<PAGE> 1
As filed with the Securities and Exchange Commission on July 16, 1998
Registration No. 333-57961
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
Amendment No. 1
To
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
-----------------
STONE & WEBSTER, INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 8711 13-5416910
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
245 Summer Street
Boston, Massachusetts 02210
(617) 589-5111
(Address, Including ZIP Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
JAMES P. JONES
VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
STONE & WEBSTER, INCORPORATED
245 Summer Street
Boston, Massachusetts 02210
(617) 589-5111
(Name, Address, Including ZIP Code, and Telephone Number, Including Area Code,
of Agent for Service)
with copies to:
Steven N. Farber, Esq.
Marc A. Rubenstein, Esq.
Palmer & Dodge LLP
One Beacon Street
Boston, Massachusetts 02108
(617) 573-0100
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective and
all other conditions to the merger described in the enclosed Prospectus and
Proxy Statement have been satisfied or waived.
------------------------------
(continued on following page)
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The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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EXPLANATORY NOTE
This Registration Statement includes two prospectuses: (i) a prospectus
and proxy statement containing information about the proposed acquisition by
Registrant of Power Technologies, Inc. and covering the shares of Common Stock
and the Rights to be issued by the Registrant in connection with such
transaction and (ii) a "base" prospectus covering the remaining shares of Common
Stock that may be issued from time to time by the Registrant under this
Registration Statement pursuant to Rule 415 under the Securities Act of 1933 in
connection with transactions of the type described in General Instruction A to
Form S-4.
<PAGE> 4
POWER TECHNOLOGIES, INC.
1482 Erie Boulevard
Schenectady, New York 12301-1058
July __, 1998
Dear Shareholder and/or ESOP Participant:
You are cordially invited to attend the annual meeting of shareholders of
Power Technologies, Inc. ("PTI") to be held at 3:00 p.m. on August 11, 1998 at
the offices of PTI, located at 1482 Erie Boulevard, Schenectady, New York.
The principal purposes of the meeting will be (i) to elect a class
consisting of four directors of PTI, (ii) to consider and vote on a proposal to
amend the Certificate of Incorporation of PTI to limit the liability of the
directors of PTI to PTI and the shareholders of PTI for certain breaches of
fiduciary duties, and (iii) to consider and vote on a proposal to approve and
adopt an Agreement and Plan of Merger dated as of April 20, 1998 (the "Merger
Agreement") which provides for the merger (the "Merger") of Stone & Webster
Acquisition Corp. (the "Merger Sub"), a wholly-owned subsidiary of Stone &
Webster, Incorporated ("SWI"), with and into PTI, with PTI (the "Surviving
Corporation") surviving as a wholly-owned subsidiary of SWI.
Under the terms of the Merger Agreement, if the Merger is consummated, the
outstanding shares of each class of common stock of PTI, par value $.10 per
share (the "PTI Common Stock"), will be converted into the right to receive, in
the aggregate, the following consideration:
(a) a number of shares of common stock of SWI, par value $1.00 per share
("SWI Common Stock"), equal to (1) the lesser of 1.5 times the
stockholders' equity of PTI at December 31, 1997 and $9,000,000,
divided by (2) the average of the closing prices of SWI Common Stock
as reported in the New York Stock Exchange (the "NYSE") Composite
Transactions for the 30 trading days ending on the third trading day
prior to the closing date (the "Closing Market Value");
(b) the right to receive additional shares of SWI Common Stock, up to a
maximum number of shares equal to $8,000,000 divided by the Closing
Market Value (the "Contingent Shares"), if and to the extent that
certain milestones based on the cumulative net income of the
Surviving Corporation before deducting taxes (as determined under
the Merger Agreement) during the period from January 1, 1998 to
December 31, 2002 are achieved;
(c) if Contingent Shares are payable and certain other circumstances
described in the Merger Agreement exist, additional shares of SWI
Common Stock up to a maximum number of shares equal to $500,000
divided by the average of the closing prices of SWI Common Stock as
reported in the NYSE Composite Transactions for the period of ten
trading days ending on the third trading day before such shares
would be distributed; and
(d) if the Surviving Corporation receives income from PTI's "Transasia"
project as described in the Merger Agreement, the income received by
the Surviving Corporation net of all taxes and costs of collecting
and administering such income, not to exceed 20% of the value of the
other Merger Consideration.
The Merger Agreement and certain financial and other information concerning SWI
and PTI are included in the enclosed Prospectus and Proxy Statement. Please
review the Prospectus and Proxy Statement carefully.
The Board of Directors believes that the Merger is in the best interests
of the shareholders of PTI and has unanimously approved the Merger.
We appreciate the loyalty and support our shareholders have demonstrated
over the years. We hope that you will continue this support by voting FOR the
Merger proposal now. Approval of the Merger requires the affirmative vote of the
holders of two-thirds of all of the outstanding PTI Common Stock and the
separate affirmative vote of the holders of a majority of each class of PTI
Common Stock. Therefore, regardless of the
<PAGE> 5
number of shares you may own, it is important that your shares be represented at
the meeting. Accordingly, whether or not you plan to attend the meeting, please
promptly complete and sign the following documents and return them in the
envelope provided: (i) the enclosed proxy card, (ii) if you are a participant in
PTI's Employee Stock Ownership Plan (the "ESOP"), the enclosed voting
instructions which direct the ESOP Trustee how to vote your allocated shares
held by the ESOP, and (iii) two copies of the enclosed Shareholders' Committee
Agreement which authorizes a shareholders' committee to represent your interests
in connection with the Merger following the Closing.
Sincerely,
[Insert Balser facsimile signature]
President
NOTE: PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES NOW.
<PAGE> 6
POWER TECHNOLOGIES, INC.
1482 Erie Boulevard
Schenectady, New York 12301-1058
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 11, 1998
------------------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Power
Technologies, Inc. ("PTI") will be held on August 11, 1998, at 3:00 p.m., at the
offices of PTI for the following purposes which are more fully described in the
attached Prospectus and Proxy Statement:
1. To elect one class consisting of four directors of PTI;
2. To consider and vote on a proposal to amend the Certificate of
Incorporation of PTI to limit the liability of the directors of PTI to PTI and
the shareholders of PTI for certain breaches of fiduciary duties; and
3. To approve and adopt the Agreement and Plan of Merger (the "Merger
Agreement") dated April 20, 1998 among PTI, the directors and certain
shareholders of PTI, Stone & Webster, Incorporated ("SWI"), Stone & Webster
Acquisition Corp. ("Merger Sub"), a wholly-owned subsidiary of SWI, and Stone &
Webster Management Consultants, Inc. and the transactions contemplated thereby
including the merger of the Merger Sub with and into PTI as contemplated by the
Merger Agreement, a copy of which is attached as Appendix A to the accompanying
Prospectus and Proxy Statement.
4. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.
Shareholders at the close of business on July 15, 1998 are entitled to
notice of, and to vote at, the PTI Annual Meeting and any adjournment or
postponement of the PTI Annual Meeting.
By Order of the Board of Directors,
[Insert Hirschman facsimile signature]
Secretary
Schenectady, New York
July __, 1998
IT IS IMPORTANT THAT PROXIES AND OTHER MATERIALS BE RETURNED PROMPTLY.
THEREFORE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY
COMPLETE AND SIGN THE FOLLOWING DOCUMENTS AND RETURN THEM IN THE ENVELOPE
PROVIDED: (I) THE ENCLOSED PROXY CARD, (II) IF YOU ARE A PARTICIPANT IN PTI'S
EMPLOYEE STOCK OWNERSHIP PLAN (THE "ESOP"), THE ENCLOSED VOTING INSTRUCTIONS
WHICH DIRECT THE ESOP TRUSTEE HOW TO VOTE YOUR ALLOCATED SHARES HELD BY THE
ESOP, AND (III) TWO COPIES OF THE ENCLOSED SHAREHOLDERS' COMMITTEE AGREEMENT
WHICH AUTHORIZES A SHAREHOLDERS' COMMITTEE TO REPRESENT YOUR INTERESTS IN
CONNECTION WITH THE MERGER FOLLOWING THE CLOSING.
<PAGE> 7
Prospectus and Proxy Statement
Stone & Webster, Incorporated Power Technologies, Inc.
245 Summer Street 1482 Erie Boulevard
Boston, Massachusetts 02210 Schenectady, New York 12301-1058
(617) 589-5111 (518) 395-5000
PROSPECTUS PROXY STATEMENT
Common Stock, $1.00 par value For the PTI Annual Meeting of
Shareholders to be held
on August 11, 1998
This Prospectus and Proxy Statement (the "Prospectus and Proxy Statement")
is being furnished to holders of Class A Common Stock, Class B Common Stock, and
Class C Common Stock, each $0.10 par value per share (collectively, "PTI Common
Stock"), of Power Technologies, Inc., a New York corporation ("PTI"), in
connection with the solicitation of proxies by the Board of Directors of PTI to
be used at the PTI Annual Meeting of Shareholders of PTI (the "PTI Annual
Meeting") to be held on August 11, 1998 and any adjournments or postponements
thereof.
The principal purposes of the PTI Annual Meeting will be (i) to elect a
class consisting of four directors of PTI, (ii) to consider and vote on a
proposal to amend the Certificate of Incorporation of PTI to limit the liability
of the directors of PTI to PTI and the shareholders of PTI for certain breaches
of fiduciary duties, and (iii) to consider and vote on a proposal to approve and
adopt an Agreement and Plan of Merger dated as of April 20, 1998 (the "Merger
Agreement"), by and among Stone & Webster, Incorporated, a Delaware corporation
("SWI"), Stone & Webster Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of SWI (the "Merger Sub"), Stone & Webster Management
Consultants, Inc., a New York corporation and wholly-owned subsidiary of SWI
("SWMCI"), PTI, certain shareholders of PTI (the "Principal Shareholders") and
the directors of PTI who are not Principal Shareholders. The Merger Agreement
provides for the merger (the "Merger") of the Merger Sub with and into PTI, with
PTI (referred to as the "Surviving Corporation" following the Merger) surviving
as a wholly-owned subsidiary of SWI.
Under the Merger Agreement, the PTI shareholders will be entitled to
receive in the aggregate (i) shares of SWI Common Stock, $1.00 par value per
share ("SWI Common Stock"), having a value, based on the average of the closing
prices of the SWI Common Stock as reported in the New York Stock Exchange (the
"NYSE") Composite Transactions for the 30 trading days ending on the third day
prior to the closing date (the "Closing Market Value"), equal to the lesser of
1.5 times the stockholders' equity of PTI at December 31, 1997 and $9,000,000,
(ii) depending on the extent to which certain milestones based on the cumulative
net income of the Surviving Corporation before deducting taxes during the period
from January 1, 1998 through December 31, 2002 (the "Contingent Period") (such
cumulative net income, as determined pursuant to the Merger Agreement, is
referred to as the "Final Cumulative Net Earnings") are achieved, a maximum
number of additional shares of SWI Common Stock equal to $8,000,000 divided by
the Closing Market Value (the "Contingent Merger Consideration"), (iii) in the
event that Contingent Merger Consideration becomes payable and certain other
circumstances exist, a maximum number of shares of SWI Common Stock equal to
$500,000 divided by the average of the closing prices of SWI Common Stock as
reported in the NYSE Composite Transactions for the ten trading days ending on
the third trading day prior to the day on which such shares are paid, and (iv)
if the Surviving Corporation receives income from PTI's "Transasia" project as
described in the Merger Agreement, the income received by the Surviving
Corporation less its costs in collecting and administering such income. As soon
as practicable following the effective time of the Merger, SWI will transfer all
shares of the Surviving Corporation to SWMCI so that the Surviving Corporation
will become a wholly-owned subsidiary of SWMCI. The Merger Agreement is attached
as
<PAGE> 8
Appendix A to this Prospectus and Proxy Statement and is incorporated herein by
reference.
SWI has filed a registration statement on Form S-4 (including the exhibits
and amendments thereto, the "Registration Statement") pursuant to the Securities
Act of 1933, as amended (the "Securities Act"), covering (i) the shares of SWI
Common Stock issuable as Initial Merger Consideration in accordance with the
Merger Agreement in exchange for PTI Common Stock, (ii) the right to receive the
Contingent Merger Consideration and Additional Contingent Shares (the "Rights"),
and (iii) certain other shares of SWI Common Stock to be issued by SWI in the
future in connection with other business combinations. This Prospectus and Proxy
Statement also constitutes the prospectus of SWI covering such shares of SWI
Common Stock and the Rights issuable in connection with the Merger.
See "RISK FACTORS" beginning on page 10 for certain information that should be
considered by PTI shareholders in deciding whether or not to vote in favor of
the Merger.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS AND PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus and Proxy Statement is July 16, 1998, and it
is first being mailed or delivered to PTI shareholders on or about that date.
<PAGE> 9
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION...................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 1
INTRODUCTION............................................................... 3
SUMMARY.................................................................... 3
Summary Business Description......................................... 3
The PTI Annual Meeting............................................... 4
The Merger........................................................... 5
RISK FACTORS............................................................... 10
Risks Relating to SWI................................................ 10
Risks Relating to the Merger......................................... 14
Risks Relating to PTI................................................ 16
SELECTED FINANCIAL DATA.................................................... 19
SWI Selected Financial Data.......................................... 19
PTI Selected Financial Data.......................................... 20
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION................. 21
COMPARATIVE PER SHARE FINANCIAL INFORMATION................................ 22
SWI MARKET PRICE AND DIVIDEND DATA......................................... 23
THE PTI ANNUAL MEETING..................................................... 24
Record Date; Outstanding Securities.................................. 24
Purposes of the PTI Annual Meeting................................... 24
Voting of Shares of PTI Common Stock Held by the ESOP................ 25
Voting of Proxies.................................................... 26
Dissenters' Rights................................................... 26
Solicitation of Proxies.............................................. 27
Other Matters........................................................ 27
Further Information.................................................. 27
THE MERGER................................................................. 28
General.............................................................. 28
Background of the Merger............................................. 29
PTI's Reasons for the Merger......................................... 29
SWI's Reasons for the Merger......................................... 30
Manner and Basis of Converting Shares................................ 31
Initial Merger Consideration......................................... 32
Contingent Consideration............................................. 32
Interests of Certain Persons in the Merger........................... 36
Effective Time....................................................... 37
Resales of SWI Common Stock.......................................... 37
Shareholders' Committee.............................................. 37
i
<PAGE> 10
THE MERGER AGREEMENT....................................................... 39
Representations and Warranties....................................... 39
Certain Covenants.................................................... 39
Conditions of Merger................................................. 41
Termination.......................................................... 42
Termination Fee...................................................... 42
Waiver and Amendment................................................. 42
No Solicitation...................................................... 43
Indemnity and Escrow................................................. 43
CERTAIN OTHER MATTERS RELATING TO THE MERGER............................... 44
Regulatory Matters................................................... 44
Expenses............................................................. 44
Accounting Treatment................................................. 44
Employee Stock Ownership Plan Contribution and
Termination; Termination of Termination Bonus Plan and Payment
of Accrued Benefits...................................................44
MANAGEMENT AND OTHER INFORMATION........................................... 45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 45
Tax Consequences of the Merger....................................... 45
DESCRIPTION OF SWI......................................................... 47
SWI SHARE OWNERSHIP........................................................ 47
DESCRIPTION OF SWI CAPITAL STOCK........................................... 49
General Description.................................................. 49
Description of SWI Common Stock...................................... 49
Description of SWI Preferred Stock................................... 50
Description of SWI Series A Junior Participating Preferred Stock,
Rights to Purchase Series A Junior Participating Preferred
Stock and the Rights to be Issued in the Merger ............... 51
DESCRIPTION OF PTI......................................................... 51
General.............................................................. 51
Consulting Services.................................................. 51
Software Products.................................................... 53
Education/Training................................................... 53
Specialty Hardware................................................... 54
Operations........................................................... 54
Employees and Consultants............................................ 55
Directors and Officers............................................... 55
PTI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................. 56
General.............................................................. 56
Results of Operations................................................ 56
Liquidity............................................................ 58
Capital Resources.................................................... 59
PTI SHARE OWNERSHIP........................................................ 60
COMPARISON OF RIGHTS OF HOLDERS OF SWI COMMON STOCK
AND PTI COMMON STOCK....................................................... 61
General.............................................................. 61
Dividends............................................................ 61
Vote Required for Certain Transactions; Removal of Directors......... 61
Dissenters' Rights of Appraisal...................................... 62
ii
<PAGE> 11
"Anti-Takeover" Provisions........................................... 62
Corporate Action by Written Consent without a Shareholders' Meeting.. 62
Classification of the Board of Directors............................. 63
Number of Directors.................................................. 63
Issuance to Officers, Directors and Employees of Rights or
Options to Purchase Shares ....................................... 63
Loans to Directors................................................... 63
Inspection of Shareholders List...................................... 63
Indemnification of Officers and Directors; Limitation of Liability... 64
Voting Rights........................................................ 64
Transfer Restrictions................................................ 64
Shareholder Rights Plan.............................................. 65
LEGAL OPINIONS............................................................. 66
EXPERTS.................................................................... 66
SOLICITATION COMPENSATION.................................................. 66
OTHER MATTERS.............................................................. 66
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF PTI.........................FS-1
APPENDIX A -- Merger Agreement.........................................A-1
APPENDIX B -- Section 623 of the New York Business Corporation Law
Relating to Rights of Dissenting Holders.................B-1
APPENDIX C -- SWI's Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1997..................................C-1
APPENDIX D -- SWI's Quarterly Report on Form 10-Q for the Quarter
Ended March 31, 1998 ....................................D-1
APPENDIX E -- Descriptions of SWI Series A Junior Participating
Preferred Stock and SWI Rights to Purchase Series A
Junior Participating Preferred Stock ....................E-1
APPENDIX F -- SWI's Revised Schedule 14A Proxy Statement Pursuant to
Section 14(a) of the Securities Exchange Act of
1934 as filed with the Commission on July 8, 1998 .......F-1
iii
<PAGE> 12
AVAILABLE INFORMATION
SWI is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission") relating to its
business, financial statements and other matters. Reports, proxy and information
statements filed pursuant to Sections 14(a) and 14(c) of the Exchange Act and
other information filed with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the following
Regional Offices of the Commission: Midwest Regional Office, 500 West Madison
Avenue, Suite 1400, Chicago, Illinois 60661; and Northeast Regional Office, 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at its principal office at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 or without charge at the Commission's
World Wide Web site (http://www.sec.gov), and can also be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10005.
SWI has filed with the Commission a Registration Statement with respect to
the securities offered hereby. This Prospectus and Proxy Statement also
constitutes the prospectus of SWI filed as part of the Registration Statement
and does not contain all of the information set forth in the Registration
Statement and the exhibits thereto, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements made in
this Prospectus and Proxy Statement as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Registration Statement
and any amendments thereto, including exhibits filed or incorporated by
reference as a part thereof, are available for inspection and copying at the
Commission's offices as described above. All information included herein with
respect to PTI and its shareholders has been furnished by PTI.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by SWI with the Commission (File
No. 1-1228) under the Exchange Act are incorporated by reference herein and, as
indicated, are attached to this Prospectus and Proxy Statement:
(1) SWI's annual report on Form 10-K for the fiscal year ended December
31, 1997, filed with the Commission on March 30, 1998 (attached as
Appendix C).
(2) SWI's quarterly report on Form 10-Q for the quarter ended March 31,
1998, filed with the Commission on May 12, 1998 (attached as
Appendix D).
(3) All other reports filed pursuant to Section 13(a) or 15(d) of the
Exchange Act since the end of the fiscal period covered by the
annual report referred to in (1) above.
(4) The descriptions of SWI Series A Junior Participating Preferred
Stock and SWI Rights to Purchase Series A Junior Participating
Preferred Stock contained in its Registration Statement on Form 8-A
filed with the Commission on August 16, 1996 and amended by Form
8-A/A filed with the Commission on September 24, 1996 (attached as
Appendix E).
All documents filed by SWI pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date of this Prospectus and Proxy Statement and
prior to the date of the PTI Annual Meeting shall be deemed to be incorporated
by reference in this Prospectus and Proxy Statement and to be a part hereof from
the date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document which also is or is deemed to be incorporated
herein by reference) modifies
1
<PAGE> 13
or supersedes such statement. Any statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part of this
Prospectus and Proxy Statement.
This Prospectus and Proxy Statement incorporates certain documents by
reference that are not presented herein or delivered herewith. SWI undertakes to
provide copies of such documents (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference), without charge, to
any person, including any beneficial owner, to whom this Prospectus and Proxy
Statement is delivered, upon written or oral request to the attention of the
Corporate Secretary, Stone & Webster, Incorporated, 245 Summer Street, 8th
Floor, Boston, Massachusetts 02210 (telephone (617) 589-5111). In order to
ensure delivery of the documents, such requests should be made by July 28, 1998.
No person is authorized to give any information or make any representation
not contained in this Prospectus and Proxy Statement, and, if given or made,
such information or representation should not be relied upon as having been
authorized. This Prospectus and Proxy Statement does not constitute an offer to
sell or a solicitation of an offer to buy the securities offered by this
Prospectus and Proxy Statement or a solicitation of a proxy in any jurisdiction
where, or to or from any person to whom, it is unlawful to make such offer or
solicitation of an offer or proxy solicitation. Neither the delivery of this
Prospectus and Proxy Statement nor any distribution of the securities offered
pursuant to this Prospectus and Proxy Statement shall create an implication that
there has been no change in the affairs of SWI or PTI since the date of this
Prospectus and Proxy Statement or that the information in this Prospectus and
Proxy Statement or in the documents incorporated herein by reference is correct
as of any time after the dates hereof or thereof.
2
<PAGE> 14
INTRODUCTION
This Prospectus and Proxy Statement is being furnished to the shareholders
of PTI in connection with the solicitation of proxies by the PTI Board to be
voted at the PTI Annual Meeting. This Prospectus and Proxy Statement is also the
prospectus of SWI filed as part of the Registration Statement relating to the
registration of the issuance of SWI Common Stock and the Rights to holders of
PTI Common Stock pursuant to the Merger Agreement.
SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information contained elsewhere in this Prospectus and Proxy Statement,
including the appendices hereto. You are urged to read this Prospectus and Proxy
Statement, the Merger Agreement, which is attached hereto as Appendix A and
incorporated herein by reference, and the other appendices attached hereto in
their entirety. Cross-references in this summary are to captions in this
Prospectus and Proxy Statement. Certain capitalized terms used in this summary
are defined in this Prospectus and Proxy Statement.
Certain of the information contained in this Prospectus and Proxy
Statement, including documents incorporated by reference, may contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, including statements as to the benefits
and synergies expected to be realized as a result of the Merger. See "The Merger
- -- Background of Merger"; "-- PTI's Reasons for the Merger"; "-- SWI's Reasons
for the Merger"; and "The PTI Annual Meeting -- Purposes of the Annual Meeting
- -- The Merger Agreement." There are a number of important factors that could
cause actual results to differ materially from those indicated by such
forward-looking statements. Such factors include but are not limited to those
set forth in this Prospectus and Proxy Statement under the caption "Risk
Factors."
Summary Business Description
SWI and Merger Sub
SWI was incorporated as a Delaware corporation in 1929. SWI, through its
subsidiaries, is principally engaged in providing professional engineering,
construction and consulting services. Subsidiaries of SWI also own cold storage
warehousing facilities in Atlanta and Rockmart, Georgia, own and operate office
buildings in Boston, Massachusetts and Houston, Texas, and develop, take
ownership interests in and operate projects for which they may provide
engineering, construction and other services. Services of the nature inherent in
these businesses are provided to clients and customers. Merger Sub is a
wholly-owned subsidiary of SWI and was incorporated in Delaware on February 18,
1998. Merger Sub is not engaged in any operating activity. SWI's principal
executive offices are located at 245 Summer Street, Boston, Massachusetts 02210.
Its telephone number is (617) 589-5111.
PTI
PTI was incorporated as a New York corporation in 1969 to serve the
analytical engineering needs of the electric power industry in the areas of
power system analysis, design, and operation. PTI and its subsidiaries are
engaged primarily in providing consulting services, software products,
educational programs, and special hardware products to utilities, large
industrial companies, research organizations, regulators, reliability councils,
consultants, universities and power marketers. PTI's consulting services span
the range of activities related to utility and industrial power system
engineering and are provided in four areas of technology: system planning and
operation, transmission and distribution, generation and competitive power
market solutions. PTI conducts its business directly and through subsidiaries,
joint ventures and a network of sales representatives. Approximately 45% of
PTI's business is from customers outside of the United States. PTI's principal
executive offices are located at 1482 Erie Boulevard, P.O. Box 1058,
Schenectady, New York 12301-1058. Its telephone number is (518) 395-5000.
3
<PAGE> 15
The PTI Annual Meeting
The Meeting
The PTI Annual Meeting will be held on August 11, 1998, at 3:00 p.m., at
the principal executive offices of PTI. At the PTI Annual Meeting, the
shareholders of PTI will be asked to (i) elect a class consisting of four
directors of PTI, (ii) consider and vote on a proposal to amend the Certificate
of Incorporation of PTI to limit the liability of the directors of PTI to PTI
and the shareholders of PTI for certain breaches of fiduciary duties, and (iii)
consider and vote on a proposal to approve and adopt the Merger Agreement. The
holders of Class A Common Stock and Class C Common Stock of PTI are entitled to
vote with respect to all matters presented at the PTI Annual Meeting; however,
the holders of Class B Common Stock of PTI are entitled to vote only with
respect to the approval of the Merger Agreement. The holders of shares of PTI at
the close of business on July 15, 1998 (the "Record Date") are entitled to
notice of and to vote at the PTI Annual Meeting. At such date, 246,232.73 shares
of Class A Common Stock, 50,552.34 shares of Class B Common Stock and 22,100
shares of Class C Common Stock were outstanding.
