(graphic omitted)
Watson Wyatt
Worldwide Memo
January 19, 2000
To: All Associates
From: John Haley
Subject: IPO Update
I would like to inform you about some important IPO news. Today, we filed two
preliminary registration statements with the U.S. Securities and Exchange
Commission, our first formal action in a series of events leading to what we
hope will be a successful IPO. We continue to be subject to securities law
requirements that limit our communications on certain issues to what is
contained in these filings. In addition, our communications with current
shareholders are governed by SEC proxy rules with which we will be complying as
we answer continuing questions from our associates.
On the "IPO News" site on Insite
(http://insite.watsonwyatt.com/Marketing/IPO/index.html), we have placed some
general information and responses to questions submitted to the "IPO News" site
over the past month.
Once again, I want to thank all associates who have offered their input,
encouragement and especially your continuing focus on client service since we
announced our IPO initiative.
John
<PAGE>
WATSON WYATT & COMPANY
RESPONSES TO ASSOCIATE/SHAREHOLDER QUESTIONS
1/19/00
Today we filed with the U.S. Securities and Exchange Commission (SEC) two
preliminary registration statements, the first formal action in a series of
events which we hope will lead to a successful initial public offering (IPO)
during the first half of calendar 2000.
The questions and answers that follow respond to some of the input received from
associates who have submitted questions over the past month, most of which
relate to the mechanics of converting our current shares, the new long term
incentive plan, our current bank loans, etc. If you do not see an answer to a
question you submitted, the reason is that we judged it to be a matter more
properly addressed in the filed documents. Additional Q's and A's will be added
as warranted in the days and weeks to come.
Under SEC rules, while we may continue to communicate with our associates, we
are required to "stick to information that is in the SEC filings" when
responding to questions about the proxy vote or the public offering. In other
words, while we will make every effort to assist our associates in understanding
the merger and the IPO process, we cannot add material information that is not
contained in these filings. In addition, this begins the period during which the
SEC may review these preliminary documents and the SEC may, of course, require
changes.
Click on the links below or scroll down to read the full document.
Filing Process Q&A
* The SEC Filings * The Merger
o S-3 (link to document) * Changes to Our Current
o S-4 (link to document) Structure and Organization
* The Proposed Merger and * Incentive Compensation
Conversion of Stock * Selling Shareholders
* Class A and Class B Stock * Proxy Voting
* Stock Price * The Offering
* Shareholder Approval of the * Miscellaneous
Merger
* The 2000 Long Term Incentive
Plan
* Amending our Current Bylaws
to Facilitate Estate
Planning
* Timing
The SEC Filings
The two documents together explain our company, our financial statements, the
mechanism through which we are taking the company public and risks associated
with an investor's purchase of our shares. The document referred as an "S-3"
deals with the shares we will sell to the public. The document referred to as an
"S-4" deals with the shares our current shareholders will receive in exchange
for their current shares, and includes a draft proxy statement, which is also
subject to SEC review before we formally provide it to our shareholders for
their vote. A copy of each document will be available in each office.
Associates who read the "Business" sections of the documents may notice that the
business summary differs in tone or emphasis from some of our internal
communications. This is because potential investors (who are the primary
audience for these materials) have much less familiarity with our industry and
business than do our associates and clients. Please keep in mind that these
documents must not only explain the historical growth and financial strength of
our longstanding core practices, such as retirement consulting, but must convey
where we see growth potential, which obviously includes opportunities arising
from technology. None of these drafting decisions should be taken by associates
in any part of the business as implying even subtle changes in strategy,
business focus, our global commitment or your personal area of responsibility.
The documents must, as a legal matter, speak on behalf of the Company, as
opposed to Watson Wyatt Worldwide, since the stock is being offered only by the
Company. In addition, the business disclosure is organized by practice, without
emphasis on particular regions, because this approach was determined to more
clearly explain our business and our seamless global operations to unfamiliar
readers. This should not be read within any part of Watson Wyatt Worldwide as
implying any reduction in our global objectives, regional strengths or ambitions
as a worldwide firm.
The Proposed Merger and Conversion of Stock
To move from our current structure to a company with publicly traded stock, we
have, for various legal reasons, proposed a merger of Watson Wyatt & Co. with a
wholly-owned subsidiary. When coupled with related steps, this structure will
result in a new holding company, "Watson Wyatt & Company Holdings," becoming the
issuer of our stock. Your current shares of our stock will be converted
automatically into stock of Watson Wyatt & Company Holdings at an exchange ratio
that takes into account both the value of our shares in the aggregate and the
initial share price that our underwriters determine is appropriate for the
public offering of our stock. This series of transactions is explained in detail
in the S-4.
