Focus on the Future
<PAGE>
Wellspring Resources
<PAGE>
Decision
- - Watson Wyatt is ending our involvement in Wellspring
- We will not make any future investments in Wellspring
- State Street will continue Wellspring at a reduced level
- We will need to fund an orderly wind-down of our obligations
<PAGE>
Historical Perspective on Outsourcing
- - Entered outsourcing for strategic reasons
- - Marketing success
- - Concerns about
- capital requirements
- management competencies
- - Search for a partner
<PAGE>
Formation of Wellspring
- - Joint venture formed with State Street
- - Retained client agreement
- - New management team put in place
<PAGE>
Experience with Wellspring
- - Continued significant losses
- - WW entered Outsourcing to protect our core consulting services, but
- Lack of synergy
- Damage to client relationships
- - Outsourcing has grown
- But, other solutions have grown faster
<PAGE>
Since Last June
- - Full-time project to evaluate Wellspring investment
- - Examined all alternatives
- Continued investment
- Third partner
- Sale of our interest
- Shutdown
- - Conclusions
- Need to exit business
- No simple exit strategy available
<PAGE>
Key Terms of Agreement
- - WW to operate Retained Clients
- Nynex 7/98
- Westinghouse 12/98
- Rockwell Negotiated
- - State Street to continue with all other clients
<PAGE>
Financial Effect on Watson Wyatt
<PAGE>
Discontinued Operations Outsourcing
<TABLE>
<CAPTION>
Tax
Pretax Benefit Net Loss
------ ------- --------
Loss on Disposal:
<S> <C> <C> <C>
Book Value of Investment ($58.6) $26.4 ($32.3)
Accrued Exit Costs & Future
Losses (61.2) 27.5 (33.6)
------- ------ ------
Total Loss on Disposal (119.8) 53.9 (65.9)
FY98 Losses of Discontinued
Operations Through March 31 (14.4) 6.5 (7.9)
($134.2) $60.4 ($73.8)
======== ===== =======
</TABLE>
<PAGE>
Peak Borrowings --
Historical and Projected
<TABLE>
<CAPTION>
Fiscal Year Borrowings as a Percent of Revenue
<S> <C>
1992 0.099
1993 0.052
1994 0.073
1995 0.040
1996 0.033
1997 0.064
1998 0.074
1999 0.138
2000 0.110
2001 0.086
2002 0.057
</TABLE>
<PAGE>
Benefits to Watson Wyatt
- - Cash that had gone to Wellspring can be
- invested in core business
- used to reward shareholders and associates
- - Positive message to clients and associates:
WW focusing on what we do best
<PAGE>
Focus on the Future
<PAGE>
Focus on the Future
<PAGE>
Stock Issues
<PAGE>
Goals Of Changing Our
Book Value Formula For Our Stock
- - To change our book value formula to reflect current economic realities.
- - To be fair to all shareholders.
- Large and Small
- Retiring/Sellers and New Associates/Buyers.
- - To maintain our liquid internal stock market.
- - To encourage shareholders to hold their stock for the long term.
<PAGE>
Stock Pricing Methods
- - Other Methods Explored
- Public Stock Market
- Private Sale of Company
- Appraisal Using Investment Banker
- Subject to discounts
<PAGE>
Stock Pricing Methods (Continued)
- Formulas
- Book Value (our current method)
- EBIT -- Multiple
- Net Income -- Multiple
- There Are Pros/Cons For Each One
- Highly dependent upon business, financial and cultural strategies
- Board has evaluated all of them
<PAGE>
Board's Decision:
Stay With Book Value But Modify It
- Benefits
- Consistent with Articulated Stock Philosophy:
Capital Contribution
- Stable and Conservative Approach
- Increases with Profits
<PAGE>
Our Current Book Value Formula
- Definition: Net Book Value
(plus or minus) Annual Net Income (Retained Earnings)
- Divided by Shares Outstanding
- Losses for Discontinued Operations have a disproportionately adverse
impact.
<PAGE>
Our Current Book Value Formula
<TABLE>
<CAPTION>
- History
Fiscal Year Share Price % Change
----------- ----------- ---------
<S> <C> <C> <C>
1988 $4.76 --
1989 $4.90 +2.9%
1990 $4.90 0
1991 $4.71 -3.9%
1992 $4.23 -10.2%
1993 $4.11 -2.8%
1994 $4.44 + 8.0%
1995 $4.51 +1.6%
1996 $4.94 +9.5%
1997 $5.30 +7.3%
1998 ? ?