Quorum; Required Votes
The presence, in person or by proxy, at the PTI Annual Meeting of the
holders of a majority of the shares of Class A and Class C Common Stock of PTI
outstanding as of the Record Date is necessary to constitute a quorum at the
meeting; however, consideration of the Merger requires a quorum consisting of a
majority of all shares of PTI Common Stock outstanding as of the Record Date and
a separate majority of each class of PTI Common Stock outstanding as of the
Record Date. Each share of PTI Common Stock entitles the holder thereof to one
vote at the PTI Annual Meeting for each matter with respect to which such share
entitles the holder thereof to vote. At the PTI Annual Meeting, the directors
will be elected by a plurality of the votes cast by the holders of Class A and
Class C PTI Common Stock at the PTI Annual Meeting (the highest number of votes
cast even if less than a majority) if a quorum is present. The affirmative vote
of holders of a majority of the outstanding Class A and Class C Common Stock of
PTI is required to approve and adopt the proposed amendment to PTI's Certificate
of Incorporation (the "Certificate Amendment"). The affirmative vote of the
holders of two-thirds of all outstanding shares of PTI Common Stock and the
affirmative vote of the holders of a majority of each class of PTI Common Stock,
voting as a separate class, is required to approve and adopt the Merger
Agreement. Abstentions will be counted for purposes of determining a quorum but
will have the effect of votes against the adoption and approval of the Merger
Agreement and the Certificate Amendment. Shares not represented at the PTI
Annual Meeting will also have the effect of votes against the adoption and
approval of the Merger Agreement and the amendment to PTI's Certificate of
Incorporation. SWI and its directors and executive officers do not own any
shares of PTI Common Stock. The officers and directors of PTI collectively own
beneficially approximately 32.7% of the shares of PTI Common Stock outstanding
as of the Record Date and have agreed to vote such shares in favor of the
approval and adoption of the Merger Agreement. See "PTI Share Ownership."
Voting of Shares of PTI Common Stock Held by the ESOP
Pursuant to the terms of PTI's Employee Stock Ownership Plan (the "ESOP"),
the participants in the ESOP are entitled to direct the trustee of the ESOP how
to vote shares of Class C Common Stock which are held by the ESOP and have been
allocated to their respective accounts. The ESOP provides that the ESOP trustee
must vote any unallocated shares in proportion to the votes cast on each issue
by the participants in the ESOP. As a result, if participants in the ESOP direct
the ESOP trustee to vote more allocated shares in favor of the Merger than
against the Merger, the separate class vote of the Class C PTI Common Stock will
be satisfied. A form for participants to direct the ESOP trustee how to vote
shares allocated to their accounts ("Voting Instructions") is enclosed with this
Prospectus and Proxy Statement. An ESOP participant may change his or her
direction to the ESOP trustee by submitting new Voting Instructions prior to the
date of the PTI Annual Meeting.
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Proxies
The authority granted by an executed proxy may be revoked at any time
before its exercise by filing with the Secretary of PTI a written revocation or
a duly executed proxy bearing a later date or by voting in person at the
meeting. Shares represented by valid proxies will be voted in accordance with
the specifications in the proxies. If no specifications are made, the proxies
will be voted to approve the proposals set forth in the proxy in accordance with
the recommendation of the PTI Board of Directors. See "The PTI Annual Meeting --
Voting of Proxies."
Dissenters' Rights
Under New York law, holders of PTI Common Stock may elect to have the
"fair value" of their shares (determined in accordance with New York law)
judicially appraised and paid to them if the Merger is consummated. To exercise
this right, holders of PTI Common Stock must deliver to PTI a written demand for
payment before the taking of the vote, must not vote to adopt the Merger
Agreement and must comply with the other requirements of Section 623 of the New
York Business Corporation Law (the "NYBCL"), a copy of which is attached hereto
as Appendix B. A failure to properly and timely make a demand or a failure to
strictly comply with the requirements of Section 623 will preclude a holder from
exercising such rights. See "The PTI Annual Meeting -- Dissenters' Rights."
The Merger
Terms of the Merger
SWI's acquisition of PTI is structured as a merger of the Merger Sub into
PTI. Immediately following the Merger, PTI will be the Surviving Corporation and
will be a wholly-owned subsidiary of SWI. As soon as practicable following the
effective time of the Merger (the "Effective Time"), SWI will transfer all
shares of the Surviving Corporation to SWMCI so that the Surviving Corporation
will become a wholly-owned subsidiary of SWMCI. In connection with the Merger,
the holders of PTI Common Stock will be entitled to receive the following
consideration (collectively, the "Merger Consideration"):
o the "Initial Merger Consideration" which is a maximum number of shares of
Common Stock of SWI, $1.00 par value per share ("SWI Common Stock"), equal
to (i) the lesser of 1.5 times the stockholders' equity of PTI at December
31, 1997 and $9,000,000, divided by (ii) the average of the closing price
of the SWI Common Stock (the "Closing Market Value") as reported in the
NYSE Composite Transactions for the 30 trading days ending on the third
trading day prior to the closing date of the Merger (the "Closing");
o if and to the extent that certain milestones based on the Final Cumulative
Net Earnings are achieved, all or a portion of the "Contingent Merger
Consideration" which is a maximum number of shares of SWI Common Stock
equal to $8,000,000 divided by the Closing Market Value;
o in the event that all or a portion of the Contingent Merger Consideration
becomes payable and certain other conditions are satisfied, the
"Additional Contingent Shares" which is a maximum number of shares of SWI
Common Stock equal to a maximum of $500,000 divided by the average of the
closing price of the SWI Common Stock as reported in the NYSE Composite
Transactions for the ten trading days ending on the third trading day
prior to the date that such shares are paid; and
o the "Transasia Consideration" which is the amount, up to a maximum of 20%
of the value of the other Merger Consideration and net of any taxes or
expenses incurred with respect to collecting and administering such
amounts, of all payments paid, during the period from January 1, 1998
through the date the Contingent Merger Consideration is determined, to the
Surviving Corporation as development fees or on account of PTI's carried
interest under the Transasia Transmission Cooperation Agreement dated
August 4, 1997 and related agreements among PTI and certain parties,
together with the proceeds from the disposition of or modification of any
of such rights.
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For a more detailed discussion of the procedures for determining the
Merger Consideration, see "The Merger -- Initial Consideration" and "--
Contingent Consideration."
The Initial Merger Consideration is payable at the Effective Time and any
Contingent Merger Consideration and Transasia Consideration to which the
Participating Holders are entitled becomes payable as soon as practicable
following the computation of the Contingent Merger Consideration (which, except
in certain circumstances under which such rights may be accelerated as described
in "The Merger -- Contingent Consideration," cannot occur until after December
31, 2002) but in any event prior to the fifth anniversary of the Closing. Any
Additional Contingent Shares to which the Participating Holders are entitled
will become payable as soon as practicable after the number of Additional
Contingent Shares is determined (which, except in certain circumstances under
which such rights may be accelerated which are described in "The Merger --
Contingent Consideration," cannot occur prior to August 30, 2003).
If there are shareholders of PTI who properly dissent to the Merger
("Dissenting Holders"), the PTI shareholders who are not Dissenting Holders (the
"Participating Holders") will be entitled to receive, in the aggregate, a
percentage of the Initial Merger Consideration and Contingent Merger
Consideration equal to the number of shares of PTI Common Stock owned by the
Participating Holders divided by the total number of outstanding shares of PTI
Common Stock (the "Participation Percentage"); otherwise, all PTI shareholders
will be Participating Holders and will be entitled to receive, in the aggregate,
all of the Initial Merger Consideration and Contingent Merger Consideration. The
presence of Dissenting Holders will not affect the aggregate number of
Additional Contingent Shares or the amount of Transasia Consideration. The
Dissenting Holders will not be entitled to receive any of the Merger
Consideration but will be entitled to receive a cash payment equal to the fair
value of their shares of PTI Common Stock. See "The PTI Annual Meeting --
Dissenters' Rights."
At the Effective Time, each issued and outstanding share of PTI Common
Stock, other than shares held by Dissenting Holders, treasury stock, or shares
held by a subsidiary of PTI ("Participating Shares"), will automatically be
converted into and become the right to receive (i) a proportionate share, based
on the total number of Participating Shares, of the aggregate Initial Merger
Consideration, Contingent Merger Consideration and Transasia Consideration
payable to the Participating Holders, and (ii) a portion of the Additional
Contingent Shares which will be based on the respective tax liabilities of the
Participating Holders incurred as a result of the payment of the Contingent
Merger Consideration.
A number of the shares of SWI Common Stock payable as Initial Merger
Consideration equal to $1,000,000 divided by the Closing Market Value and
multiplied by the greater of the Participation Percentage and 95% will be held
in escrow by The Chase Manhattan Bank, as escrow agent (the "Escrow") to satisfy
indemnity obligations based on representations, warranties or covenants of PTI
and the Principal Shareholders contained in the Merger Agreement. The Escrow
will be held until January 15, 2000 or until claims made by SWI during such
period are resolved after such date. In addition, SWI has the right to withhold
from the Contingent Merger Consideration, to the extent earned, shares of SWI
Common Stock having an aggregate Closing Market Value of up to a maximum amount
of $1,000,000 (assuming that all of the Contingent Merger Consideration is
earned) to satisfy indemnification obligations of PTI and the Principal
Shareholders for (i) claims made before January 15, 2000 but not satisfied out
of the Escrow, (ii) breaches of certain representations, warranties and
covenants relating to environmental matters arising after termination of the
Escrow but before January 15, 2003, and (iii) expenses relating to the
indemnification of the escrow agent for the Escrow.
The Merger will become effective after the conditions specified in the
Merger Agreement have been met. SWI and PTI have targeted the third quarter of
calendar 1998 for completion of the Merger. See "The Merger -- Merger and
Effective Time," "-- Conditions of Merger." Notwithstanding the foregoing, (i)
PTI has the right to terminate the Merger Agreement on the second business day
before the Closing date if the Closing Market Value is greater than $60.00 (the
"Ceiling Amount") unless SWI notifies PTI before 5:00 p.m. EST on the day before
the Closing date of its intention to fix the Closing Market Value at the Ceiling
Amount, and (ii) SWI has the right to terminate the Merger Agreement on the
second business day before the Closing date if the Closing Market Value is less
than $35.00 (the "Floor Amount") unless PTI notifies SWI before 5:00 p.m. EST on
the day before the Closing date of its intention to fix the Closing Market Value
at the Floor Amount. If the Closing Market Value
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<PAGE> 18
was computed based on the thirty trading days ending on July 14, 1998, the most
recent practicable date before the date of this Prospectus and Proxy Statement,
the Closing Market Value would be $39.15.
Shareholders' Committee
The Merger Agreement contemplates that each Participating Holder will
execute a Shareholders' Committee Agreement appointing F.S. Prabhakara,
Mary A. Sager and Douglas E. Welsh as a shareholders' committee (the
"Shareholders' Committee") to represent the interests of the Participating
Holders in connection with administering the Escrow, negotiating indemnification
disputes, resolving issues regarding the amount of the Contingent Merger
Consideration and resolving any other disputes arising under the Merger
Agreement. The Shareholders' Committee Agreement grants the members of the
Shareholders' Committee a power of attorney to act on behalf of the
Participating Holders, authorizes the Shareholders' Committee to commence
litigation, releases the members of the Shareholders' Committee from certain
breaches of fiduciary duties, and provides for the Participating Holders to
indemnify the members of the Shareholders' Committee against any claims,
liabilities or losses incurred by them as a result of their actions as members
of the Shareholders' Committee. Two copies of a Shareholders' Committee
Agreement are enclosed with this Prospectus and Proxy Statement and the PTI
Board requests that you execute and return these Agreements whether or not you
vote for or against the Merger. Participating Holders who do not execute
Shareholders' Committee Agreements will not be represented by the Shareholders'
Committee and will be required to independently resolve any disputes relating to
the Merger with SWI directly.
Each of the members of the Shareholders' Committee will be entitled to an
annual retainer of $1,000 and will be paid $250 for each Shareholders' Committee
meeting that they attend (up to a maximum of four meetings per year). They will
also be entitled to be reimbursed for their reasonable out-of-pocket expenses
incurred in performing their duties as members of the Shareholders' Committee.
In order to compensate and satisfy expenses incurred by the Shareholders'
Committee (including without limitation legal and accounting fees and expenses
and compensation paid to members of the Shareholders' Committee), an escrow
account will be established and administered by the Shareholders' Committee with
a portion of the Initial Merger Consideration equal to the number of shares of
SWI Common Stock determined by dividing $250,000 by the Closing Market Value.
The number of shares of Initial Merger Consideration that are received by each
Participating Holder (whether or not they execute a Shareholders' Committee
Agreement) will be proportionately reduced. Any shares of SWI Common Stock not
used to satisfy expenses of the Shareholders' Committee will be distributed by
the Shareholder's Committee proportionately to the Participating Holders.
Recommendation of the PTI Board of Directors
The PTI Board of Directors has unanimously approved the Merger Agreement
and determined that the Merger is fair and in the best interests of PTI and its
shareholders. THE PTI BOARD OF DIRECTORS RECOMMENDS THAT PTI SHAREHOLDERS VOTE
TO ADOPT AND APPROVE THE MERGER AGREEMENT AND THE MERGER. For a discussion of
the factors considered by the PTI Board of Directors in reaching its decision to
approve the Merger Agreement and the Merger, see "The Merger -- Background of
the Merger" and "-- PTI's Reasons for the Merger."
SWI's Reasons for the Merger
The Board of Directors of SWI (the "SWI Board") has determined that the
Merger Agreement and the transactions contemplated thereby are in the best
interests of SWI and, therefore, has unanimously approved the Merger Agreement.
In making this determination, the SWI Board and management reviewed information
about PTI available to it from PTI's management and other sources and assessed
PTI's financial condition. After considering this information, the SWI Board
concluded that the anticipated business advantages of the Merger favored
adoption of the Merger Agreement and consummation of the Merger. See "The Merger
- -- Background of the Merger" and "-- SWI's Reasons for the Merger."
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Conditions to the Merger
The obligations of SWI and PTI to consummate the Merger are subject to the
satisfaction of certain conditions, including but not limited to, obtaining the
approval of PTI shareholders, obtaining requisite regulatory clearance, the
continuing accuracy as of the Effective Time of the representations and
warranties made by SWI and PTI in the Merger Agreement, limitations on the
exercise of dissenters' appraisal rights, the effectiveness of the Registration
Statement of which this Prospectus and Proxy Statement forms a part, and the
listing of the shares to be issued as Initial Merger Consideration on the NYSE.
Each party has the right to waive certain of the closing conditions referred to
above. See "Certain Other Matters Relating to the Merger Agreement -- Regulatory
Matters" and "The Merger Agreement -- Conditions of Merger."
Conduct of PTI's Business Pending the Merger
PTI has made certain covenants and agreements in the Merger Agreement
relating to, among other things, the conduct of its business pending the
consummation of the Merger, including actions taken by PTI in relation to
issuing shares of stock, employment and compensation, payment of dividends on
PTI Common Stock, acquisition transactions and other matters. See "The Merger
Agreement -- Certain Covenants."
No Solicitation
PTI has agreed that, from the date of the Merger Agreement through the
Effective Time, neither PTI or any of the Principal Shareholders will solicit,
initiate or encourage discussions with any third party concerning any proposal
regarding a merger or other business combination with PTI or (except to the
extent that the PTI Board of Directors determines upon the written advice of
independent legal counsel that the Board's fiduciary duties require it to do so)
participate in discussions or negotiations with, or furnish information to any
person with respect to any effort to do or seek to do any such transaction. See
"The Merger Agreement -- No Solicitation" and "-- Termination Fee."
Termination
The Merger Agreement is subject to termination by mutual written consent
of SWI and PTI, at the option of either SWI or PTI if the Merger is not
consummated by September 1, 1998 (although the parties may mutually extend such
date) or upon the occurrence of certain events, including if the Merger
Agreement is not approved by PTI's shareholders. See "The Merger Agreement --
Termination."
Termination Fee
PTI will be required to pay SWI a termination fee of $300,000 if the
Merger Agreement is terminated (i) by SWI because PTI or a Principal Shareholder
breaches a material representation, warranty or covenant and fails to timely
cure such breach or (ii) by SWI or PTI if PTI fails to obtain the requisite
shareholder approval or the PTI Board withdraws its recommendation that the
shareholders vote in favor of the Merger if at the time of such failure or
withdrawal or within 12 months thereafter, PTI or a Principal Shareholder shall
have entered into an agreement to engage in a merger or business combination
transaction with any person other than SWI or if the Board approves or
recommends that the PTI shareholders approve such a transaction. See "The Merger
Agreement -- Termination" and "-- Termination Fee."
Certain Federal Income Tax Consequences
The Merger is intended to be a tax-free reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code")
in which no gain or loss will be recognized by PTI, SWI or Merger Sub and no
gain or loss will be recognized by the Participating Holders, except in respect
of cash received in lieu of fractional shares. No ruling has been or will be
requested from the Internal Revenue Service with respect to any tax matters.
With respect to the foregoing, as well as the consequences if the Merger does
not constitute a reorganization within the meaning of the Code, see "Certain
Federal Income Tax Consequences" below.
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Because certain tax consequences of the Merger may vary depending upon the
particular circumstances of each PTI shareholder, each shareholder should
consult the PTI shareholder's own tax advisor as to the federal (and any state,
local or foreign) tax consequences of the Merger on the PTI shareholder's
particular circumstances.
Accounting Treatment
The Merger is expected to be accounted for as a "purchase" for accounting
and financial reporting purposes. See "Certain Other Matters Relating to the
Merger -- Accounting Treatment."
Interests of Certain Persons in the Merger
Steven J. Balser, the President and a Director of PTI, has an interest in
the Merger that is in addition to the interests of shareholders of PTI
generally. PTI has entered into an agreement with Mr. Balser that provides
certain benefits in the event of the termination of Mr. Balser's employment
following a change of control of PTI. The Merger will constitute a change in
control of PTI within the meaning of such agreement. See "The Merger --
Interests of Certain Persons in the Merger." The Board of Directors of PTI was
aware of this interest and considered it, among other matters, in approving and
adopting the Merger Agreement and the transactions contemplated thereby.
In addition, certain members of the Board of Directors and management of
PTI have agreed to enter into employment agreements with the Surviving
Corporation as a condition of the Merger.
Comparative Rights of Holders of PTI and SWI Common Stock
Upon consummation of the Merger, holders of PTI Common Stock will become
shareholders of SWI. The internal affairs of SWI are governed by the Delaware
General Corporation Law (the "DGCL") and SWI's Restated Certificate of
Incorporation and By-laws. There are certain differences in the rights of
holders of PTI and SWI Common Stock. See "Description of SWI Capital Stock" and
"Comparison of Rights of Holders of SWI Common Stock and PTI Common Stock."
Indemnification
The Merger Agreement also provides that the Surviving Corporation will
indemnify and hold harmless each former director and officer of PTI with respect
to actions taken before the Effective Time to the fullest extent permitted by
New York law. See "The Merger Agreement -- Certain Covenants."
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RISK FACTORS
The following risk factors, in addition to other information contained or
incorporated by reference in this Prospectus and Proxy Statement, should be
considered by the holders of PTI Common Stock in evaluating whether to approve
and adopt the Merger Agreement and thereby become holders of SWI Common Stock.
Risks Relating to SWI
General Business; Competition
SWI is principally engaged, through its subsidiaries, in providing
engineering, construction and consulting services. The principal business
activities of SWI in the engineering, construction and consulting services areas
are highly competitive, with competition from a large number of
well-established, well-financed concerns, both privately and publicly held.
Inasmuch as SWI is primarily a service organization, it competes in its areas of
interest by providing services of the highest quality. SWI believes it occupies
a strong competitive position, but is unable to estimate with reasonable
accuracy its competitive position in the engineering, construction and
consulting services industry. The markets served by the engineering,
construction and consulting businesses of SWI are likewise highly competitive
and, for the most part, require substantial resources and particularly highly
skilled and experienced technical personnel. A large number of multi-national
companies are also competing in the markets served by SWI's subsidiaries.
Intense competition in the engineering, construction and consulting businesses
is expected to continue, presenting SWI with significant challenges in its
ability to maintain strong growth rates while maintaining and improving
acceptable profit margins.
Backlog
The dollar amount of SWI's backlog as stated at any given time is not
necessarily indicative of the future earnings of SWI related to the performance
of such work. Clients frequently revise the scope of the services for which they
have contracted with subsidiaries of SWI, especially on projects subject to
regulatory approval or which require environmental permitting/licensing. Scope
increases and decreases of substantial magnitude are commonplace on such
projects and directly affect SWI's backlog. In addition, delays, suspensions and
cancellations of projects included within SWI's backlog may occur. Recently, the
Trans-Pacific Petrochemical Indotama ("TPPI") project in Indonesia, which
represents approximately $500 million of SWI's current backlog of approximately
$2.5 billion, was suspended. A prolonged suspension or cancellation of the TPPI
project, or the delay, suspension or cancellation of other projects included in
SWI's backlog, could have a material adverse effect on SWI's business or results
of operations.
Uncertainty Regarding Client Relationships
Although SWI's subsidiaries in the engineering, construction and
consulting services business have numerous clients and SWI historically has not
had a continuing dependence on any single client, one or a few clients has in
the past and may in the future contribute a substantial portion of SWI's
consolidated revenues in any one year, or over a period of several consecutive
years, due to the size of major engineering and construction projects. The
unexpected loss of business from any one of such customers could have a material
adverse effect on SWI's business or results of operations.
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Size and Uncertainty of Timing of Contracts
SWI's contract award prospects include a number of large-scale domestic
and international projects. The large size and uncertain timing of these
projects can create variability in SWI's contract award pattern. Consequently,
future contract award trends are difficult to predict with certainty. In
addition, the timing of receipt of revenue by SWI from engineering and
construction projects can be affected by a number of factors outside the control
of SWI and its subsidiaries. Frequently, the subsidiary's services on a project
take place over extended periods of time, and are subject to unavoidable delays
from weather conditions, unavailability of material and equipment from vendors,
changes in the scope of services requested by clients, or labor disruptions.
Uncertainty of the timing of contract execution and performance can also present
difficulties in matching workforce size with contract needs. In some cases, SWI
must maintain and bear the cost of maintaining the availability of a workforce
larger than called for under existing contracts in anticipation of future
workforce needs in connection with the execution and performance of contracts
not yet received, which may ultimately be delayed, modified or canceled.
Uncertainty Regarding International Nature of Business
A significant portion of SWI's business services are and are expected to
continue to be performed for clients located outside of the United States.
During 1997, revenues from SWI's services performed for and products sold to
clients outside the U.S. accounted for approximately 50.2% of its total
revenues. SWI's international operations and offices in foreign countries give
rise to political and economic uncertainties relating to, among other things,
U.S. and foreign trade restrictions; foreign government stability; foreign
economic stability; tariffs; export controls; government regulation (including
the Foreign Corrupt Practices Act); patent and trademark availability,
protection and registration; foreign exchange restrictions which limit the
repatriation of investments and earnings therefrom; changes in taxation or
international tax treaties; military action and other hostilities or
confiscation of property. SWI attempts to hedge against such risks, where
possible, using contractual protection and insurance coverage. However, there
can be no assurance that such measures will be effective in reducing the risks
associated with international operations.
SWI's revenues from the Asian region have created a particular risk
resulting from the Asian financial crisis. Projects in which SWI is involved,
including the TPPI project, have been suspended or delayed, and perhaps
jeopardized, by such crisis. SWI may experience decreases in demand for its
products and services as a result of the continuation of financial instability
in Asia which could have a material adverse effect on SWI's business and results
of operations.
SWI is subject to currency exchange risks to the extent that its purchases
and sales occur outside the U.S. and to the extent that it is unable to
denominate its purchases or sales in U.S. dollars, or otherwise shift to its
customers or suppliers, the risks of currency exchange rate fluctuations. SWI
attempts to hedge against currency risks, where possible, by using foreign
exchange contracts and avoiding concentrations of credit risk. However, there
can be no assurance that such measures will be effective in reducing the risks
associated with international operations.
Risk of Technological Changes
SWI believes that it has a leading position in technology associated with
the design and construction of plants which produce ethylene, which it protects
and develops with patent registrations, license restrictions, and a research and
development program. This technology position is subject to the risk that others
may develop competing processes which could affect SWI's pre-eminent position.
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Risks Due to Fixed, Maximum or Unit Priced Contracts
An increasing number of SWI's contracts for the provision of engineering
and construction services are fixed, maximum or unit price contracts. Under
fixed, maximum or unit price contracts, SWI's subsidiaries agree to perform the
contract for a fixed price and as a result, benefit from costs savings, but are
unable to recover for any cost overruns. Under fixed price incentive contracts,
SWI shares with the customer any savings up to a negotiated ceiling price and
carries some or all of the burden of costs exceeding the negotiated ceiling
price. Contract prices are established based in part on cost estimates which are
subject to a number of assumptions, such as assumptions regarding future
economic conditions. If in the future these estimates prove inaccurate, or
circumstances change, cost overruns can occur and can cause a material adverse
effect on SWI's business and results of operations.
Contract Performance Risk
In certain circumstances, SWI or its subsidiaries guarantee facility
completion by a scheduled acceptance date or achievement of certain acceptance
and performance testing levels. Failure to meet any such schedule or performance
requirements could result in additional costs and the amount of such additional
costs could exceed project profit margins. Performance problems for existing and
future contracts, whether fixed, maximum or unit priced, could cause actual
results of operations to differ materially from those anticipated by SWI.
Uncertainties in Government Contracts
Several of SWI's subsidiaries' significant contracts are contracts with
agencies of the U.S. Government. Generally, Government contracts are subject to
oversight audits by Government representatives, to profit and cost controls and
limitations, and to provisions permitting modification or termination, in whole
or in part, without prior notice, at the Government's convenience and with
payment of compensation only for work done and commitments made at the time of
termination. In the event of termination, SWI generally will receive some
allowance for profit on the work performed. In some cases, Government contracts
are subject to the uncertainties surrounding congressional appropriations or
agency funding. Government business is subject to specific procurement
regulations and a variety of socio-economic and other requirements. Failure to
comply with such regulations and requirements could lead to suspension or
debarment, for cause, from future Government contracting or subcontracting for a
period of time. Among the causes for debarment are violations of various
statutes, including those related to employment practices, the protection of the
environment, the accuracy of records and the recording of costs.
