assignee, Landlord shall give its
consent, or notify the Tenant of its refusal to consent, to the proposed
assignment. If Landlord fails to give its consent, notify Tenant of its refusal
to consent, or to request further information regarding a proposed sublessee
within fifteen (15) business days after Landlord's receipt of a request by
Tenant to sublease, or to give its consent or notify Tenant of its refusal to
consent within fifteen (15) business days of its receipt of all information
requested of Tenant regarding the proposed sublessee, Landlord shall be deemed
to have consented to such request. If Landlord fails to give its consent, notify
Tenant of its refusal to consent, or to request further information regarding a
proposed assignee within thirty (30) business days after Landlord's receipt of a
request by Tenant to assign, or to give its consent or notify Tenant of its
refusal to consent within thirty (30) business days of its receipt of all
information requested of Tenant regarding the proposed assignee, Landlord shall
be deemed to have consented to such request. In the event of any assignment or
sublease, Tenant shall nevertheless remain fully liable for all obligations of
Tenant under the Lease, and Landlord's prior written consent to any further
assignment or sublease shall be required.
(b) The terms "assignment" and "assign" as used herein shall mean and
refer to: (i) any disposition or transfer by Tenant (other than a sublease) of
its rights or obligations under the Lease; (ii) an arrangement (other than a
sublease, or other than as provided in Paragraph 15 (e), below) that allows the
use and occupancy of the Premises by any person or entity other than Tenant;
(iii) subject to Paragraph 15(d), a transfer or pledge of voting control of
Tenant if Tenant is a non-public corporation; or (iv) a transfer of more than
fifty percent (50%) of the partnership interest of Tenant (if Tenant is a
partnership).
(c) If Landlord consents to a sublease or assignment by Tenant, Tenant
shall pay to Landlord (i) fifty percent (50%) of any "Profit" (as defined below)
derived by Tenant from
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that sublease or assignment with respect to any portion of the Premises located
on the Seventh (7th) Floor, Eighth (8th) Floor, or Ninth (9th) Floor, and (ii)
seventy-five percent (75%) of any "Profit" (as defined below) derived by Tenant
from that sublease or assignment with respect to any portion of the Premises
located on the Fourth (4th) Floor, Fifth (5th) Floor, Sixth (6th) Floor, Tenth
(10th) Floor, or Eleventh (11th) Floor, or in any Expansion Space (as defined
below). "Profit" means (i) in the case of a sublet, the total amount paid by a
sublessee to Tenant as consideration for such sublet in excess of the Base Rent
and Additional Rent for the allocable sublet space and after deducting all of
Tenant's reasonable subleasing costs including commissions paid, legal fees,
concessions and improvements made to the subleased premises; and (ii) in the
case of an assignment, the total amount paid by an assignee, either directly or
indirectly, as consideration for such assignment in excess of the Base Rent and
Additional Rent for the allocable assigned space. Tenant shall pay Landlord the
percentage of the Profit that is due in accordance with the provisions of this
Paragraph 15 promptly upon receipt by Tenant. Within thirty (30) days after
Tenant receives any amount from an assignee or sublessee as consideration for an
assignment or sublet, the Tenant shall submit to Landlord a statement containing
a reasonably detailed calculation of any Profit derived from such an assignment
or sublet, certified as correct by an officer of Tenant, and simultaneously with
the delivery of such statement. Upon Landlord's request, Tenant shall provide
substantiation of Tenant's calculation of Profit (with supporting documentation)
reasonably satisfactory to Landlord.
(d) Notwithstanding anything to the contrary set forth in this
Paragraph 15, Tenant shall have the right, upon prior written notice to Landlord
in each instance but without the necessity of obtaining Landlord's consent, to
(i) assign or otherwise transfer this Lease or any of its rights hereunder to an
Affiliate or Successor Entity, (ii) sublet the Premises or any part thereof to
an Affiliate or Successor Entity, or (iii) permit the use of the Premises or any
part thereof by an Affiliate or Successor Entity. "Affiliate" shall mean any
entity which, directly or indirectly, controls or is controlled by or is under
common control with Tenant. For purposes of the definition of "Affiliate," the
word "Control" (including "Controlling", "Controlled by" and "under common
Control with") shall mean the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policy of a particular
entity, whether through the ownership of voting securities, by contract or
otherwise. A "Successor Entity" as used in this Paragraph 15 shall mean (x) an
entity into which or with which Tenant, its successors or assigns, is merged or
consolidated, or (y) an entity acquiring this Lease for the term hereby demised,
the good will and all of the other property and assets of Tenant, its successors
or assigns, and assuming all of the liabilities of Tenant, its successors and
assigns.
(e) Notwithstanding anything to the contrary in this Lease, Tenant
shall have the right, without obtaining the consent of Landlord, but upon prior
written notice to Landlord, to permit office-sharing arrangements pursuant to
which clients or subcontractors of Tenant may
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use space in the Premises, provided that any such arrangements under which any
rent or other remuneration or consideration is received directly or indirectly
by Tenant shall be subject in all respects to the provisions of Paragraphs
15(a), 15(b) and 15(c). Tenant shall promptly provide Landlord with the names of
such persons who are using these cards at any given time. Landlord shall supply
Tenant with thirty (30) additional security cards for these "office-sharers"
(Tenant shall administer cards), which cards shall access the perimeter of the
building only.
16. CONDITION OF PREMISES. Tenant will keep the Premises in good order and
condition, and will surrender them at the expiration or other termination of the
Lease in the condition in which they will be upon completion of the initial
Improvements or any other Improvements permitted under the terms of this Lease,
casualty and normal wear and tear excepted.
17. ENTRY BY LANDLORD. Upon reasonable written notice, except (i) in cases
of emergency or (ii) for the protection of the Building or the Premises, of any
property located therein, or of any person, in which event no notice shall be
required, Landlord and its agents shall have access to the Premises at any
reasonable time for the purpose of inspection, or for the purpose of making any
repair, alteration or renovation Landlord considers necessary or desirable, so
long as such entry does not unreasonably interfere with the operation of
Tenant's business in the Premises or permanently reduce the number of rentable
square feet of the Premises, or to show the Premises to a prospective purchaser
of the Building or, during the final Lease Year of the Lease Term, or after
Tenant has exercised its Termination Option pursuant to the provisions of
Paragraph 41, below, to a prospective tenant. Any major repair shall be made
during non-Building Operating Hours and shall be scheduled so as to minimize
interference with Tenant's business activities. Landlord shall have the absolute
right to alter or renovate the common areas and the exterior of the Building,
and any such alteration or renovation shall not be a breach of Paragraph 32 or
of any other provision of the Lease, provided such alteration or renovation will
be of a quality and condition consistent with first-class commercial office
buildings in downtown Washington, D.C.
18. LIABILITY; INDEMNITY. Tenant shall defend Landlord, and hereby does
indemnify and hold harmless Landlord, from and against any and all liabilities,
damages, causes of action, suits, claims, judgments, costs and expenses
(including reasonable attorney's fees) arising from any claimed or asserted
injury, loss or damage to any persons or property (a) arising within the
Premises, unless caused by the intentional misconduct or gross negligence of
Landlord or Landlord's employees or agents, (b) arising out of any act or
omission of Tenant or of any person within the Premises or the Building by the
license, express or implied, of Tenant, or (c) arising in whole or in part from
any default or breach of this Lease by Tenant.
19. INSURANCE.
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(a) Tenant will not conduct or permit to be conducted any activity, or
place any equipment in or about the Premises, that will, in any way, materially
increase the rate of fire insurance or other insurance on the Building; and if
any increase in the rate of fire insurance or other insurance is stated by any
insurance company or by the applicable Insurance Rating Bureau to be due to
activity or equipment in or about the Premises, such statements shall be
conclusive evidence that the increase in such rate is due to such activity or
equipment and, as a result thereof, Tenant shall be liable for such increase and
shall reimburse Landlord therefor on demand.
(b) At all times during the Lease Term and at all times Tenant is
occupying the Premises, Tenant shall carry the following insurance:
(i) Workers compensation insurance;
(ii) Commercial general liability insurance (bodily
injury, personal injury and property damage), in a
minimum amount of $2,000,000 combined personal injury
and property damage single limit per occurrence,
including contractual liability coverage, with an
umbrella coverage in the minimum annual aggregate
amount of $10,000,000; and
(iii) All-risk insurance for (1) all of Tenant's furniture,
fixtures and equipment, (2) all personal or other
removable property that may be stored, contained or
found on the Premises, and (3) all Improvements (as
defined in Paragraph 20 of the Lease) made by or for
Tenant under the provisions hereof, in amounts not
less than one hundred percent (100%) of the full
replacement cost thereof.
(c) All insurance carried by Tenant pursuant to the requirements of
this Lease shall be issued by a company or companies licensed to do business in
the District of Columbia with a Best's rating of "A-" or higher.
(d) Throughout the Lease Term, Landlord shall, at its expense, keep the
base Building insured against any loss or damage caused by fire damage or other
casualty to the full replacement cost thereof. Throughout the Lease Term,
Landlord shall carry the following insurance, the cost of which shall be
included in Operating Expenses:
(i) Commercial general liability insurance (bodily
injury, personal injury and property damage), in a
minimum amount of $2 million combined personal injury
and property damage single limit per occurrence,
including contractual liability coverage, with an
umbrella coverage in the minimum amount of
$10,000,000;
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(ii) Adequate boiler and machinery coverage; and
(iii) Adequate business income/interruption insurance.
(e) All insurance carried by Landlord pursuant to the requirements of
this Lease shall be issued by a company or companies licensed to do business in
the District of Columbia with a Best's rating of "A-" or higher.
(e) Certificates evidencing Tenant's insurance shall be delivered to
Landlord prior to the earlier of (i) any occupancy by Tenant of the Premises or
(ii) commencement of installation of any Improvements in the Premises, including
installation in the Premises of any equipment owned or to be used by Tenant, and
at least annually thereafter, and each policy shall contain an endorsement that
will prohibit its cancellation or material change prior to the expiration of
thirty (30) days after notice to Landlord of such proposed cancellation or
material change.
(f) Tenant shall require that any sublessee of a portion of the
Premises carry insurance in accordance with all requirements set forth in this
Paragraph 18 with respect to the Premises.
20. IMPROVEMENTS. As used in this Lease, "Improvements" shall mean any
alterations, additions, installations, improvements or changes of any kind to
the Premises, including the Tenant Improvement Work, the Renewal Improvements
(referenced in Paragraph 38), the Improvements in the Expansion Space
(referenced in Paragraph 39), and the Improvements in the Additional Expansion
Space (referenced in Paragraph 40) . No Improvements shall be made in or to the
Premises without the prior written consent of Landlord, which consent shall not
be unreasonably withheld, conditioned or delayed, provided, however, that after
the initial Tenant Improvements Work is constructed and other than the initial
Improvements to the Expansion Space and Additional Expansion Space and the
refurbishment of the Improvements upon renewal, Tenant shall have the right
during the Lease Term, without obtaining Landlord's prior written consent, to
make minor cosmetic changes (e.g. painting and carpeting) to the Improvements,
which changes do not cost more than $7,500 and which do not alter or affect the
Building structure or base Building mechanical, electrical and plumbing systems
and which do not move partition walls or doors. The provisions of Exhibit B
shall apply to the construction of the initial and any future Improvements. All
Improvements shall become the property of Landlord, and shall be surrendered
with the Premises, at the expiration or earlier termination of the Lease Term,
provided, however, that, if Tenant is not in default, Tenant shall have the
right to remove, prior to the expiration or earlier termination of the Lease
Term, all movable furniture, furnishings and equipment in the Premises solely at
Tenant's expense. Landlord shall have the right to repair at Tenant's expense
all damage and injury to the Premises caused by such removal or to require
Tenant to do the same. If any such furniture, furnishings or equipment is not
removed by Tenant prior to the expiration or
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earlier termination of the Lease Term, then, five (5) days after written notice
is delivered to Tenant, the same shall become Landlord's property and shall be
surrendered with the Premises as a part thereof and Landlord may remove or
dispose of such property at Tenant's expense. If any mechanic's lien is filed
against the Premises, the Building or the real property of which the Premises
are a part for work claimed to have been done for or materials claimed to have
been furnished to Tenant, it shall be discharged by Tenant within fifteen (15)
days after Tenant's receipt of notice thereof, at Tenant's sole cost and
expense, by the payment thereof or by filing any bond required by law. If Tenant
shall fail to discharge any such mechanic's lien as required by this Paragraph
20, Landlord may, at its option, discharge the same and the cost thereof shall
be Additional Rent due from Tenant with the monthly installment of Base Rent
next becoming due; it hereby being expressly agreed that such discharge by
Landlord shall not be deemed to waive, or release, the default of Tenant in not
discharging the same.
21. RULES AND REGULATIONS. Tenant shall comply with the Rules and
Regulations set forth on EXHIBIT D attached hereto and made a part hereof, and
with such other reasonable rules and regulations as Landlord may adopt for the
Building from time to time, provided such other rules and regulations shall be
effective only after Tenant has received reasonable notice thereof. Landlord
shall enforce the rules set forth in EXHIBIT D in a nondiscriminatory manner. In
the event of any inconsistency or contradiction between the main body of this
Lease and any such rules and regulations the provisions of the main body of this
Lease shall govern and prevail.