Class A and Class B Stock
There will be two classes of common stock. The stock you receive in exchange for
your current shares will be called "Class B" stock, of which you will be able to
sell a portion in the IPO. There will also be a "Class A" stock, which is the
stock to be issued directly by the Company to IPO investors. There is no
difference between Classes A and B in terms of voting rights or any other powers
related to ownership, except sales or other transfers of Class B stock are
restricted.
Here are the proposed rules regarding the new Class B common stock:
* You will be asked whether you wish to sell any of your shares in the IPO.
If you wish to do so, you will need enter into an underwriting agreement
with our underwriters, and will then be permitted to convert your Class B
shares into Class A and sell up to the equivalent of 500 of your current
shares, plus 10% of the remainder of the shares you hold.
* Your shares which are not sold in the IPO will be equally divided into
shares of Class B-1 and Class B-2, with Class B-1 shares restricted for 12
months (after the closing) and Class B-2 shares restricted for 24 months.
Stock Price
We do not yet know the offering price of our stock. In an IPO, the offering
price is determined immediately prior to the offering based on many factors,
including market conditions at that time. However, when we informally ask you to
indicate whether you will wish to sell any of your shares in the IPO, we will
provide you with a likely range. The Board, of course, has the final authority
on whether or not to proceed with the IPO process based upon its view of whether
this will be in the best interests of the company and its shareholders.
Shareholder Approval of the Merger
Since the IPO is contingent on shareholder approval of the merger, the IPO is
effectively subject to shareholder approval. Although the applicable law only
requires an affirmative vote of the majority of our outstanding shares to
approve the merger, the Board has determined also to require an 80% affirmative
vote of all shares voted for or against the proposal.
There will be some changes in the "corporate governance" of our company as a
result of the IPO; these have mainly to do with making sure your Board of
Directors retains substantial authority over the direction, strategy and
ownership of the company. These changes in our corporate charter and bylaws are
explained in detail in the S-4.
The 2000 Long Term Incentive Plan
At the same time of the IPO, we will also introduce a new stock option plan, to
be called the "2000 Long Term Incentive Plan." This plan is also described in
the S-4. Under this plan, the Company will issue stock options at the time of
the IPO, and will have a plan in place to do so thereafter. The terms of the
plan are described more fully in the S-4 and in the Qs and As below. To become
effective, this plan requires the affirmative vote of a majority of shares
outstanding.
Amending our Current Bylaws to Facilitate Estate Planning
Finally, the Board has also decided to ask the shareholders to approve an
amendment to our current Bylaws to permit some very limited transfers of our
stock to trusts or other entities for the benefit of spouses, children or other
descendants. The purpose of this proposal is to enable shareholders who wish to
do so to make such transfers prior to the approval or implementation of the IPO,
since this could have estate planning advantages for shareholders. This
proposal, under our current bylaws, requires an 80% affirmative vote of all
shares outstanding.
Timing
The SEC has ten days to notify us if they intend to review our proxy. We would
expect to distribute proxies to the shareholders as soon after we fulfill our
SEC requirements as possible. When we do so, shareholders will have at least 20
days notice of the meeting.
The SEC should notify us within approximately 30 days of any comments on our
proposed stock offering. We would expect to proceed with the IPO as soon as we
can after the SEC comment process is completed. A number of other major events
must take place during the period prior to consummating the IPO. Subject to the
timing requirements imposed by law, we will try to make as much progress on all
fronts as we can simultaneously to keep the process moving ahead.
We will continue to collect your questions, and we will try to answer them,
again subject to SEC regulations, as promptly and fully as we can.
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Q&A
The Merger
Q: What will I receive in the merger?
A: As stated in the answer to question two on page 1 of the S-4, "In the
merger, each share of outstanding Watson Wyatt & Company common stock will
convert automatically, at the appropriate exchange ratio, into shares of
Watson Wyatt & Company Holdings class B common stock, split equally between
B-1 common shares and B-2 common shares. After expiration of the applicable
transfer restrictions, the class B common stock automatically will convert
to shares of class A common stock."