Environmental, Safety and Health Risks
It is impossible to predict the full impact of future legislative or
regulatory developments relating to environmental protection and occupational
health and safety issues on SWI's operations, because the standards to be met,
as well as the technology and length of time available to meet those standards,
continue to develop and change. SWI's business is primarily that of a
professional service provider. Therefore, although regulations and statutes
which relate to manufacturing and other non-service operations are not likely to
adversely impact SWI's business directly, they may adversely impact SWI's
subsidiaries' clients, causing a decrease in demand for SWI's services.
Potential Liability for Services Relating to Toxic and Hazardous Materials and
the Ability to Insure Such Risks
SWI's engineering and consulting services involve professional judgments
about the nature of soil and water conditions and other physical conditions,
including the extent to which toxic and hazardous materials are present, and
about the probable effect of procedures to mitigate problems or otherwise impact
those conditions. If those judgments and the recommendations based upon them do
not result in the anticipated consequences, losses to SWI's subsidiaries'
clients can occur for which such clients may seek to hold SWI liable. In
addition, projects often involve nuclear, hazardous and/or highly regulated
material, the improper characterization, handling, or disposal of which could
constitute violations of federal, state or local statutes, and result in
criminal and civil liabilities.
12
<PAGE> 24
SWI and its subsidiaries attempt to insure against risks for professional
liability, workers compensation, and general and automobile claims up to certain
policy limits. There can be no assurance that the dollar amount of SWI's
liabilities, if any, will not exceed the insurance coverage limits. In addition,
there can be no assurance that environmental impairment insurance coverage will
continue to be available in the insurance market.
Other Impact of Environmental Regulation
Much of SWI's subsidiaries' business is generated either directly or
indirectly as a result of federal and state laws, regulations and programs
related to environmental issues. United States regulatory enforcement has
fluctuated, and one of the key environmental laws, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), has
not yet received congressional reauthorization. Accordingly, changes of
environmental laws and regulations, or changes in governmental policies
regarding the funding, implementation or enforcement of such programs, could
have a material adverse effect on SWI's business. In addition, such laws and
regulations often subject SWI's subsidiaries to stringent regulation in the
conduct of their operations. The principal federal environmental legislation
affecting the Environmental/Infrastructure Division of SWI's principal
engineering subsidiary and its clients include: the National Environmental
Policy Act of 1969 ("NEPA"), the Resource Conservation and Recovery Act of 1976
("RCRA"), the Clean Air Act, the Federal Water Pollution Control Act, and the
Superfund Amendments and Reauthorization Act of 1986 ("SARA"). It is possible
that additional laws and regulations may be adopted which could have significant
impact on SWI and the clients of its subsidiaries.
Although the liabilities imposed by CERCLA, as amended by SARA, (and other
environmental legislation) are usually more directly related to SWI's clients,
they could, under certain circumstances, give rise to liability on the part of
SWI as a result of its subsidiaries efforts in completing client assignments
that involve transportation or disposal of contaminated samples or other
hazardous materials belonging to its clients or arising from certain historic
activities as discussed below under Litigation Risks. Liabilities imposed by
CERCLA can be joint and several where other parties are involved.
Litigation Risks
SWI and certain subsidiaries have been named as defendants, along with
others, in legal actions claiming damages in connection with engineering and
construction projects and other matters. Most of the legal actions involve
claims for personal injury or property damage which occur from time to time in
connection with services performed relating to project or construction sites and
other actions that arise in the normal course of business, including
employment-related claims and contractual disputes. Such contractual disputes
normally involve claims relating to the performance of equipment design or other
engineering services or project construction services provided by subsidiaries
of SWI.
SWI and certain of its subsidiaries have possible liabilities relating to
environmental pollution. While no governmental authority has sought redress from
SWI or its subsidiaries (except in the case of one subsidiary in connection with
claims made with respect to clients of that subsidiary) nor has SWI been
determined to be a Potentially Responsible Party by the federal or any state or
local governmental authority, some information has been requested from SWI with
regard to environmental matters, and there can be no assurance that SWI will not
be named as a party in such matters. Based on presently known facts and existing
laws and regulations, SWI believes that it has valid legal defenses and that the
costs associated with such matters, including legal costs, should be mitigated
by the presence of other entities which may be Potentially Responsible Parties,
by contractual indemnities, and by insurance coverage, but there can be no
assurance that such defenses will prevail, that the presence of such mitigating
factors will prove adequate or that SWI will not be held liable in connection
with such matters in amounts that would have a material adverse effect on SWI's
business and results of operations.
Attraction and Retention of Professional Personnel
SWI's ability to attract and retain qualified engineers, scientists and
other professionals, either through direct hiring or acquisition of other firms
employing such professionals, will be an important factor in determining SWI's
future success. The market for these professionals is competitive, and there can
be no assurance that SWI and its subsidiaries will be successful in its efforts
to attract and retain such professionals.
13
<PAGE> 25
Availability of Additional Acquisition Targets
SWI's ongoing acquisition program is an element of its growth strategy for
expanding its services. Consequently, the future growth of SWI depends in part
upon the successful continuation of its acquisition program. SWI may encounter
substantial competition in its efforts to acquire companies or entities which
meet its acquisition criteria. There can be no assurance that SWI will succeed
in locating or acquiring appropriate acquisition candidates at price levels and
on terms and conditions that SWI considers appropriate.
Risks Relating to the Merger
Uncertainty Regarding Amount of Contingent Merger Consideration and Transasia
Consideration Payments
The Contingent Merger Consideration represents a substantial portion of
the total available Merger Consideration (SWI Common Stock having a Closing
Market Value equal to up to $8,000,000 of the potential $17,000,000 of the
Merger Consideration). The number of shares of SWI Common Stock, if any, which
will ultimately be issued to the Participating Holders as Contingent Merger
Consideration and Additional Contingent Shares under the Merger Agreement cannot
presently be determined and is highly speculative. As discussed in "The Merger
- -- Contingent Consideration -- Contingent Merger Consideration," except in
certain circumstances where the right to receive the Contingent Merger
Consideration may be accelerated, the number of shares of SWI Common Stock to be
issued as Contingent Merger Consideration will be based on the Final Cumulative
Net Earnings during the period from January 1, 1998 through December 31, 2002
(the "Contingent Period"). See "The Merger -- Contingent Consideration --
Contingent Merger Consideration." The amount of Contingent Merger Consideration
payable, if any, is determined in accordance with milestones set forth in the
Merger Agreement based on projected net income of the Surviving Corporation. If
the Final Cumulative Net Earnings are not greater than $3,960,000, no Contingent
Merger Consideration or Additional Contingent Shares will be earned. The entire
amount of Contingent Merger Consideration will not be earned unless the Final
Cumulative Net Earnings are at least $11,327,000, which would require a
significant improvement in the income of the Surviving Corporation over the
historical income of PTI to be achieved.
Although the Merger Agreement contains certain covenants relating to the
conduct by SWI of the operations of the Surviving Corporation, SWI has
substantial discretion with regard to the management and operation of the
Surviving Corporation and such covenants may not provide the Participating
Holders with adequate protection against changes in the business of the
Surviving Corporation imposed by SWI. Future cash flows and income of the
Surviving Corporation may be significantly affected by changes in the operation
of the Surviving Corporation, including changes in the structure, ownership or
business of the Surviving Corporation made or required by SWI. There can be no
assurance that the Surviving Corporation will have any, or sufficient, Final
Cumulative Net Earnings during the Contingent Period to entitle the
Participating Holders to receive all or any portion of the Contingent Merger
Consideration. In addition, the number of shares issuable as Contingent Merger
Consideration will be determined by reference to the Closing Market Value, which
is a fixed value, while the actual market value of such shares when issued will
be based on the then market value of the SWI Common Stock, which may be less
than the Closing Market Value. See "-- Risks Relating to PTI" below for
additional factors that could limit the ability of the Surviving Corporation to
generate sufficient Final Cumulative Net Earnings to entitle the Participating
Holders to Contingent Merger Consideration.
The Transasia Consideration will only be payable to the extent that the
Surviving Corporation receives, during the Contingent Period, development fees
or payments on account of PTI's carried interest under the Transasia Agreements
or proceeds from the disposition of or modification of any right to receive such
fees or payments. The amount received by the Surviving Corporation will depend
solely on whether the Transasia project is pursued by the other parties involved
in the project and whether such parties are able to obtain financing for the
project. In addition, the Surviving Corporation is not required to attempt to
dispose of the rights to receive payments under the Transasia Agreements during
the Contingent Period and the value, if any, of such rights cannot be readily
ascertained. There can be no assurance that the Surviving Corporation will
receive any payments under the Transasia Agreements or dispose of the right to
receive such payments during the Contingent Period, nor, if it does so, that
sufficient net proceeds will be realized to pay to the Participating Holders any
Transasia Consideration.
14
<PAGE> 26
The Additional Contingent Shares will only be payable to the extent that
(i) the Contingent Merger Consideration is payable, and (ii) there has been
insufficient appreciation from the Closing Market Value to the market price of
SWI Common Stock at the time that the Contingent Merger Consideration, if any,
becomes payable to offset the amount of federal and state income tax incurred by
the Participating Holders as a result of imputed interest incurred from the
receipt of the Contingent Merger Consideration.
Integration of Operations; Conflicts of Interest
SWI and PTI operate world-wide businesses with complementary product lines
and development and sales forces in a variety of international locations.
Integrating the operations (including product integration, workforce
rationalization, marketing plans and activities, employee training, and
expansion strategy) and management of the two companies will be a time-consuming
process, and there can be no assurance that this integration will result in the
achievement of the anticipated synergies and other benefits expected to be
realized from the Merger. Moreover, the integration of these organizations will
require the dedication of management resources, which may temporarily distract
attention from the day-to-day business of the Surviving Corporation. The
inability of management to successfully integrate the operations of the two
companies could have a material adverse effect on the business and operating
results of the Surviving Corporation and, consequently, could impair the ability
of the Surviving Corporation to achieve the Final Cumulative Net Earnings
milestones necessary for the Contingent Merger Consideration to become payable.
In addition, as commonly occurs with mergers of technology companies, during the
pre-merger and integration phases aggressive competitors may undertake formal
initiatives to attract customers and recruit key employees through various
incentives. Following the Merger, PTI will have non-compete agreements with a
number of its professionals and senior management; however, such agreements may
not be effective in retaining the professionals and senior management. In
addition, changes in the nature of PTI following the Merger could influence some
of the professionals or senior management to leave their employment with PTI.
See "-- Risks Relating to PTI -- Dependence on Key Personnel."
In addition, the Merger or PTI's relationship as a subsidiary of SWI may
adversely affect PTI's relationship with one or more of its significant
customers, particularly if SWI or another one of its subsidiaries becomes
involved in a dispute with such a customer over a matter unrelated to PTI. Also,
PTI's relationship with SWI may prevent it from undertaking projects due to a
conflict of interest where SWI or another one of its subsidiaries is
participating in the project in another capacity or is participating in a
competing project. Such conflicts could have a material adverse effect on the
business and operating results of the Surviving Corporation. See "-- Risks
Relating to PTI -- Dependence on Significant Customers."
Indemnification Obligations
Under the Merger Agreement, PTI and the Principal Shareholders have made
extensive representations, warranties and covenants to SWI, SWMCI and Merger
Sub. The Merger Agreement provides that PTI, the Participating Holders and the
Principal Shareholders will indemnify SWI, SWMCI and Merger Sub for any Losses
(as defined in the Merger Agreement) resulting from breaches of such
representations, warranties and covenants. The Participating Holders are not
personally responsible for such indemnification obligations; however, they will
not be entitled to receive the Initial Merger Consideration placed in the Escrow
to the extent that it is necessary to satisfy indemnification claims. In
addition, up to $1,000,000 of the Contingent Merger Consideration (assuming a
sufficient amount of Contingent Merger Consideration is earned) is subject to
being withheld by SWI to satisfy indemnification claims. The nature of the items
that could give rise to indemnification claims is such that PTI is likely not
aware of such items or such items are beyond its control. As a result, there
could be significant indemnification claims and up to $2,000,000 of the Merger
Consideration could be used to satisfy such claims. See "The Merger Agreement --
Representations and Warranties" and "-- Indemnity and Escrow."
15
<PAGE> 27
No Rights to Cash Flow or Assets
The rights of the Participating Holders to receive the Contingent Merger
Consideration, Additional Contingent Shares and Transasia Merger Consideration,
if any, payable under the Merger Agreement represent solely contractual rights
to receive such payments to the extent that they become payable and do not
represent any ownership interest in, or rights to, cash flow or assets of any of
the Surviving Corporation, SWI or SWMCI. The rights of the Participating Holders
to receive such payments under the Merger Agreement could be substantially
impaired in the event of a bankruptcy or insolvency involving SWI, SWMCI or the
Surviving Corporation.
Limited Obligation to Provide Additional Capital
Under the Merger Agreement, SWI has only a limited obligation to provide
additional funding to the Surviving Corporation. There can be no assurance that
revenues from operations will be sufficient to fund operations of the Surviving
Corporation nor that third-party financing will be available on satisfactory
terms, or at all. Lack of sufficient funding during the Contingent Period could
significantly impair the ability of the Surviving Corporation to meet the Final
Cumulative Net Earnings milestones which must be satisfied for the Contingent
Merger Consideration to be payable.
Acceleration of Right to Receive Contingent Merger Consideration
Under certain circumstances involving a transaction which would cause the
Contingent Merger Consideration to be payable in other than voting stock of SWI,
the rights of the Participating Holders to receive the Contingent Merger
Consideration may be accelerated to before the end of the Contingent Period. In
the event such a transaction occurs and the Rights are accelerated, the amount
of the Contingent Merger Consideration, if any, that the Participating Holders
will be entitled to receive will be determined in accordance with the Final
Cumulative Net Earnings through the end of preceding fiscal year, as measured
against milestones which are pro-rated to reflect the shortening of the
Contingent Period. Such acceleration may occur following a period of relatively
poor financial performance by the Surviving Corporation which could have been
offset by improved financial performance during the latter part of the
Contingent Period. If such acceleration occurs, the ability of the Participating
Holders to achieve the applicable milestones and receive the Contingent Merger
Consideration could be significantly impaired.
Transfer Restrictions
Subject to certain limited exceptions, the rights of the Participating
Holders to receive the Contingent Merger Consideration and Additional Contingent
Shares under the Merger Agreement are not transferable. Accordingly, until the
Contingent Merger Consideration or Additional Contingent Shares are actually
issued, the Participating Holders will have a limited ability to monetize their
interests in the Contingent Merger Consideration and Additional Contingent
Shares under the Merger Agreement.
Risks Relating to PTI
Dependence on Significant Customers
The success of PTI depends heavily on the business it conducts with a
limited number of significant customers. In 1997, 6.7%, 3.1% and 3.0% of PTI's
net sales were attributable to the Electric Power Research Institute, Inc.
("EPRI"), Niagara Mohawk, and PT Freeport Indonesia, respectively, and 28% of
PTI's net sales were to its largest ten customers. PTI has had long-standing
relationships with most of its significant customers; however, it contracts with
them on a project by project basis and they may unilaterally reduce or
discontinue their purchases at any time. PTI's loss of (or failure to retain a
significant amount of business with) any of its significant customers could have
a material adverse effect on PTI.
16
<PAGE> 28
Dependence on Key Personnel
PTI is dependent upon the efforts of its engineers and computer science
professionals (collectively, "Professionals") generally and on certain key
members of its senior management team specifically. The loss of a significant
portion of its Professionals in a short time period would likely have a material
adverse effect on the operations of PTI, and the loss of a key member of PTI's
senior management team could have an adverse effect on the operations of PTI. In
addition, changes in the nature of PTI following the Merger could influence some
of the Professionals to leave their employment with PTI.
Risks Associated with International Operations
PTI is exposed to risks associated with international operations because a
significant portion of its sales are generated from customers in foreign
countries. Sales of PTI's services and products outside the United States
accounted for approximately 45% of its net sales during 1997. PTI intends to
continue to focus on the sale of its services and products in international
markets. PTI's international operations and offices in foreign countries give
rise to political and economic uncertainties relating to, among other things,
U.S. and foreign trade restrictions; foreign government stability; foreign
economic stability; tariffs; export controls; government regulation (including
the Foreign Corrupt Practices Act); patent and trademark availability,
protection and registration; foreign exchange restrictions which limit the
repatriation of investments and earnings therefrom; changes in taxation or
international tax treaties; military action and other hostilities or
confiscation of property.
PTI's sales to the Asian region have created a particular risk resulting
from the Asian financial crisis. Projects in which PTI is involved have been
delayed and perhaps jeopardized by such crisis, and as of March 31, 1998, PTI
had approximately $1,557,000 of accounts receivable for services provided in
connection with projects in Asia. PTI recorded a reserve of approximately
$754,000 on accounts receivable from such region as bad debt expense during
1997. PTI may incur additional losses if the remaining accounts receivable are
not collected, and the reduction in demand for PTI's services and products in
such region may materially adversely affect its ability to generate revenues.
PTI is subject to currency exchange risks to the extent that its purchases
and sales occur outside the United States and to the extent that it is unable to
denominate its purchases or sales in U.S. dollars, or otherwise shift to its
customers or suppliers, the risks of currency exchange rate fluctuations.
Currently, PTI denominates its price for services and products in U.S. dollars
and does not engage in currency hedging transactions for normal operations;
however, it may engage in hedging transactions in the future. Fluctuations in
exchange rates may affect the results of PTI's international operations reported
in U.S. dollars and the value of such operations' net assets reported in U.S.
dollars. Additionally, the results of operations, financial condition and
competitive position of PTI may be affected by the relative strength of the
currencies in countries where its services and products are sold.
Competition
The markets in which PTI operates are highly competitive. PTI's
competitors include most major power equipment manufacturers, some architectural
engineering companies, and internal engineering departments at utilities and
other PTI customers. In addition, PTI may face competition from new entrants
into these markets and increased competition from existing competitors. PTI has
observed a trend of utilities spinning-off their engineering departments in
connection with deregulation initiatives which creates additional competition
for PTI. The recent trend in the decline in PTI's revenues from its consulting
services business reflects in part the pressure of increasing competition for
the types of consulting services it provides. Also, the distribution of PTI's
software products, while it does generate revenues for PTI, reduces the scope of
the consulting services that PTI will provide on an on-going basis to customers
who purchase its software. A number of PTI's competitors have substantially
greater financial and other resources than PTI presently has or may have in the
future. PTI competes on the basis of such factors as professional expertise,
efficiency of providing services, cost of products and availability of
alternative sources of supply. There can be no assurance that PTI will continue
to be able to provide its services and products in a competitive manner, and its
failure to do so will have a material adverse effect on its operations.
17
<PAGE> 29
Dependence on Electric Power Industry; Risks of Technological Changes
Almost all of PTI's customers are in the electric power industry which is
characterized by continuous technological advances. The domestic electric power
industry is going through a deregulation process and the impact of such
deregulation on the operations of public utilities may have an adverse impact on
their need or desire to obtain services and products from PTI. Due to the
significant reliance of PTI on its PSS/E software, any technological changes
which made PSS/E obsolete could have a significant adverse effect on PTI. In
addition, significant technological changes in the electric power industry could
make PTI's expertise and software obsolete. PTI's future success will depend in
large part on its ability to stay abreast of technology to meet customer needs
as well as to enhance its existing services and products and to make them
cost-effective. Any failure by PTI to anticipate or respond rapidly to
technological advances, new products and enhancements by competitors, or changes
in customer requirements could have a material adverse effect on PTI.
Intellectual Property
PTI's ability to compete effectively will depend, in part, on its ability
to protect its intellectual property, including its patents, trademarks,
copyrights and trade secrets, and on its ability to develop and protect future
intellectual property. In addition to patents, PTI relies on a combination of
trademark registrations, copyrights and confidentiality agreements to protect
its proprietary rights in intellectual property. PTI's ability to compete
effectively also depends on its ability to avoid infringing on the proprietary
rights of others. New patent applications are continually being filed and
prosecuted, and pending U.S. patent applications are confidential until patents
are issued. As a result, it is impossible to anticipate all potential patent
infringement issues. There can be no assurance that the steps taken by PTI to
protect its intellectual property will be adequate to prevent misappropriation
or that others will not independently develop technology or products that
compete with or are superior to the products of PTI. Likewise, there can be no
assurance that PTI will not inadvertently infringe on the intellectual property
rights of others.
Year 2000 Problem
A significant portion of PTI's business (representing approximately 35% of
its net sales for 1997) is sales of its software products. While PTI believes
that the functionality of its software products will not be significantly
adversely affected by the "Year 2000" millennium change, PTI has not yet
completed analyzing all of its software for Year 2000 compliance and some of its
software will require modifications to function properly. PTI does not believe
that any of its software will require significant modifications or that any of
the software that it uses in its business will be significantly adversely
affected by the Year 2000 problem. If PTI's software products are adversely
affected more than PTI expects, if PTI is unable to make timely modifications to
such products or if the cost of necessary modifications is more than PTI
expects, it may have a material adverse effect on PTI. In addition, the overall
demand in the computer industry for software programmers to respond to Year 2000
issues may adversely affect PTI because it may make it more difficult for PTI to
retain computer programmers to develop and maintain its software products.
18
<PAGE> 30
SELECTED FINANCIAL DATA
SWI Selected Financial Data
(Historical)
The following table sets forth summary historical financial statement data
of SWI and its subsidiaries on a consolidated basis. The balance sheet and
statement of operations data presented below for each of the years in the
five-year period ended December 31, 1997 are derived from SWI's financial
statements, which have been audited by PricewaterhouseCoopers LLP, independent
accountants. The financial statements as of December 31, 1996 and 1997 and for
each of the years in the three-year period ended December 31, 1997 and the
report of PricewaterhouseCoopers LLP relating thereto are incorporated by
reference in this Prospectus and Proxy Statement and the summary financial data
presented below are qualified in their entirety by reference thereto. The
balance sheet data as of March 31, 1997 and 1998 and the statement of operations
data for the three-month periods ended March 31, 1997 and 1998 are derived from
SWI's unaudited consolidated financial statements which are also incorporated
herein by reference. In the opinion of SWI management, the unaudited
consolidated financial statements have been prepared on a basis consistent with
the audited consolidated financial statements and include all adjustments, none
of which were other than normal and recurring, necessary for a fair presentation
of the results of operations for these periods. The operating results for the
three months ended March 31, 1997 and 1998 are not necessarily indicative of the
results that may be expected for the entire fiscal year. The data should be read
in conjunction with the historical financial statements and notes thereto, and
related Management's Discussion and Analysis of Financial Condition and Results
of Operations of SWI incorporated by reference in this Prospectus and Proxy
Statement. See "Incorporation Of Certain Documents By Reference." Amounts are in
thousands, except for per share data.
<TABLE>
<CAPTION>
Three
Months Ended
March 31, Years Ended December 31,
------------------- -------------------------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statement of Operations Data
Revenues:
Engineering, Construction and
Consulting services ..................... $ 287,097 $ 344,686 $ 1,299,220 $ 1,143,587
Cold Storage and related activities ........ 6,860 4,839 23,320 21,250
Other ...................................... -- -- -- --
Total Revenue ................................ $ 293,957 $ 349,525 $ 1,322,540 $ 1,164,837
Operating income (loss)(4) ................... $ 11,634 $ 8,802 $ 47,292 $ (25,920)
Income (loss) from continuing operations ..... $ 7,613 $ 5,568 $ 33,510 $ (17,431)
Net income (loss)(1,2,3 and 4) ............... $ 7,613 $ 5,568 $ 33,510 $ (10,644)
Weighted average shares of common and
dilutive potential shares outstanding ..... 12,919 12,829 12,929 13,223
Basic income (loss) from continuing
operations per share ....................... $ 0.59 $ 0.43 $ 2.61 $ (1.32)
Diluted income (loss) from continuing
operations per share ....................... $ 0.59 $ 0.43 $ 2.59 $ (1.32)
Basic earnings (loss) per share(1,2,3 and 4) . $ 0.59 $ 0.43 $ 2.61 $ (0.80)
Diluted earnings (loss) per share(1,2,3 and 4) $ 0.59 $ 0.43 $ 2.59 $ (0.80)
Dividends declared per share(5) .............. $ 0.15 $ 0.15 $ 0.60 $ 0.45
Balance Sheet Data
Total assets ................................. $ 722,309 $ 787,408 $ 738,777 $ 692,065
Long-term debt ............................... $ 22,091 $ 23,866 $ 22,510 $ 24,260
<CAPTION>
Years Ended December 31,
---------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statement of Operations Data
Revenues:
Engineering, Construction and
Consulting services...................... $ 969,284 $ 748,614 $ 1,013,265
Cold Storage and related activities ........ 21,188 17,280 16,914
Other ...................................... 12,347 13,361 16,130
Total Revenue ................................ $ 1,002,819 $ 779,255 $ 1,046,309
Operating income (loss)(4) ................... $ 35,041 $ (42,097) $ 6,813
Income (loss) from continuing operations ..... $ 14,880 $ (7,807) $ (370)
Net income (loss)(1,2,3 and 4) ............... $ 14,880 $ (7,807) $ 1,952
Weighted average shares of common and
dilutive potential shares outstanding ..... 14,376 14,907 14,978
Basic income (loss) from continuing
operations per share ....................... $ 1.04 $ (0.52) $ (0.03)
Diluted income (loss) from continuing
operations per share ....................... $ 1.04 $ (0.52) $ (0.03)
Basic earnings (loss) per share(1,2,3 and 4) . $ 1.04 $ (0.52) $ 0.13
Diluted earnings (loss) per share(1,2,3 and 4) $ 1.04 $ (0.52) $ 0.13
Dividends declared per share(5) .............. $ 0.60 $ 0.60 $ 0.60
Balance Sheet Data
Total assets ................................. $ 716,772 $ 678,384 $ 683,579
Long-term debt ............................... $ 74,677 $ 89,642 $ 47,739
</TABLE>
(1) Reflects gain or loss on sale of assets,which increased net income by
$5,363, or $0.41 per share in 1997, decreased net income by $7,511, or
$0.52 per share in 1995, and increased net income by $21,208 or $1.42 per
share in 1994.