22. HAZARDOUS MATERIALS. Tenant will not allow any Hazardous Materials to
be kept in the Premises, or do anything which would increase the rate of
casualty insurance upon the Building. Notwithstanding the foregoing, Tenant may
use and store within the Premises reasonable quantities of Hazardous Materials
that are customarily used in comparable offices (such as cleaning fluids and
photocopier supplies), provided such use and storage complies with all
applicable environmental laws. The term "Hazardous Materials" shall mean (a)
"hazardous wastes," as defined by the Resource Conservation and Recovery Act of
1976, as amended from time to time, (b) "hazardous substances," as defined by
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended from time to time, (c) "toxic substances," as defined by the
Toxic Substances Control Act, as amended from time to time, (d) "hazardous
materials," as defined by the Hazardous Materials Transportation Act, as amended
from time to time, (e) all substances classed or defined as "hazardous" or
"toxic" pursuant to any legislation enacted or in effect during the Lease Term,
and (f) oil or other petroleum products.
23. LIMITATION ON LIABILITY; TENANT'S PROPERTY.
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(a) Notwithstanding anything to the contrary in this Lease, (i)
Landlord shall not be liable to Tenant for any loss or damage to property which
is either covered by Tenant's insurance or for which Tenant is required by this
Lease to carry insurance, and (ii) any liability of Landlord to Tenant in
connection with this Lease shall be limited to direct damages and shall not
include indirect, consequential, or incidental damages, or any lost profits or
damages to Tenant's business.
(b) Except as may be the direct result of intentionally wrongful or
negligent acts or omissions of Landlord or Landlord's agents or employees,
Landlord shall not be liable to Tenant or its employees, agents, business
invitees, licensees, customers, clients, family members, guests, or trespassers,
for any damage, compensation, claim or expense arising from (i) damage or loss
to the property of Tenant or others located anywhere in the Premises or the
Building, or (ii) death, accident or injury to persons occurring anywhere within
the Premises or the Building or as a result of any activity within the Building.
(c) Except as may be the direct result of intentionally wrongful or
negligent acts or omissions of Landlord or Landlord's agents or employees,
Landlord shall not be liable to Tenant, its employees, agents, business
invitees, licensees, customers, clients, family members, guests, or trespassers
for any damage, compensation, claim, cost or expense arising from (i) the
repairing or renovation of any portion of the Building, (ii) any interruption in
the use of the Premises or the Building, (iii) accident or damage resulting from
the use or operation (by Landlord, Tenant or any other person or persons
whatsoever) of elevators or heating, cooling, electrical or plumbing equipment
or apparatus; (iv) any discontinuance of or interruption in the provision of
heat, air-conditioning, elevator service or any other service; (v) any fire,
robbery, theft, criminal act and/or other casualty; (vi) any leakage in any part
of the Premises or the rest of the Building or from water, rain or snow that may
leak into or flow from any part of the Premises or the Building or from drains,
pipes, or plumbing work in or about the Building; or (vii) any other cause
whatsoever not within the reasonable control of Landlord. In no event shall
Landlord be liable to Tenant, its employees, agents, business invitees,
licensees, customers, clients, family members, guests or trespassers for any
damages, compensation or claim arising from the termination of this Lease by
reason of the destruction of the Demised Premises or a taking or sale in lieu
thereof by condemnation or eminent domain. All personal property in the Premises
shall be and remain at Tenant's sole risk, and Landlord shall not be liable for
any damage to or loss of such personal property or for any accident or injury to
persons in the Premises or Building arising from any cause as provided in this
Paragraph 23. Tenant shall have the rights of abatement and termination for
interruption of services provided in Paragraph 8(o) and Paragraphs 24 and 25 of
this Lease, notwithstanding the foregoing provisions of this Paragraph 23(c).
24. DAMAGE TO PREMISES.
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(a) If any portion of the Premises is damaged by fire or other
casualty, or if the Building is damaged such that Tenant is deprived of
reasonable access to any portion of the Premises, Tenant shall promptly give
notice to Landlord. If fifty percent (50%) or more of the Premises or fifty
percent (50%) or more of the Building is damaged, Landlord shall not be required
to repair the Premises or the Building, provided Landlord gives notice to Tenant
within sixty (60) days after such damage, of its intention not to repair the
damage ("Notice of Non-Restoration"). If Landlord delivers a Notice of
Non-Restoration to Tenant as provided above, this Lease shall terminate ten (10)
days after Tenant's receipt thereof.
(b) If less than fifty percent (50%) of the Premises or less than fifty
percent (50%) of the Building is damaged or if the common areas of the Building
are damaged so as to deny Tenant access to the Premises, or if Landlord does not
deliver a Notice of Non-Restoration to Tenant as provided above, (i) Landlord
shall repair the Premises and/or the Building, as applicable, at Landlord's
expense, to substantially the condition of the Building and/or Premises prior to
the damage, provided that Landlord shall not be required to repair or replace
any of Tenant's fixtures or equipment in the Premises or any Improvements made
by or for Tenant, and (ii) as soon as is reasonably practicable, and in any
event not more than sixty (60) days after the date of any such damage to the
Premises and/or the Building, Landlord shall give notice (the "Restoration
Notice") to Tenant of the date by which Landlord reasonably estimates the
restoration of the Premises shall be substantially completed. If the damage does
not interfere with Tenant's use of the Premises, there shall be no abatement of
Base Rent or Additional Rent. If the damage deprives Tenant of the use of less
than all of the Premises, the Base Rent and Additional Rent shall be abated by
the percentage that the unusable rentable area of the Premises bears to the
total rentable area thereof, for the period commencing with the damage and
ending with substantial completion by Landlord of the repairs. If the damage
makes it impossible for Tenant to carry on its business at all in the Premises,
then all Base Rent and Additional Rent shall be abated in full during the period
commencing with the damage and ending with substantial completion by Landlord of
the repairs.
(c) Tenant shall have the right to terminate the Lease by delivering a
notice of termination to Landlord, which shall be effective 10 days after
delivery thereof, if (i) Landlord estimates in the Restoration Notice that the
damage to the Premises and/or Building will require more than 180 days from the
date of the damage to repair, provided Tenant's notice of termination is
delivered to Landlord within thirty (30) days of Tenant's receipt of the
Restoration Notice, or (ii) the repair of the damage is not substantially
completed within thirty (30) days after the date by which, in the Restoration
Notice, Landlord estimates the restoration of the Premises shall be
substantially completed, provided Tenant's notice of termination is delivered to
Landlord upon the end of said thirty day period. If the Lease is terminated as
provided herein, Tenant shall be released from liability for Base Rent and
Additional Rent for any period after such termination is effective.
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(d) Notwithstanding anything set forth in this Paragraph 24 to the
contrary, in the event that, during the final twelve (12) months of the Lease
Term, more than thirty-three percent (33%) of the Premises is damaged and
thereby rendered untenantable or not reasonably usable by Tenant for its
business purposes, either Landlord or Tenant may terminate this Lease by notice
to the other party within thirty (30) days after the occurrence of such damage,
and this Lease shall terminate on the date of such notice if timely given. For
purposes of this Paragraph 24 (d), the Premises shall be deemed wholly
untenantable or unusable if, due to such damage, Tenant shall be precluded from
using more then thirty-three percent (33%) of the Premises for the conduct of
its business, and Tenant's inability to so use the Premises is reasonably
expected to continue until at least the ninetieth (90th) day after the date on
which such damage occurred.
(e) Notwithstanding anything herein to the contrary, Tenant shall have
the right to terminate this Lease, and Landlord shall not be obligated to
restore the Premises or the Building, and shall have the right to terminate this
Lease, if zoning or other applicable laws or regulations do not permit such
repair and restoration.
(f) Tenant shall have the rights of' abatement and termination for
Interruption of services provided in Paragraph 8(o) of this Lease,
notwithstanding the foregoing provisions of this Paragraph 24.
25. CONDEMNATION. If the whole of the Premises is taken in fee simple,
under eminent domain, the Lease Term shall terminate as of the date of such
taking. If less than the whole of the Premises is so taken, and such partial
taking materially and adversely affects the continuance of Tenant's business on
the Premises, the Lease Term may, at the election of either party, terminate
upon notice to the other within sixty (60) days after surrender of possession
pursuant to such taking; if neither party so elects, the Lease Term shall
terminate as to the part taken and shall continue as to the part not taken, and
the Base Rent shall be reduced by the percentage that the part taken bears to
the whole of the Premises. (For purposes of calculating Tenant's share of
Operating Expenses, the part of the Premises not taken shall thereafter
constitute the Premises, and Tenant's share of Operating Expenses shall be
recalculated, using the method described in Paragraph 5 hereof, based upon the
new area of the Premises.) If more than fifty percent (50%) of the Building is
so taken, the Lease Term may, at the election of Landlord, terminate upon notice
to Tenant within sixty (60) days after surrender of possession pursuant to such
taking. In the event of termination pursuant to this Paragraph, Base Rent and
Additional Rent shall be apportioned as of the date of termination. If a part of
the Premises shall be taken by eminent domain, and this Lease and the Lease Term
shall not be terminated in accordance with this Paragraph 25, Landlord, at
Landlord's expense, shall restore that part of the Premises not so acquired or
condemned to a self-contained rental unit substantially equivalent (with respect
to character, quality, appearance and services) to that which existed
immediately prior to such acquisition or condemnation.
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Landlord shall be entitled to all damages and compensation awarded for any
taking, and Tenant assigns to Landlord all of its right to any such award.
Tenant, however, may claim any award made specifically for fixtures and other
equipment installed by it, but only if such award shall be made by the
condemnation court in addition to and stated separately from the award made by
it for the land and the Building or part thereof so taken. Tenant shall have the
rights of abatement and termination for interruption of services provided in
Paragraph 8 (o) of this Lease, notwithstanding the foregoing provisions of this
Paragraph 25.
26. SUBORDINATION. This Lease is subject and subordinate to the lien of any
mortgage or deed of trust now or at any time hereafter placed upon the Building,
and Tenant shall execute any and all instruments to effect such subordination
which the Landlord may require within 10 days of receipt of Landlord's request
therefor. Landlord will secure for Tenant, from the current holder of the
mortgage on the Building and from the ground lessor and master lessor, if any,
within 30 days after the date of execution of this Lease, a non-disturbance
agreement in the form attached hereto as EXHIBIT E, executed by the mortgage
holder, the ground lessor and master lessor, if any, and by Landlord, and if
Landlord does not do so, Tenant may terminate this Lease by written notice to
Landlord. Landlord also will secure for Tenant, from any future holder of any
mortgage or deed of trust, or ground lease or master lease, on the Building, a
non-disturbance agreement, in a form substantially similar to that attached as
EXHIBIT E hereto, and, if Landlord does not do so, this Lease shall be deemed
not subordinate to any such mortgage or deed of trust, or ground lease or master
lease, if any.
27. ESTOPPEL CERTIFICATES. Within twenty (20) calendar days of Tenant's
receipt of a written request therefor by Landlord, Tenant shall execute and
deliver to Landlord, or to such person(s) as may be designated by Landlord, a
written estoppel certificate concerning the status of the Lease on such
reasonable and customary form as may be required by the holder of a mortgage or
deed of trust on the Building, or by a prospective lender or by a prospective
purchaser of the Building. Tenant shall be deemed to have accepted, agreed to
and ratified any estoppel certificate to which Tenant does not object with
specificity as to the grounds for objection, in writing, within twenty (20)
calendar days of Tenant' s receipt thereof from Landlord. Tenant shall have the
right to obtain upon request an estoppel certificate from the Landlord
certifying that the Lease is not in default.
28. PERSONAL LIABILITY OF LANDLORD.
(a) There shall be no personal liability on the part of any individual
who is a partner, trustee, officer, director, shareholder, agent or
representative of Landlord, or of any mortgagee in possession, to any person
with respect to any terms of this Lease or for any claim of loss, damage,
liability, or expense arising under the Lease or relating to Tenant's leasing or
occupation of the Premises.
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(b) Notwithstanding anything to the contrary in this Paragraph 28 or
elsewhere in the Lease, in all events the liability of the fee owners of the
Building and the real property on which the Building is located (collectively,
the "Property") shall be limited to their equity in the Property, and in the
event that Landlord under this Lease is at any time the fee owner (rather than
master lessee) of the Building, then such Landlord's liability under this Lease
or arising in connection with this Lease shall be limited to and satisfied
solely from Landlord's equity interest in the Property. In the event that the
Property is encumbered by financing in an amount that exceeds 80% of the fair
market value of the Property at the time of the financing, the Landlord's
liability shall be limited to the amount which is equal to twenty percent (20%)
of the aforesaid fair market value of the Property, which liability shall be
satisfied first from Landlord's equity in the Property and, if that is
insufficient, then from Landlord's assets beyond Landlord's equity in the
Building.
29. NO WAIVER. This Lease is binding on and may be legally enforced by, the
parties hereto, their heirs, executors, administrators, successors and assigns.
No waiver of any breach of any term contained herein, or of any default, shall
be construed to be a waiver of any such term or of any subsequent breach
thereof, or of any subsequent default.
30. HOLDING OVER. If Tenant remains in possession of the Premises after the
expiration of the Lease Term, Tenant shall be a tenant from month to month, upon
all the terms hereof which are not inconsistent with such tenancy; provided,
however, that Tenant shall pay to Landlord, (a) as Base Rent, on the first day
of each month during the first two months of such tenancy, an amount equal to
one hundred fifty percent (150%) of the monthly Base Rent and Additional Rent in
effect immediately before the expiration of the Lease Term, and on the first day
of each month during the third and all subsequent months of such tenancy, an
amount equal to two hundred percent (200%) of the monthly Base Rent and
Additional Rent in effect immediately before the expiration of the Lease Term,
and, in addition, shall continue to be responsible for any payments of
Additional Rent that otherwise would be due under the terms of this Lease if the
Lease were still in effect. The aforesaid month-to-month tenancy may be
terminated by Landlord or Tenant upon thirty (30) days' written notice. In the
event Tenant remains in possession after such termination, Tenant shall pay, as
liquidated damages, for each month or part of a month of such possession, an
amount equal to two hundred percent (200%) of the monthly amount Tenant was
paying immediately before the expiration of the Lease Term.