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Q: Is it certain that there will be a 2 for 1 exchange of old Watson
Wyatt shares for the holding company shares?
A: No. Based on market conditions and the advice of our underwriter, the
rate of exchange will be determined so that the public offering price
is at a level that is attractive to the market. The exchange rate
itself does not have a financial impact on existing shareholders since
the market price and the exchange rate are related.
For illustrative purposes only, if the underwriters felt the value of the
company would result in a stock price of $15.00 per share, and that the
stock would be most favorably received by the market at a price of $7.50
per share, they would do a 2 for 1 conversion (i.e. 1 share at $15.00 is
worth the same as 2 shares at $7.50). However, if the market value was
determined to be $14.00 per share, and they still wanted to get to a market
price of $7.50 per share, the exchange used in the split would be 1.87 to 1
(1.87 shares at $7.50 is equivalent to 1 share at $14.00). This will result
in the same ownership percentage in either scenario.
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Q: Will I be able to sell or transfer my class B common stock
immediately?
A: No. As stated in the answer to question 3 on page 1 of the S-4, "Provided
you enter into an underwriting agreement with the underwriters, you will be
able to sell up to the equivalent of 500 of your Watson Wyatt & Company
shares (as measured on a pre-converted basis) plus 10% of the remainder of
such shares in the initial public offering. Immediately prior to such sale,
your class B shares will be converted automatically into class A shares.
Following the public offering, Watson Wyatt & Company Holdings' certificate
of incorporation will restrict you from selling or transferring class B-1
common stock for 12 months after our public offering, and from selling or
transferring class B-2 common stock for 24 months after our public
offering. The certificate of incorporation allows transfers to a limited
class of permitted transferees."
----------
Q: If an associate chooses not to sell shares, will his entire holdings become
Class B shares and subject to the 12 and 24 month selling restrictions?
A: Yes.
----------
Q: Will the 12 and 24 month restrictions on the Class B shares also apply
to retirees?
A: Yes, retirees will be subject to the same stock transfer restrictions.
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Q: How do the restricted B shares convert to unrestricted A shares?
A: The B shares will convert to A shares automatically at the time the
applicable restrictions lapse.
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Changes to Our Current Structure and Organization
Q: How will the non-compete agreements be changed to reflect the
transition to publicly held stock?
A: We will be changing the current non-compete agreement to remove all of
the provisions relating to participation in the stock purchase plan,
holding stock proceeds during the non-compete period and losing
appreciation on stock in the event of a violation of the non-compete.
This will apply to all outstanding agreements and agreements that will
be signed by new hires. The new stock option plan will contain
non-compete provisions identical to our current restrictions and will
provide for rescission of unexercised options or the "recapture" of
any option gains resulting from exercises during the 24 month period
immediately before breach of the non-compete.
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Q: How will being public affect our Global Alliance?
A: Our global alliance will operate as usual following the offering of
Watson Wyatt & Company Holdings stock. Both Watson Wyatt & Company and
Watson Wyatt Partners are strongly committed to the alliance.
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Q: Will there be new outside directors?
A: The Board intends to add an additional outside director.
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Q: What is our future dividend policy?
A: The intended dividend policy, as explained at page 15 of the S-3, is
". . . to retain our future earnings to finance the operation and
expansion of our business and we do not anticipate paying cash
dividends on our common stock in the foreseeable future. Any future
determination as to the payment of dividends will be at the discretion
of our board of directors."
----------
Q: How will we preserve control of the company?
A: We intend to continue to have our Board in a strong position to set
strategy and direct our future. To that end, we are proposing certain
changes to the Certificate of Incorporation and Bylaws of Watson Wyatt &
Company Holdings that would have the effect of enhancing our Board's
ability to manage any proposed change in control in the interests of our
shareholders. As described in the answer to the fourth question on page 14
of the S-4, the proposed changes would:
* "authorize the issuance of preferred stock without fixed
characteristics that could be issued by the board of directors to
increase the number of outstanding shares and deter a takeover
attempt;
* create a classified board of directors with staggered, three-year
terms, which may lengthen the time required to gain control of the
board of directors;
* require super-majority voting to amend the staggered board and
certain other provisions of the certificate of incorporation;
* provide that only the president or majority of the 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; and
* provide that board of director vacancies, including new
directorships, may be filled only by the directors then in
office."
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Q: How will the IPO affect Watson Wyatt as a place to work, i.e. our
unique culture?