(2) Includes income from divested operations of $1,048 or $0.08 per share in
1997 and an extraordinary gain of $6,787 or $0.52 per share in 1996 on
debt extinguishment from transfer of Auburn VPS Partnership assets to the
construction lenders.
(3) Includes cumulative effect of a change in accounting principle, which
increased net income by $2,322, or $0.16 per share in 1993.
(4) Net income includes a provision for SWI's share of contract losses on a
joint venture in the Middle East of $15,469, or $1.20 per share (operating
income includes $25,781) in 1997, restructuring and other charges of
$28,516 or $2.14 per share (operating income includes $54,424 for these
items) in 1996 (see Notes B, E and I to the 1997 SWI and subsidiaries
consolidated financial statements), a write-down
19
<PAGE> 31
of SWI's equity interest in Binghamton Cogeneration Partnership to fair
value in 1996 which reduced net income by $2,712, or $0.21 per share,
costs associated with the Incentive Retirement Program of $1,416, or $0.10
per share in 1995, pension curtailment gains which increased net income by
$218, or $0.02 per share in 1994 and by $1,072, or $0.07 per share in
1993, severance costs which decreased net income by $12,596, or $0.84 per
share in 1994 and $4,967, or $0.33 per share in 1993 and costs which
decreased net income in 1993 as follows: $5,460, or $0.36 per share,
associated with the Incentive Retirement Program; $1,131, or $0.08 per
share, related to an increase in the statutory federal income tax rate on
corporations from 34 percent to 35 percent; $2,340, or $0.16 per share,
related to a judgment against a subsidiary of SWI, $2,015, or $0.13 per
share, related to an IRS settlement in connection with prior years' income
tax returns and income from asset divestitures of $1,933 or $0.15 per
share (operating income includes $3,066) for the three months ended March
31, 1998.
(5) In the fourth quarter of 1996, SWI changed the quarterly dividend
declaration date to the first month of the quarter from the month
preceding the quarter. This change had no effect on the annual dividend
payment rate of $0.60 per share, although dividends declared in 1996
totaled $0.45 per share.
PTI Selected Financial Data
The following table represents summary historical financial data of PTI
and its subsidiaries on a consolidated basis. The balance sheet and statement of
operations data presented below for the year ended December 31, 1997 are derived
from PTI's financial statements which have been audited by Marvin and Company,
P.C., independent accountants. The balance sheet and statement of operations
data presented below for the years ended December 31, 1996, 1995, 1994 and 1993
and for the three months ended March 31, 1998 and 1997 are derived from the
unaudited financial statements of PTI. In the opinion of PTI's management, the
unaudited consolidated financial statements have been prepared on a basis
consistent with the audited consolidated financial statements and include all
adjustments, none of which were other than normal and recurring, necessary for a
fair presentation of the results of operations for these periods. The data
should be read in conjunction with the historical Consolidated Financial
Statements and notes thereto of PTI included in the Prospectus and Proxy
Statement. Amounts are in thousands, except for per share data.
<TABLE>
<CAPTION>
Three
Months Ended
March 31, Years Ended December 31,
---------------- -------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ........................ $ 3,613 $ 3,872 $ 18,855 $ 17,565 $ 17,855 $ 19,149 $ 18,532
Net income (loss) ............... $ (337) $ (490) $ 73 $ 151 $ (25) $ 472 $ 491
Weighted average shares of
common and dilutive potential
shares outstanding ............. 317 285 301 286 308 313 312
Basic and diluted earnings (loss)
per share ...................... $ (1.06) $ (1.72) $ 0.24 $ 0.53 $ (0.08) $ 1.51 $ 1.58
Balance Sheet Data:
Total assets .................... $ 12,513 $ 11,714 $ 11,938 $ 12,130 $ 10,796 $ 11,129 $ 9,459
Long-term debt, excluding current
installments ................... $ 1,783 $ 2,450 $ 1,857 $ 2,195 $ 1,598 $ 1,613 $ 1,711
</TABLE>
20
<PAGE> 32
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial data assumes a
business combination between SWI and PTI accounted for as a purchase and is
based on, and should be read in conjunction with, the respective historical
financial statements and the notes thereto of SWI, which are incorporated by
reference in this Prospectus and Proxy Statement, and of PTI, which are included
in this Prospectus and Proxy Statement. See "Available Information" and
"Incorporation of Certain Documents by Reference." Amounts are in thousands,
except for per share data.
The unaudited pro forma combined condensed statement of operations data
combines information from the historical consolidated statements of operations
of SWI and PTI giving effect to the merger as if it occurred at the beginning of
the earliest period presented. Pro forma adjustments made to the combined
condensed statements of operations were to record the amortization of the cost
in excess of net assets acquired (goodwill) of $213 and $58 for the twelve and
three month periods ended December 31, 1997 and March 31, 1998, respectively,
and to record fees and expenses associated with the Merger of $400 in 1997. The
combined statement of operations for SWI and PTI for the three month period
ended March 31, 1998 results in revenues of $297,569, operating income of
$11,126, net income of $7,223 and diluted earnings per share of $0.55. The
combined statement of operations for the twelve month period ended December 31,
1997 results in revenues of $1,341,395, operating income of $47,174, net income
of $33,129 and diluted earnings per share of $2.52. Goodwill is being amortized
over a life of 20 years. The unaudited pro forma combined condensed balance
sheet data combines information from the historical consolidated balance sheets
of SWI and PTI giving effect to the Merger as if it had been completed on March
31, 1998. Pro forma adjustments made to the combined condensed balance sheet
data were to record the cost in excess of assets acquired of $4,255, to
eliminate PTI's historical equity balances, and to record the assumed issuance
of 229,885 shares of SWI Common Stock at the assumed Closing Market Value of
$39.15 per share. The combined balance sheet for SWI and PTI at March 31, 1998
results in total assets of $739,076, long-term debt of $23,874, total
liabilities of $378,624 and shareholders' equity of $360,452.
For purposes of the preparation of the unaudited pro forma balance sheet
data, merger related integration expenses were not included. The pro forma
combined financial data does not include adjustments to conform the accounting
policies of PTI to those followed by SWI. The nature and extent of such
adjustments, if any, will be based upon further analysis and are not expected to
be material. The pro forma combined financial data set forth herein is presented
for illustrative purposes only and is not necessarily indicative of the
operating results or financial position that would have been achieved if the
Merger had been consummated as of the beginning of the relevant periods, nor is
it necessarily indicative of the future operating results or financial position
of the combined company. The pro forma combined financial data set forth herein
does not give effect to any cost savings which may result from the integration
of SWI's and PTI's operations.
21
<PAGE> 33
COMPARATIVE PER SHARE FINANCIAL INFORMATION
The following unaudited information reflects certain comparative per share
data related to book value and income (loss) from continuing operations (i) on a
historical basis for SWI Common Stock; (ii) on a pro forma basis per share of
SWI Common Stock giving effect to the Merger; and (iii) on an equivalent pro
forma basis per share of PTI Common Stock giving effect to the Merger.
Equivalent pro forma per share amounts for PTI Common Stock are calculated
assuming that the holder of one share of PTI Common Stock would be entitled to
0.720903 shares of SWI Common Stock for all periods presented (assuming a
Closing Market Value of $39.15 per share, calculated based on the average of the
closing prices of the SWI Common Stock as reported in the NYSE Composite
Transactions for the 30 trading days ended July 14, 1998). The pro forma
combined financial data is not necessarily indicative of the operating results
or financial position that would have been achieved if the Merger had been
consummated as of the beginning of the periods presented, nor is it necessarily
indicative of the future operating results or financial position of the
Surviving Corporation.
The information shown below should be read in conjunction with the
consolidated historical financial statements delivered herewith, and the notes
thereto.
<TABLE>
<CAPTION>
SWI
Three Months Year
Ended Ended
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Historical Per Common Share Data
Income from continuing operations:
Basic ......................................... $ 0.59 $ 2.61
Diluted ....................................... $ 0.59 $ 2.59
Cash Dividends .................................. $ 0.15 $ 0.60
Book Value ...................................... $ 27.49 $ 26.92
Pro Forma Per Common Share Data
Income from continuing operations:
Basic ......................................... $ 0.55 $ 2.54
Diluted ....................................... $ 0.55 $ 2.52
Cash Dividends .................................. $ 0.15 $ 0.60
Book Value ...................................... $ 27.69 $ 27.14
PTI
Three Months Year
Ended Ended
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Historical Per Common Share Data
Income (loss) from continuing operations:
Basic ......................................... $ (1.06) $ 0.24
Diluted ....................................... $ (1.06) $ 0.24
Cash Dividends .................................. -- --
Book Value ...................................... $ 17.97 $ 18.99
Pro Forma Per Common Share Data
Income from continuing operations:
Basic ......................................... $ 0.40 $ 1.83
Diluted ....................................... $ 0.40 $ 1.82
Cash Dividends .................................. $ 0.11 $ 0.43
Book Value ...................................... $ 19.96 $ 19.56
</TABLE>
22
<PAGE> 34
SWI MARKET PRICE AND DIVIDEND DATA
SWI Common Stock is quoted on the NYSE. The table below sets forth, for
the periods indicated, the reported high and low closing sales prices for SWI
Common Stock as reported in the NYSE Composite Transactions and the cash
dividends paid on each share of SWI Common Stock.
<TABLE>
<CAPTION>
High Low Dividend
---- --- --------
<S> <C> <C> <C>
1996
First Quarter...................... $ 36 $ 32 5/8 $0.15
Second Quarter..................... 37 3/8 32 0.15
Third Quarter...................... 35 3/8 28 5/8 0.15
Fourth Quarter..................... 34 1/8 30 0.15
1997
First Quarter...................... $37 1/2 $31 1/8 $0.15
Second Quarter..................... 45 3/8 36 0.15
Third Quarter...................... 55 41 7/8 0.15
Fourth Quarter..................... 55 1/8 41 1/4 0.15
1998
First Quarter...................... $47 $37 3/4 $0.15
Second Quarter .................... 50 9/16 37 7/8 --
Third Quarter (through July 14).... 40 1/8 39 1/2 --
</TABLE>
On April 17, 1998, the last full trading day before the execution and
delivery of the Merger Agreement and the public announcement thereof, the
closing price of SWI Common Stock as reported in the NYSE Composite Transactions
was $48.88 per share. Based on a conversion factor of 0.720903 shares of SWI
Common Stock for each share of PTI Common Stock (which assumes a Closing Market
Value of $39.15 per share and is calculated based on the average of the closing
prices of the SWI Common Stock as reported in the NYSE Composite Transactions
for the 30 trading days ended July 14, 1998), the pro forma equivalent per share
value of PTI Common Stock on July 14, 1998 was $28.61 per share. On July 14,
1998, the most recent practicable date before the printing of this Prospectus
and Proxy Statement, the closing price of SWI Common Stock as reported in the
NYSE Composite Transactions was $39.69 per share.
SWI has purchased and may continue to purchase from time to time shares of
SWI Common Stock on the NYSE, or otherwise. However, there is no assurance that
SWI will continue to purchase shares of its Common Stock. Also, see Note L to
the consolidated financial statements set forth in the Annual Report on Form
10-K for the fiscal year ended December 31, 1997, incorporated by reference
herein and attached hereto as Appendix C. The approximate number of record
holders of SWI Common Stock as of December 31, 1997 was 5,400. The SWI Common
Stock is also listed for trading on the Boston Stock Exchange.
Because the market price of SWI Common Stock is subject to fluctuation,
the number of shares of SWI Common Stock that holders of PTI Common Stock will
receive in the Merger may increase or decrease prior to the Merger. PTI
shareholders are urged to obtain a current market quotation of SWI Common Stock.
PTI is a privately held company and there is no public market for PTI
Common Stock. PTI did not pay any dividends on shares of PTI Common Stock in
calendar years 1995, 1996 or 1997.
23
<PAGE> 35
THE PTI ANNUAL MEETING
Record Date; Outstanding Securities
The PTI Annual Meeting will be held on August 11, 1998, at 3:00 p.m., at
the principal executive offices of PTI. At the PTI Annual Meeting, the
shareholders of PTI will be asked to (i) elect a class consisting of four
directors of PTI, (ii) consider and vote on a proposal to amend the Certificate
of Incorporation of PTI to limit the liability of the directors of PTI to PTI
and the shareholders of PTI for certain breaches of fiduciary duties, and (iii)
consider and vote on a proposal to approve and adopt the Merger Agreement. The
holders of Class A Common Stock and Class C Common Stock of PTI are entitled to
vote with respect to all matters presented at the PTI Annual Meeting; however,
the holders of Class B Common Stock of PTI are entitled to vote only with
respect to the approval of the Merger Agreement. The holders of shares of PTI
Common Stock at the close of business on the Record Date of July 15, 1998 are
entitled to notice of and to vote at the PTI Annual Meeting. At such date,
246,232.73 shares of Class A Common Stock, 50,552.34 shares of Class B Common
Stock and 22,100 shares of Class C Common Stock were outstanding. Each share of
PTI Common Stock entitles the holder thereof to one vote at the PTI Annual
Meeting for each matter with respect to which such share entitles the holder
thereof to vote. Abstentions will be counted for purposes of determining a
quorum, but will have the effect of votes against the adoption and approval of
the Merger Agreement and the Certificate Amendment. Shares not represented at
the PTI Annual Meeting will also have the effect of votes against the adoption
and approval of the Merger Agreement and the Certificate Amendment.
Purposes of the PTI Annual Meeting
Election of Directors
In accordance with PTI's By-Laws, the PTI Board of Directors is divided
into two classes. The PTI Board has eight Board seats (one of which is presently
vacant), and four Board seats will be filled at the PTI Annual Meeting. The
four directors to be elected at the PTI Annual Meeting will be elected to serve
until the 2000 PTI Annual Meeting of the PTI shareholders, and until their
successors are duly elected and qualified, or until their earlier resignation or
removal. Upon the consummation of the Merger, the existing members of the PTI
Board of Directors (other than Steven J. Balser) will be replaced by the
directors of the Merger Sub by virtue of the Merger. Only holders of shares of
Class A Common Stock and Class C Common Stock outstanding as of the Record Date
are entitled to vote in connection with the election of directors, and the
presence, in person or by proxy, at the PTI Annual Meeting of the holders of a
majority of such shares is necessary to constitute a quorum at the PTI Annual
Meeting for such purpose. The persons who have been nominated are Dale A.
Douglass, James W. Feltes, Timothy F. Laskowski, David J. Lawrence, N. Dag
Reppen and Mary A. Sager. The directors will be elected by a plurality of the
votes cast by the holders of Class A Common Stock and Class C Common Stock at
the PTI Annual Meeting (the four persons receiving the greatest number of votes
cast will be elected even if less than a majority) if a quorum is present.
PROXIES AND VOTING INSTRUCTIONS WHICH ARE EXECUTED WITHOUT SPECIFICATION WILL
NOT BE VOTED.
Amendment of PTI's Certificate of Incorporation
On June 16, 1998, the PTI Board of Directors approved the Certificate of
Amendment to amend PTI's Certificate of Incorporation to limit the personal
liability of PTI's directors to PTI and PTI's shareholders for damages for any
breach of their duties as directors. The liability of each PTI director is not
limited if (i) a judgment or other final adjudication adverse to such director
establishes that such director's acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law, (ii) such director
personally gained in fact a financial profit or other advantage to which such
director was not legally entitled, or (iii) such director's acts violated
certain provisions of the NYBCL prohibiting certain actions by directors. The
Certificate Amendment will not affect any liabilities of directors of PTI for
acts or omissions prior to the amendment of PTI's Certificate of Incorporation.
24
<PAGE> 36
Only holders of shares of Class A Common Stock and Class C Common Stock
outstanding as of the Record Date are entitled to vote in connection with the
Certificate Amendment, and the presence, in person or by proxy, at the PTI
Annual Meeting of the holders of a majority of such shares is necessary to
constitute a quorum at the PTI Annual Meeting for such purpose. The affirmative
vote of holders of a majority of the Class A Common Stock and Class C Common
Stock outstanding as of the Record Date is required to approve and adopt the
Certificate Amendment. THE PTI BOARD RECOMMENDS THAT THE PTI SHAREHOLDERS VOTE
FOR THE ADOPTION AND APPROVAL OF THE CERTIFICATE AMENDMENT. PROXIES AND VOTING
INSTRUCTIONS WHICH ARE EXECUTED WITHOUT SPECIFICATION WILL BE VOTED FOR THE
ADOPTION AND APPROVAL OF THIS PROPOSAL.
The Merger Agreement
At the PTI Annual Meeting, the shareholders of PTI will consider and vote
upon a proposal to adopt the Merger Agreement pursuant to which (i) the Merger
and the other transactions contemplated by the Merger Agreement are to be
consummated and (ii) holders of PTI Common Stock are to receive shares of SWI
Common Stock constituting the Initial Merger Consideration and the Rights to
receive the Contingent Merger Consideration, Additional Contingent Shares and
Transasia Consideration, if any, in exchange for the PTI Common Stock held by
each of them as of the Effective Time of the Merger.
The holders of all outstanding shares of PTI Common Stock as of the Record
Date (including the holders of Class B Common Stock) are entitled to vote in
connection with the Merger Agreement. Consideration of the Merger Agreement
requires a quorum consisting of a majority of all shares of PTI Common Stock
outstanding as of the Record Date and a separate majority of each class of PTI
Common Stock outstanding as of the Record Date. The affirmative vote of the
holders of two-thirds of all outstanding shares of PTI Common Stock and the
affirmative vote of the holders of a majority of each class of PTI Common Stock,
voting as a separate class, is required to approve and adopt the Merger
Agreement. SWI and its directors and executive officers do not own any shares of
PTI Common Stock. The officers and directors of PTI collectively own
beneficially approximately 42% of the Class A PTI Common Stock, none of the
Class B PTI Common Stock, 2% of the Class C PTI Common Stock and 32.7% of the
aggregate of all classes of PTI Common Stock outstanding as of the Record Date
and have agreed to vote such shares in favor of the approval and adoption of the
Merger Agreement. See "PTI Share Ownership." THE PTI BOARD BELIEVES THAT THE
MERGER IS IN THE BEST INTERESTS OF PTI AND ITS SHAREHOLDERS AND UNANIMOUSLY
RECOMMENDS A VOTE TO ADOPT AND APPROVE THE MERGER AGREEMENT. PROXIES AND VOTING
INSTRUCTIONS WHICH ARE EXECUTED WITHOUT SPECIFICATION WILL BE VOTED FOR THE
ADOPTION AND APPROVAL OF THIS PROPOSAL.
Voting of Shares of PTI Common Stock Held by the ESOP
Pursuant to the terms of PTI's ESOP, the participants in the ESOP are
entitled to direct the trustee of the ESOP how to vote shares of Class C Common
Stock which are held by the ESOP and have been allocated to their respective
accounts. The ESOP provides that the ESOP trustee must vote any unallocated
shares in proportion to the votes cast on each issue by the participants in the
ESOP. As a result, if participants in the ESOP direct the ESOP trustee to vote
more allocated shares in favor of the Merger than against the Merger, the
separate class vote of the Class C Common Stock will be satisfied. A Voting
Instructions Form for participants to direct the ESOP trustee how to vote shares
allocated to their accounts is enclosed with this Prospectus and Proxy
Statement. An ESOP participant may change his or her direction to the ESOP
trustee by submitting new Voting Instructions prior to the date of the PTI
Annual Meeting.
25
<PAGE> 37
Voting of Proxies
All proxies that are properly executed and returned will be voted at the
PTI Annual Meeting in accordance with the instructions thereon, unless
previously revoked. With regard to any other business not specified above that
may properly come before the PTI Annual Meeting, shares represented by properly
executed proxies will be voted at the discretion of the persons named in the
relevant proxy. The execution and return of a proxy will not affect a
shareholder's right to attend the PTI Annual Meeting and vote in person.
ANY PTI SHAREHOLDER GIVING A PROXY HAS THE POWER TO REVOKE THE PROXY PRIOR
TO ITS EXERCISE. A PROXY MAY BE REVOKED BY (A) FILING WITH THE SECRETARY OF PTI
OR THE INSPECTOR OF ELECTIONS, AT OR BEFORE THE TAKING OF THE VOTE AT THE PTI
ANNUAL MEETING, (1) A WRITTEN NOTICE OF REVOCATION SPECIFYING THE NUMBER OF
SHARES AND CLEARLY IDENTIFYING THE PROXY TO BE REVOKED OR (2) A NEW, DULY
EXECUTED PROXY BEARING A LATER DATE, OR (B) ATTENDING THE PTI ANNUAL MEETING AND
VOTING IN PERSON (ALTHOUGH ATTENDANCE AT THE MEETING WILL NOT IN AND OF ITSELF
CONSTITUTE A REVOCATION OF A PROXY).
Dissenters' Rights
If the Merger is consummated, holders of PTI Common Stock will be entitled
to dissenters' rights under the NYBCL, provided that they comply with the
conditions established by Sections 910 and 623.
Section 910 of the NYBCL sets forth the rights of shareholders of PTI who
object to the Merger and provides that any shareholder of PTI who strictly
complies with the requirements of Section 623 of the NYBCL ("Section 623"), a
copy of which is attached as Appendix B hereto, and does not vote in favor of
the Merger or duly revokes his or her vote in favor of the Merger has the right
to obtain payment in cash of the fair value of his or her PTI Common Stock if
the Merger is consummated.
To qualify as a dissenting shareholder, a shareholder must file with PTI,
before the taking of the vote on the Merger, a written objection including (i) a
statement of election to dissent, (ii) the shareholder's name and residence
address, (iii) the number and class of shares of PTI Common Stock as to which
dissent is made (which number may not be less than all of the shares as to which
such shareholder has a right to dissent) and (iv) a demand for payment of the
fair value of such shares if the Merger is consummated. Any such written
objection should be addressed to: Gordon B. Hirschman, Secretary, Power
Technologies, Inc., 1482 Erie Boulevard, Schenectady, New York 12301.
Within 10 days after the vote of shareholders authorizing the Merger, PTI
must give written notice of such authorization to each such dissenting
shareholder. Within 20 days after the giving of such notice, any shareholder to
whom PTI failed to give notice of the PTI Annual Meeting (and who was entitled
to such notice) who elects to dissent from the Merger must file with PTI a
written notice of such election, stating (i) the shareholder's name and
residence address, (ii) the number and class of shares of PTI Common Stock as to
which dissent is made (which number may not be less than all of the shares as to
which such shareholder has a right to dissent) and (iii) a demand for payment of
the fair value of such shares if the Merger is consummated.
At the time of filing a notice of election to dissent or within one month
thereafter, a dissenting shareholder must submit certificate(s) representing the
applicable shares to PTI or its transfer agent, Liberty Transfer Co., for
notation thereon of the election to dissent, after which such certificates will
be returned to the shareholder. Any shareholder who fails to submit his or her
share certificates for such notation shall, at the option of PTI exercised by
written notice to the shareholder within 45 days from the date of filing of the
notice of election to dissent, lose such shareholder's appraisal rights unless a
court, for good cause shown, shall otherwise direct.
Within 15 days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within 15 days
after consummation of the Merger, whichever is later (but not later than 90 days
after the shareholders' vote authorizing the Merger), PTI must make a written
offer (which, if the Merger has not been consummated within the 90 day period
after the shareholders' vote authorizing the Merger, may be conditioned upon
26
<PAGE> 38
such consummation) to each shareholder who has filed such notice of election to
pay for the shares at a specified price which PTI considers to be their fair
value based on the fair value of the shares as of the close of business on the
day prior to the shareholders' vote authorizing the Merger. If PTI and the
dissenting shareholder are unable to agree as to such value, Section 623
provides for judicial determination of fair value based on the fair value of the
shares as of the close of business on the day prior to the shareholders' vote
authorizing the Merger. In the event of such a disagreement, a proceeding shall
be commenced by PTI in the Supreme Court of the State of New York, County of
Albany, or by the dissenting shareholder if PTI fails to commence the proceeding
within the time period required by Section 623. PTI intends to commence such a
proceeding in the event of such a disagreement.
A negative vote on the Merger does not constitute a "written objection"
filed by an objecting shareholder. Failure by a shareholder to vote against the
Merger will not, however, constitute a waiver of rights under Section 623
provided that a written objection has been properly filed and such shareholder
has not voted in favor of the Merger.
The foregoing does not purport to be a complete statement of the
provisions of Section 623 and is qualified in its entirety by reference to said
Section, a copy of which is attached hereto in full as Appendix B. Each
shareholder intending to exercise dissenter's rights should review Appendix B
carefully and consult such shareholder's counsel for a more complete and
definitive statement of the rights of a dissenting shareholder and the proper
procedure to follow to exercise such rights.
Solicitation of Proxies
All expenses of this solicitation, excluding SWI's costs incurred in
preparing and printing this Prospectus and Proxy Statement but including PTI's
costs incurred in preparing and mailing this Prospectus and Proxy Statement,
will be borne by PTI. In addition to solicitation by use of the mails, proxies
may be solicited by directors, officers and employees of PTI in person or by
telephone, telegram or other means of communication. Such directors, officers
and employees will not receive additional compensation, but may be reimbursed
for reasonable out-of-pocket expenses in connection with such solicitation.
Other Matters
At the date of this Prospectus and Proxy Statement, the Board of Directors
of PTI does not know of any business to be presented at the PTI Annual Meeting
other than as set forth in the notice accompanying this Prospectus and Proxy
Statement. If any other matters should properly come before the PTI Annual
Meeting, it is intended that the shares represented by proxies will be voted
with respect to such matters in accordance with the judgment of the person named
in such proxies.
Further Information
If you have any questions about giving your PTI proxy, directing the ESOP
Trustee how to vote your shares held by the ESOP or executing the Shareholders'
Committee Agreement or otherwise require assistance, please contact Eileen M.
Hanafin or Kathleen B. Rose at the following address or telephone number: Power
Technologies, Inc., 1482 Erie Boulevard, Schenectady, New York 12301 (telephone
518-395-5000).
27
<PAGE> 39
THE MERGER
The detailed terms of and conditions to the consummation of the Merger are
contained in the Merger Agreement, a conformed copy of which is attached hereto
as Appendix A and incorporated herein by reference. The following discussion
sets forth a description of the material terms and conditions of the Merger and
the Merger Agreement and is qualified by, and made subject to, the more complete
information set forth in the Merger Agreement.