31. [Intentionally deleted.]
32. COVENANT OF QUIET ENJOYMENT. Landlord covenants that it has the right
to make this Lease for the Lease Term, and that if Tenant shall pay the Base
Rent and the Additional Rent and perform all of the covenants, terms, and
conditions required by this Lease, Tenant shall, except as otherwise provided in
this Lease, during the Lease Term, freely, peaceably and
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quietly occupy and enjoy the full possession of the Premises without molestation
or hindrance by Landlord or its agents.
33. NOTICES. All notices or other communications hereunder shall be in
writing, unless otherwise expressly provided herein, and shall be deemed duly
given if delivered by hand or by certified or registered mail, return receipt
requested, first-class, postage prepaid (i) if to Landlord, at 2122
Massachusetts Avenue, Suite 12, N.W., Washington, D.C., 20008, with a copy to
Dennis A. Davison, Esq., David, Hagner, Kuney & Davison, P.C., 1120 19th Street,
Suite 800, Washington, D.C. 20036, and (ii) if to Tenant prior to Tenant's
occupancy of the Premises, at 6707 Democracy Boulevard, Suite 800 Bethesda, MD
20817 Attention: Michael L. Brendes, and if to Tenant after Tenant's occupancy
of the Premises, at the Premises, with a copy to Stephen W. Porter, Esq., Arnold
& Porter, 555 12th Street, N.W., Washington, D.C. 20004, unless notice of a
change of address is given by Landlord or Tenant pursuant to the provisions of
this Paragraph 32. Notice shall be deemed to have been given upon receipt or at
the time delivery is refused.
34. BROKER'S COMMISSION. Tenant represents that it has dealt exclusively
with Barnes, Morris, Pardoe and Foster, Inc. and Equis ("Broker") in connection
with this Lease. Landlord and Tenant acknowledge that Broker is the sole and
exclusive procuring cause of this Lease. Landlord shall pay to Broker a
brokerage commission equal to three percent (3%) of the Base Rent and storage
space base rent, unescalated but increased pursuant to Paragraph 4 (f), for the
initial Premises (i.e. 87,327 rentable square feet) for the first ten (10) Lease
Years of the Lease Term, fifty percent (50%) of which shall be payable upon
execution of the Lease by all parties, and the balance of which shall be payable
upon Landlord's receipt from Tenant of the first month's Base Rent. In addition,
if Tenant exercises the Expansion Option (as defined below), Landlord shall pay
to Broker a brokerage commission equal to three percent (3%) of the unescalated
Base Rent for the Expansion Space (as defined below) leased by Tenant, fifty
percent (50%) of which shall be payable on the date the Lease Term for the
Expansion Space commences, as provided in Paragraph 39(a), and the balance of
which shall be payable upon Landlord's receipt from Tenant of the first month's
Base Rent for the Expansion Space. Broker shall not be entitled to any other
brokerage commission or fee, including with respect to the Extended Term, the
Second Extended Term, or any other renewal or extension of the Lease or of
Tenant's occupancy of the Premises beyond the initial ten (10) Lease Years of
the Lease Term.
35. MAINTENANCE.
(a) Landlord shall keep and maintain in good order and repair and in a
first class manner the Building, including the Building structure and systems,
the foundation, roof, exterior walls, elevators, electrical, plumbing, HVAC
systems, entrance, sidewalks, lobbies, stairways, landscaped areas, parking
garage and common areas and facilities. Landlord shall
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be responsible for causing the lobby, other common areas, and exterior areas,
sidewalks, driveways, parking garage, exercise facility, entrances and core area
restrooms on all floors leased by Tenant to comply with the requirements of
Title III of the ADA, all Environmental Laws (hereinafter defined), provided
however, that with regard to the bathrooms on the floors leased by Tenant (i)
Landlord shall install in each an alarm visual strobe and insulate the sink hot
and drain pipes that are exposed under the counter tops, and (ii) Tenant shall
perform all ADA changes required as a result of Tenant installing, at Tenant's
expense, a rear door in the womens' bathrooms, which doors Landlord consents to
Tenant installing, provided they are installed in accordance with applicable
laws, codes and regulations. Landlord agrees that the base Building fire alarm
system shall be adequate to accommodate the strobes and annunciators required by
the provisions of the District of Columbia Code to be installed in the Premises
by Tenant as part of the Tenant Improvement Work. Where Improvements or any
other alterations made by Landlord or by Tenant after execution of this Lease
trigger "path of travel" requirements under the ADA, the party making such
alterations shall be responsible for satisfying such requirements. Any changes
to the Building necessary to cause such common and public areas to comply with
the requirements of Title III of the ADA or Environmental Laws shall be at
Landlord's expense and shall not be included in the Operating Expenses of the
Building, unless such changes are required by the construction of Improvements
by or for Tenant or by any other act or omission of Tenant, in which case shall
be solely responsible for all costs of any such changes. In addition, Landlord
shall remedy, as promptly as is feasible under the circumstances, any material
interruption of the Services to be provided to Tenant as set forth in Paragraph
8, above. The Landlord shall in no event be required to make repairs to
leasehold improvements made by the Tenant, or to make repairs to wear and tear
within the Premises. The Tenant agrees to deliver notice to the Landlord, as
promptly as is reasonable under the circumstances, of any defective condition in
or about the Premises known to the Tenant which the Landlord is required to
repair hereunder; provided, however, that the Tenant's failure to report to the
Landlord any such defective condition shall not relieve the Landlord of the
Landlord's obligation to repair any such defective condition promptly upon
learning of the need for such repair.
(b) Except to the extent a violation is caused by Tenant or any invitee
of Tenant, Landlord shall be responsible for causing the Building to comply with
all applicable federal and local laws, ordinances, regulations and orders
governing asbestos and Hazardous Materials ("Environmental Laws"). Any action
necessary to cure a violation of any Environmental Laws shall be at Landlord's
expense and shall not be included in the operating Expenses of the Building,
except that any violation caused by Tenant or an invitee of Tenant shall be
cured at Tenant's sole cost.
(c) Landlord shall retain an expert indoor environmental quality
consultant (the "Landlord's IAQ Consultant") who shall conduct testing (and
prepare written reports of such testing) of the indoor air quality of the
Building and such other indoor environmental factors
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as are reasonably tested in first-class office buildings (collectively, "IAQ")
one (1) time every other calendar year, for the purpose of determining the
normal and acceptable IAQ of the Premises and the common areas of the Building.
36. PARKING. Tenant shall have the right during the Lease Term to lease one
(1) parking space in the Building's parking garage for each one thousand (1,000)
rentable square feet of the Premises. The parking garage will operate
twenty-four hours a day every day of the year except Holidays, and will he
accessible to Tenant's employees with monthly parking contracts every day of the
year, including Holidays. The parking fees shall be established by the Landlord
(or garage operator) from time to time and shall be competitive with those of
similar parking garages for similar parking spaces (i.e., "reserved" or
"non-reserved") of comparable quality located in the vicinity of the Building.
At the time of execution of this Lease, the rate is $150 per month for
unreserved spaces and $270 per month for reserved spaces, of which there is a
limited number. The parking garage shall be operated by Landlord consistent with
standards employed by the operators of other parking garages in comparable
first-class commercial office buildings in the downtown Washington, D.C. central
business district.
37. RULE AGAINST PERPETUITIES. Notwithstanding any provision in this Lease
to the contrary, if the Lease Term has not commenced within twenty-one (21)
years after the date of execution of this Lease, this Lease automatically shall
terminate on the 21st anniversary of the date of execution hereof. The sole
purpose of this provision is to avoid any possible interpretation of this Lease
as violating the Rule Against Perpetuities or other rule of law against
restraints on alienation.
38. RENEWAL.
(a) Tenant shall have the right to extend the Lease Term for one
five-year period (the "Extended Term") commencing immediately after the end of
the tenth Lease Year (the "First Renewal Option"), and, provided Tenant has
exercised the First Renewal Option, Tenant shall have the right to extend the
Lease Term for a second five-year period (the "Second Extended Term") commencing
immediately after the end of the fifteenth Lease Year (the "Second Renewal
Option").
(b) To exercise the First Renewal Option, Tenant must deliver to
Landlord written notice of such exercise ("First Renewal Option Notice") not
earlier than fifteen (15) months prior to the last day of the tenth Lease Year
and not later than twelve (12) months prior to the last day of the tenth Lease
Year. To exercise the Second Renewal Option, Tenant must deliver to Landlord
written notice of such exercise ("Second Renewal Option Notice") not earlier
than fifteen (15) months prior to the last day of the fifteenth Lease Year and
not later than twelve (12) months prior to the last day of the fifteenth Lease
Year. If Tenant does not provide notice to Landlord in accordance with all
provisions of this Paragraph 38(b), Tenant
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shall not have the right to extend the Lease Term, and such rights as are
provided herein shall be null and void and of no further effect.
(c) Provided that Tenant exercises its First Renewal Option as provided
above, the Base Rent per rentable square foot of the Premises that shall be due
from Tenant for the eleventh Lease Year (the first Lease Year during the
Extended Term) shall be adjusted to the lesser of (i) ninety-five percent (95%)
of the then prevailing fair market base rental rate for new tenants of space of
comparable size and quality in office buildings in Washington, D.C., taking into
consideration the value of concession packages as determined pursuant to
Paragraph 38(f) (including, without limitation, allowances and rent abatements)
(the "Adjusted Market Rate"), or (ii) the Base Rent per rentable square foot of
the Premises that Tenant is obligated to pay under the terms of the Lease for
the tenth Lease Year (the "Current Lease Rate"). If the Adjusted Market Rate is
less than the Current Lease Rate, (A) the Base Rent shall escalate in accordance
with the "Market Escalation Factor," as determined pursuant to Paragraph 38(f),
during the Extended Term and (B) the Operating Expenses and the Real Estate
Taxes incurred during the eleventh Lease Year shall be the new Base Year
Operating Expenses and the new Base Year Real Estate Taxes applicable during the
Extended Term, and Tenant therefore shall have no obligation to pay any amounts
on account of Operating Expenses and Real Estate Taxes for the eleventh Lease
Year. If the Current Lease Rate is less than the Adjusted Market Rate, (X) the
Base Rent shall escalate in accordance with Paragraph 4(d) during the Extended
Term, (Y) there shall be no change in the Base Year Operating Expenses or the
Base Year Real Estate Taxes during the Extended Term and Tenant shall be
obligated to continue to pay Tenant's Proportionate Share of Operating Expense
Increases and Tenant's Proportionate Share of Real Estate Tax Increases during
each and every Lease Year during the Extended Term, and (Z) Landlord shall
provide to Tenant a "Renewal Improvement Allowance" equal to Ten Dollars
($10.00) per rentable square foot of the Premises, which may be used by Tenant
in accordance with the purposes set forth in Paragraph 3(d), above.
(d) Provided that Tenant exercises its Second Renewal Option as
provided above, the Base Rent per rentable square foot of the Premises that
shall be due from Tenant for the sixteenth Lease Year (the first Lease Year
during the Second Extended Term) shall be adjusted to the lesser of (i)
ninety-five percent (95%) of the then-prevailing fair market base rental rate
for new tenants of space of comparable size and quality in office buildings in
Washington, D.C., taking into consideration the value of concession packages as
determined pursuant to Paragraph 38(f) (including, without limitation,
allowances and rent abatements) (the "Adjusted Market Rate"), or (ii) the Base
Rent per rentable square foot of the Premises that Tenant is obligated to pay
under the terms of the Lease for the fifteenth Lease Year (the "Current Lease
Rate"). If the Adjusted Market Rate is less than the Current Lease Rate, (A) the
Base Rent shall escalate in accordance with the "Market Escalation Factor," as
determined pursuant to Paragraph 38 (f), during the Second Extended Term and (B)
the Operating
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Expenses and the Real Estate Taxes incurred during the eleventh Lease Year shall
be the new Base Year Operating Expenses and the new Base Year Real Estate Taxes
applicable during the Second Extended Term, and Tenant therefore shall have no
obligation to pay any amounts on account of Operating Expenses and Real Estate
Taxes for the sixteenth Lease Year. If the Current Lease Rate is less than the
Adjusted Market Rate, (X) the Base Rent shall escalate in accordance with the
"Market Escalation Factor," during the Second Extended Term, (Y) there shall be
no change in the Base Year Operating Expenses or the Base Year Real Estate Taxes
during the Second Extended Term and Tenant shall be obligated to continue to pay
Tenant's Proportionate Share of Operating Expense Increases and Tenant's
Proportionate Share of Real Estate Tax Increases during each and every Lease
Year during the Second Extended Term, and (Z) Landlord shall provide to Tenant a
"Renewal Improvement Allowance" equal to Ten Dollars ($10.00) per rentable
square foot of the Premises, which shall be used by Tenant for refurbishment of
the Premises (e.g. repainting and recarpeting), and any unused amount of the
Renewal Improvement Allowance shall be applied as a rental credit. The Renewal
Improvements shall be constructed in accordance with the provisions of Exhibit B
and the Renewal Improvement Allowance shall be paid in accordance with the
provisions of Exhibit B.