</TABLE>
<PAGE>
Our Current Book Value Formula
"Unmodified" 1998 Stock Price
<TABLE>
<CAPTION>
Per Share
------------
<S> <C>
FY97 Value $5.30
FY98 Forecasted Results ($4.16)
------------
"Unmodified" FY98 Stock Price $1.14
</TABLE>
<PAGE>
The Proposal: Modified Formula Book Value
- Computes share price by "modifying" book value
- Excludes from calculation the after-tax loss from discontinued
operations from Wellspring
<PAGE>
The Proposal: Modified Formula Book Value
- - Estimated share price June 30, 1998: $5.72
- Assumes consulting operation make forecast
- Assumes payment of target bonuses
- - 8% increase in share price from June '97
<PAGE>
How Does The Stock Price Increase?
- - Operating Results Generate Distributable NOI
- - Board of Directors Allocates Distributable NOI to:
- Bonus Pool
- Stock Price Increase
- Targeting 5% "Real"
- SIBP
- - Actual Stock Price Increase can be Higher or Lower
<PAGE>
Calendar
- - Proxy Distributed - March 4, 1998
- - Proxy Solicitation and Voting to Approve Change to Formula
- - Special Shareholders' Meeting - April 2, 1998
- - New Stock Price Set
- - FY99 Stock Sale
- Pre-tax Purchase Opportunity
<PAGE>
The Future
- - Important Change/Successful Firm
- - Fair to All Associates
<PAGE>
Focus on the Future
<PAGE>
Questions and Answers
Wellspring
1. Why did we get into the total benefits outsourcing business?
In the early 90's Watson Wyatt and our competitors came under marketplace
pressure to provide total benefits administration outsourcing services. It was
also believed that the organization handling the employer's pension data would
be in an ideal position to gain its actuarial work. If we were unable to provide
outsourcing services, then our large base of actuarial work could be at risk. On
the other hand, if we provided outsourcing services we would protect our core
business and have the opportunity to gain actuarial work from our competitors.
In fact, the original concern has proved not valid thus far - very few companies
shifted their actuarial work to their outsourcing services provider.
2. Why did our investment in Wellspring cost so much?
Our investment in Wellspring has been about the same as our competitors.
Essentially we were building a new transactional business in which there was
very little hard knowledge about what it would take to get the business up and
running - and what it would take to get each client's benefit program on line.
Last, but most important, we greatly underestimated the cost for systems
development and implementation of complex client plans.
3. Why didn't we exit Wellspring earlier?
Since we entered the total outsourcing business, the Board has carefully
monitored our costs. In 1995 it became clear that the costs were too large for
our firm - but we were also still convinced that we needed to be in the business
for defensive reasons. So we sought a partner - and several major firms
expressed interest. In early 1996 we selected State Street Bank as our joint
venture partner. Shortly thereafter, we began to put in a new management team.
We and State Street knew that Wellspring would continue to lose money but we
believed they would be profitable within three to four years. By the fall of
1997, Wellspring was off budget again, and it was apparent that they would not
be profitable for many years to come. The Board then set in place a series of
detailed reviews and analyses which led to the decision to exit the business.
<PAGE>
4. Who is being held accountable for Wellspring?
Our CEO, Pete Smith, holds himself accountable for Wellspring. However, it is
very important to note that many people have been involved with Wellspring
decisions over the years. The Board of Directors, since we first entered the
outsourcing business in 1991, have taken very seriously their obligations to
evaluate our outsourcing strategy and all of the major developments related to
that business. Each decision was made after lengthy review and debate by
successive Boards with what appeared to be in the best strategic interests of
the Company at the time; as the circumstances changed, the Company's outsourcing
approach changed. Once the Board was convinced that the investment could not
succeed for us, it adopted the exit strategy we described today.
5. Doesn't all this leave our firm in a very weak position?
No. We believe we will be a stronger firm because of the action we are taking on
Wellspring. As our outside strategic and financial advisors have noted, since
1993 - at the same time we were investing in Wellspring - we also brought our
consulting operations to high levels of profitability; we created a matrix
management structure that works well; we established account management as the
way we do business; and we made a valuable global alliance with R Watson & Sons.
Going forward, without having to invest nearly $30 million a year in Wellspring,
we will be positioned to invest more in our core consulting businesses and
greatly improve the return to shareholders. That is why our banks and advisors
consider our action on Wellspring a sound business decision.