General
SWI's acquisition of PTI is structured as a merger of the Merger Sub into
PTI. Immediately following the Merger, PTI will be the Surviving Corporation and
will be a wholly-owned subsidiary of SWI. As soon as practicable following the
Effective Time, SWI will transfer all shares of the Surviving Corporation to
SWMCI so that the Surviving Corporation will become a wholly-owned subsidiary of
SWMCI. In connection with the Merger, Participating Holders will be entitled to
receive the following:
o the Initial Merger Consideration, consisting of a maximum number of shares
of SWI Common Stock, equal to (i) the lesser of 1.5 times the
stockholders' equity of PTI at December 31, 1997 and $9,000,000, divided
by (ii) the Closing Market Value;
o if and to the extent that certain milestones based on the Final Cumulative
Net Earnings are achieved, all or a portion of the Contingent Merger
Consideration, consisting of a maximum number of shares of SWI Common
Stock equal to $8,000,000 divided by the Closing Market Value;
o in the event that all or a portion of the Contingent Merger Consideration
becomes payable and certain other conditions are satisfied, the Additional
Contingent Shares consisting of a maximum number of shares of SWI Common
Stock equal to $500,000 divided by the average of the closing prices of
the SWI Common Stock as reported in the NYSE Composite Transactions for
the ten trading days ending on the third trading day prior to the date on
which such shares are paid; and
o the Transasia Consideration consisting of the amount, up to a maximum of
20% of the value of the other Merger Consideration and net of any taxes or
expenses incurred with respect to collecting and administering such
amounts, of all payments paid to the Surviving Corporation, if any, during
the period from January 1, 1998 through the date that the Contingent
Merger Consideration is determined, as development fees or on account of
PTI's carried interest under the Transasia Agreements, together with the
net proceeds from the disposition of or modification to any such rights.
The Initial Merger Consideration is payable at the Effective Time, and any
Contingent Merger Consideration and Transasia Consideration to which the
Participating Holders are entitled become payable as soon as practicable
following the computation of the Contingent Merger Consideration (which, except
in certain circumstances described in "- Contingent Consideration," cannot occur
until after December 31, 2002) but in any event prior to the fifth anniversary
of the Closing. Any Additional Contingent Shares to which the Participating
Holders are entitled will become payable as soon as practicable after the number
of Additional Contingent Shares is determined (which cannot, except in certain
circumstances described in "-- Contingent Consideration," occur prior to August
30, 2003).
28
<PAGE> 40
If there are Dissenting Holders, the Participating Holders will be
entitled to receive, in the aggregate, the Initial Merger Consideration and
Contingent Merger Consideration multiplied by the Participation Percentage (the
number of shares of PTI Common Stock owned by the Participating Holders divided
by the total number of outstanding shares of PTI Common Stock); otherwise, all
PTI shareholders will be Participating Holders and will be entitled to receive,
in the aggregate, all of the Initial Merger Consideration and Contingent Merger
Consideration. The presence of Dissenting Holders will not affect the aggregate
number of Additional Contingent Shares or the amount of Transasia Consideration.
The Dissenting Holders will not be entitled to receive any of the Merger
Consideration but will be entitled to receive cash equal to the fair value of
their shares of PTI Common Stock. See "The PTI Annual Meeting -- Dissenters'
Rights."
The Merger will become effective after the conditions specified in the
Merger Agreement have been met. SWI and PTI have targeted the third quarter of
calendar 1998 for completion of the Merger. See "The Merger -- Effective Time,"
and "-- Conditions of Merger." Notwithstanding the foregoing in addition to
certain other events which may result in a party having a right to terminate the
Merger Agreement, (i) PTI has the right to terminate the Merger Agreement on the
second business day before the Closing date if the Closing Market Value is
greater than the Ceiling Amount ($60.00) unless SWI notifies PTI before 5:00
p.m. EST on the day before the Closing date of its intention to fix the Closing
Market Value at the Ceiling Amount, and (ii) SWI has the right to terminate the
Merger Agreement on the second business day before the Closing date if the
Closing Market Value is less than the Floor Amount ($35.00) unless PTI notifies
SWI before 5:00 p.m. EST on the day before the Closing date of its intention to
fix the Closing Market Value at the Floor Amount. If the Closing Market Value
was computed based on the 30 trading days ending on July 14, 1998, the most
recent practicable date before the date of this Prospectus and Proxy Statement,
the Closing Market Value would be $39.15.
Background of the Merger
Due, in part, to liquidity concerns which began in 1995, PTI's management
determined that it was necessary for PTI to raise capital from sources other
than its employees to enable it to achieve its operating objectives and redeem
stock owned by employees who were nearing retirement. To this end, PTI
approached a number of companies with businesses that it considered to have
synergies with PTI's business proposing that such companies make an investment
in PTI by purchasing a 25% or more interest in PTI. As part of this process, PTI
initiated discussions with SWMCI, SWI's management consulting subsidiary. Both
companies were familiar with each other based on previous joint projects.
During subsequent visits from March 1996 to June 1997 between Steven J. Balser
of PTI, Richard Hieber, Victor Blanchett and Robert McWhinney, Jr. of SWMCI and
H. Kerner Smith and other members of management of SWI, SWI and PTI continued
to discuss potential investment alternatives.
In 1997, PTI's management determined that it would be unable to raise the
necessary capital by selling an interest in PTI and concluded that it would be
in the best interest of PTI's shareholders to pursue a sale of the company. In
September 1997, PTI circulated an offering binder soliciting purchase proposals
from a number of potential acquirors. PTI discussed transactions with a number
of potential partners and found the opportunities presented by the preliminary
offer from SWI the most attractive. After an initial period of investigation,
discussions were initiated among the parties, their representatives and
consultants, and a Letter of Intent was signed on October 31, 1997. After a
subsequent period of due diligence by both parties, the Merger Agreement was
negotiated and signed on April 20, 1998, subject to the approval of the
shareholders of PTI.
PTI's Reasons for the Merger
The PTI Board believes that the Merger will result in greater value to
PTI's shareholders than would likely have been realized by them in the
foreseeable future through the continued independent operation of PTI.
In reaching its determination, the PTI Board considered the anticipated
advantages of the Merger to PTI's shareholders and to PTI itself. The primary
benefit to PTI's shareholders is the immediate increase in the liquidity of
their investment coupled with a continued ability to benefit from PTI's success
during the period from January 1, 1998 through December 31, 2002. The PTI Common
Stock that they own is subject to transfer restrictions and there is no market
on which it can be traded, whereas the SWI Common Stock they will receive in
connection with
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<PAGE> 41
the Merger will be free from transfer restrictions (other than some securities
law requirements that must be complied with by certain PTI affiliates) and may
be freely traded on the NYSE. Due to limited capital resources, PTI has been
unable to repurchase shares of PTI Common Stock owned by employees of PTI when
they terminate their employment with PTI. In addition, several large
shareholders of PTI are nearing retirement and if PTI were unable to purchase
their shares, a significant percentage of PTI Common Stock would be owned by
non-employees, creating greater conflicts in the operation of PTI. PTI's
inability to redeem this PTI Common Stock was a significant factor in the PTI
Board's decision to pursue the Merger.
The PTI Board believes that PTI will benefit from its relationship with
SWI because it will have access to additional capital through SWI and will be
able to take advantage of business opportunities presented by SWI and its
affiliates. The PTI Board believes that SWI, through its relationships and
business, will be able to assist PTI by identifying potential projects and
enhancing PTI's ability to be selected for such projects. The Board also
believes that SWI will enable PTI to further enhance and expand its expertise.
To the extent that the Surviving Corporation is successful following the Merger
due to the additional capital and support from SWI, the Participating Holders
will share in that success until December 31, 2002 through their right to
receive the Contingent Merger Consideration and, to the extent that they are and
continue to be employees of the Surviving Corporation, will benefit from a
continued employment relationship with the Surviving Corporation.
The PTI Board considered that the consummation of the Merger necessarily
means that PTI's shareholders will not benefit directly from any increase in the
value of PTI which might be achieved if it were to continue to operate
independently. In order to achieve such increased value, however, the PTI Board
believes that PTI would be required to expand the scope of its operations in
order to obtain economies of scale and to increase revenues. The PTI Board
believes that the additional financing that would be required to achieve these
objectives might not be available on satisfactory terms, if at all. Accordingly,
in evaluating the Merger, the PTI Board considered PTI's immediate and
foreseeable prospects for such expansion and concluded that the Merger provides
the best available alternative to maximize shareholder value.
SWI's Reasons for the Merger
The SWI Board believes that the Merger is in the best interests of SWI
and, therefore, has unanimously approved the Merger Agreement and the
transactions contemplated thereby.
The SWI Board reviewed information about PTI available to it from PTI's
management and other sources and assessed PTI's financial condition. After
considering this information, the SWI Board concluded that the anticipated
business advantages of the Merger favored adoption of the Merger Agreement and
consummation of the Merger.
SWI's business strategy is to deliver superior returns to its shareholders
and to create shareholder wealth through building and refining its core
business. It attempts to do this by providing best in class full service to its
clients, customers and business partners in engineering, construction and
consulting for the Power, Process, Environmental/Infrastructure and Industrial
markets, while exceeding their expectations. An element of this strategy
involves an acquisition program under which the management of SWI has begun to
search for companies which can contribute to its long term growth in a
significant way, which will complement the existing and planned business
development, and which can be integrated at reasonable cost.
The SWI Board believes that PTI possesses a unique combination of
commercial assets that are attractive to SWI. Among these assets is a strong and
reputable electric systems consulting practice that specializes in the analysis
of the technical phenomena that are associated with reliable and cost effective
delivery of electric power. PTI's consulting practice, along with a base of
educational courses and training programs, complements SWI's objective to offer
a wide array of services to the energy industry. PTI also possesses a globally
recognized portfolio of computer software programs that are used to plan,
design, operate and control segments of an electric power system and has
demonstrated an ability to effectively produce, distribute and support its
portfolio of software products. PTI's software business is particularly
attractive to SWI because a single software sale can produce a high margin
revenue stream. The consulting services component of PTI also serves as a
natural conduit for new ideas and functionality which often take the form of new
or upgraded software products. Moreover, with clients and sales
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<PAGE> 42
representatives in over 70 countries outside the U.S., the SWI Board believes
that PTI has developed a well known and respected brand name that could be very
valuable in SWI's international business development efforts. The technical
skills of PTI's staff also complement the management, financial, regulatory and
policy strengths of SWI. The SWI Board believes that the technical skills of PTI
personnel will also be an important contributor to the analysis and valuation of
energy industry assets, particularly in the Lender's Advisory Services and the
Energy Markets Analysis businesses of SWI, where SWI is retained on behalf of
sellers, buyers and lenders to provide advice on the disposition, acquisition or
securitization of assets. The SWI Board believes that the structure of the
transaction as a merger with PTI, rather than as a purchase of assets, will
allow SWI to benefit from the goodwill associated with the PTI business and the
strength and reputation of PTI's personnel through their continued relationship
with the Surviving Corporation.
The SWI Board not only considered the benefits that could arise from the
Merger, but also considered certain adverse factors, including the dilution to
holders of SWI Common Stock resulting from the issuance of the shares of SWI
stock in the Merger and the potential contingent liabilities associated with
PTI's business, which SWI estimated would not be material. The SWI Board
concluded, in its business judgment, that the factors favoring adoption of the
Merger Agreement outweighed the Merger's potential adverse effect.
Manner and Basis of Converting Shares
At the Effective Time, the Participating Shares will be converted
automatically into and become the right to receive (i) a proportionate share,
based on the total number of Participating Shares, of the aggregate Initial
Merger Consideration, and, to the extent payable, the Contingent Merger
Consideration payable to the Participating Holders, (ii) a portion of any
Additional Contingent Shares payable to the Participating Holders which will be
based on the respective tax liabilities of the Participating Holders incurred as
a result of the payment of the Contingent Merger Consideration, and (iii) to the
extent payable, the Transasia Consideration payable to the Participating
Holders.
As soon as practicable following the Effective Time, SWI will mail to each
Participating Holder a letter of transmittal and other information advising such
holder of the consummation of the Merger and explaining how to exchange PTI
Common Stock certificates for SWI Common Stock certificates representing the
portion of the Initial Merger Consideration to which such Participating Holder
is entitled. Letters of transmittal will also be available following the
Effective Time at the offices of SWI in Boston, Massachusetts. After the
Effective Time, there will be no further registration of transfers on the stock
transfer books of PTI of shares of PTI Common Stock that were outstanding
immediately prior to the Effective Time. Share certificates should not be
surrendered for exchange by shareholders of PTI prior to the Effective Time and
the shareholder's receipt of a letter of transmittal.
No fractional shares of SWI Common Stock will be issued in the Merger.
Each shareholder of PTI otherwise entitled to a fractional share will receive an
amount in cash equal to the value of such fractional share based upon the price
of SWI Common Stock used as the divisor in the calculation of the Merger
Consideration. No interest will be paid on such amount, and all shares of PTI
Common Stock held by a record holder shall be aggregated for the purpose of
computing the amount of such payment.
Until surrendered and exchanged, each certificate previously evidencing
PTI Common Stock will represent solely the right to receive the Merger
Consideration and cash in lieu of fractional shares. Unless and until any such
certificates are surrendered and exchanged, no dividends or other distributions
payable to the holders of record of SWI Common Stock as of any time on or after
the Effective Time will be paid to the holders of such certificates previously
evidencing PTI Common Stock; however, when such certificates are surrendered and
exchanged the record holders of the certificates issued and exchanged therefor
will be paid (i) the amount, without interest thereon, of dividends and other
distributions, if any, with a record date on or after the Effective Time
theretofore paid with respect to such whole shares of SWI Common Stock, and (ii)
at the appropriate payment date, the amount of dividends or other distributions,
if any, with a record date on or after the Effective Time but prior to surrender
and a payment date occurring after surrender, payable with respect to such whole
shares of SWI Common Stock.
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<PAGE> 43
Initial Merger Consideration
The Initial Merger Consideration consists of a number of shares of SWI
Common Stock, equal to (i) the lesser of 1.5 times the stockholders' equity of
PTI at December 31, 1997 and $9,000,000, (ii) divided by the Closing Market
Value (the average of the closing price of SWI Common Stock as reported in the
NYSE Composite Transactions for the 30 trading days ending on the third trading
day prior to the Closing date) and (iii) multiplied by the Participation
Percentage. The Initial Merger Consideration will be allocated among the
Participating Holders pro rata based upon their respective holdings of PTI
Common Stock.
A number of the shares of SWI Common Stock payable as Initial Merger
Consideration equal to $1,000,000 divided by the Closing Market Value and
multiplied by the greater of the Participation Percentage and 95% will be held
in the Escrow to satisfy indemnity obligations based on representations,
warranties or covenants of PTI and the Principal Shareholders contained in the
Merger Agreement. The Escrow will be held until January 15, 2000 or until claims
made by SWI during such period are resolved. In addition, a separate escrow will
be established by the Shareholders' Committee to satisfy expenses incurred by
the Shareholders' Committee (including without limitation legal and accounting
fees and expenses and compensation paid to members of the Shareholders'
Committee), and a portion of the Initial Merger Consideration equal to the
number of shares of SWI Common Stock determined by dividing $250,000 by the
Closing Market Value will be deposited into that escrow. The number of shares of
Initial Merger Consideration that are received by each Participating Holder
(whether or not they execute a Shareholders' Committee Agreement) will be
proportionately reduced to take into account the shares of SWI Common Stock
placed in the Escrow or the escrow to fund the Stockholders' Committee's
expenses. Any shares of SWI Common Stock deposited in such escrow accounts which
are not used to satisfy indemnification obligations or expenses of the
Shareholders' Committee will be distributed by the Shareholders' Committee to
the Participating Holders in the same proportions as the Initial Merger
Consideration was distributed.
Contingent Consideration
In addition to the Initial Merger Consideration, the Participating Holders
will receive Rights entitling them to receive additional consideration (the
"Contingent Consideration") provided that certain conditions are met. The
Contingent Consideration consists of (i) the Contingent Merger Consideration,
(ii) the Additional Contingent Shares and (iii) the Transasia Consideration. The
Contingent Merger Consideration and the Transasia Consideration will be
allocated among the Participating Holders pro rata based upon their respective
holdings of PTI Common Stock and the Additional Contingent Shares will be
allocated based on the respective tax liabilities of the Participating Holders
entitled to receive Additional Contingent Shares. The following describes how
each type of Contingent Consideration will be determined and the conditions
under which each type of Contingent Consideration will be paid, if at all. The
Rights of the Participating Holders to receive the Contingent Consideration (i)
are personal to each such Participating Holder; (ii) are not transferable,
except by operation of law or by the laws of descent and distribution; (iii) do
not constitute any equity or ownership interest in the Surviving Corporation,
SWI or SWMCI and (iv) do not entitle the holder to any voting or dividend rights
or any other rights common to shareholders.
Contingent Merger Consideration
The amount of Contingent Merger Consideration, if any, payable to the
Participating Holders depends on the extent to which certain milestones based on
the Final Cumulative Net Earnings during the Contingent Period are achieved. If
the Final Cumulative Net Earnings for the Contingent Period equal or exceed
$11,327,000 (the "Full Payment Milestone") then the Participating Holders will
be entitled to receive the entire amount of the Contingent Merger Consideration
(equal to a number of shares of SWI Common Stock calculated as $8,000,000
divided by the Closing Market Value and multiplied by the Participation
Percentage). If the Final Cumulative Net Earnings for the Contingent Period is
less than the Full Payment Milestone but more than $3,960,000 (the "Minimum
Payment Milestone"), then the Participating Holders will be entitled to a pro
rata portion of the Contingent Merger Consideration equal to (i) the maximum
Contingent Merger Consideration, (ii) multiplied by a fraction, the numerator of
which will be equal to the Final Cumulative Net Earnings less the Minimum
Payment Milestone and the denominator of which will be equal to $7,367,000 (the
Full Payment Milestone less the Minimum
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Payment Milestone) and (iii) the resulting product multiplied by the
Participation Percentage. If the Final Cumulative Net Earnings for the
Contingent Period is less than the Minimum Payment Milestone, then the
Participating Holders will not be entitled to any portion of the Contingent
Merger Consideration. As described below, certain amounts may be deducted by SWI
from the amounts otherwise payable as Contingent Merger Consideration to (i)
satisfy claims for indemnification made by SWI and SWMCI and (ii) offset certain
expenses incurred in determining the Final Cumulative Net Earnings. In the event
of any transaction involving a change in identity, form or jurisdiction of
incorporation of SWI or a recapitalization, reclassification or change of
outstanding shares of SWI Common Stock (other than a change in par value or an
event which can be adjusted for by changing the Closing Market Value) which
results in the SWI Common Stock being converted into or exchanged for one or
more different classes or kinds of voting stock of SWI (each, a
"Reclassification Event"), each Participating Holder will thereafter have the
right to receive, in lieu of the Contingent Merger Consideration, the kind and
amount of voting stock which would have been issued to such Participating Holder
if the Contingent Merger Consideration had been paid immediately prior to such
Reclassification Event.
The Contingent Merger Consideration, if any, will be payable as soon as
practicable after the determination of the Final Cumulative Net Earnings. The
right to receive the Contingent Merger Consideration, however, may be
accelerated in the event of: (i) a business combination transaction between SWI
and any other entity (other than (X) a transaction in which SWI is the surviving
entity and SWI remains a publicly-traded company or (Y) which would constitute a
Reclassification Event) which would result in the SWI Common Stock outstanding
prior to such transaction being converted into or exchanged for capital stock or
other securities (other than voting stock of SWI), cash or other property; (ii)
the sale or disposition by SWI of all or substantially all of its assets; (iii)
a complete liquidation of SWI; or (iv) any other transaction or event (other
than a Reclassification Event) the consummation of which would preclude the
issuance of SWI Common Stock (or other voting stock of SWI) as the Contingent
Merger Consideration (each, an "Acceleration Event"). In the case of an
Acceleration Event, the Contingent Merger Consideration will be payable
immediately prior to the record date for the vote of stockholders of SWI
required to authorize such Acceleration Event. If the right to receive the
Contingent Merger Consideration is accelerated, the amount payable will be
determined using the same formula as described above, except that (i) Final
Cumulative Net Earnings will be determined as of the end of the calendar year
most recently ended before the Acceleration Date and (ii) the Minimum Payment
Milestone and Full Payment Milestone will be prorated based on the abbreviated
measuring period for Final Cumulative Net Earnings in accordance with the
following table:
<TABLE>
<CAPTION>
End of Year Prior to Acceleration Event
(Calendar Year Ended December 31,) Full Payment Milestone Minimum Payment Milestone
- ---------------------------------- ---------------------- -------------------------
<S> <C> <C>
1998 $1,328,000 $792,000
1999 $3,091,000 $1,584,000
2000 $5,342,000 $2,376,000
2001 $8,068,000 $3,168,000
2002 $11,327,000 $3,960,000
</TABLE>
In addition, upon the occurrence of any other event which impairs the rights of
the Participating Holders to receive or reduces the economic value of the
Contingent Merger Consideration and which would not be covered by any specific
provision of the Merger Agreement relating to the adjustment or acceleration of
the right to receive the Contingent Merger Consideration, SWI will make an
equitable adjustment in the application of such provisions, in accordance with
the intent and principles of such provisions, so as to protect the rights of the
Participating Holders to receive the Contingent Merger Consideration and to
preserve the economic value of the Contingent Merger Consideration.
The Final Cumulative Net Earnings will be determined based on income
statements to be prepared by SWI for each fiscal year during the Contingent
Period (each, an "Audit Period"). At the end of each Audit Period, SWI will
cause an audit to be conducted of the books and records of the Surviving
Corporation as of the end of such Audit Period and will cause an income
statement to be prepared for such Audit Period in accordance with generally
accepted accounting principles consistently applied (the "Income Statements").
Promptly following the end of each Audit Period, SWI's internal auditors under
the supervision of SWI's independent accountants (collectively, the "Auditors")
will determine and report the net earnings of the Surviving Corporation for the
Audit Period and the
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cumulative net earnings of the Surviving Corporation from January 1, 1998
through the end of the most recently completed Audit Period (an "Earnings
Report") based on the Income Statements. For purposes of determining net
earnings and cumulative net earnings and reporting them in the Earnings Reports,
the Earnings Reports will start with income net of all other expenses but before
deducting tax expenses as reported in the applicable Income Statement ("Base
Earnings"), which amount will be adjusted as follows:
(i) increased by the amount of any costs or expenses included in Base
Earnings which were incurred by the Surviving Corporation for which SWI
actually received indemnification under the Merger Agreement;
(ii) increased by the amount of all costs and expenses included in Base
Earnings which were incurred by PTI and the Surviving Corporation in
connection with the Merger Agreement and related transactions, including
any amortization of goodwill by the Surviving Corporation resulting from
the transactions contemplated thereby, any expenses incurred by the
Surviving Corporation associated with imputed interest related to the
Contingent Merger Consideration and all legal and accounting fees and
disbursements in an aggregate amount not to exceed $400,000;
(iii) increased by any loss or increase in costs and expenses or decreased
by any gain or any decrease in costs or expenses resulting from the sale
of real properties owned by PTI at the Effective Time and located at 1473
and 1482 Erie Boulevard, Schenectady, New York;
(iv) increased by any costs and expenses (including, without limitation,
any additional funding requirements, interest incurred with respect to
such funding requirements, and legal and accounting fees and
disbursements) included in the Base Earnings incurred by PTI or the
Surviving Corporation solely as a result of the termination of any
qualified pension or profit sharing plan of PTI, including the PTI
Employee Stock Ownership Plan, and the termination of any PTI stock option
plan (other than amounts paid directly to option holders in connection
with the termination of such plans or options) and the liquidation and
dissolution of PTI's subsidiary Power Technologies International, Inc.;
(v) to the extent not otherwise accounted for by generally accepted
accounting principles, increased by any costs, expenses or losses which
are reimbursed by insurance or for which reserves were established before
the Contingent Period;
(vi) increased by any amount by which (X) amounts paid to holders of PTI
Common Stock who exercise their dissenters' rights under the NYBCL,
together with any costs to fund expenses associated with the satisfaction
of PTI's or the Surviving Corporation's obligations under the NYBCL exceed
(Y) the value of the shares of SWI Common Stock (based on the Closing
Market Value) which such Dissenting Holders would have received if such
Dissenting Holders were Participating Holders; provided, however, that no
such adjustment shall be made unless the amounts paid to Dissenting
Holders are reflected as an expense in the applicable Income Statement(s)
for the fiscal year(s) in which they were incurred;
(vii) increased by any costs and expenses incurred by the Surviving
Corporation in connection with any environmental remediation; provided,
that no such adjustment will be made for any costs and expenses incurred
in connection with environmental compliance in the ordinary course of
business as conducted by PTI prior to the Closing date;
(viii) increased or decreased, as appropriate, to the extent necessary
during any Audit Period to adjust for changes in Base Earnings which
directly result from changes in generally accepted accounting principles
during any such Audit Period as compared to generally accepted accounting
principles as in effect as of the Effective Time; and
(ix) increased or decreased, as appropriate, to mitigate any other effect
of increases or decreases in "operating expenses" and "interest expense
and other income" resulting from the Surviving Corporation operating as a
subsidiary of SWI or SWMCI as compared to "operating expenses" and
"interest expense
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<PAGE> 46
and other income" that would have been incurred by the Surviving
Corporation if operated on a stand-alone basis, or resulting from changes
to the business of the Surviving Corporation imposed by SWI or SWMCI that
were not contemplated when the projections furnished by PTI to SWMCI were
prepared, and which would not otherwise have been incurred by PTI, or
which are not offset by incremental revenues resulting from such changes.