(e) The Adjusted Market Rate and the Market Escalation Factor with
respect to the Extended Term, or the Second Extended Term, as the case may be,
shall be determined as follows. After Landlord's receipt of the First Renewal
Option Notice, or Second Renewal Option Notice, as the case may be, Landlord and
Tenant shall attempt to agree upon the Adjusted Market Rate and the Market
Escalation Factor. If Landlord and Tenant are unable to reach agreement upon the
Adjusted Market Rate and the Market Escalation Factor within thirty (30) days
after Landlord's receipt of the First Renewal Option Notice, or the Second
Renewal Option Notice, as the case may be, the Adjusted Market Rate and the
Market Escalation Factor shall be determined by a panel of three brokers, one of
whom shall be selected by Landlord, one of whom shall be selected by Tenant, and
the third of whom shall be chosen by the brokers selected by Landlord and by
Tenant. Each broker selected shall have at least 10 years' experience in the
downtown Washington, D.C., commercial real estate market, and shall be
recognized as ethical and reputable within the local real estate industry and
not otherwise employed by or engaged by or working for Landlord, Tenant or any
of their respective affiliates. Landlord and Tenant each shall select a broker
as specified above within fifteen (15) days after the expiration of the
aforesaid 30-day period. The third broker shall be selected within fifteen (15)
days after the first two brokers have been selected. Within thirty (30) days
after the third broker has been selected, the three brokers shall determine the
Adjusted Market Rate and the Market Escalation Factor. The Adjusted Market Rate
shall be the amount that is agreed upon by any two of the three brokers. In the
event no two of the three brokers are able to agree upon the Adjusted Market
Rate within 30 days after the selection of the third broker, each of the brokers
shall submit to Landlord and Tenant within fifteen (15) days his or her
determination of the Adjusted Market Rate, the determination that
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is furthest from the average of the three determinations shall be disregarded,
and the average of the remaining two determinations shall be the Adjusted Market
Rate. The Market Escalation Factor shall be the rate or formula agreed upon by
any two of the three brokers. In the event no two of the three brokers are able
to agree upon the Market Escalation Factor within 30 days after the selection of
the third broker, the Market Escalation Factor shall be determined by the third
broker. It is understood and agreed that the determination of the Adjusted
Market Rate and the Market Escalation Factor as provided herein shall be binding
upon Landlord and Tenant. Landlord shall pay the cost of the services of the
broker it selects, Tenant shall pay the cost of services of the broker it
selects, and the cost of the services of the third broker shall be borne one
half by Landlord and one half by Tenant.
(f) Except as provided in this Paragraph 38, during the Extended Term
and the Second Extended Term, all terms and conditions contained in the Lease
shall continue to apply with full force and effect, provided however, that this
Paragraph 38 will not be deemed to provide further renewal options under the
Lease as renewed.
39. EXPANSION OPTION.
(a) At any time prior to February 28, 1999, Tenant shall have the
option to expand the Premises to include either (i) all of the office space on
all or one or more entire floors of the Fourth (4th), Fifth (5th) and Sixth
(6th) Floors of the Building, or (ii) all of the office space on all or one or
more entire floors of the Sixth (6th), Tenth (l0th) and Eleventh (11th) Floors
of the Building (the "Expansion Space"), which option hereinafter shall be
referred to as the "Expansion Option." Tenant shall not be entitled to exercise
the aforesaid Expansion Option to lease Expansion Space if, at the time Tenant
is entitled to exercise said option, Tenant has subleased or has entered into an
agreement to sublease in the future more than twenty-five percent (25%) of the
then total amount of rentable square feet of the Premises, unless Tenant itself
occupies at all times the Expansion Space and does not relocate its employees
from the initial Premises into the Expansion Space in order to comply with this
provision. To exercise the Expansion Option, Tenant must deliver to Landlord
written notice of the exercise of the Expansion Option (the "Expansion Notice")
on or before February 28, 1999. If Tenant delivers to Landlord the Expansion
Notice within the time provided herein, the Expansion Space shall be leased upon
all of the same terms and conditions set forth in this Lease with respect to the
Premises (which terms and conditions shall be adjusted proportionately to
account for the increased rentable square footage of the Premises upon inclusion
of the Expansion Space), except that: (1) the Lease Term with respect to the
Expansion Space shall commence on the later of (A) September 1, 2000, or (B) the
date on which Landlord delivers the Expansion Space to Tenant; (2) Tenant shall
be obligated to pay Base Rent and Additional Rent for the Expansion Space
beginning on the date that is 120 calendar days after the date on which Landlord
delivers the Expansion Space to Tenant; (3) if Tenant exercises the Expansion
Option with respect to Expansion Space on the Tenth (10th)
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or Eleventh (11th) Floors, the Base Rental for that space shall be Two Dollars
($2.00) per rentable square foot greater than that for the remainder of the
Premises; and (4) Landlord shall provide to Tenant an "Expansion Space
Improvement Allowance" equal to Twenty-Seven and 50/100 Dollars ($27.50) per
rentable square foot of the Expansion Space, which shall be paid by Landlord,
and may be used by Tenant in accordance with the purposes set forth in Paragraph
3(d), above. The Expansion Space Improvements shall be constructed in accordance
with the provisions of EXHIBIT B and the Expansion Space Improvement Allowance
shall be paid in accordance with the provisions of Exhibit B.
(b) Landlord shall use commercially reasonable efforts to deliver the
Expansion Space to Tenant by September 1, 2000, or as soon thereafter as
possible, by taking all reasonable steps to recover possession of the Expansion
Space from the entity that is the tenant of the Expansion Space as of the date
of execution of this Lease (the "Current Expansion Space Tenant"). If Landlord
does not deliver the Expansion Space to Tenant by September 1, 2000, and as a
direct result Tenant is forced to hold over under its existing lease for
premises at 6707 Democracy Boulevard, Bethesda, Maryland (the "Existing Lease"),
then Landlord shall reimburse Tenant for the amounts paid by Tenant under the
Existing Lease for the period during which Tenant occupies space pursuant to the
Existing Lease after the expiration of the Existing Lease by reason of
Landlord's failure to timely deliver the Expansion Space (the "Expansion
Holdover Period") that are in excess of the amounts Tenant would have been
obligated to pay during the Expansion Holdover Period if those amounts were
required to be paid at the rate in effect under the Existing Lease immediately
prior to the expiration of the term of the Existing Lease, provided that the
total amount of any such reimbursement shall not exceed the amount actually
received by Landlord as rent from the Current Expansion Space Tenant after
September 1, 2000 that are in excess of the amounts the Current Expansion Space
Tenant would have been obligated to pay after the expiration of its lease for
the Premises if those amounts were required to be paid at the rate in effect
under the Current Expansion Space Tenant's lease for the Premises immediately
prior to the expiration of the term of that lease. Tenant shall have the right
to rescind the exercise of this expansion option in the event that Landlord
fails to deliver the Expansion Space to Tenant by June 30, 2001, provided that
Tenant exercise said option to rescind by giving written notice thereof to
Landlord by July 10, 2001.
40. FIRST RIGHT TO LEASE. Tenant shall have a continuing first right to
lease, exercisable at any time after full execution of this Lease, any space
that becomes available on floors immediately above or below the Premises
("Additional Expansion Space"). In addition, Tenant shall have a continuing
first right to lease, exercisable at any time after full execution of this
Lease, any additional available lower level or storage space ("Additional
Storage Space"). Tenant shall not be entitled to exercise the aforesaid rights
to lease Additional Expansion Space or Additional Storage Space if, at the time
Tenant is entitled to exercise said rights Tenant has subleased or has entered
into an agreement to sublease in the future more
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than twenty-five percent (25%) of the then total amount of rentable square feet
of the Premises, unless Tenant itself occupies the Additional Expansion Space
for the entire first year of Tenant's leasing of said Additional Expansion Space
and does not relocate its employees from the initial or Expansion Premises into
the Additional Expansion Space in order to comply with this provision. If Tenant
leases any Additional Expansion Space but Tenant does not itself occupy said
Additional Expansion Space for the entire first year of Tenant leasing said
space or if Tenant relocates its employees from the initial or expansion space
in violation of the above provision, then Landlord shall be entitled to 100% of
the profits from all future subleasing of said Additional Expansion Space.
Landlord shall provide written notice to Tenant that Additional Expansion Space
or Additional Storage Space is available ("Landlord's Notice") promptly after
Landlord learns that any such space will soon become or has become available.
Tenant shall have fifteen (15) days after receiving Landlord's Notice to provide
written notice to Landlord ("Tenant's Notice") that Tenant wishes to lease the
Additional Expansion Space or Additional Storage Space identified in. Landlord's
Notice. Within ten (10) days after Landlord receives Tenant's Notice with
respect to Additional Storage Space, Landlord and Tenant shall enter into a
written amendment to this Lease providing for the lease of such Additional
Storage Space under the same terms relating to Storage Space rent as are
contained in Paragraph 42, below. Within ten (10) days after Landlord receives
Tenant's Notice with respect to Additional Expansion Space, Landlord shall
deliver to Tenant a notice stating the rent and other terms and conditions upon
which Landlord is willing to lease the Additional Expansion Space ("Notice of
Proposed Terms"). The parties shall have a period of thirty (30) days after
Landlord's delivery to Tenant of the Notice of Proposed Terms to negotiate in
good faith in an attempt to reach agreement with respect to rent, terms and
conditions for the Additional Expansion Space. If the parties are unable to
reach agreement on the rent, terms and conditions for the Additional Expansion
Space, Landlord shall have the right (subject to any applicable provisions of
this Lease) to lease the Additional Expansion Space to any person or entity
other than Tenant, provided, however, that if Landlord seeks to lease the
Additional Expansion Space at a rent rate and upon terms and conditions that are
more favorable to the tenant than those that were offered to Tenant, Landlord
must notify Tenant in writing of that rent and those terms and conditions (the
"Second Offering Notice"), and Tenant shall have a period of ten (10) days after
Landlord's delivery to Tenant of the Second Offering Notice to agree by written
notice to Landlord to lease the Additional Expansion Space at the rent and on
the terms and conditions stated in the Second Offering Notice. If Tenant either
declines to lease the Additional Expansion Space at the rent and on the terms
and conditions stated in the Second Offering Notice, or does not agree in
writing to the rent, terms and conditions stated in the Second Offering Notice
within the aforesaid ten-day period, Landlord shall be free to lease the
Additional Expansion Space to a third party on the terms and conditions stated
in the Second Offering Notice for a period of six (6) months after the date on
which Tenant declines to lease the offered space. If a lease with respect to the
Additional Expansion Space is not entered
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into by Landlord and a third party upon the terms and conditions set forth in
the Second Offering Notice within such six (6) month period, or if such space
again becomes available for any other reason, Tenant shall again have the first
right to lease such Additional Expansion Space in accordance with the terms of
this Paragraph 39. In no event shall the failure of Landlord and Tenant to agree
to terms under this First Right to Lease result in the loss of any of Tenant's
renewal or other expansion option rights or change of the terms thereof. In the
event Tenant leases Additional Expansion Space, the Additional Expansion Space
Improvements shall be constructed in accordance with the provisions of Exhibit B
and the Additional Expansion Space Improvement Allowance, if any, shall be paid
in accordance with the provisions of Exhibit B.
41. TERMINATION OPTION. Tenant shall have the right to terminate the Lease
(i) effective as of the last day of the fifth Lease Year, by delivering to
Landlord written notice of termination not later than sixteen (16) months prior
to the last day of the fifth Lease Year, and paying to Landlord the "Termination
Fee" (as defined below) not later than six (6) months prior to the last day of
the fifth Lease Year, or (ii) effective as of the last day of the seventh Lease
Year, by delivering to Landlord written notice of termination not later than
sixteen (16) months prior to the last day of the seventh Lease Year, and paying
to Landlord the Termination Fee not later than six (6) months prior to the last
day of the seventh Lease Year. The Termination Fee shall be the amount equal to
the sum of (1) the unamortized amount of all tenant improvement allowances paid
or applied by Landlord to or for the benefit of Tenant (including, but not
limited to, the "Tenant Allowance" described in Paragraph 3 (d), which shall be
amortized on a straight-line basis over the first ten (10) Lease Years of the
Lease Term, and the "Expansion Space Improvement Allowance" described in
Paragraph 1 (c)), which shall be amortized on a straight-line basis over the
actual term for which the Expansion Space is leased by Tenant), the unamortized
amount of all rental abatement provided to Tenant pursuant to Paragraph 4 (e) of
the Lease, and the unamortized amount of all brokerage and other commissions
paid by Landlord in accordance with the terms of the Lease, which shall be
amortized on a straight-line basis over the first ten (10) Lease Years of the
Lease Term for the commission for the initial Premises and on a straight-line
basis over the term of the Expansion Space for the commission for the Expansion
Space, if any, leased by Tenant), and (2) an amount equal to two months' Base
Rent, as escalated, that is due as of the month immediately prior to the
effective date of termination.
42. STORAGE SPACE. Tenant shall have the right to lease up to two thousand
eight hundred (2,800) usable square feet (measured according to BOMA standards)
of storage space in the Building, which space shall be secure and demised, with
existing lighting and existing conditions. During the first Lease Year, Tenant
shall pay Ten Dollars ($10.00) per rentable square foot for the storage space,
which rate shall be increased in each succeeding Lease Year by two percent (2%)
of the storage space rent applicable for the preceding Lease Year. If Tenant
exercises its option to expand in accordance with Paragraph 38, above, Tenant
shall
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have the right to lease approximately 1,000 usable square feet of additional
storage space, at the rental rate for storage space then in effect. Tenant shall
have the right to install, at its sole expense, a heating and/or air
conditioning system and additional lighting in the storage space, provided that
said system and lighting (i) is approved by Landlord, which approval shall not
be unreasonably withheld, conditioned or delayed, (ii) Tenant maintains said
system and lighting at its expense, and (iii) Tenant pays the utility costs for
operating said system, which Tenant shall separately meter as required by
Landlord, and Tenant pays for the maintenance for such storage space, provided
however, that Tenant shall not otherwise be liable for Operating Expenses or
Real Estate Taxes for the garage. Landlord shall be responsible for preventing
water infiltration into the storage space (which cost shall be included in
Tenant's Operating Expenses), but Landlord shall not be liable for damage due to
humidity caused by existing conditions or, if Tenant installs the aforesaid
system, the inadequacy or failure or said system.