A: We see the IPO as leveraging the best qualities of Watson Wyatt - our
culture of open communications, teamwork and creativity and innovation. The
IPO is also likely to promote increased discipline as a firm. Publicly
traded firms are rewarded - or penalized - by investors based on their
performance.
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Q: Are we worried about senior people retiring prematurely?
A: We do not anticipate a substantial or unusual departure of senior
people as a result of the IPO.
----------
Q: What are the new share ownership guidelines?
A: We will announce the new share ownership guidelines as soon as we can.
----------
Incentive Compensation
Q: Can you recap for me the structure of the long-term incentive stock
option plan that was announced by John Haley?
A: The structure of the long term incentive plan has been expanded to provide
all associates with a minimum grant of 100 options. The number of options
an associate receives in this one-time grant will be based on a market
value equivalent to 40% of their target bonus, or 100 options, whichever is
greater. The option price will be based on the fair market value of the
underlying stock on the date of grant, which is expected to be the
effective date of the offering.
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Q: If an individual retires with unvested options, will the options
continue to vest after retirement? Do options vest at retirement?
A: No. As described in the plan which is annexed to the S-4, all unvested
options will terminate when your employment terminates.
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Q: Are part-time associates eligible for the stock option plan?
A: Yes. The eligibility requirements will be the same as those for our
flex benefits program and the current stock purchase plan. That means that
all regular part-time associates will be eligible for the stock option
plan. A regular, part-time associate is someone who is regularly scheduled
to work less than full time but at least 60 percent of the office's normal
work week.
-----------
Q: What is the tax treatment for the stock option program -- at grant; at
exercise; at ultimate sale?
A: For U.S. taxpayers:
As described in more detail on pages 35 and 36 of the S-4:
At the date of grant, there are no tax consequences.
At the date of exercise, you will recognize compensation income (ordinary
income) equal to the fair market value of the stock on the exercise date
less the option price paid for the stock.
When you sell your stock, you will recognize capital gain in an amount
equal to the sales proceeds from the sale of stock less the option price
paid and less the compensation income on the date of exercise. The capital
gain will be short term or long term depending on how long you held the
stock from the date of exercise.
Special rules will apply if a cashless exercise is used. Please refer to
the Tax discussion in the Form S-4 for a more detailed discussion.
For non-U.S. taxpayers:
The Company is in the process of evaluating the legal and tax issues
of the stock option plan in non-U.S. jurisdictions. Depending on the
legal, tax, or other issues that arise in a non-U.S. jurisdiction,
alternative plans may be considered or used in that country.
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Q: Will Watson Wyatt stock be a standard investment option in our 401(k)
plan alongside the various mutual funds?
A: This is under consideration.
----------
Q: Will the Company adopt a stock purchase plan for associates as part of
its overall benefit structure?
A: While we will not be going forward with the discount purchase plan
discussed in the associate meeting, a Watson Wyatt team is currently
studying alternative stock purchase plans that may be adopted in the
future.
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Q: What guidance can you give us as to stock to be offered in the future
to new hires? How about between now and the IPO?
A: It is probable that stock options will be used in future new hire
situations as appropriate. The Compensation and Stock Committee will be
considering those situations. Any one who is hired and at work before the
IPO date will be eligible for the initial stock options if they meet the
otherwise applicable eligibility requirements.
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Q: Presumably, we will be able to purchase shares of WW stock through an
IRA as we can any publicly traded organization. Please comment.
A: You may purchase shares through the open market for your IRA just as
you would be able to with the stock of any other public company.
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Selling Shareholders
Q: What's the process for selling shares in the IPO?
A: All shareholders will shortly receive forms asking them to indicate
their interest in offering a portion of their shares in the IPO. Interested
shareholders will receive follow-up forms that will ask them to indicate
what shares the shareholder wishes to sell (for tax basis purposes). The
forms will provide detailed information on the procedure for instructing
the company to sell your shares, which will include signing a power of
attorney authorizing the sale of your shares. Any shares not sold in the
IPO will remain Class B shares.
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Q: What happens to our stock loans?
A: As described on page two of the S-4, if you do not want to pay off all
outstanding loans at the time of the IPO, 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.
At the time the 12 and 24 month restrictions 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 significantly higher than the current book value price, you
should still receive sufficient proceeds from any sale. 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 restriction on your Class B shares has not yet been
released, in which case your loan will become due and payable within 30
days of the restriction lapsing).