With respect to all Audit Periods other than the Audit Period ending December
31, 2002, SWI and the Shareholders' Committee will have ninety (90) days after
receiving the Earnings Report and the accompanying Income Statement for such
Audit Period to assert any disagreements with any items contained therein. The
Income Statement and Earnings Report for the Audit Period ending December 31,
2002 must be delivered to the Shareholders' Committee by February 28, 2003, and
SWI and the Shareholders' Committee will have until 5:00 p.m. EST on March 15,
2003 to assert any disagreements. If SWI and the Shareholders' Committee are
unable to resolve any properly asserted dispute concerning the final Earnings
Report by March 31, 2003, an independent accounting firm chosen in a manner set
forth in the Merger Agreement (the "Firm") will resolve the dispute. SWI and the
Shareholders' Committee may at any time, whether or not a Firm has been
retained, resolve any disputes and agree on the content of the final Earnings
Report and Final Cumulative Net Earnings. The fees of the Firm in connection
with this review and resolution of the disputes will be paid by SWI; however,
one-half of such costs will be deducted from the Contingent Merger Consideration
to which the Participating Holders would otherwise be entitled. The Contingent
Merger Consideration will be distributed promptly after the correct amount is
determined which can be no later than the fifth anniversary of the Closing date.
SWI has the right to withhold a portion of the earned Contingent Merger
Consideration, to satisfy indemnification obligations of PTI and the Principal
Shareholders for (i) claims made before January 15, 2000 but not satisfied out
of the Escrow, (ii) breaches of certain representations, warranties and
covenants relating to environmental matters arising after termination of the
Escrow but before January 15, 2003, and (iii) expenses relating to the
indemnification of the escrow agent for the Escrow. The number of shares of SWI
Common Stock that can be withheld will vary proportionately depending on how
much of the Contingent Merger Consideration is earned; however, the number of
shares of SWI Common Stock having an aggregate Closing Market Value of
$1,000,000 is the maximum number that can be withheld if all of the Contingent
Merger Consideration is earned. The number of shares of Contingent Merger
Consideration that are received by each Participating Holder will be
proportionately reduced to take into account shares of SWI Common Stock withheld
by SWI pursuant to such provision.
Additional Contingent Shares
In the event that the Contingent Merger Consideration becomes payable and
certain other conditions described below are met, the Participating Holders who
follow the procedures outlined below will be entitled to receive the Additional
Contingent Shares. The payment of the Additional Contingent Shares is intended,
in the event of limited appreciation in the value of SWI Common Stock, to
partially offset the tax liability that Participating Holders may incur as a
result of recognizing imputed interest income from the Contingent Merger
Consideration. To become eligible to receive a portion of the Additional
Contingent Shares, a Participating Holder must provide to SWI's independent
auditors by August 30, 2003 a copy of his or her federal and applicable state
tax returns for 2002 as actually filed. On February 1, 2003, SWI will mail a
reminder to each Participating Holder at his, her or its last known address
setting forth the name of its independent auditors and the address to which
copies of the Participating Holders' 2002 tax returns are to be sent.
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The number of shares of SWI Common Stock that will be Additional
Contingent Shares will be determined by dividing the amount of Additional
Consideration (as defined below) by the average of the closing prices of SWI
Common Stock as reported in the NYSE Composite Transactions for the ten trading
days ending on the third trading day prior to the day that the Additional
Contingent Shares, if any, are distributed to the Participating Holders. The
"Additional Consideration" is equal to one-half of the amount, if any, by which
the aggregate Individual Tax Liability (as defined below) of all of the
Participating Holders who submit their tax returns exceeds the appreciation in
the value of the Contingent Merger Consideration between the Closing date and
the date it was paid; however, the Additional Consideration cannot be greater
than $500,000 or less than zero. The "Individual Tax Liability" of the
Participating Holders is the amount, as reasonably estimated by SWI's
independent auditors based on the tax returns provided by Participating Holders,
by which the federal and state income tax liability of the Participating Holders
who submit their tax returns for 2002 would have increased if the amount of
imputed interest received by such Participating Holders as a result of the
distribution of the Contingent Merger Consideration had been included in such
Participating Holder's income for 2002.
The Additional Contingent Shares will be allocated among the Participating
Holders who submit their tax returns pro rata in the proportion that their
respective Individual Tax Liability bears to the aggregate Individual Tax
Liability of all such Participating Holders.
Transasia Consideration
If, during the period from January 1, 1998 until the Contingent Merger
Consideration is determined, the Surviving Corporation receives (i) payments of
"development fees" or payments on account of its "carried interest" pursuant to
the Transasia Agreement or (ii) net proceeds from the disposition of its
interest in the Transasia Agreement, then the Participating Holders will be
entitled to receive such amounts as Transasia Consideration. Such payments or
proceeds will be reduced by any taxes or expenses incurred in collecting and
administering such amounts and in determining the amount of the Transasia
Consideration. The aggregate amount payable as Transasia Consideration is
limited to not more than 20% of the aggregate value of the Initial Merger
Consideration and Contingent Merger Consideration received by the Participating
Holders. Any Transasia Consideration payable will be paid to the Participating
Holders by check on the date on which the certificates representing the
Contingent Merger Consideration are delivered or, if no Contingent Merger
Consideration is due, promptly after the amount of Transasia Consideration is
determined. To date, no development fees or payments on account of PTI's carried
interest pursuant to the Transasia Agreement have been paid.
Interests of Certain Persons in the Merger
Steven J. Balser, President and a Director of PTI, has an interest in the
Merger that is in addition to the interests of shareholders of PTI generally.
PTI has entered into an agreement with Mr. Balser that provides certain benefits
in the event of the termination of Mr. Balser's employment following a change of
control of PTI. The Merger will constitute a change in control of PTI within the
meaning of such agreement. This Agreement provides that if Mr. Balser is
terminated for other than "cause" within one year following the Merger, he will
be entitled to receive an amount equal to his annual salary pro-rated for each
month that he remains employed following the Merger, but in no event less than
50% of his annual salary. The Board of Directors of PTI was aware of this
interest and considered it, among other matters, in approving and adopting the
Merger Agreement and the transactions contemplated thereby.
In addition, it is a condition to the consummation of the Merger that Ian
Grant, Gordon Hirschman, James V. Mitsche, John D. Mountford, David J. Lawrence
and Timothy G. Schmehl, each a member of PTI's management, enter into employment
agreements with the Surviving Corporation.
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Effective Time
It is expected that the Closing contemplated by the Merger Agreement will
take place on or about August 14, 1998.
The date and time of the filing of appropriate merger documents with the
Secretary of State of the State of Delaware and the New York Department of
State, or such later time as may be specified therein, will be the Effective
Time of the Merger. PTI and SWI will cause such merger documents to be filed and
recorded as soon as practicable on or after the satisfaction or waiver of all
conditions to the Merger. It is expected that the Merger documents will be filed
on the Closing date, and will specify an Effective Time of not later than
September 1, 1998.
Resales of SWI Common Stock
The shares of SWI Common Stock to be issued as Initial Merger
Consideration pursuant to the Merger Agreement have been registered under the
Securities Act and may be traded without restriction by all former holders of
shares of PTI Common Stock who are not "affiliates," as such term is defined
under the Securities Act, of PTI ("Affiliates"). The Rights to receive the SWI
Common Stock, if any, payable as Contingent Merger Consideration and Additional
Contingent Shares have been registered under the Securities Act. Such Rights are
not transferable by the holders thereof, except by operation of law or in
accordance with the applicable laws of descent and distribution. Under the
Merger Agreement, SWI has agreed, if necessary, to register the shares of SWI
Common Stock, if any, issued as Contingent Merger Consideration and Additional
Contingent Shares under the Securities Act.
Directors, executive officers and certain 10% shareholders of PTI may be
deemed to be Affiliates. It is a condition to SWI's obligations under the Merger
Agreement that each Affiliate execute and deliver to SWI an affiliate letter (an
"Affiliate Letter") setting forth certain restrictions on such Affiliate's
ability to sell the shares of SWI Common Stock received in the Merger. Such
restrictions arise from the applicable provisions of Rules 144 and 145 under the
Securities Act. The signatory to the Affiliate Letter also makes certain
representations as to the tax-free nature of the Merger.
Shareholders' Committee
The Merger Agreement contemplates that each Participating Holder will
execute a Shareholders' Committee Agreement appointing F.S. Prabhakara, Mary A.
Sager and Douglas E. Welsh as the Shareholders' Committee to represent the
interests of the Participating Holders in connection with administering the
Escrow, negotiating indemnification disputes, resolving issues regarding the
amount of the Contingent Merger Consideration and resolving any other disputes
arising under the Merger Agreement and Escrow Agreement.
In addition, the Shareholders' Committee would be authorized to negotiate
with SWI for the payment of a reduced amount of the Contingent Merger
Consideration within the limitations described in the Shareholders' Committee
Agreement. The Shareholders' Committee would also be authorized to agree to
waive or amend any rights of the Represented Shareholders if authorized to do so
by the affirmative vote of the holders of two-thirds of the Participating Shares
held by the Represented Shareholders.
The members of the Shareholders' Committee were selected by an informal
vote of the PTI shareholders. The Shareholders' Committee Agreement grants the
members of the Shareholders' Committee a power of attorney to act on behalf of
the shareholders of PTI who sign such agreements (the "Represented
Shareholders"), authorizes the Shareholders' Committee to commence litigation,
releases the members of the Shareholders' Committee from certain breaches of
fiduciary duties, and provides for the Represented Shareholders to indemnify the
members of the Shareholders' Committee against any claims, liabilities or losses
incurred by them as a result of their actions as members of the Shareholders'
Committee. Two copies of a Shareholders' Committee Agreement are enclosed with
this Prospectus and Proxy Statement, and the PTI Board requests that you execute
and return these Agreements whether you vote for or against the Merger.
Participating Holders who do not execute Shareholders' Committee Agreements will
not be represented by the Shareholders' Committee and will be required to
independently resolve any disputes relating to the Merger with SWI directly.
Each of the members of the Shareholders' Committee will be entitled to an
annual retainer of $1,000 and will be paid $250 for each Shareholders' Committee
meeting that they attend (up to a maximum of four meetings per year). They will
also be entitled to be reimbursed for their reasonable out-of-pocket expenses
incurred in performing their duties as members of the Shareholders' Committee.
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In order to satisfy expenses incurred by the Shareholders' Committee
(including without limitation legal and accounting fees and expenses and
compensation paid to members of the Shareholders' Committee), an escrow account
will be established with a portion of the Initial Merger Consideration equal to
the number of shares of SWI Common Stock determined by dividing $250,000 by the
Closing Market Value. The number of shares of Initial Merger Consideration that
are received by each Participating Holder (whether or not they are a Represented
Shareholder) will be proportionately reduced. Any shares of SWI Common Stock not
used to satisfy expenses of the Shareholders' Committee will be distributed
proportionately to the Participating Holders.
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THE MERGER AGREEMENT
Representations and Warranties
PTI and SWI have made certain representations and warranties to each other
relating to, among other things, (i) organization and similar corporate matters;
(ii) capitalization, (iii) the authorization, execution, delivery and
performance of the Merger Agreement and absence of conflicts, violations and
defaults under their respective charter and by-laws and certain other agreements
and documents, (iv) preparation of financial statements, (v) absence of material
adverse changes and events since a certain date, (vi) compliance with laws,
(vii) absence of investigations and litigation, (viii) that no brokers were
involved in the transactions, and (ix) full disclosure of material information.
The Merger Agreement also contains additional representations and warranties of
PTI relating to, among other things, (i) collectibility of and adequacy of
reserves made for accounts receivable, (ii) taxes, (iii) contracts and other
agreements, (iv) real property owned and leased, (v) tangible property owned,
(vi) intellectual property, (vii) title to its properties, (viii) customers,
(ix) employee benefit plans, (x) employee relations, (xi) relationships with
affiliates of PTI, (xii) insurance coverage and claims, (xiii) banking
relationships, (xiv) compliance with environmental laws, (xv) year 2000
compliance of software owned or licensed by PTI and (xvi) the information
provided by PTI for inclusion in this Prospectus and Proxy Statement. The Merger
Agreement also contains an additional representation and warranty by SWI
relating to the documents and reports filed by SWI with the Commission. Certain
of the representations and warranties made by PTI and SWI also extend in many
respects to their respective subsidiaries and affiliates. In the case of SWI,
Merger Sub and SWMCI join in certain of the representations and warranties. In
addition, the Merger Agreement contains various representations and warranties
by the Principal Shareholders relating to, among other things, (i) authority to
execute, deliver and perform the Merger Agreement, (ii) absence of conflicts,
violations and defaults, (iii) title to their shares and (iv) accuracy of the
representations and warranties of PTI.
Certain Covenants
PTI has agreed that, except with the prior written consent of SWI and with
certain other exceptions set forth in the Merger Agreement, prior to the
consummation of the Merger it will observe certain covenants relating to the
conduct of its business, including conducting its business in the usual course
and using reasonable efforts to (i) preserve intact and keep available the
services of PTI's employees, (ii) keep in effect certain insurance policies in
coverage amounts not less than those in effect on the date that the Merger
Agreement was executed, (iii) preserve its business, advertise, promote and
market its services, keep its properties intact and preserve its goodwill, (iv)
use all reasonable efforts to preserve and protect its intellectual property
rights and (v) operate its business diligently and solely in the ordinary course
of business.
PTI has also agreed that, except with the prior written consent of SWI and
with certain other exceptions set forth in the Merger Agreement, it will not
take the following actions: (i) sell or transfer, or mortgage, pledge or create
or permit to be created any security interest on any of its assets, except for
sales or transfers in the ordinary course of business and the disposition by PTI
of shares of Hydropower Technologies, Inc. held by PTI on terms satisfactory to
SWI; (ii) incur any obligation or liability other than in the ordinary course of
business, incur any indebtedness for borrowed money or enter into any other
contracts or commitments involving payments of $50,000 or more, except for
purchase orders or commitments for inventory, materials, supplies and items for
customers in the ordinary course of business; (iii) change the compensation or
fringe benefits for any officer, director, employee, or consultant, except for
ordinary merit increases for employees other than officers based on periodic
reviews in accordance with past practices, or enter into or modify any employee
benefit plan or any employment severance or other agreement with any officer,
director, employee, or consultant of PTI (except that PTI may terminate certain
benefits plans and distribute certain accrued benefits payable under such plans
to the extent permitted under the Merger Agreement); (iv) grant or accelerate
the exercisability of any option, warrant, or other right to purchase, or
convert any obligation into shares of PTI capital stock (except that PTI may
accelerate the exercisability of options to purchase PTI Common Stock held by
employees and outstanding on the date of the Merger Agreement), declare or pay
any dividend or other distribution with respect to any shares of PTI capital
stock or issue any shares of its capital stock except upon the exercise of
certain options outstanding on the date of the Merger Agreement or in exchange
for shares of Class C Common Stock surrendered in exchange for shares of Class A
Common Stock upon the termination of the PTI Employee Stock Ownership Plan; (v)
amend its
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certificate of incorporation or by-laws (other than to limit its directors'
liabilities in certain cases and to provide for indemnification of the officers
and directors to the fullest extent permitted by New York law and SWI's internal
policies); (vi) make any material acquisition of property other than in the
ordinary course of business or (vii) to enter into or modify any license,
technology development or technology transfer agreement with any third party,
other than software license agreements between PTI and its customers in the
ordinary course of business on PTI's standard form of license agreement and
involving payments of less than $200,000.
PTI has additionally agreed that it will (i) permit SWMCI and SWI and
their authorized employees and representatives to have access to the assets,
properties, business, books, records and operations of PTI and its subsidiaries
and affiliates and to cause its employees and representatives to cooperate with
such investigation; (ii) identify to SWI all persons that PTI believes may be
affiliates of PTI for purposes of Rule 145 under the Securities Act, to furnish
information to SWI concerning such persons and to cause such persons to deliver
an Affiliate Letter to SWI; and (iii) to use reasonable efforts to cause each
Participating Holder to execute and deliver a Shareholders' Committee Agreement
authorizing a shareholders' representative to act on behalf of such
Participating Holders in certain matters. The Principal Shareholders have joined
in certain of the covenants made by PTI to SWI.
SWI has agreed that prior to the Effective Time, it will (i) take all
action it deems reasonably necessary to register under the Securities Act the
issuance of SWI Common Stock to the holders of PTI Common Stock as Initial
Merger Consideration, and, if necessary, the shares of SWI Common Stock issuable
as Contingent Merger Consideration and Additional Contingent Shares, if any,
under the Securities Act and take any action reasonably required to be taken
under state blue sky or securities laws in connection with the issuance of such
shares of SWI Common Stock pursuant to the Merger Agreement; (ii) take such
steps as are required to accomplish, as of the Effective Time, the listing of
the shares of SWI Common Stock to be issued as Initial Merger Consideration on
the NYSE; (iii) through the Closing date, furnish PTI with copies of each report
filed by SWI under the Exchange Act and to file all reports under the Exchange
Act in a timely manner and in compliance with the Exchange Act; (iv) provide
employees of the Surviving Corporation after the Merger with certain benefits
described in the Merger Agreement; (v) make available to the Surviving
Corporation working capital in an amount reasonably required to conduct the
business of the Surviving Corporation in the manner contemplated in the
projections furnished by PTI to SWI which form the basis for the calculation of
the Contingent Merger Consideration and on such other terms set forth in the
Merger Agreement; (vi) operate the Surviving Corporation as a separate entity
during the period before the Contingent Merger Consideration is paid and conduct
the business of the Surviving Corporation during such period in a manner which
maximizes the revenues and earnings of the Surviving Corporation; and (vii)
indemnify and hold harmless the former officers and directors of PTI with
respect to actions taken before the Effective Time to the fullest extent
permitted under New York law.
PTI and SWI have each agreed to (i) use their respective reasonable
efforts to obtain the other party's approval prior to issuance of any press
release or other information to the press or any third party with respect to the
Merger Agreement or the transactions contemplated thereby and (ii) not take any
action that would cause the Merger to fail to qualify as a tax free
reorganization.
Under the Merger Agreement, the Principal Shareholders, consisting of
Messrs. Steven J. Balser, Lionel O. Barthold and Ian S. Grant, as well as the
other directors of PTI, consisting of Messrs. Dale Douglass, Gordon B. Hirschman
and F.S. Prabhakara and Ms. Mary A. Sager, have each agreed that, until the
Merger Agreement is terminated, he or she will vote all shares of PTI Stock held
by him or her in favor of the approval of the Merger Agreement and the
transactions contemplated by the Merger Agreement and will not exercise
dissenters' rights with respect to a vote on such matters. Each of such
individuals has additionally granted to SWI an irrevocable proxy to vote all
shares of PTI held by such individuals in favor of the Merger Agreement and the
transactions contemplated by the Merger Agreement. As of the Record Date, such
individuals had voting control over, in the aggregate, 103,841 shares of PTI
Class A Common Stock, no shares of PTI Class B Common Stock, and 446 shares of
PTI Class C Common Stock, representing approximately 32.7% of all of the
outstanding shares of PTI Common Stock as of such date.
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Conditions of Merger
The respective obligations of SWI and PTI to consummate the Merger are
subject to the satisfaction of certain conditions, including the following: (i)
approval of the Merger Agreement and the Merger by the shareholders of PTI; (ii)
the absence of any order or injunction prohibiting consummation of the Merger;
(iii) the accuracy in all material respects of the representations and
warranties made to each party and compliance in all material respects with all
agreements and covenants by each party; (iv) the eligibility for trading on the
NYSE of SWI Common Stock to be issued as Initial Merger Consideration; (v) the
declaration by the Commission of the effectiveness of the Registration Statement
of which this Prospectus and Proxy Statement forms a part; (vi) the execution
and delivery of the Escrow Agreement by all parties thereto, and; (vii) the
delivery by each party of all certificates of public officials reasonably
requested by the other party.
The obligations of PTI and the Principal Shareholders to consummate and
effect the Merger are further subject to receipt of certain closing certificates
and a legal opinion and fulfillment, or the waiver thereof by PTI and the
Principal Shareholders before the Effective Time, of the following conditions:
(i) the representations and warranties of SWI contained in the Merger Agreement
shall be, in all respects, true as of and at the Effective Time with the same
effect as though made at such date, except as affected by transactions permitted
or contemplated by the Merger Agreement; (ii) SWI shall have performed and
complied, in all material respects, with all covenants required by the Merger
Agreement to be performed or complied with by SWI before the Effective Time;
(iii) Nixon, Hargrave, Devans & Doyle LLP shall have delivered to PTI and the
Principal Shareholders dated as of the Closing date and in a form satisfactory
to PTI and the Principal Shareholders its written opinion substantially to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code.
The obligations of SWI to consummate and effect the Merger are further
subject to the receipt of certain closing certificates and a legal opinion and
fulfillment, or to the waiver thereof by SWI before the Effective Time, of the
following conditions: (i) the representations and warranties of PTI contained in
the Merger Agreement shall be, in all respects, true as of and at the Effective
Time with the same effect as though made at such date, except as affected by
transactions permitted or contemplated by the Merger Agreement; (ii) PTI shall
have performed and complied, in all material respects, with all covenants
required by the Merger Agreement to be performed or complied with by PTI before
the Effective Time; (iii) PTI shall have delivered to SWI an Affiliate Letter
executed by each person affiliated by PTI who is required to execute such a
letter under the Merger Agreement; (iv) PTI shall have executed and delivered
the Merger Agreement, Escrow Agreement and related documents required to
effectuate the Merger and carry out the transactions contemplated thereby; (v)
SWMCI shall have entered into an employment and noncompetition agreement with
each of several key management employees of PTI and reached understandings with
at least seven out of ten key personnel identified by SWI to continue their
respective employment with the Surviving Corporation; (vi) PTI shall have
terminated the PTI Money Purchase Plan and Trust and the 401(k) Profit Sharing
Plan of PTI; (vii) Power Technologies International, Inc. shall have duly
redeemed all of its shares held by PTI; (viii) holders of not more than 5% of
the outstanding shares of PTI Common Stock on the date of the Merger Agreement
shall have received or be entitled to receive consideration pursuant to the
provisions of Section 623 of the NYBCL; (ix) Palmer & Dodge LLP shall have
delivered to SWI its written opinion that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code; (x) PTI shall
have delivered to SWI documentation necessary for SWI to change the authorized
signatories on PTI's bank and brokerage accounts; (xi) PTI shall have arranged
for the surrender and cancellation of any outstanding options exercisable for
PTI Common Stock, and; (xii) the SWI Board of Directors shall have ratified the
execution and delivery of the Merger Agreement by SWI.
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Termination
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether prior to or after approval by PTI's shareholders, as follows: (i)
by either SWI or PTI if, without fault of the terminating party, the Closing
date shall not have occurred on or before September 1, 1998, which date may be
extended by mutual consent of the parties; (ii) by PTI if any representation or
warranty of SWI made herein was not true and correct in all material respects
when made, or if SWI has materially breached any covenant contained in the
Merger Agreement and has not cured such breach within 30 business days of
receipt of written notice from PTI or by the Closing date, whichever occurs
first; (iii) by SWI upon written notice to PTI if any representation or warranty
made in the Merger Agreement by PTI or a Principal Shareholder was not true and
correct in all material respects when made, or PTI or any Principal Shareholder
has materially breached any covenant in the Merger Agreement and has not cured
such breach within 30 business days of receipt of written notice from SWI or by
the Closing date, whichever occurs first; (iv) if a court of competent
jurisdiction or governmental body shall have issued an order, decree or ruling
or taken any other action restraining, enjoining or otherwise prohibiting the
Merger and such order, decree or ruling shall have become final and
nonappealable; (v) by PTI or SWI if the PTI shareholders vote and fail to
approve the Merger as required by New York law (provided that SWI does not have
the right to terminate the Merger Agreement for this reason if PTI would
otherwise have a right to terminate this Agreement); (vi) by SWI if PTI's Board
of Directors (a) fails to include in this Prospectus and Proxy Statement its
recommendation that the PTI shareholders vote in favor of the adoption of the
Merger Agreement, (b) withdraws its recommendation that shareholders vote in
favor (other than in connection with exercising PTI's rights to terminate the
Merger Agreement pursuant to any other provisions) or (c) adopts resolutions
approving or otherwise authorizes an acquisition transaction prior to
termination of the Merger Agreement; (vii) by PTI, by 5:00 p.m. Boston time on
the second business day prior to the Closing date, if the Closing Market Value
is greater than $60.00; provided that SWI may negate such termination by
notifying PTI prior to 5:00 p.m. Boston time on the day prior to the Closing
date of its election to use $60.00 as the Closing Market Value; (viii) by SWI,
by 5:00 p.m. Boston time on the second business day prior to the Closing date,
if the Closing Market Value is less than $35.00; provided that PTI may negate
such termination by notifying SWI prior to 5:00 p.m. Boston time on the day
prior to the Closing date of its election to use $35.00 as the Closing Market
Value; (ix) by SWI, if the Disclosure Schedule to the Merger Agreement delivered
by PTI as of the Closing date reflects any event, fact, circumstance or
condition (a) which was in existence on or as of the date hereof or which arose
subsequent to the date hereof, (b) which was not reflected on the PTI Disclosure
Schedule delivered with the Merger Agreement when executed, and (c) which
represents a material adverse change in the business or financial condition of
PTI; or (x) at any time with the written consent of SWI and PTI.
Termination Fee
PTI will be required to pay SWI a termination fee of $300,000 if the
Merger Agreement is terminated (i) by SWI because PTI or a Principal Shareholder
breaches a material representation, warranty or covenant and fails to timely
cure such breach or (ii) by SWI or PTI if PTI fails to obtain the requisite
shareholder approval or the PTI Board withdraws its recommendation that the
shareholders vote in favor of the Merger if at the time of such failure or
withdrawal or within 12 months thereafter, PTI or a Principal Shareholder shall
have entered into an agreement to engage in a merger or business combination
transaction with any person other than SWI or if the PTI Board approves or
recommends that the PTI shareholders approve such a transaction.
Waiver and Amendment
At any time prior to the Effective Time (i) the parties to the Merger
Agreement may, by written agreement, waive or extend the time for performance of
any obligation under the Merger Agreement, and (ii) any term or provision of
the Merger Agreement may be waived in writing by the party entitled to the
benefits thereof.