43. WAIVER OF JURY TRIAL. Landlord and Tenant, freely, knowingly, and with
advice of counsel, hereby waive their right to a trial by jury in any action,
proceeding or counterclaim brought by either of the parties hereto against the
other in respect of any matter whatsoever arising out of or in any way connected
with this Lease, the relationship of Landlord and Tenant hereunder, Tenant's use
or occupancy of the Premises, and any claim or counterclaim of injury, damage or
otherwise by Landlord or Tenant against or with respect to each other.
44. RETAIL SPACE. Landlord shall ensure that the exterior appearance of any
future retail space in the Building shall be designed and maintained in
accordance with the standards generally observed with respect to exterior retail
space located in comparable modern first-class commercial office buildings in
the downtown Washington, D.C. central business district. Landlord agrees not to
lease retail space in the Building to retail tenants that do not meet the
standards applied by comparable modern first class commercial office buildings
in the downtown Washington, D.C. central business district. In addition,
Landlord shall not lease the retail space for the following services to walk-in
members of the public: passport, motor vehicle licensing and registration,
public assistance, unemployment, drug treatment, or law enforcement.
45. SIGNS. Tenant shall have the right to display its name and 100 lines
(e.g. for departments or names) on the directory in the main lobby of the
Building. Tenant may install, at its sole expense, on floors on which it is the
sole tenant, signs in the interior of the Premises, including in elevator
lobbies, that are not visible from the exterior of the Premises. If any of
Tenant's signage is installed on a floor that is leased only partially to
Tenant, Landlord's consent (which shall not be unreasonably withheld,
conditioned or delayed) shall be required with respect to such signage. All such
signage shall be of a size and materials that are appropriate for a first-class
office building located in the District of Columbia. Subsequent to the Lease
Commencement Date, and provided Tenant is occupying the
47
<PAGE>
Premises, Tenant shall have the right to place exterior signage on the Building
as set forth on Exhibit G hereto (the "Initial Signage") with respect to
appearance, substance, size and location, (the materials, method of attachment
and other specifications for the signs shall be appropriate for a first-class
office building located in the District of Columbia and shall be mutually agreed
upon by Landlord and Tenant), which exterior signage shall be furnished and
installed at Tenant's expense. If Tenant exercises the Expansion Option and
thereby leases three entire additional floors of the Building, and moves
Tenant's corporate headquarters to the Building, then Tenant shall have the
right to place one exterior sign on the Building, either on the right or left
hand front column, as set forth on EXHIBIT F hereto ("Signage with Corporate
Expansion") with respect to appearance, substance, size and location, (the
materials, method of attachment and other specifications for the signs shall be
appropriate for a first-class office building located in the District of
Columbia and shall be mutually agreed upon by Landlord and Tenant), which
exterior signage shall be furnished and installed at Tenant's expense.
Throughout the Lease Term, Tenant shall have the right to display signage that
is mutually agreed upon by Tenant and Landlord.
46. EXTERIOR/LANDSCAPING. Prior to the Rent Commencement Date, Landlord
shall refurbish the entrance area to the Building by cleaning the sidewalk and
improving the plantings.
47. EXCLUSIVITY. At any time during the Lease Term, Landlord shall not
lease space in the Building to the following companies: Buck Consultants, Inc.,
Hewitt Associates, L.L.C., Towers Perrin, William M. Mercer, Inc., Aon
Consulting Worldwide, and Hay Group. After Tenant's exercise of its Expansion
Option pursuant to Paragraph 39, Landlord shall not lease more than one floor of
the Building, or give an option to expand with respect to more than one floor of
the Building, to any competitor listed on Exhibit E hereto, unless at the time
Landlord is entering into agreement to lease or give an option to lease to a
competitor listed on Exhibit E, Tenant shall have subleased or agreed to
sublease space in the Premises that is equal to or greater than the rentable
square feet of one entire floor of the Premises. Upon any assignment of this
Lease to any person or entity other than an Affiliate or Successor, as those
terms are defined above, this Paragraph 47 immediately shall become null and
void and of no further effect.
48. AUTHORITY.
(a) Landlord hereby represents and warrants, solely for the benefit of
Tenant, that, as of the date of execution of this Lease Landlord is a validly
existing corporation under the laws of the District of Columbia, is authorized
to do business in the District of Columbia, and has full power and authority,
and has obtained all necessary authorizations and consents to enter into and
perform its obligations under this Lease, and the persons executing and
delivering this Lease on behalf of Landlord have been authorized to do so by all
necessary
48
<PAGE>
corporate actions. The persons executing this Lease on behalf of Landlord have
the authority to bind Landlord to the terms and conditions of this Lease.
(b) Tenant hereby represents and warrants, solely for the benefit of
Landlord, that, as of the date of execution of this Lease, Tenant is a validly
existing corporation under the laws of the State of Delaware, is authorized to
do business in the District of Columbia, and has full power and authority, and
has obtained all necessary authorizations and consents to enter into and perform
its obligations under this Lease, and the persons executing and delivering this
Lease on behalf of Tenant have been authorized to do so by all necessary
corporate actions. The persons executing this Lease on behalf of Tenant have the
authority to bind Tenant to the terms and conditions of this Lease.
49. MISCELLANEOUS.
(a) This Lease constitutes the entire agreement between the parties
concerning the matters set forth herein, and supersedes and revokes any and all
negotiations, arrangements, letters of intent, representations, inducements, or
other oral or written agreements. Representations, oral or in writing, between
the parties, not contained in this Lease, shall be of no force or effect. If
Tenant shall comprise more than one person, the obligations hereunder of all
such persons shall be joint and several. This Lease shall be governed by and
construed in accordance with the laws of the District of Columbia. If any
provision of this Lease or the application thereof to any person or circumstance
shall to any extent be held by a court of competent jurisdiction invalid or
unenforceable, the remainder of the Lease shall not be affected. The paragraph
headings used herein are for convenience of the parties only, and shall not be
deemed to alter or modify in any way the contents of any paragraph of this
Lease.
(b) This Lease shall not be binding upon Landlord or Tenant unless and
until Tenant shall have executed and delivered a fully executed copy of this
Lease to Landlord and Landlord shall have executed and delivered a fully
executed copy of this Lease to Tenant. This Lease shall not be recorded in the
land records of the District of Columbia.
(c) The captions in this Lease are inserted only as a matter of
convenience and for reference and in now way define, limit or describe the scope
of this Lease or the intent of any provision hereof.
(d) Except as otherwise expressly set forth to the contrary in this
Lease, each of Landlord and Tenant shall exercise any rights it may have under
this Lease to consent, approve or otherwise exercise discretion with respect to
a matter in a reasonable manner and shall not unreasonably withhold, condition
or delay the granting of any such consent or approval.
49
<PAGE>
IN WITNESS WHEREOF, the parties have set their hands and seals as of
the day and year first above written.
WITNESS: LANDLORD:
/s/ Dennis A. Darwin /S/ Marvin M. Robertson
---------------- -------------------------------
Dennis A. Darwin Marvin M. Robertson, Trustee
/s/ Dennis A. Darwin /S/ Katheryn M. Robertson
---------------- -------------------------------
Dennis A. Darwin Katheryn M. Robertson, Trustee
Trustees under Trust Indenture
made by Mathilda M. Kirchner
dated November 28, 1953 and
Trustee under Trust Indenture
made by Cecilia E. Goodman date
November 28, 1953
/s/ Dennis A. Darwin /S/ Marvin M. Robertson
------------------- -------------------------------
Dennis A. Darwin Marvin M. Robertson, Trustee
/S/ Dennis A. Darwin /S/ Katheryn M. Robertson
------------------- -------------------------------
Dennis A. Darwin Katheryn M. Robertson, Trustee
/S/ Dennis a Darwin /S/ George W. Lemm
------------------- -------------------------------
Dennis A. Darwin George W. Lemm, Trustee
Trustees under the Will of
Katheryn Lemm (Trust Estates 2
through 4), Trustees under
Trust Indenture made by John C.
Goodman dated August 14, 1959
(Trust Estates 1 through 4),
Trustees under Trust Indenture
made by Mathilda M. Kirchner
dated August 14, 1959 (Trust
Estates 4, 5 and 6), Trustees
under Trust Indenture made by
Cecilia E. Goodman dated August
14, 1959 (Trust Estates 1
through 6), Trustees under the
Trust Indenture made by
Katheryn E. Lemm (Trust Estates
4 and 5), dated August 14,
1959, Trustees under Trust
50
<PAGE>
Indenture No. II made by Walter
M. Macnichol dated September
21, 1959.
/s/ Dennis A. Darwin /S/ Marvin M. Robertson
------------------- -------------------------------
Dennis A. Darwin Marvin M. Robertson, Trustee
/S/ Dennis A. Darwin /S/ Michael A. Maiatico
------------------- -------------------------------
Dennis A. Darwin Michael A. Maiatico, Trustee
/S/ Dennis A. Darwin /S/ Ann T. Maiatico
------------------- -------------------------------
Dennis A. Darwin Ann T. Maiatico, Trustee
Trustees under Trust Indenture
No. I made by Walter M.
Macnichol dated September 21,
1959 (Trust Estates 1 through
8)
/s/ Dennis A. Darwin /S/ Marvin M. Robertson
------------------- -------------------------------
Dennis A. Darwin Marvin M. Robertson, Trustee
/S/ Dennis A. Darwin /S/ George W. Lemm
------------------- -------------------------------
Dennis A. Darwin George W. Lemm, Trustee
Trustees under Trust Indenture
made by William F. Glockner
dated May 7, 1965 (Trust
Estates 3 through 9 and 11)
ATTEST: TENANT:
WATSON WYATT & COMPANY
d/b/a WATSON WYATT WORLDWIDE
/s/James S. Minogue /S/ Barbara L. Landes (SEAL)
------------------------ -------------------------------
James S. Minogue Barbara L. Landes
Assistant Secretary
County of Montgomery
State of Maryland
51
<PAGE>
/S/ Ruth E. Skolnick
---------------------
Ruth E. Skolnick
Notary Public
My commission expires: June 5, 2001
52
<PAGE>
WATSON WYATT & COMPANY
1999 ANNUAL REPORT
Table of Contents
Letter to Shareholders 2
About Our Company 4
About Our Financial Results 6
Report of Independent Accountants 17
Consolidated Financial Statements 18
Notes to the Consolidated Financial Statements 22
Watson Wyatt & Company Capital Stock and Items of Interest to Shareholders 43
Board of Directors 46
Watson Wyatt Services and Offices 48
DELIVERING VALUE
Watson Wyatt ranks number one in the consulting industry when it comes to
delivering value to clients, according to an independent study conducted by THE
WALL STREET JOURNAL among its subscribers. Significantly, respondents rate
"value of services" as the single most important factor when selecting a
management consulting firm--precisely where Watson Wyatt is rated number one.
Source: 1998/99 Wall Street Journal Management Consulting Study
<PAGE>
LETTER TO WATSON WYATT & COMPANY SHAREHOLDERS
Dear Fellow Shareholders:
Fiscal year 1999 was a terrific year for Watson Wyatt.
Our financial results -- THE BEST IN OUR FIRM'S HISTORY -- reflect the progress
we have made in implementing a client-focused business strategy that capitalizes
on our strengths and points the way to superior revenue growth, expanded
marketshare and increased shareholder value.
Our success is a tribute to the outstanding performance of our talented
associates, who maintained client focus and supported the firm and each other as
we transitioned out of benefits outsourcing -- consistent with our new strategy.
Thanks to your dedication and teamwork, our firm has emerged from a challenging
few years much stronger, more unified and more competitive and profitable than
ever.
SOME OF THE HIGHLIGHTS OF WHAT WE ACCOMPLISHED TOGETHER IN FISCAL YEAR 1999:
- - Financially, distributable income grew 21% to $88.1 million, while revenues
rose 9% to $556.9 million -- both all-time highs. Our associates shared in
our financial success through above-target funding of our bonus pool, a
first-time payout from our Stock Incentive Bonus Plan and a 10.4% increase
in our share price.
- - We made great strides in strengthening our global capabilities. Under the
leadership of our Global Matrix Group, we expanded global initiatives in
Account Management, and put in place an infrastructure of tools and
processes to support our strong global network. Firm-wide efforts to
improve delivery of Merger and Acquisition (M&A) and other integrated
services have paid off with development of substantial new business with
multinational firms.
- - We continued to see the tremendous benefits that accrue when we partner to
win, as improved integration within our lines of business fueled
significant growth. Our Retirement practice continued to gain marketshare
and a revitalized Group and Health Care practice made tremendous strides --
and is now growing faster than the market. Capitalizing on the emphasis on
technology in the workplace, Human Resources Technologies achieved
significant revenue and net operating income growth, and our Human Capital
Group team refocused for strong growth.
- - Through the Workforce Management conferences and other avenues, we
showcased our groundbreaking research on the aging workforce and phased
retirement and in other thought leadership areas ranging from the 401(k)
Value Index to global remuneration and value in health care. We applied
that research to help clients develop solutions to some very complex human
capital issues.