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Q: If I am confident in the future of WW, why would I want to sell my
stock?
A: The decision of whether or not to sell stock is of course up to each
individual associate. Associates may have various reasons for wanting to
sell stock even if they are confident in the future of WW, including
diversification of their personal investments or to reduce their Bank of
America stock loans.
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Q: Will we have stock certificates?
A: The Class A shares (which are the freely tradable shares) will be
represented by certificates. The Class B shares will be denominated by
book entry.
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Proxy Voting
Q: If the proxy is approved, and then the IPO is delayed for any reason,
will our annual stock purchase process be reinstated?
A: If the IPO were to be delayed for a significant period of time, the Board
of Directors would reassess the situation and make a decision about future
stock sales.
Q: The IPO is contingent upon various conditions (market value, recent
performance, etc.). Will the proxy contain any sunset provisions, or will
the proxy allow for an IPO at any time in the future, without benefit of
another proxy? Who ultimately makes the go/no go decision on the IPO?
A: The Proxy Statement asks the shareholders to approve the merger
transaction, the new stock plan, and an interim bylaw amendment. The Proxy
clearly indicates that the consummation of the merger and adoption of the
plan are contingent on the successful completion of an IPO. The Board of
Directors has the responsibility to determine whether completing the IPO is
in the best interests of the shareholders and the company.
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The Offering
Q: How much stock are we selling to the public?
A: As indicated in the answer to question 4, on page 1 of the S-4,
"Immediately after the public offering, after giving effect to anticipated
sales of shares by both the company and associates, we expect that roughly
25% of the outstanding shares of Watson Wyatt & Company Holdings will be in
the hands of the public, while existing shareholders will hold the
remaining 75%. The actual amounts of stock to be sold by us depends upon
market conditions present at the time of the public offering and will be
determined by us and our underwriters."
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Q: What will we do with the proceeds from the IPO?
A: As stated on page 15 of the S-3, "we expect to use the net proceeds
from the offering for working capital and other general corporate purposes,
which may include the retirement of outstanding indebtedness, if any, at
the time of the completion of the offering and possible strategic
acquisitions of complementary businesses, products or technologies. We will
have broad discretion regarding the use of the net proceeds of the
offering. Pending such use, the proceeds of the offering will be invested
in short-term, investment grade, interest-bearing securities."
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Q: Who will buy our stock in the IPO?
A: 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 IPO.
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Q: Is the underwriting by the investment banker on a "firm commitment"
basis, or on a "best-efforts" basis?
A: The underwriting is going to be done on a "Firm Commitment" basis, which
means that if the offering proceeds, the underwriter makes a firm
commitment to purchase an agreed upon number of shares. In a "best effort"
offering, the underwriter merely agrees to purchase the number of shares
that they are able to sell in the public market.
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Q: When will the IPO close?
A: The IPO will close after the registration documents have been reviewed by
the Securities and Exchange Commission, the shareholder meeting has
occurred, we have completed the "road shows" with potential investors, and
the underwriters and the Board of Directors agree on an offering price and
have concluded that desirable market factors favor our going forward.
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Q: Why did we apply for listing on the NYSE instead of NASDAQ?
A: After weighing the relative benefits with our investment bankers, we
determined that the NYSE was the appropriate market for our
securities.
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Miscellaneous
Q: Considering that we already have "authorized but not yet issued shares
of stock," why are equity-based acquisitions less of an opportunity
under the current structure?
A: The company does not have any specific plans to use equity for
acquisitions. However, using a stock valued at a formula book value would
require more shares to achieve the same acquisition price; the fact that
the market value of shares is greater than their book value price could
result in us overpaying for acquisitions. Typically, publicly traded stock
is more attractive to potential acquirees because of liquidity and the
potential for market appreciation.
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Q: When can the Company talk more about the IPO?
A: The entire IPO process is strictly regulated. Although we can provide
certain information now that the registration statements have been filed
with the SEC, we are still restricted in our ability to provide
information, even to our own employee shareholders. We will do our best to
keep you informed within the parameters that the laws allow.
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Q: What can I say publicly about the IPO?
A: Individual associates should generally not be providing information to
others about the IPO. Our current filings are preliminary only. The
best approach is to not say anything. If clients are interested in
more information, please direct them to our public filings or to Gretchen
Ace in Corporate Marketing/PR.
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IPO Page