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No Solicitation
PTI has agreed not to (i) solicit, initiate or encourage discussions with
any person, other than SWI, relating to the possible acquisition of PTI or all
or a material portion of the assets or capital stock of PTI or any merger or
other business combination with PTI, or (ii) except to the extent reasonably
required by fiduciary obligations under applicable law as advised in writing by
independent legal counsel, participate in any negotiations regarding, or furnish
to any other person information with respect to, any effort or attempt by any
other person to do or to seek any such transaction.
Indemnity and Escrow
Under the Merger Agreement, the holders of PTI Common Stock outstanding
immediately prior to the Effective Time, agree, jointly and severally, to
indemnify and hold harmless SWI (and its respective directors, officers,
employees, agents, affiliates and assigns) from and against all losses,
liabilities, damages, deficiencies, costs or expenses, including interest and
penalties and reasonable attorneys' fees whether or not arising out of
third-party claims, and including all amounts paid in investigation, defense or
settlement of any actions or claims or related proceedings (i) based upon,
arising out of or otherwise in respect of any inaccuracy in, or breach of, any
representation, warranty or covenant of PTI contained in the Merger Agreement or
in any certificate delivered pursuant to the Merger Agreement (separately and
together, "Losses") or (ii) resulting from the redemption by PTI on or after the
date of the Merger Agreement of any shares of PTI Common Stock pursuant to any
Share Repurchase Agreements between PTI and any shareholder of PTI. PTI and SWI
have agreed, however, that with respect to any Losses based upon or arising out
of a breach of or inaccuracy in the representations and warranties relating to
environmental matters, Losses shall only consist of: (i) losses relating to
Hazardous Materials (as such term is defined in the Merger Agreement) generated,
used, handled, treated, stored or disposed or released by PTI at any site owned
or premises leased by PTI, or relating to underground storage tanks located at
such sites or premises; (ii) losses relating to off-site shipments of Hazardous
Materials from any site owned by or premises leased by PTI, for the purpose of
treatment, storage or disposal; (iii) losses relating to conditions of which PTI
had knowledge as of the Closing date and which were not disclosed in the
Disclosure Schedule delivered by PTI; (iv) losses relating to PTI's property
situated on the site known as Parcel 344 - Schenectady Industrial Development
Corporation located at 344 Knott Street, Schenectady, New York, and; (v) losses
not described in clauses (i), (ii) and (iii) above which arise as a result of
conditions (a) revealed by means other than (x) any environmental investigations
conducted by or on behalf of SWI, or (y) any environmental investigations
conducted by any third party which SWI, SWMCI or the Surviving Corporation is
not required to permit under any applicable law(s) regulation(s) or order(s) of
a governmental authority, or which are not required under any applicable law(s),
regulation(s) or order(s) of a governmental authority, and (b) required by any
applicable law(s), regulation(s) or of a governmental authority to be reported
and remediated.
Each Principal Shareholder has agreed to indemnify SWI (and its directors,
officers, employees, agents, affiliates and assigns) from and against Losses
based upon, arising out of or otherwise in respect of any inaccuracy in, or
breach of, any representation, warranty or covenant of such Principal
Shareholder contained in the Merger Agreement or in any certificate delivered
pursuant to the Merger Agreement.
A number of the shares of SWI Common Stock payable as Initial Merger
Consideration equal to $1,000,000 divided by the Closing Market Value and
multiplied by the greater of the Participation Percentage or 95% will be held in
escrow (the "Escrow") to satisfy indemnity obligations based on representations,
warranties or covenants of PTI and the Principal Shareholders contained in the
Merger Agreement. The Escrow will be held until January 15, 2000 or until claims
made by SWI during such period are resolved. In addition, SWI has the right to
withhold from the Contingent Merger Consideration, to the extent earned, shares
of SWI Common Stock having an aggregate Closing Market Value of up to a maximum
amount of $1,000,000 (assuming that all of the Contingent Merger Consideration
is earned) to satisfy indemnification obligations of PTI and the Principal
Shareholders for (i) claims made before January 15, 2000 but not satisfied out
of the Escrow, (ii) breaches of certain representations, warranties and
covenants relating to environmental matters arising after termination of the
Escrow but before January 15, 2003, and (iii) expenses relating to the
indemnification of the escrow agent for the Escrow. No indemnification shall be
payable by SWI, on the one hand, or PTI and the Principal Shareholders, on the
other hand, until the aggregate amount of all Losses covered by their respective
obligations to indemnify exceed $100,000.
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Notwithstanding the foregoing, no indemnification shall be payable by PTI for
Losses arising out of any breach by PTI of its representations and warranties
relating to intellectual property matters except to the extent that such Losses,
in the aggregate, exceed $25,000.
In addition, to the extent that the amount of claims and expenses for
which SWI may withhold shares of SWI Common Stock otherwise payable as
Contingent Merger Consideration are disputed or cannot be readily ascertained on
the date that the Contingent Merger Consideration is paid, then SWI may withhold
and deposit into escrow an amount of shares of SWI Common Stock having an
aggregate Closing Market Value equal to the estimated amount of such claims. The
escrow into which such shares are deposited will provide for customary terms and
conditions substantially similar to those contained in the Escrow Agreement.
By voting in favor of the Merger, a PTI shareholder is approving the terms
and conditions of the Escrow Agreement and thereby is agreeing to share in the
obligation to indemnify SWI under the Merger Agreement to the extent of the
funds deposited in escrow.
CERTAIN OTHER MATTERS RELATING TO THE MERGER
Regulatory Matters
Other than the filing of appropriate merger documents with the Secretary
of State of Delaware and the New York Department of State, the declaration of
effectiveness of the Registration Statement of which this Prospectus and Proxy
Statement is a part, and routine approvals and actions required under PTI's
permits and licenses to reflect the change in control of PTI, there are no
governmental approvals required to effect the Merger.
Expenses
The Merger Agreement provides that if the Merger is not consummated, SWI
and PTI will each bear their respective expenses incurred in connection with the
preparation, execution, and performance of the Merger Agreement and the
transactions contemplated thereby. The Principal Shareholders will bear their
own expenses whether or not the Merger is consummated. SWI will pay all fees
relating to the registration and issuance of the shares of SWI Common Stock
comprising the Initial Merger Consideration and the rights to receive the
Contingent Merger Consideration and Additional Contingent Shares under
applicable federal and state securities laws. The expense of printing the
Prospectus and Proxy Statement will also be borne by SWI.
Accounting Treatment
The Merger will be accounted for under the purchase method of accounting
in accordance with generally accepted accounting principles ("GAAP"). Under this
method of accounting, the purchase price, including costs directly related to
the Merger, will be allocated to the assets acquired and liabilities assumed
based upon their estimated fair values as of the date of consummation, with any
excess purchase consideration allocated to cost in excess of net assets
acquired. The operating results of PTI will be included with those of SWI from
the date of consummation.
Employee Stock Ownership Plan Contribution and Termination; Termination of
Termination Bonus Plan and Payment of Accrued Benefits
If all of the conditions precedent to the Closing have been satisfied or
waived on or before August 31, 1998 then, immediately following such event, PTI
will make a contribution to the PTI ESOP for the plan year ended December 31,
1997 in an amount sufficient to pay the indebtedness encumbering the shares of
PTI Class C Common Stock held by the ESOP. At December 31, 1997, the outstanding
balance of such indebtedness was $347,921. Upon payment of the indebtedness, all
shares held by the ESOP will be allocated to the respective accounts of the ESOP
participants pro rata based on the existing allocation of shares under the ESOP
and, thereafter, the ESOP will be terminated and the ESOP shares distributed to
the participants. In addition, following the consummation of the Merger, PTI's
Termination Bonus Plan, under which employees of PTI are eligible to receive a
cash payment upon termination of employment, will be terminated. Upon the
termination of such plan, the employees eligible to participate in the plan will
be paid their accrued benefits through December 31, 1997.
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MANAGEMENT AND OTHER INFORMATION
Immediately following the consummation of the Merger, PTI will be a
wholly-owned subsidiary of SWI, and all of PTI's subsidiaries will be indirect
wholly-owned subsidiaries of SWI. As soon as practicable following the Effective
Time, SWI will transfer all shares of the Surviving Corporation to SWMCI so that
the Surviving Corporation will become a wholly-owned subsidiary of SWMCI and an
indirect wholly-owned subsidiary of SWI. After the consummation of the Merger,
SWI will be managed by the same Board of Directors and executive officers as
existed prior to the Merger. Certain information relating to the management,
executive compensation, certain relationships and related transactions and other
related matters pertaining to SWI is set forth in or incorporated by reference
in SWI's Annual Report on Form 10-K for the fiscal year ended December 31, 1997,
which is incorporated by reference in this Prospectus and Proxy Statement and
attached hereto as Appendix C. See "Incorporation of Certain Documents by
Reference." In addition, attached as Appendix F hereto is copy of SWI's Revised
Schedule 14A Proxy Statement Pursuant to Section 14(a) of the Exchange Act, as
filed with the Commission on July 8, 1998, which contains certain of such
information which is incorporated by reference into SWI's Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences
of the Merger. This summary is not a complete description of all of the federal
income tax consequences of the Merger, nor does it discuss the possible tax
consequences of the Merger to shareholders who are subject to special treatment
under the Code, such as shareholders who are not U.S. citizens or residents,
shareholders who do not hold their PTI Common Stock as a capital asset, or
shareholders who acquired their PTI Common Stock pursuant to the exercise of
employee stock options or otherwise as compensation. In addition, this summary
does not discuss the tax consequences of the Merger under state, local or
foreign law. PTI shareholders are urged to consult their own tax advisors
regarding the tax consequences of the Merger to them based on their particular
tax situations, as well as the effects of state, local and foreign law.
The following discussion is based on the law in effect on the date of this
Prospectus and Proxy Statement. If changes are made to current law, the tax
consequences of the Merger may vary from those described in this summary.
Palmer & Dodge LLP, counsel to SWI, and Nixon, Hargrave, Devans & Doyle
LLP, counsel to PTI, have each delivered an opinion that the description of the
federal income tax consequences of the Merger contained in this section fairly
and accurately summarizes the material federal income tax consequences of the
Merger. These opinions, which are attached as Exhibits 8.1 and 8.2,
respectively, to the Registration Statement of which this Prospectus and Proxy
Statement is a part, are based on certain assumptions and subject to certain
limitations and qualifications, including the assumption that the Merger will be
implemented as described in this Prospectus and Proxy Statement and the Merger
Agreement. Neither this summary nor the opinions of counsel to SWI and PTI are
binding on the Internal Revenue Service (the "IRS"), and no rulings have been or
will be requested from the IRS with respect to the Merger.
Tax Consequences of the Merger
Based upon and subject to the assumptions and limitations stated above, it
is the opinion of Palmer & Dodge LLP and Nixon, Hargrave, Devans & Doyle LLP
that the Merger will constitute a reorganization within the meaning of Section
368(a) of the Code and that the material federal income tax consequences of the
Merger will be as follows:
(i) no gain or loss will be recognized by PTI or SWI by reason of the
Merger;
(ii) no gain or loss will be recognized by PTI shareholders on account of
their receipt of SWI Common Stock as Initial Merger Consideration in exchange
for their PTI Common Stock;
(iii) PTI shareholders who receive cash in lieu of fractional shares of
SWI Common Stock will be treated as if the fractional shares were distributed as
part of the exchange and then redeemed by SWI; shareholders will recognize gain
or loss as a result of this deemed redemption in an amount equal to the
difference between the cash received and the portion of the basis in their PTI
Common Stock allocable to the fractional shares they are
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<PAGE> 57
deemed to have received; such gain or loss will be capital gain or loss if a
shareholder held his or her PTI Common Stock as a capital asset at the Effective
Time;
(iv) in the event that Contingent Merger Consideration and Additional
Contingent Shares (together, "Contingent Shares") are issued, a portion of such
Contingent Shares will be considered a payment of interest under the "imputed
interest" rules of section 483 of the Code, and PTI shareholders will recognize
ordinary income upon their receipt of such portion; no gain or loss will be
recognized by PTI shareholders on account of their receipt of the remaining
portion of the Contingent Shares in exchange for their PTI Common Stock;
(v) in the event that a payment of Transasia Consideration is made, a
portion of such payment will be considered a payment of interest under the
"imputed interest" rules of section 483 of the Code, and PTI shareholders will
recognize ordinary income upon their receipt of such portion; the remaining
portion of the Transasia Consideration will be treated as part of the
consideration received by PTI shareholders in exchange for their PTI Common
Stock, and the gain, if any, to a PTI shareholder upon such exchange will be
recognized, but not in an amount in excess of the non-interest portion of the
Transasia Consideration received; such gain will be capital gain if the PTI
Common Stock was held as a capital asset at the Effective Time, unless the
exchange has the effect of the distribution of a dividend; if the exchange has
the effect of the distribution of a dividend, then the amount of gain recognized
that is not in excess of each shareholder's ratable share of the undistributed
earnings and profits of PTI at the Effective Time will be treated as a dividend;
generally, a payment of Transasia Consideration to a PTI shareholder should not
be treated as having the effect of the distribution of a dividend;
(vi) the basis of the SWI Common Stock received by a PTI shareholder,
including fractional share interests, shares held in escrow and Contingent
Shares, if any (excluding Contingent Shares treated as interest), will be the
same as the basis of the PTI Common Stock exchanged therefor, decreased by the
amount of Transasia Consideration, if any, received (excluding Transasia
Consideration treated as interest) and increased by the amount of gain required
to be recognized by the shareholder; while not free from doubt, it is expected
that, until such time as it is possible to determine the actual number of
Contingent Shares, if any, to be issued, the interim basis of the SWI Common
Stock received in exchange for PTI Common Stock will be determined by assuming
that the maximum number of Contingent Shares (excluding Contingent Shares
treated as imputed interest) which could be issued will be issued; in addition,
no basis adjustments should be required with respect to the Transasia
Consideration, if any, to which shareholders may be entitled, until such
Transasia Consideration is received;
(vii) the holding period of the SWI Common Stock received by a PTI
shareholder (including fractional share interests and Contingent Shares, if any,
but not including the portion of any Contingent Shares treated as interest) will
include the period during which the PTI Common Stock surrendered in exchange
therefore was held, provided that the PTI Common Stock was held as a capital
asset at the Effective Time;
(viii) the portion of Contingent Shares, if any, treated as interest will
have a basis equal to the fair market value of such portion on the date it is
treated as having been received by a PTI shareholder and will have a holding
period beginning on such date; and
(ix) a PTI shareholder who exercises dissenters' rights with respect to
his or her shares will generally recognize gain or loss measured by the
difference between the shareholder's basis in his or her PTI Common Stock and
the amount of cash received, and such gain or loss will be capital gain or loss
if the PTI Common Stock was held as a capital asset at the Effective Time.
Consummation of the Merger is conditioned on the receipt of an opinion of
Nixon, Hargrave, Devans & Doyle LLP and of Palmer & Dodge LLP, each dated as of
the Effective Time, that the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code. Delivery of these opinions will be based
on receipt by such counsel of representations by PTI and SWI substantially
similar to representations that the IRS customarily requires for advance rulings
on tax free acquisitive reorganizations and facts that are reasonably consistent
with facts existing at the Effective Time.
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DESCRIPTION OF SWI
The business of SWI is described in SWI's annual report on Form 10-K for
the fiscal year ended December 31, 1997, which is incorporated herein by
reference and attached as Appendix C hereto. See "Incorporation of Certain
Documents By Reference."
SWI SHARE OWNERSHIP
The following table sets forth information with respect to (i) all persons
who are known to SWI to be the beneficial owner of more than five percent of the
outstanding SWI Common Stock, (ii) all directors of SWI, (iii) each of the
executive officers of SWI named in the Summary Compensation Table filed as part
of the Company's Proxy Statement dated March 31, 1998 (the "Named Executive
Officers") and (iv) all directors and executive officers of SWI as a group. The
information set forth below is based solely on information furnished by each
stockholder as contained in filings made by such person with the Commission, and
is as of May 31, 1998 unless otherwise indicated.
<TABLE>
<CAPTION>
Shares of SWI Common Percentage of SWI
Name Stock Beneficially Owned(1) Common Stock Outstanding(1)
---- --------------------------- ---------------------------
<S> <C> <C>
Employee Stock Ownership Plan .................... 2,572,334 (2) 20.1%
FMR Corp. ........................................ 1,667,600 (3) 13.0
Employee Investment Plan ......................... 1,471,205 (4) 11.5
Frank J.A. Cilluffo .............................. 725,971 (5)(8) 5.7
H. Kerner Smith .................................. 139,632 (6)(7) 1.1
John P. Merrill, Jr .............................. 7,576 (8) *
Bernard W. Reznicek .............................. 7,645 (8) *
Robert C. Wiesel ................................. 30,262 (6)(9) *
Kent F. Hansen ................................... 5,471 (8) *
J. Angus McKee ................................... 6,193 (8) *
Peter M. Wood .................................... 5,776 (8) *
David N. McCammon ................................ 5,658 (8) *
Donna F. Bethell ................................. 5,071 (8) *
Elvin R. Heiberg III ............................. 5,071 (8) *
Edward J. Walsh .................................. 21,710 (6)(9) *
Daniel P. Levy ................................... 6,019 (6)(9) *
Thomas L. Langford ............................... 7,000 (6)(9) *
All directors and executive officers
as a group (17 persons)(10) ...................... 993,247 7.6
</TABLE>
- ----------
* Percentage is less than 1% of the total number of outstanding shares of
SWI Common Stock.
(1) The number of shares beneficially owned by each director or executive
officer is determined under rules of the Securities and Exchange
Commission, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under such rules, beneficial
ownership includes any shares as to which the individual has the sole or
shared voting power or investment power and also any shares which the
individual has the right to acquire within 60 days of May 31, 1998 through
the exercise of any stock option or other right. Unless otherwise
indicated, each person has sole investment and voting power (or shares
such power with his or her spouse) with respect to the shares set forth in
the table. The inclusion therein of any shares deemed beneficially owned
does not constitute an admission of beneficial ownership of such shares.
The number of shares deemed outstanding includes shares outstanding as of
May 31, 1998, plus any shares subject to issuance upon exercise of options
held by the person in question that are currently exercisable or
exercisable within 60 days after May 31, 1998.
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<PAGE> 59
(2) Pursuant to the Employee Stock Ownership Plan of Stone & Webster,
Incorporated and Participating Subsidiaries (the "ESOP"), shares allocated
to the accounts of participants are voted as the participants direct, and
allocated shares as to which participants have not given directions and
all unallocated shares are voted in the proportions the allocated shares
are voted by the participants. Shares held under the ESOP may not be
transferred by the trustee of that plan, other than to meet distribution
requirements of the ESOP or in connection with a statutory
reclassification of the Corporation's Common Stock or a statutory merger,
consolidation or sale of assets or in certain limited circumstances, upon
the direction of the participants. As of March 16, 1998, the Payroll-based
Employee Stock Ownership Plan (PAYSOP) trust (which was merged into, but
held in a separate account within, the ESOP trust effective as of January
1, 1995) held 66,118 shares (approximately 0.5%) of Common Stock. Shares
allocated to the accounts of participants from the PAYSOP are voted as the
participants direct, and allocated shares as to which no participant
directions are given will not be voted. Shares held are as of March 16,
1998.
(3) FMR Corp., reporting for itself, and Edward C. Johnson 3d and Abigail P.
Johnson have furnished information to the Corporation which disclosed that
as of December 31, 1997 they and affiliated entities exercised investment
discretion with respect to 1,667,600 shares which were owned by their
accounts and investment advisory clients.
(4) The Committee (the "Plan Committee") under the Employee Investment Plan of
Stone & Webster, Incorporated and Participating Subsidiaries (the
"Employee Investment Plan") may be considered beneficial owner of the
shares held under the Employee Investment Plan by reason of its shared
voting power over such shares. The Employee Investment Plan provides that
shares allocated to the investment accounts of participants will be voted
as the participants direct, and shares as to which participants have not
given directions will be voted in accordance with the direction of the
Plan Committee. The Plan Committee is presently composed of Donna F.
Bethell, Chairman, J. Angus McKee, H. Kerner Smith and Peter M. Wood, a
majority of whom are non-employee Directors of the Corporation and each of
whom has a mailing address at the Corporation. Shares held are as of March
16, 1998.
(5) Frank J.A. Cilluffo, a Director of the Corporation, reporting for himself
and Cilluffo Associates, L.P., Zenith Associates, L.P., Frank and Irja
Cilluffo Foundation, and Edward C. Meyer, has furnished information to the
Corporation which disclosed that as of March 16, 1998, such individuals
and entities beneficially owned, taken together, 721,871 shares. Mr.
Cilluffo disclaims beneficial ownership of the 615,200 shares held by
Cilluffo Associates, L.P. and the 105,800 shares held by Zenith
Associates, L.P. except to the extent of his pecuniary interest in the
securities. He also disclaims beneficial ownership of 10,000 shares held
by the Frank and Irja Cilluffo Foundation which are not included in the
total above. Mr. Cilluffo also has options to purchase 4,000 shares issued
under the Corporation's 1995 Stock Option Plan which are currently
exercisable or will be exercisable within 60 days following May 31, 1998.
(6) Includes (i) shares allocated under the Employee Investment Plan and which
are subject to its terms and provisions with respect to termination and
withdrawal and, in limited circumstances, to forfeiture, and held as of
December 31, 1997 by Putnam Fiduciary Trust Company, trustee under the
plan (with respect to such shares, voting power and investment power are
determined in accordance with the provisions of the plan); (ii) shares
allocated under the ESOP and which are subject to its terms with respect
to forfeiture and held as of December 31, 1997 by The Chase Manhattan
Bank, N.A., trustee under the plan; (iii) shares allocated under the
PAYSOP and which are subject to its terms and held as of December 31, 1997
by The Chase Manhattan Bank, N.A., trustee; and (iv) shares awarded under
the Corporation's Restricted Stock Plan and which are subject to its terms
with respect to forfeiture. Shares held in accounts of employees in the
Employee Investment Plan, ESOP and PAYSOP, including Messrs. Smith, Walsh,
Wiesel, Langford and Levy, are voted by the trustees of such plans in
accordance with the instructions of the employees; in the absence of such
instructions, such shares are voted by the trustees in accordance with the
terms of such plans.
(7) Shares shown include: 100,000 shares issuable upon exercise of stock
options issued under the Corporation's 1995 Stock Option Plan which are
exercisable during the ten year term of the options granted on February
12, 1996; and 18,500 of the 37,000 shares issuable upon exercise of stock
options issued April 16, 1996 and 10,000 of the 40,000 shares issuable
upon exercise of stock options issued April 21, 1997, each for ten year
terms, under the Corporation's 1995 Stock Option Plan which vest 25% on
each of the first four anniversaries of the dates of grant. Under the
Rules of the Commission, such shares issuable under currently exercisable
options are considered to be beneficially owned for the purpose of this
Registration Statement. For the purpose of calculating percentage
ownership, such shares were also considered to be outstanding.
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<PAGE> 60
(8) Shares shown include 4,000 shares issuable upon exercise of stock options
issued to each non-employee Director under SWI's 1995 Stock Option Plan
which are currently exercisable or will be exercisable within 60 days
following May 31, 1998.
(9) Shares shown include shares issuable upon exercise of stock options issued
to Executive Officers under SWI's 1995 Stock Option Plan which are
currently exercisable or will be exercisable within 60 days including: Mr.
Wiesel, 24,000, Mr. Walsh, 19,000, Mr. Langford, 5,000 and Mr. Levy,
3,750.
(10) Includes shares allocated under the Employee Investment Plan, the ESOP and
the PAYSOP, and shares issuable with respect to options granted under the
1995 Stock Option Plan which are currently exercisable. The nature of
beneficial ownership for said outstanding shares was sole voting and
investment power, except (i) as referred to in footnotes (5) through (9)
above, and (ii) with respect to 4,413 shares held under the Employee
Investment Plan where voting power was shared.
DESCRIPTION OF SWI CAPITAL STOCK
General Description
The Restated Certificate of Incorporation, as amended, of SWI (the "SWI
Certificate") authorizes the issuance of 2,000,000 shares of Preferred Stock, no
par value, and 40,000,000 shares of SWI Common Stock, $1 par value per share. At
June 30, 1998, there were 12,793,789 shares of SWI Common Stock outstanding and
no shares of Preferred Stock outstanding. Should Preferred Stock be issued
in the future, holders thereof will have preferential rights over holders of SWI
Common Stock with respect to dividends, liquidation and certain other matters
and may be entitled to vote under certain circumstances.
The following description summarizes certain provisions of the SWI
Certificate relating to SWI Common Stock, SWI Preferred Stock, SWI Series A
Junior Participating Preferred Stock and Rights to Purchase Series A Junior
Participating Preferred Stock. For a full description, reference is made to the
SWI Certificate which is an exhibit to the Registration Statement of which this
Prospectus and Proxy Statement is a part. For a description of the Rights, see
"The Merger -- Contingent Consideration."
Description of SWI Common Stock
Dividend Rights
Subject to the preferential rights of holders of Preferred Stock should
any Preferred Stock be issued in the future, holders of SWI Common Stock are
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefor.
Voting Rights and Other Matters
Subject to the voting rights of holders of Preferred Stock should
Preferred Stock be issued in the future, holders of SWI Common Stock exclusively
possess voting power for all purposes. The voting rights are non-cumulative.
The directors of SWI are divided into three classes with the number of
directors fixed by or in accordance with the SWI By-laws divided equally so far
as possible among the classes. At each annual election, one class of directors
is elected by vote of a majority of SWI's outstanding voting stock for a term of
three years. Special voting provisions apply to any change in the number of
directors, to the filling of vacancies on the SWI Board when not filled by the
remaining directors and to the removal of directors without cause under certain
circumstances. In addition, with certain exceptions, the SWI Certificate
requires the affirmative vote of two-thirds of SWI's outstanding voting stock to
authorize specified corporate transactions (including certain mergers, sale of
substantially all of SWI's assets and the like) involving SWI, or any subsidiary
of SWI, and any owner of 5% or more of SWI's outstanding voting stock. The
foregoing special voting provisions may only be changed upon a specified vote of
the directors and/or stockholders of SWI.