- - We completed our exit from non-core businesses such as benefits
administration outsourcing and defined contribution recordkeeping --
freeing up capital and resources to strengthen our benefits consulting
areas. Our core practice focus created the opportunity to acquire KPMG's
northeast U.S. benefits consulting business and its Dallas health care
practice -- two businesses with high growth potential.
<PAGE>
- - We made the necessary investments and took the required steps to eliminate
risks for our firm and our clients associated with the Year 2000 challenge.
Looking ahead, our biggest challenge will be to build on the momentum we have
established to achieve higher rates of sustained, profitable growth.
TO MAKE OUR STRATEGY WORK WE WILL:
- - Operate as a truly global firm -- using common tools and processes;
striving for global consistency wherever we can; spreading best practice
ideas across all our regions, practices and offices; positioning the firm
to meet the total global service requirements of multinational firms
wherever they operate.
- - Invest wisely in our core consulting services -- strengthening our
resources in markets that offer significant growth opportunities and
investing in the development and deployment of new products and services
that add value for clients.
- - Strengthen client relationships -- growing by elevating and broadening our
dialogue with clients; adding value through higher quality consulting;
aggressively seeking opportunities to sell cross-practice projects to
large, key clients -- because that's where the biggest opportunities for
growth are found.
- - Be the thought leaders on key business issues -- valuing innovation and
creativity, transforming our ideas and research into problem-solving
solutions for our clients.
- - Build a growth culture that becomes our foundation for true growth --
creating a work environment where talented people, guided by shared values,
an external focus and a continuous-learning mindset team to help both the
firm and associates reach their potential.
If we implement our strategy well, the benefits will be tremendous for clients,
associates and the firm. Strong revenue growth will enable us to attract and
retain even more of the best people, expand career opportunities for our
associates, invest in and provide the scope and depth of services our clients
want, gain marketshare and build brand equity with the companies we desire as
clients, and increase the value of our firm.
This is truly an exciting time for our firm and for our associates. I am
convinced we have a unique opportunity -- right now -- to take our firm to a
higher level of success. We have many things going for us. Our strategy is
clear and working. We have great talent everywhere around the world. We're
more coordinated and global than ever. We have the financial strength to
invest resources to grow.
Achieving our goal of being one of the most influential -- and successful --
consulting firms in the world is within our reach. Let's take advantage of our
enormous opportunities for growth and achieve the great satisfaction that will
come from shaping a future where both the firm and our associates reach their
potential.
/s/ John J. Haley
John J. Haley
President and Chief Executive Officer
<PAGE>
ABOUT OUR COMPANY
Watson Wyatt & Company provides employee benefits, human capital and human
resources technology consulting to major employers throughout the world.
Together with our alliance partner, Watson Wyatt Partners, the leading United
Kingdom-based employee benefits partnership, we operate seamlessly as Watson
Wyatt Worldwide -- with more than 5,000 associates in 32 countries.
A global consulting firm, Watson Wyatt brings together two disciplines -- people
and financial management -- to help clients improve business performance.
Through our BENEFITS CONSULTING GROUP, we structure cost-effective compensation
and benefits programs that help companies attract, retain and motivate a
talented workforce. Our HUMAN CAPITAL GROUP helps clients achieve competitive
advantage by aligning their workforce with their business strategy. And our
HUMAN RESOURCES TECHNOLOGIES consultants help clients use technology to reduce
costs and improve employee service.
Our collaborative consulting approach starts with ClientFirst-TM- -- where we
work with clients to define needs and expectations and then measure our
performance according to these agreed standards. Building on our research-based
innovation and a deep knowledge of our clients' businesses, we partner with them
to provide tailored solutions.
We are backed by the best and most current research on people and financial
management issues.
OUR SERVICES INCLUDE:
- - Actuarial Services
- - Strategic Plan Design
- - Merger & Acquisition Due Diligence and Integration
- - Organization & HR Communications
- - Executive Compensation
- - Strategic Rewards
- - Workforce Advantage Strategy
- - Group & Health Care Consulting
- - Employee Services Delivery Strategy
(including co-sourcing, shared services and self-service solutions)
- - Expatriate Services
- - Investment Consulting
- - Organization Measurement & Development
- - Leadership Development
- - Research & Information Services
- - HR Best Practices
FORWARD-THINKING SOLUTIONS
Watson Wyatt's market-driven research includes senior-level viewpoints and local
intelligence from around the world, ensuring our advice is based on reality, not
conventional wisdom.
Our ongoing investment in research provides not just data, but knowledge that
generates creative ideas and forward-thinking solutions. And it's those
innovative solutions that help create a positive relationship with our clients,
year after year, around the globe.
<PAGE>
ABOUT OUR FINANCIAL RESULTS
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company as of and for each of the years in the five year period ended June 30,
1999. The selected consolidated financial data as of June 30, 1999 and 1998 and
for each of the years in the three year period ended June 30, 1999 are derived
from the audited consolidated financial statements of Watson Wyatt included in
this Annual Report. The selected consolidated financial data as of June 30,
1997, 1996, 1995 and for each of the years ended June 30, 1996 and 1995 have
been derived from audited consolidated financial statements of Watson Wyatt not
included in this Annual Report and have been restated to reflect the Company's
discontinued operations.
The selected consolidated financial data should be read in conjunction with
Watson Wyatt's consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this Annual Report. Amounts are in thousands, except per
share data.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------
Statements of Operations Data: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Continuing operations
Fees $556,860 $512,660 $486,502 $475,298 $465,788
Income (loss) before income taxes and
minority interest (See Note 12 of Notes
to the Consolidated Financial Statements) 23,800 (42,966) 21,618 34,036 12,204
Income (loss) from continuing operations 12,135 (56,212) 12,381 19,835 4,908
(See Note 12 of Notes to the Consolidated
Financial Statements)
Earnings (loss) per share, continuing
operations $ 0.80 $ (3.27) $ 0.71 $ 1.07 $ 0.25
Discontinued operations - income (loss)
(See Note 16 of Notes to the
Consolidated Financial Statements) 8,678 (69,906) (11,483) (10,480) (4,059)
Net income (loss) (See Note 12 of Notes
to the Consolidated Financial Statements) 20,813 (126,118) 898 9,355 849
Earnings (loss) per share, net income (loss) $ 1.37 $ (7.34) $ 0.05 $ 0.51 $ 0.05
Weighted average shares outstanding 15,215 17,170 17,438 18,516 19,248
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------------------------------------------
Balance Sheet Data: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital(1) $ 11,692 $ 23,748 $ 21,307 $ 18,788 $ 49,826
Total assets 313,960 268,310 331,778 320,819 286,622
Redeemable Common Stock 107,631 96,296 96,091 90,214 86,275
Formula Book Value per share $ 6.68 $ 6.05 $ 5.30 $ 4.94 $ 4.51
Shares outstanding 16,112 15,917 18,130 18,262 19,130
</TABLE>
- -----------------------
(1) See Management's Discussion of Liquidity and Capital Resources.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998.
The Company generated net income in fiscal year 1999 of $20.8 million compared
to a net loss in fiscal year 1998 of $126.1 million. The fiscal year 1998
results included a non-recurring compensation charge and the after-tax effect of
the discontinuation of the Benefits Administration Outsourcing Business (see
discussion of 1998 financial results found in "Year Ended June 30, 1998 Compared
to Year Ended June 30, 1997" on pages 8 - 11). Income (loss) before income taxes
and minority interest in 1999 was $23.8 million compared to $26.9 million in
1998 without the effect of the non-recurring compensation charge. These results
reflect growth of share value of 10.4% and a larger bonus pool allocated at the
discretion of the Company's Board of Directors.
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 a 9% growth in revenue. This increase occurred primarily in the
Company's U.S. East, U.S. Central and Asia/Pacific consulting regions. In North
America, the Retirement and HR Technologies practices experienced strong revenue
growth; the Human Capital practice revenues declined modestly amid a
reorganization of the practice. Revenues for fiscal year 1999 also reflect the
sale late in fiscal year 1998 of the Company's North American risk and insurance
consulting practice and its exit from the defined contribution recordkeeping
business.
For the fiscal year 1999, salaries and employee benefit expenses were $321.5
million, an increase of $52.9 million, or 20%, from fiscal year 1998. This
increase is due primarily to increased bonuses, a 6% increase in headcount, and
increases in annual compensation and benefits.
Occupancy and communications expense increased $0.9 million or 1% in fiscal year
1999. This low percentage increase reflects the Company's adoption of an office
space standard as well as its ability to negotiate advantageous leases of office
space.
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 costs of providing services increased $3.0 million in 1999, which is
mainly attributable to increased travel.
General and administrative expenses for fiscal year 1999 were $56.6 million, an
increase of $4.8 million, or 9%, from fiscal year 1998 due to the increased cost
of providing technology support to core consulting areas.
Depreciation and amortization decreased $9.7 million in fiscal year 1999 to
$15.2 million. This decrease is due to higher amortization of software in 1998
of $11.6 million, primarily due to a reevaluation and subsequent reduction of
the useful lives of the related products. Without this item, depreciation and
amortization expense increased $1.9 million in 1999 due to the increased
purchases of capital assets.
Income from affiliates was $2.5 million in 1999 compared to $0.3 million in
1998. The increase reflects heightened synergies and focus within the European
operations as well as improved business operations in the United Kingdom.
<PAGE>
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% compared to 49% in 1998 without the effect
of the non-recurring compensation charge.
In fiscal year 1999, the Company further resolved its future obligations related
to the discontinuation of its Benefits Administration Outsourcing Business and
reduced the expected loss on disposal by $8.7 million net of taxes. The Company
believes it has adequate provisions for any remaining costs related to the
discontinuation.
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997. (1997 has been
reclassified to reflect discontinued operations. See Note 16 of Notes to the
Consolidated Financial Statements.)
The Company had strong operating results in 1998 from continuing operations. Two
major events also affected financial results in fiscal year 1998. The first
event, the discontinuation of the Company's Benefits Administration Outsourcing
Business, resulted in a $69.9 million loss due to the withdrawal from this line
of business and is reported as a discontinued operation. The loss on
discontinuation, net of taxes of $69.9 million, included the write-off of its
investment in Wellspring Resources, net capitalized software development costs
for the Retained Clients (as defined in Note 16 of Notes to the Consolidated
Financial Statements) and a provision for the completion of any obligations to
clients, vendors or its former joint venture partner.
The second event, a $69.9 million non-recurring compensation charge, was due to
a required method of accounting for the change in the Company's bylaws to modify
the Formula Book Value of the Company's stock to exclude the discontinued
operations from the Formula Book Value calculation. This charge was reported as
a component of continuing operations. The charge was measured by the difference
between what the value per share was at June 30, 1998 and what it would have
been at that date without the modification. The charge did not reduce company
resources but did reduce operating income from continuing operations.
Management believes the Company's results from continuing operations are more
comparable to prior years and are a better indication of current year results if
they are analyzed without giving effect to such charge. In such case, the "Costs
of providing services" in 1998 would have been $407.4 million instead of $477.3
million and continuing operations would have shown a profit of $13.7 million
instead of a loss of $56.2 million. The net loss for the Company would have been
$56.2 million including the loss from discontinued operations, rather than
$126.1 million.
<PAGE>
The following table presents the Company's 1998 results of operations without
the non-recurring compensation charge and the same captions as reported in the
Company's audited financial statements.
<TABLE>
<CAPTION>
Non-Recurring ProForma
1998 RESULTS OF OPERATIONS Without Compensation Charge As Reported
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Fees $ 512,660 $ 512,660
Costs of providing services 407,358 477,264
General & administrative costs, depreciation and amortization 76,753 76,753
------------ ------------
484,111 554,017
------------ ------------
Income (loss) from operations 28,549 (41,357)
Interest income/expense and income from affiliates (1,609) (1,609)
------------ ------------
Income (loss) before income taxes and minority interest 26,940 (42,966)
Income taxes and minority interest (13,246) (13,246)
------------ ------------
Income (loss) from continuing operations 13,694 (56,212)
------------ ------------
Discontinued operations - net loss (69,906) (69,906)
------------ ------------
Net loss $ (56,212) $ (126,118)
============= ============
Earnings per share:
Earnings (loss) per share, continuing operations $ 0.80 $ (3.27)
============ ============
Loss per share, discontinued operations $ (4.07) $ (4.07)
============ ============
Loss per share, net loss $ (3.27) $ (7.34)
============ ============
</TABLE>
Although the Company generated 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 the non-recurring compensation charge explained above and the after tax
effect of the discontinuation of the Benefits Administration Outsourcing
Business for both fiscal years. Without the non-recurring compensation charge,
results of continuing operations in 1998 before income taxes and minority
interest would have been $26.9 million compared to $21.6 million in 1997, or a
24% increase. The Company's revenue growth of $26.2 million, or 5%, outpaced
inflation and leveraged the expense base to improve return on revenue before
taxes to 5% in 1998 from 4% in 1997.
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 occurred primarily in the Company's U.S. East, U.S. Central
and U.S. West regions, offsetting a decline in the Asia/Pacific region, and is
due to the realization of billing rate increases. In North America, the
Retirement, Human Capital, and HR Technologies practices experienced strong
revenue growth.
For the fiscal year 1998, salaries and employee benefit expenses were $268.6
million excluding the non-recurring compensation charges, an increase of $16.3
million or 6% from fiscal year 1997 due primarily to a 2% increase in headcount
and annual salary increases.
Occupancy and communications expense decreased $10.1 million in 1998. The
Company relocated its corporate office to lower cost suburban facilities 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 expense.