<PAGE>
HR Technologies
6. How does the decision to exit Wellspring affect our administrative systems
consulting services?
We remain committed to helping clients meet their benefits administration needs
- - and we feel the best way for us to do so is by:
- - consulting with our clients on the strategic implications of a variety of
approaches, and
- - continuing to be the leader in providing cosourcing, insourcing and other
innovative Web-based solutions to their benefits administration needs.
Debt
7. Will the exiting of Wellspring force the Company to take on an inordinate
level of debt?
In 1992 our level of debt was about 10% of our revenue. Over the past few years
that debt has usually been at the 5% of revenue level or lower. We anticipate
that due to exiting Wellspring our debt will peak in fiscal 99 at about 13% -
14% of revenue - and decline thereafter to about the 5% level by the year 2002.
For a Company like ours that has a strong cash flow, the level of debt is very
manageable.
<PAGE>
Stock
8. Why was the modified book value selected as the method for revaluing our
stock?
The modified formula book value method continues the fundamental
valuation approach that the Company has used throughout its history. It is a
conservative approach that produces generally less volatile results than other
valuation methods, and it is consistent with the Company's stock ownership
philosophy of capital contribution.
9. Will there be a stock sale this year?
No, there will not be a stock sale in this fiscal year. We do anticipate a stock
sale in fiscal 99.
Strategy
10. How does the new strategy differentiate Watson Wyatt?
The key to the new strategy is "focus". By focusing all of our energies and
resources on the three key areas of our business - benefits, human resources,
and HR technology - we can become the leader in each of those businesses and
grow our revenues much more rapidly than in the past. The combination of our new
strategic focus with our ongoing emphasis on strengthening client relations
should give us sustainable competitive advantage in the marketplace. Part of
that advantage will come through being able to clearly define for our clients
what Watson Wyatt is all about.
<PAGE>
11. What did Bain's research show about the marketplace and our position?
Bain's research showed that there is good growth potential in the benefits
market, and that we have an enviable reputation in the retirement area of that
market. By focusing more of our resources on the retirement area, we should be
able to regain our position as the dominant leader in that business.
The Bain research also showed that there is enormous growth potential in the
human resources market, and that our clients are beginning to see benefits and
other areas of HR as integrated elements of their total people programs. Again,
with our HCG Practice, we are ideally positioned to gain market share in this
emerging area of the business.
In summary, Bain's research made it clear that by focusing, Watson Wyatt could
leverage its strong reputation in the market and greatly increase its revenues.
12. What will we do to make sure we have the resources to execute this new
strategy?
We won't rule out acquisitions in the future - but since we know where our focus
is - we'd make sure they were aligned with our strategic goals.
<PAGE>
To: Stockholders of Watson Wyatt & Company
From: Walter W. Bardenwerper, Secretary
Date: March 4, 1998
Re: Attached Proxy Statement and Ballot
Attached as two WORD 6.0 documents are (i) a Proxy Statement and (ii) a Proxy
Ballot, in connection with a proposal to amend the Bylaws of the Company to
modify certain aspects of calculating the share price of the Company's Common
Stock. Information regarding the subject matter of this Proxy, as well as other
important information about Wellspring and Company Strategy, is being
communicated to shareholders in a series of Regional and Office meetings during
the month of March. As stated in the attached Notice of the Special
Shareholders' Meeting which accompanies the Proxy, the proxies are being
solicited by the Board of Directors who recommend a vote in favor of the Bylaw
Amendment Proposal. The date of the Special Shareholders' Meeting is April 2,
1998.
If you have any difficulty retrieving or printing either the Proxy document or
the Proxy ballot, please first contact your Office Administrator who will assist
you or will provide you with a hard copy of the documents. Any stockholder may
also, if necessary, obtain a hard copy of the Proxy document and Proxy ballot by
contacting Elaine Wiggins or me at this Office.
AN ENVELOPE FOR THE PROXY BALLOTS WILL BE PROVIDED TO EACH STOCKHOLDER BY YOUR
OFFICE ADMINISTRATOR. PLEASE READ THE PROXY DOCUMENT AND COMPLETE, SIGN AND DATE
YOUR PROXY BALLOT AND RETURN IT TO YOUR OFFICE ADMINISTRATOR IN THE ENVELOPE
PROVIDED NO LATER THAN MARCH 30, 1998.
Thank you.