<PAGE>
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 costs of providing services increased $2.9 million in 1998 due to travel
and local office promotion expenses.
General and administrative expenses for fiscal year 1998 were $51.8 million, an
increase of $6.1 million or 13% from fiscal year 1997 due to increased spending
on business strategy initiatives and higher corporate advertising and
promotional expense.
Depreciation and amortization increased $2.9 million in fiscal year 1998 to
$25.0 million. This increase is primarily due to management's decision to
accelerate the amortization of software in 1998 by $6.8 million based upon a
reevaluation and subsequent reduction of the useful lives of the related
products. Without this item, depreciation and amortization expense declined 18%
due to the decreased base of capital assets.
Loss before income taxes, minority interest and discontinued operations was
$43.0 million in fiscal year 1998. This loss reflects the $69.9 million
non-recurring charge that is not a taxable transaction. Pre-tax income without
this amount was $26.9 million with taxes of $13.1 million, or an effective tax
rate of 49% compared to 42% in 1997. The increase in the effective tax rate is
due to changes in income in various tax jurisdictions with differing tax rates,
particularly foreign jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies primarily on funds from operations and short-term borrowings
as its sources of liquidity. The Company believes that it has access to ample
financial resources to finance its growth, meet its commitments to affiliates as
well as support ongoing operations. The Company's cash and cash equivalents at
June 30, 1999 totaled $36.0 million, compared to $13.4 million at June 30, 1998.
The Company had no borrowings at June 30, 1999, compared to $9.0 million of
borrowings at June 30, 1998. The decrease in borrowings and increased cash
balances were the result of the Company's stock sale in fiscal year 1999, and
from reduced operating and closedown costs associated with the discontinuation
of the Benefits Administration Outsourcing Business.
The Company has a $120.0 million credit line that is currently scheduled to
mature in June 2003. Ninety-five million dollars of the credit line is available
to the Company as revolving credit for operating needs, subject to certain
borrowing limitations. The remaining $25.0 million is available to secure loans
to associates for the purchase of Redeemable Common Stock made available under
the Company's Stock Purchase Program.
CASH FROM OPERATIONS. Net cash provided by operating activities increased in
1999 compared to 1998 by $33.3 million. The increase was primarily due 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 change in receivables from clients
increased $14.4 million, thereby decreasing cash that would have been provided
by operations. Deferred income taxes increased $7.3 million in conjunction with
the increase in accounts payable and accrued liabilities.
<PAGE>
CASH FROM INVESTING ACTIVITIES. Uses of cash for investing activities decreased
$8.7 million from 1998, principally due to reduced cash needs of the
discontinued operations.
CASH FROM FINANCING ACTIVITIES. The Company used more cash in fiscal year 1999
as it paid down its outstanding debt. The Company's net stock activity had
virtually no impact on cash used by financing activities in 1999.
The Company's foreign operations do not materially impact its 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 the Company has 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.
Due to the nature of the Company's operations (billing and collecting for
services within each country in that country's local currency), the Company has
historically had moderate foreign currency transaction risk. The Company has not
implemented a formal hedging policy or program. Any foreign currency risk would
be primarily associated with the Company's investments in its non-U.S.
subsidiaries. This risk is mitigated by the Company's intention to leave the
investments in place rather than repatriating them.
The Company's ratio of current assets to current liabilities declined to 1.1 in
fiscal year 1999 from 1.2 in fiscal year 1998. The Company's working capital
decreased $12.1 million from 1999 to 1998, mainly due to the increase in 1999
fiscal year-end accruals related to discretionary payments.
Anticipated commitments of funds for fiscal year 2000 are estimated at $30.1
million, which includes expected purchases of fixed assets and payments related
to the purchase of certain consulting operations. The Company expects operating
cash flows and seasonal use of its credit line to provide for the Company's cash
needs.
YEAR 2000 ISSUE
The Company has continued to address the Year 2000 problem as it affects the
Company's business. While the Company has successfully passed several important
Year 2000 milestones, management believes that effort will be required through
the end of 1999 and beyond to enable the Company to meet its Year 2000 goals.
Based on the work completed during the past year, management continues to be
confident that the Year 2000 problem is not likely to have a material effect on
the Company's business, results of operations, or financial condition.
Nevertheless, since the effects of the Year 2000 problem are likely to be
unpredictable, management does not expect that the Company's Year 2000
compliance program will eliminate all risk to the Company associated with the
Year 2000 problem.
Based on its ongoing review, management continues to believe that the most
significant risk facing the Company in connection with Year 2000 issues relates
to software provided by the Company for use by, or on behalf of, its clients.
This software has been provided principally by the HR Technologies practice
(including benefit administration software and call center services) and the
Retirement practice (principally spreadsheet-based 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 costs
of replacing or repairing client systems. Other risks identified by the Company
include: risk of a general economic downturn as a result of the Year 2000
problem; risk arising from the failure of infrastructure,
<PAGE>
including power, water, telecommunications, and building services; and risks
from operations outside North America. The Company's Year 2000 compliance
program will not address or prevent adverse effects to the Company because of
economic disruption or failure of public infrastructure.
The Company's Year 2000 compliance plan relies on geographic and practice
leaders to assess and oversee repair or replacement of software and hardware
used in their domain. Except in the case of software provided to or maintained
for clients by the HR Technologies practice, substantially all assessment and
remediation work has been completed, but formal verification and documentation
of this effort is still in process. The Company expects to complete verification
and documentation by September 30, 1999.
The Company has completed assessment, repair, and testing of all its internal
information technology systems, including WyVal, the Company's actuarial
valuation software. The Company has completed an inventory of its vendors and is
monitoring Year 2000 compliance efforts by its major vendors. Because of the
nature of the Company's business and the widely distributed locations of the
Company's operations, management believes that the Company does not face
significant risks from Year 2000 failures in systems relied upon by its vendors.
The Company has not reviewed the Year 2000 compliance status of its clients,
some of which may be affected by Year 2000 problems. Management believes that
the effect of client problems on the Company's own operations is not likely to
be material because of the broad, diversified nature of the Company's client
base. The Company will continue to develop and revise contingency procedures to
address the Year 2000 situation. In many cases, the Company will rely on
existing contingency plans relating to failures in information technology
systems. A principal focus of the Company's contingency planning is maintaining
communications among employees and with clients in the event of short-term
telecommunications failures or short-term disruptions limiting access to the
Company's offices.
While the Company has made progress toward meeting its compliance goals for
software provided to or used on behalf of clients, the Company continues to be
behind in its schedule for compliance activity for such systems. The Company's
deadline for bringing systems into compliance was June 30, 1999. The following
summarizes the status of the Company's Year 2000 compliance efforts related to
client software:
- - As of August 31, 1999, remediation and testing were complete on
substantially all of the systems inventoried by the Retirement practice in
North America. This assessment, however, does not include certain internal
systems with limited application (such as calculators used to estimate
benefits for a single client plan). The Company will remediate and test
such systems as a part of its normal quality review process when such
systems are next used.
- - As of August 31, 1999, the HR Technologies practice has completed
assessment on more than 70% of the systems inventoried in North America.
Testing and remediation have been completed on approximately 45% of such
systems. Testing and remediation of the remaining systems are scheduled to
be completed before the end of 1999. A substantial number of the remaining
systems are used to support open enrollment in benefit plans; these systems
are normally modified late in the calendar year and any required Year 2000
remediation will be performed as a part of such modifications.
- - The Company has established a program of contacting clients to discuss Year
2000 issues. As of August 31, 1999, the Company had completed approximately
90% of the projected effort for this program. The Company expects to
complete its client contact program by October 31, 1999.
<PAGE>
The Company's Year 2000 compliance program includes its operations outside North
America. Because of the size of these operations, management does not expect
that Year 2000 problems outside North America will have a material effect on the
Company.
The Company's cost to address Year 2000 compliance issues exceeded $4.0 million
for fiscal year 1999. The Company's principal expenditures were for repair and
testing of internal and client software, costs associated with the Company's
Year 2000 compliance program and costs of outside consultants. The Company
expects that its costs for Year 2000 compliance will be lower in fiscal year
2000. Funds for costs associated with the Company's Year 2000 compliance efforts
will come from operating cash flows for all areas of the Company's operations
and will be expensed as incurred.
The information concerning the Company's Year 2000 compliance effort includes
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors that may cause actual events or
costs to be materially different than indicated by such forward-looking
statements. These factors include, among others, unanticipated costs of
remediation and replacement, the Company's inability to meet its targeted dates
as scheduled and extensive failures of governmental and municipal
infrastructures. Any estimates and projections described have been developed by
the management of the Company and are based on the Company's best judgments
together with the information that is available to date. Due to the many
uncertainties surrounding the Year 2000 problem, the shareholders of the Company
are cautioned not to place undue reliance on such forward-looking statements.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF WATSON WYATT & COMPANY:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in permanent
shareholders' equity 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 generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Washington, D.C.
September 8, 1999
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
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 321,525 268,611 252,302
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 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 $ 0.80 $ (3.27) $ 0.71
========= ========= =========
Earnings (loss) per share, discontinued operations $ 0.57 $ (4.07) $ (0.66)
========= ========= =========
Earnings (loss) per share, net income (loss) $ 1.37 $ (7.34) $ 0.05
========= ========= =========
</TABLE>
See accompanying notes
F-2
<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 loss (2,562) (2,916)
Commitments and contingencies
--------- ---------
$ 313,960 $ 268,310
========= =========
</TABLE>
See accompanying notes
F-3
<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-4
<PAGE>
WATSON WYATT & COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN PERMANENT SHAREHOLDERS' EQUITY
(Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Adjustment for
Redemption Value
(Greater) Less
Retained Cumulative Than Amounts
Earnings Translation Paid in by
(Deficit) Gain (Loss) Shareholders
--------- ---------- ------------
<S> <C> <C> <C>
Balance at June 30, 1996 $ 30,677 $ 1,040 $ (37,549)
Comprehensive income:
Net income 898 -- --
Foreign currency translation adjustment -- (204) --
--------- --------- ---------
Total comprehensive income 898 (204) --
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)
--------- --------- ---------
Balance at June 30, 1997 $ 24,633 $ 836 $ (37,674)
Comprehensive loss:
Net loss (126,118) -- --
Foreign currency translation adjustment -- (3,752) --
--------- --------- ---------
Total comprehensive loss (126,118) (3,752) --
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)
Adjustment of redemption value for non-recurring
compensation charge (see Note 12) -- -- 69,906
--------- --------- ---------
Balance at June 30, 1998 $(106,834) $ (2,916) $ 25,240
Comprehensive income:
Net income 20,813 -- --
Foreign currency translation adjustment -- 354 --
--------- --------- ---------
Total comprehensive income 20,813 354 --
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)
--------- --------- ---------
Balance at June 30, 1999 $ (83,209) $ (2,562) $ 11,420
========= ========= =========
</TABLE>
See accompanying notes
F-5
<PAGE>
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. 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.
<PAGE>
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
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.
<PAGE>
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>
Ownership June 30,
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.
<PAGE>
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>
<PAGE>
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.
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.
<PAGE>
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.
The following table sets forth the principal plans' funded status as reflected
in the consolidated balance sheets:
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
------------------------------ ------------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
(QUALIFIED) (NON-QUALIFIED) (QUALIFIED) (NON-QUALIFIED)
<S> <C> <C> <C> <C>
Accumulated benefit obligation $245,890 $ 42,740 $230,886 $ 38,474
======== ======== ======== ========
Projected benefit obligation $290,704 $ 86,703 $275,139 $ 78,519
Fair value of plan assets 411,102 -- 381,398 --
-------- -------- -------- --------
Over (under) funded $120,398 $(86,703) $106,259 $(78,519)
======== ======== ======== ========
Net prepaid (accrued) benefit cost $ 26,691 $(58,527) $ 13,778 $(47,974)
======== ======== ======== ========
</TABLE>
The following table sets forth the net periodic pension cost, contributions and
benefits paid for the principal plans:
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Net periodic pension cost $5,511 $4,411 $6,596
Company contributions 7,878 9,311 7,171
Participant contributions 54 - -
Benefits paid 14,593 16,040 12,697
</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.
<PAGE>
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, $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.
<PAGE>
The following table sets forth the principal plans' status as reflected in the
consolidated balance sheets:
<TABLE>
<CAPTION>
June 30,
1999 1998
---------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation $34,981 $32,326
======= =======
Accrued benefit cost $44,419 $41,743
======= =======
</TABLE>
The following table sets forth the net periodic postretirement benefit cost for
the principal plans:
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997
----------------------------------------------------------
<S> <C> <C> <C>
Net periodic postretirement cost $3,507 $3,316 $3,243
Company contributions 1,092 660 883
Participant contributions 175 189 112
Benefits paid 1,267 849 995
</TABLE>
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>
<PAGE>
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.
Future cash outlays for operating lease commitments and cash inflows for
sublease income are:
<TABLE>
<CAPTION>
Lease Sublease
Year Commitments Income
------------ ----------------------------------------
<S> <C> <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
<PAGE>
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 29, 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 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 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.
<PAGE>
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.
<PAGE>
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 changes in this balance for the three years ended June
30, 1999 were as follows:
<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.
<PAGE>
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.
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)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
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 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>
<PAGE>
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 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. Excluding this
charge, income from continuing operations for the Company in 1998 would have
been $13,700,000 compared to the reported net loss from continuing operations.
<PAGE>
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>
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>
<PAGE>
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>
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
--------- --------- ---------
FEES:
<S> <C> <C> <C>
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
========= ========= =========
<PAGE>
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>
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.
<PAGE>
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.
<PAGE>
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".
WATSON WYATT & COMPANY
CAPITAL STOCK AND ITEMS OF INTEREST TO SHAREHOLDERS
DESCRIPTION OF CAPITAL STOCK. The following statements include brief summaries
of certain provisions contained in Watson Wyatt's Restated Certificate of
Incorporation and bylaws, copies of which may be obtained from the Secretary of
the Company upon request. Watson Wyatt's Common Stock is the only stock of the
Company. The holders of Common Stock do not have preemptive rights. Each share
entitles its holder to one vote on all matters that are submitted to the
shareholders. All Watson Wyatt stock is subject to restrictions, as described in
"Restrictions on Transfer of Watson Wyatt Stock," which follows.
RESTRICTIONS ON TRANSFER OF WATSON WYATT STOCK. Watson Wyatt restricts ownership
of its stock to active employees, outside directors, persons or entities
designated by the Board of Directors with which the Company has a business
affiliation, and the employees of such entities.
Stock restrictions are embodied in the Watson Wyatt bylaws. The bylaws provide
that any holder of Watson Wyatt securities may not in any way either encumber or
dispose of shares of Watson Wyatt stock except as
<PAGE>
set forth in the bylaws. Before any holder of Watson Wyatt stock may encumber or
dispose of any such securities, the holder must first give Watson Wyatt notice
in writing at least 120 days prior to the proposed encumbrance or disposition,
stating in detail all the information with respect thereto, including the
proposed consideration to be received. Watson Wyatt then has the option to
purchase the stock or to designate other eligible persons or entities as
purchasers ("Eligible Purchasers"). To the extent that the Company or Eligible
Purchasers do not purchase such stock so offered within the prescribed time
period, the shareholder may sell or otherwise dispose of the shares within a
30-day period, but the stock restrictions will apply against the shares in the
hands of such purchaser or other transferee.
Upon termination of a shareholder's employment with Watson Wyatt for any reason
(including retirement, death and voluntary or involuntary termination),
bankruptcy of a shareholder or the imposition of any lien or attachment on
shares of Watson Wyatt stock, all such shares owned by such shareholder,
including any and all shares held for the benefit of such holder in any trust or
personal holding corporation or any similarly approved entity in which Watson
Wyatt securities are permitted to be held for the benefit of shareholders, are
deemed to be offered to the Company or designated Eligible Purchasers in
accordance with the price and other terms of repurchase previously set forth,
except that Watson Wyatt will be obligated to purchase all shares of stock if
the designated Eligible Purchasers fail to purchase the shares. The purchase
price to Watson Wyatt or to the designated Eligible Purchasers of shares of its
stock is calculated based upon the Formula Book Value (as defined in the bylaws)
per share of Common Stock as of the last day of Watson Wyatt's fiscal year
coincident with or preceding the date of retirement, death, termination or
notice of intent to sell, pursuant to Article 9 of the bylaws.
Shares of Common Stock of the Company are valued according to a formula set
forth in the Company's bylaws. The bylaws currently define the Formula Book
Value of Common Stock ("Formula Book Value") as the Net Book Value of the
Company'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. Formula Book Value is determined by
the independent certified public accountants of the Company from the Company'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 are conclusive and binding upon
the Company and all holders of stock.
The preceding describes the principal restrictions and limitations on the
transfer of Watson Wyatt stock, but in the event of any conflict between this
description and the Restated Certificate of Incorporation or the bylaws, the
applicable provisions of the Restated Certificate of Incorporation and/or the
bylaws will control.
A copy of the bylaw provisions containing the Company's stock restrictions may
be obtained from the Secretary of the Company, and this discussion is qualified
in its entirety by reference to such provisions.
MARKET INFORMATION AND HOLDERS. There is no established public trading market
for the Company's Common Stock, nor is any likely to develop under the Company's
current bylaws, since the transferability of all shares of the Company's Common
Stock is restricted as previously described. As of October 1, 1999, there were
1,954 registered holders of the Company's Common Stock. Formula Book Value per
share as of June 30 in fiscal years 1995 through 1999 is presented elsewhere in
this Annual Report.
<PAGE>
DIVIDENDS. Under the Company's credit facility (see Note 9 of Notes to the
Consolidated Financial Statements, included in this Annual Report), the Company
is required to observe certain covenants (including requirements as to minimum
net worth) that affect the amounts available for the declaration or payment of
dividends. Under the most restrictive of these covenants, approximately $20.3
million was available for the declaration or payment of dividends as of June 30,
1999. The declaration and payment of dividends by the Company is at the
discretion of the Company's Board of Directors and depend on numerous factors,
including, without limitation, the Company's net earnings, financial condition,
availability of capital, debt covenant limitations, and other business needs of
the Company and its subsidiaries and affiliates. Historically, while the
Company's performance would have permitted the payment of dividends, the Company
has chosen not to declare dividends every year since fiscal year 1991.
ANNUAL MEETING OF SHAREHOLDERS. The 1999 Annual Meeting of Shareholders will be
held on November 19, 1999, at 8:30 a.m., local time, at The Palliser, in
Calgary, Alberta, Canada.
FORM 10-K. A copy of the Company's Annual Report on Form 10-K (which has been
filed with the SEC) will be available for review in each Watson Wyatt office to
any shareholder upon request or will be provided to any shareholder sending a
written request to the Secretary at the address below.
FOR INFORMATION. Questions concerning shareholder accounts should be addressed
to Watson Wyatt & Company, Office of the Secretary, 6707 Democracy Boulevard,
Suite 800, Bethesda, Maryland 20817, (301) 581-4600.
BOARD OF DIRECTORS
The Board of Directors of the Company currently consists of the following
individuals, whose terms shall continue until the 1999 Annual Meeting of
Shareholders, to be held on November 19, 1999. At that meeting, shareholders
will vote on a slate of 14 nominees to the board.
<TABLE>
<CAPTION>
Number of Outstanding
Shares of Common Stock
Name Beneficially Owned at 10/1/99
<S> <C>
Thomas W. Barratt
Vice President and Central Regional Manager 89,000
Paula A. DeLisle
Vice President and Managing Consultant, Hong Kong 53,900
David B. Friend, M.D.
Vice President and Eastern Regional Manager 71,000
John J. Haley
President and Chief Executive Officer 227,749
Ira T. Kay
Vice President and North American Director of the Human Capital Group 80,525
Brian E. Kennedy
Vice President, Managing Director, Canada and Managing Consultant, Toronto 50,000
Eric P. Lofgren
Vice President and Global Director of the Benefits Consulting Group 109,365
Robert D. Masding(1)
Senior Partner, Watson Wyatt Partners 0
<PAGE>
R. Michael McCullough
Retired Chairman, Booz, Allen & Hamilton 7,500
Gail E. McKee
Vice President and Managing Consultant, Southern California 27,375
John A. Steinbrunner
Vice President and Central Region Retirement Practice Leader 103,191
A. Grahame Stott
Vice President and Managing Director, Asia/Pacific Region 134,000
Total 953,605
=======
</TABLE>
(1) Watson Wyatt Holdings Limited, which is wholly owned by Watson Wyatt
Partners, a U.K. partnership in which Mr. Masding is a senior partner, owns
361,000 shares of the Company's Common Stock.
OTHER EXECUTIVE OFFICERS OF THE COMPANY
Walter W. Bardenwerper, Vice President, General Counsel and Secretary
Peter L. Childs, Controller
Carl D. Mautz, Vice President and Chief Financial Officer
Eric B. Schweizer, Treasurer
COMMITTEES OF THE BOARD
Executive Committee
Brian E. Kennedy, Chair
John J. Haley
Ira T. Kay
John A. Steinbrunner
A. Grahame Stott
AUDIT COMMITTEE
Brian E. Kennedy, Chair
Paula A. DeLisle
R. Michael McCullough
Sylvester J. Schieber*
COMPENSATION AND STOCK COMMITTEE
Thomas W. Barratt, Chair
Paula A. DeLisle
Ira T. Kay
Kevin L. Meehan*
John A. Steinbrunner
FINANCE COMMITTEE
David B. Friend, Chair
Walter W. Bardenwerper*
Elizabeth M. Caflisch*
Carl D. Mautz*
Eric P. Lofgren
A. Grahame Stott
<PAGE>
PRESIDENT'S PAY COMMITTEE
R. Michael McCullough, Chair
Thomas W. Barratt
Brian E. Kennedy
HUMAN RESOURCES COMMITTEE
Gail E. McKee, Chair
Martin J. K. Brown*
David P. Marini*
Marcia W. Marsh*
J.P. Orbeta*
Charles P. Wood, Jr.*
*nondirector member
CONSULTING OFFICES
AFRICA
Harare
ASIA-PACIFIC
Auckland
Bangkok
Beijing
Colombo
Sri Lanka
New Delhi
Hong Kong
Jakarta
Kuala Lumpur
Manila
Melbourne
Seoul
Shanghai
Singapore
Sydney
Taipei
Tokyo
Wellington
CANADA
Calgary
Montreal
Ottawa
Toronto
Vancouver
EUROPE
Amsterdam
Barcelona
Birmingham
<PAGE>
Bristol
Brussels
Dublin
Dusseldorf
Edinburgh
Eindhoven
Leeds
Lisbon
London
Madrid
Manchester
Milan
Munich
Paris
Redhill
Reigate
Rome
Rotterdam
Stockholm
Welwyn
Zurich
LATIN AMERICA
Bogota
Buenos Aires
Kingston
Mexico City
San Juan
Sao Paulo
UNITED STATES
Atlanta
Boston
Charlotte
Chicago
Cleveland
Columbus
Dallas
Denver
Detroit
Grand Rapids
Honolulu
Houston
Irvine
Lake Oswego, OR
Los Angeles
Marlborough, MA
Memphis
Miami
Minneapolis
<PAGE>
Morristown, NJ
New York
Philadelphia
Phoenix
Portland
Richmond
Rochelle Park, NJ
St. Louis
San Diego
San Francisco
Santa Clara
Seattle
Stamford
Washington, D.C.
DIVISIONS AND SUBSIDIARIES
People Management Resources
Research and Information Centers
Watson Wyatt Data Services
Watson Wyatt Investment Consulting
CORPORATE OFFICES Bethesda, MD, USA
1-800-388-9868
Reigate, England
44-1737-241144
Copyright (C) 1999, Watson Wyatt Worldwide
All rights reserved.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTS
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
March 17, 2000
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 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
March 17, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 35,985
<SECURITIES> 0
<RECEIVABLES> 139,567
<ALLOWANCES> 3,701
<INVENTORY> 0
<CURRENT-ASSETS> 182,685
<PP&E> 123,165
<DEPRECIATION> 80,368
<TOTAL-ASSETS> 313,960
<CURRENT-LIABILITIES> 170,993
<BONDS> 109,018
0
0
<COMMON> 16,112
<OTHER-SE> 17,168
<TOTAL-LIABILITY-AND-EQUITY> 313,960
<SALES> 0
<TOTAL-REVENUES> 556,860
<CGS> 462,056
<TOTAL-COSTS> 533,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,646
<INCOME-PRETAX> 23,800
<INCOME-TAX> 11,448
<INCOME-CONTINUING> 12,352
<DISCONTINUED> 8,678
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,813
<EPS-BASIC> 1.37
<EPS-DILUTED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
DRAFT FORM OF PROXY
WATSON WYATT & COMPANY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS -- , 2000
The undersigned hereby appoints John J. Haley and Walter W. Bardenwerper, and
each of them, as his or her proxies, each with full power of substitution, to
vote all of the undersigned's shares of capital stock of the Company at the
Special Meeting of Stockholders of Watson Wyatt & Company to be held on ,
2000, and at any adjournments thereof, with the same authority as if the
undersigned were personally present, as specified below:
THE DIRECTORS OF THE COMPANY RECOMMEND A VOTE 'FOR' ALL THE PROPOSALS BELOW:
I. / / FOR / / AGAINST / / ABSTAIN Proposal No. 1, regarding the
approval of the merger of Watson Wyatt & Company with the wholly-owned
subsidiary of Watson Wyatt & Company Holdings, WW Merger Subsidiary, Inc.
This proposal is contingent on the consummation of the public offering.
II. / / FOR / / AGAINST / / ABSTAIN Proposal No. 2, regarding the
adoption of the 2000 long term incentive plan. This proposal is
contingent on the approval of the merger proposal and the consummation of
the public offering.
III. / / FOR / / AGAINST / / ABSTAIN Proposal No. 3, regarding the
amendment to the bylaws of Watson Wyatt & Company to permit certain
transfers of the company's common stock, under certain conditions, to
trusts created for the benefit of the stockholder, his or her spouse or
descendants. The effectiveness of this proposal is not contingent upon
the effectiveness of any other proposal.
UNLESS A CONTRARY SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE ABOVE
PROPOSALS. THE UNDERSIGNED HEREBY REVOKES ANY PROXY PREVIOUSLY GIVEN AND
ACKNOWLEDGES RECEIPT OF THE NOTICE AND PROXY STATEMENT FOR THE SPECIAL MEETING.
When signing in any representative capacity, please insert your title and attach
papers showing your authority unless already on file with the company.
<TABLE>
<S> <C>
- -------------------------------------------- --------------------------------------------
Signature of Stockholder Watson Wyatt Office
- -------------------------------------------- --------------------------------------------
Please Print Stockholder Name (Legibly) Date Signed
</TABLE>
Stockholders must register their vote on Insite or deliver a signed proxy (in a
sealed envelope) to their Office Administrator for forwarding to the company's
corporate offices in Bethesda, Maryland. Please register your vote on Insite or
mark, sign, date and return this Proxy to your Office Administrator on or before
[ ].