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In addition to the provisions referred to in the preceding paragraph, the
SWI Certificate contains provisions pertaining to so-called "front-end loaded"
tender offers and similar transactions where an initial acquisition of a
substantial portion of the outstanding stock of a company is followed by a
second step transaction (such as a merger) in which the shares held by the
stockholders who did not participate in the first transaction are to be acquired
at a lower price. These provisions require that a second step transaction
initiated by a holder of at least 10% of the outstanding voting stock of SWI be
approved by 80% of all outstanding voting stock and a majority of the publicly
held voting stock (i.e., not including the 10% holder's shares). Neither SWI and
its subsidiaries nor any trustee or committee under any employee pension, stock
ownership, savings or similar employee benefit plan is considered a 10% holder.
The aforementioned votes will not be required where the purchase of SWI's shares
by the 10% holder in the second step transaction is for consideration equal to
or greater than the highest price previously paid by the 10% holder to acquire
shares of a class or an amount bearing the same or a greater percentage
relationship to the then market price of shares of any class of which the 10%
holder has previously acquired shares as the highest price per share paid by the
10% holder in the earlier transaction(s) by which the 10% holder achieved that
status, bears to the lower of the market price of shares of such class of shares
immediately prior to the public disclosure of, or the commencement of, such
earlier transaction(s). The consideration must be payable either in cash or in
the same form of consideration given for the majority of the shares of the class
previously acquired by the 10% holder. Any amendment of the provisions described
in this paragraph requires the approval of 80% of all outstanding voting stock
and a majority of the publicly held voting stock (i.e., not including the shares
held by the 10% holder). The SWI Certificate also requires the SWI Board, when
evaluating a merger, reorganization, tender offer or other similar proposal, to
consider all relevant factors, including the social, legal and economic effects
of the transaction as well as alternative measures of SWI's value.
Liquidation Rights
Subject to the preferential rights of holders of Preferred Stock should
any Preferred Stock be issued in the future, in the event of any liquidation,
dissolution or winding up of SWI, or any reduction of its capital resulting in
any distribution of its assets to its stockholders, the holders of SWI Common
Stock are entitled to receive, pro rata, all the remaining assets of SWI
available for distribution to its stockholders.
Pre-emptive Rights
No holder of shares of SWI Common Stock has preferential, pre-emptive or
other rights to subscribe for or purchase any stock of SWI of any class, or
securities convertible into stock.
Liability for Future Calls or Assessments
All outstanding shares of SWI Common Stock are fully paid and
non-assessable.
Limitations on Rights of Common Stock
See "-- Description of SWI Preferred Stock" below for a description of the
limitations that would be placed on the SWI Common Stock by the rights of the
SWI Preferred Stock, should any SWI Preferred Stock be issued in the future. See
" -- Description of SWI Series A Junior Participating Preferred Stock, Rights to
Purchase Series A Junior Participating Preferred Stock and the Rights" below for
a description of the provisions that would have the effect of delaying,
deferring or preventing a change of control of SWI in the event of an
extraordinary corporate transaction.
Description of SWI Preferred Stock
Preferred Stock may be issued from time to time in one or more series and
the SWI Board, without further approval of the shareholders, is authorized to
fix the dividend rights and terms, conversion rights, voting rights, redemption
rights and terms, liquidation preferences, sinking or purchase fund or agreement
and any other rights, preferences, privileges and restrictions applicable to
each such series of Preferred Stock. The purpose of authorizing the SWI Board to
determine such rights and preferences is to eliminate delays associated with a
shareholder vote on specific issuances. The issuance of Preferred Stock, while
providing flexibility in connection
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with possible acquisitions and other corporate purposes, could, among other
things, adversely affect the voting power of holders of SWI Common Stock and,
under certain circumstances, make it more difficult for a third party to gain
control of SWI.
SWI's Certificate authorizes the issuance of 2,000,000 shares of Preferred
Stock. At June 30, 1998 no shares of Preferred Stock had been issued.
Description of SWI Series A Junior Participating Preferred Stock, Rights to
Purchase Series A Junior Participating Preferred Stock and the Rights to be
Issued in the Merger
The descriptions of SWI's Series A Junior Participating Preferred Stock
and Rights to Purchase Series A Junior Participating Preferred Stock are
contained in SWI's Registration Statements filed under Section 12 of the
Exchange Act, which are incorporated herein by reference and attached as
Appendix E hereto. See "Incorporation of Certain Documents by Reference." See
"The Merger -- Contingent Consideration" for a description of the Rights to be
issued to the Participating Holders in connection with the Merger.
DESCRIPTION OF PTI
General
PTI was founded in 1969 to serve the analytical engineering needs of the
electric power industry in the areas of power system analysis, design, and
operation. PTI was the first independent company established to provide
analytical studies in connection with large electricity transmission expansion
projects. PTI's initial role was to provide impartial, reliable studies to
assist electric utilities in analyzing line and substation designs and equipment
specifications prepared by architect/engineering firms and equipment
manufacturers, to reduce the dependence of electric utilities on their suppliers
and enable them to contract more effectively. Following the contracting phase,
PTI assists electric utilities with evaluating and interpreting manufacturers'
designs and analysis to insure conformity with the contract specifications. Over
the years, the scope of the services that PTI provides has grown such that PTI's
core business areas are now consulting services, software products, educational
programs, and special hardware products.
Consulting Services
Consulting services represent the core technology base of the company.
PTI's consulting services span the entire range of activities related to utility
and industrial power system engineering and are provided in three areas of
technology: system planning and operations ("SPO"), transmission and
distribution ("T&D") and generation.
System Planning and Operations
PTI's SPO department prepares power system performance studies which cover
all aspects of system performance including load flow, short circuit, transient
and dynamic stability, equivalencing, system component modeling, voltage
stability, interchange limits, load rejection, AC and DC transmission,
application of flexible AC transmission systems ("FACTS"), subsynchronous
resonance, relay protection, series and shunt compensation, and SVC application
studies. The studies conducted by the SPO group are often an important part of,
or a precursor to, projects leading to major investments such as independent
power plant location, transmission network expansion, and addition of power flow
control equipment such as FACTS.
PTI believes that its PSS/E software, including optimal power flow and
extended term stability, is the industry standard for use in conducting power
system performance studies, and is used by virtually all of the major utilities
around the world. PTI has contributed to the design of the majority of major
grid systems in the United States and overseas. PTI is also recognized as a
leader in the areas of international interconnections, national power system
audits, preparation of master plans, reliability analysis, and training and
upgrading planning capabilities of major utilities.
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PTI's SPO group has developed a number of other innovations that are
beneficial to the electric industry. These include innovative applications of
optimal power flow calculations, frequency domain analysis which provides a
wealth of information compared to older eigenvalue methods, and the field
measurements of generator parameters theory which led to PTI's Dynamic System
Monitor hardware product.
Transmission and Distribution
PTI's T&D group assists its customers in transmission design. PTI has
developed an extensive knowledge base by conducting research projects relating
to compact transmission, conventional and unconventional transmission designs,
compact transmission at higher voltages, innovative insulation designs using
ceramic or synthetic components, optimum design of conductors in various
materials including covered conductors at transmission voltages, real-time
ratings of transmission lines, and generic design concepts offering good visual
appearance and optimum environmental performance. PTI has also contributed
significantly in establishing standards for electric and magnetic field limits.
Transmission design projects are often performed as part of larger
projects leading to line and substation construction, and PTI has teamed with
many architectural and engineering companies in such projects. Other types of
projects include problem analysis and resolution, such as failed equipment
investigations, and preparing designs to improve economic and power quality
performance of delivery systems. PTI has extensive system-based experience in
alternative dispersed generation technologies and the integration of these
technologies for improved system performance.
The T&D group also has developed engineering software for use in
transmission system design and assessment. For example, this group has been a
prime developer for the EPRI Transmission Line Workstation, the EPRI Underground
Transmission Workstation, the EPRI FAULT Underground Cable Fault Location Expert
System, and the EPRI Substation Design Workstation. Other software has been
developed on client projects and then commercialized, such as the Transmission
Lightning Protection program.
Generation
PTI's generation group offers technology and services in key areas of
power generation. PTI provides owners' engineering services, financial screening
and economic analysis, plant performance monitoring and condition assessment,
plant performance and acceptance testing, feasibility studies, new technology
evaluations and performance monitoring software systems to clients world-wide.
The generation group has developed two software applications: (a) dpmSuite
- - a suite of thermal hydraulic analysis engines, interface MS Excel
spreadsheets, archive, and man-machine interface ("MMI") for data analysis and
viewing, consisting of dpm testbook, dpmPASS (Performance Analysis Spreadsheet
Series) and dpmMonitor, and (b) dpmEMS - an Energy Management System which is a
thermal hydraulic real-time analysis system including a real-time optimization
and dispatch. The generation group has also developed capabilities in on-line
client/server local area network ("LAN") system activities. These include
turnkey systems for the power generation industry, the refinery industry, the
pulp and paper industries, and the steel industry.
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<PAGE> 64
Competitive Power Market Solutions
PTI has addressed the needs of the evolving deregulated electric power
industry by forming the Competitive Power Market Solutions ("CPMS") group in
1995. The process of deregulation and the resulting changes in the electric
power industry have created opportunities for PTI to provide new products and
services. The CPMS group has developed specialized software and techniques to
assess transmission access issues, generator site selection and parallel flow
analyses. CPMS clients include generating companies, reliability councils,
independent system operators and transmission providers. Software developed by
the CPMS group has been identified by a number of utilities and power pools as
representing an important advancement in parallel flow calculations and
transmission capability, and they have adopted PTI's Managing and Utilizing
System Transmission ("MUST") software as the calculation tool for meeting
Federal Energy Regulatory Commission ("FERC") requirements for posting of
available transmission capacity ("ATC") on the Open Access Same-Time Information
System ("OASIS"). The MUST software has also been designated by North American
Electric Reliability Council ("NERC") as the tool for calculating the interim
interchange distribution calculations (iIDC) for the eastern interconnection.
Software Products
PTI maintains and continually develops a library of power system related
software programs. These software programs cover the spectrum from transmission
planning through economic analysis, to real-time modeling for training
simulators. PTI also creates software for third party applications, such as
system control center programs. Programs for general use are established as
software products and supported on a wide range of computers, while specialized
programs are available on PTI's in-house computers for use in client projects.
PTI's software products are a vital and strategic element in its overall
business, and are synergistic with many of its other business areas. The
original impetus for software development at PTI was the desire to create tools
to facilitate the research and projects undertaken by PTI's consulting services
personnel. As consulting clients requested access to the same advanced software
tools being used by PTI, this quickly led to the development of PTI's commercial
software products business.
PTI's flagship product, PSS/E, is used by virtually all of the major
utilities and industries and is the reference tool for most major industry
studies. PSS/E customers include: transmission companies, utilities, large
industrials, regulators, reliability councils, consultants, universities and
power marketers.
Education/Training
PTI provides educational programs in power system engineering throughout
the world. Educational and training programs account for approximately 10% of
PTI's annual revenues. PTI offers courses on more than seventy topics dealing
with all aspects of power generation, transmission, distribution and industrial
power systems. Each year approximately forty of the courses are offered for open
enrollment at PTI's offices in Schenectady and in other major U.S. cities. An
additional ten to twelve courses are conducted each year on-site for specific
clients. While the continued push toward total deregulation in the industry has
reduced the demand for conventionally scheduled courses, the demand for
specialized courses conducted on-site for individual clients has increased.
The courses offered by PTI have enabled it to establish relationships with
many clients and potential clients through the attendance of their personnel at
PTI courses. Because more than 1,000 participants enroll in PTI's continuing
education programs every year (all of whom are exposed to other PTI products and
services), PTI's educational programs provide an important marketing mechanism
for PTI's consulting services and software products. In addition to having
strategic importance to long term marketing, the education group has been
operating at a profit for many years because of its ability to cost-effectively
leverage PTI's pre-existing technology and experience.
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<PAGE> 65
Specialty Hardware
PTI has developed several specialized hardware products including: large
special purpose simulators, controls for generators, instrumentation systems,
and industrial load shedding systems. While PTI offers standard products, it
also develops and manufactures specialized systems and equipment for either
one-of-a-kind or multiple applications. PTI's design and manufacturing
capability ranges from model components for transient network analyzers and DC
simulators to microprocessor-based control and instrumentation systems. PTI
maintains an advanced development shop, a light manufacturing and assembly area,
and a staging area for system inspections and debugging.
PTI presently makes three hardware products: the SS/1 Power System
Stabilizer and the Dynamic System Monitor, both of which are used in power
generation and transmission systems, and the LD/1 Load Shedding System,
currently used in industrial power systems. PTI also continues to support a
discontinued, earlier product, the transient network analyzer or TNA.
Operations
PTI operates offices in the United States and has subsidiaries around the
world, providing important geographical diversity and coverage. Approximately
45% of PTI's business is from customers outside the United States. PTI's
headquarters and primary office is in Schenectady, New York. PTI has regional
offices in California and Pennsylvania, and has employees who work out of their
homes in Idaho and Iowa. Power Technologies Limited ("PTL"), a wholly-owned
subsidiary of PTI formed in 1990, has an office located near Manchester, England
which serves the United Kingdom, Ireland, and Western and Central Europe. In
1995, PTI began operating in Russia through a wholly-owned subsidiary known as
Power Technology Development Company, Inc. This subsidiary formerly conducted
business through Russian engineers who acted as independent contractors but is
not presently conducting business. PTI also maintains an office in Brisbane,
Australia which was established in 1996 and serves Australia and New Zealand.
During 1997, PTI established Power Technologies South Asia Pvt. Ltd., a
wholly-owned subsidiary of PTI which maintains an office in Delhi and offers
PTI's services and products in India.
In addition to its offices and subsidiaries, PTI operates in a number of
foreign jurisdictions through joint ventures and sales representatives. In 1995,
PTI commenced operations in Asia through a joint venture named PTI Asia SDN BHD
("PTI Asia"), headquartered in Kuala Lumpur, in which it owns a 49% interest. In
1997 PTI entered into a joint venture based in South Africa, PTI-NET Africa, in
which it owns a 50% interest, and which focuses on serving the Southern African
region with an initial emphasis on serving Southern African Power Pool members.
PTI presently has sales representatives in the following countries: New Zealand
(specific software), Egypt, Spain, Brazil, Argentina, Peru, Pakistan, China,
Mexico, Colombia, Indonesia (through PTI-Asia), China, Norway, Israel, Japan and
Saudi Arabia. PTI's sales representatives are usually assigned their resident
country as an exclusive territory and are compensated with commissions based on
sales of services and products sold directly by PTI. PTI also has informal
representative arrangements in Turkey, Greece and Ecuador.
PTI recently disposed of its approximately 27% interest in Hydropower
Technologies, Inc., a joint venture with a Norwegian company designed to bring
Scandinavian engineering skills in the hydroelectric power industry to the
United States. This joint venture is in the process of being dissolved. Also, in
connection with the Merger, PTI will dispose of its approximately 14% interest
in Power Technologies International, Inc. ("PTII"), a domestic international
sales corporation (DISC) which has been owned by PTI and its shareholders. PTII
historically has been operated as a DISC and paid a commission by PTI, which has
been distributed as a dividend to PTII shareholders. The commission paid to PTII
is determined in accordance with a commission agreement between PTI and PTII
which was structured to conform to IRS regulations governing DISCs. For
financial reporting purposes, PTII has been a consolidated subsidiary of PTI.
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<PAGE> 66
Employees and Consultants
PTI presently has approximately 115 employees, approximately 81 of whom
are engineering or computer science professionals. Approximately 76 of PTI's
engineering and computer science professionals are located at its Schenectady
headquarters and there are one or more of such professionals at each of its
offices or subsidiaries (except Power Technology Development Company, Inc.). The
majority of PTI's engineering staff are active members of professional societies
such as IEEE and CIGRE. Many are officers of, or lead technical groups in, these
organizations and are Fellows in IEEE. In addition to its employees, PTI
maintains its Technology Assessment Group (TAG) -- a group of approximately 200
experts in scientific and technological disciplines who are under contract with
PTI and are available to work on specialized projects.
Directors and Officers
The directors and officers of PTI are as follows:
<TABLE>
<CAPTION>
Name Office
---- ------
<S> <C>
Lionel O. Barthold Director and Chairman of the Board of Directors
Steven J. Balser Director and President
Ian S. Grant Director and Executive Vice President
Mary A. Sager Director and Treasurer
Gordon B. Hirschman Director and Secretary
Dale A. Douglass Director
F.S. Prabhakara Director
</TABLE>
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<PAGE> 67
PTI MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following is PTI management's discussion and analysis of certain
significant factors that have affected the financial condition and results of
operations of PTI (including its subsidiaries) for the periods indicated.
Effective January 1, 1998, PTI began to prepare its financial statements
in accordance with GAAP. The results discussed below are based on year-end
results for 1995, 1996, and 1997 as restated on a consolidated basis according
to GAAP. The internal financial information PTI has relating to the operating
profit and loss of its various business operations is different in some respects
than the financial information included in this Prospectus and Proxy Statement
because PTI's financial statements have not historically been prepared on a GAAP
basis; however, PTI has provided certain general information about the financial
performance of its respective business operations because it is necessary to
understand the condition of PTI's business as a whole. PTI's financial
statements for 1997 were audited; however, its financial statements for 1995 and
1996 have not been audited.
The following discussion and analysis should be read in conjunction with
PTI's financial statements appearing elsewhere in the Prospectus and Proxy
Statement.
Results of Operations
Three Months Ended March 31, 1998 Compared With Three Months Ended March 31,
1997
PTI's net sales of $3,612,893 for the quarter ended March 31, 1998 were
6.7% lower than its net sales of $3,871,499 for the quarter ended March 31,
1997. The higher sales level in the first quarter of 1997 was primarily
attributable to projects during that period which had high pass-through material
components and to higher billings for educational programs. PTI's operating
expenses of $4,067,081 for the first quarter of 1998 were 8.2% lower than its
operating expenses of $4,431,892 for the first quarter of 1997 despite
extraordinary Merger related expenses of approximately $140,000 in 1998.
Operating expenses in the first quarter of 1998 were lower primarily as a result
of lower project material costs, reduced investment in PTI's products under
development, reduced interest expenses and offsetting rental income. Because the
difference in operating expenses was greater than the difference in net sales,
PTI's loss from operations and net loss for the first quarter of 1998 was lower
than its loss from operations and net loss for the first quarter of 1997. It is
typical for PTI to have a loss from operations and a net loss for the first
quarter of the year due to lower software sales during that period and reduced
services billing because of vacations and holidays in December and early
January.
Year Ended December 31, 1997 Compared with December 31, 1996
Net Sales
PTI's net sales increased by 7.3% to $18,855,000 in 1997 from $17,565,000
in 1996. Domestic sales, which had been falling in 1996, stabilized in 1997.
PTI's international sales increased by 10.6% to $7,803,000 in 1997 from
$7,056,000 in 1996. Sales to EPRI, PTI's largest client, increased by
approximately 18% over 1996 levels, and sales to Niagara Mohawk and the New York
Power Authority increased, making those clients two of PTI's largest ten clients
again and reflecting the improved domestic market. Support maintenance revenue
during 1997 increased by $400,000 compared to 1996 levels as a result of a
policy change implemented in late 1996 requiring customers to purchase annual
calendar-year contracts to retain continuity of service.
Operating Expenses
PTI's operating expenses increased by 8.0% to $18,360,000 in 1997 (97.4%
of sales) from $17,004,000 in 1996 (96.8% of sales). The increase in operating
expenses resulted from a number of factors including: additional expenses
associated with the increase in sales, a contingent contribution of $348,000 to
PTI's ESOP in contemplation of the Merger, expenses associated with certain
projects which were a greater percentage of the
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<PAGE> 68
contract price than is typical, a $319,000 increase in bad debt expenses which
were reserved for, an accrual of $38,000 which will be paid in 1998 in
connection with the settlement of PTI's environmental obligations relating to a
site located in Malta, New York and internal and external transaction expenses
incurred in connection with the proposed Merger. Excluding the contingent ESOP
contribution and the external Merger-related transaction costs, PTI's operating
expenses would only have increased by $950,000 or 5.6% and would have
represented 95.2% of sales. Such a decline in the percentage of sales
represented by operating expenses reflects a decrease of $450,000 in staffing
costs resulting from PTI's ability to utilize permanent staff more efficiently
and to leverage outside contractor labor where possible.
The project-related expenses contributing to increased operating expenses
resulted primarily from two projects which contained significant hardware
components with respect to which PTI did not receive a mark-up. The largest bad
debt expense related to PTI's (TTPC) Perlis project which was delayed and
perhaps jeopardized by currency problems in Malaysia or the "Asian Crisis." PTI
decided to recognize the future risk of payment of this major account receivable
by incurring a bad debt charge of $322,000. Future charges may also be incurred
if this account is never collected in full. The expenses associated with the
Merger included $58,000 of external legal and accounting fees and at least
$22,000 of incremental internal expenses. A number of these expenses such as the
expense associated with the Malta site settlement, the contingent ESOP
contribution and the transaction expenses associated with the Merger are
non-recurring.
The increase in PTI's operating expenses were offset somewhat because of a
decrease in the amount PTI invested in its TOPS product, a new software product
under development, from $226,000 in 1996 compared to only $135,000 in 1997. PTI
received no significant revenue return on this investment during either year.
Other Expenses
PTI's other expenses consist primarily of interest on its borrowings and
increased slightly during 1997 because PTI had greater borrowings during 1997
than 1996 and the interest rates paid on such borrowings increased. Other
expenses were offset in 1997 by approximately $19,000 of rental income from the
rental of a portion of its 1473 Erie Boulevard facility to an outside firm
beginning in November 1997 under a lease having a term of three years. Annual
net lease income is estimated at $115,000 per year, but only two months of
income were realized in 1997.
Income Tax
The effective income tax rate for 1997 was 25.6% of net income compared to
a rate of 39.6% for 1996. The lower rate for 1997 was due primarily to the
increased level of foreign tax credits generated in 1997 and the overall benefit
of use of the lower graduated rates in 1997.
Year Ended December 31, 1996 Compared with December 31, 1995
Net Sales
PTI's net sales decreased by 1.6% to $17,565,000 in 1996 compared to
$17,855,000 in 1995. The lower sales continued a trend which began in 1995
caused by a significant decline in domestic business led by a 60% reduction of
business for EPRI in 1995 compared to 1994. While EPRI maintained its position
as PTI's largest client, there was a further reduction in EPRI revenue in 1996
of 18%. On a broader front, the trend in declining domestic sales continued into
1996 as pending deregulation of the U.S. utility industry produced delays in or
cancellation of many long-term planning and expansion projects. In spite of the
shift in emphasis towards international work, international sales declined to
$7,056,000 in 1996 compared to $8,315,000 in 1995. International sales were
dominated by a number of large projects in Southeast Asia which created certain
additional risks to PTI's business as a result of the economic instability of
the region. See "Risk Factors - Risks Relating to PTI - Risks Associated with
International Operations."
A 12.5% increase in software sales from 1995 to 1996 reflected the
significant software sales included as components of many of the large,
international projects. The increase in software sales offset the significant
decline
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in revenues from consulting services and other segments. Billable time
percentage increased to 52.4% in 1996 compared to 49.7% in 1995 due to a
reduction of hourly billable staff from 47 professionals in 1995 to 43
professionals in 1996 without a corresponding reduction in work-load.
Operating Expenses
PTI's operating expenses decreased by 3.7% to $17,004,000 in 1996 (96.8%
of sales) compared to $17,650,000 in 1995 (98.9% of sales). The reduction in
operating expenses and in the percentage of sales represented by operating
expenses are attributable to cost-cutting measures implemented by PTI in
response to declining sales. PTI instituted overhead staff and benefit
reductions in 1996 which were designed to save $400,000. PTI continued a cost
reduction program which it started in 1995 and which reduced PTI's operating
expenses by $900,000 in 1995 compared to 1994. These cost-cutting measures and
the deferral of certain discretionary expenses enabled PTI to realize a total
reduction in operating expenses of $646,000 in 1996 compared to 1995.
The benefits of PTI's cost-cutting measures were offset somewhat by a bad
debt charge of $278,000 incurred in 1996 due to problems in Malaysia which
created questions as to whether certain of PTI's accounts receivable would be
collected. PTI also reduced the amount it invested in its TOPS product to
$226,000 in 1996 compared to $358,000 in 1995. PTI received no significant
revenue return on its investment in its TOPS product during either year.
Other Expenses
PTI's other expenses increased only slightly to $311,000 in 1996 from
$293,000 in 1995 due to fluctuations in the amount borrowed by PTI and changes
in interest rates.
Income Taxes
The effective income tax rate for 1996 was 39.6%. The company experienced
an operating loss in 1995 with tax benefits realized at a rate of 72% of the
loss incurred. The tax benefit rate for 1995 was higher than normal statutory
rates as a result of the benefit of foreign tax credits coupled with a domestic
net operating loss.
Liquidity
PTI has experienced periods of limited liquidity over the past several
years; however, PTI's cash flow difficulties were most severe in 1995 and 1996
and its cash flow situation improved in 1997 and is continuing to improve. PTI's
cash position was significantly weakened by a decline in sales in 1995 of
$1,294,000 compared to 1994 (resulting in a loss of $25,000), coupled with net
stock repurchases of $523,000 in 1995 and aggravated by a lag between the
decline in sales and a corresponding reduction in operating costs. The full
impact of these items was delayed from 1995 until 1996 by a decrease in accounts
receivable of $791,000 during 1995.
The cash flow situation worsened during 1996 as PTI's accounts receivable
balance increased by $318,000 and costs and revenue recognized in excess of
billings increased by $1,164,000 despite a decline in sales of $290,000. PTI had
to delay its payment of the 1995 pension contribution until September 1996
whereas the contribution for 1994 was made in March 1995. In July 1996, the
Company was forced to apply for a $1,000,000 mortgage on its 1482 Erie Boulevard
property, and a $600,000 bridge loan was used to fund the pension payment in
September and to provide additional working capital until the mortgage loan was
completed and funded.
In response to its liquidity situation, PTI implemented cost-cutting
measures in 1995 and a program restricting stock repurchases in 1996. The stock
repurchase program limited share repurchases plus any interest on notes held by
selling shareholders to $100,000 per year. Previously, PTI repurchased all
shares that were offered for sale whether by terminating employees or continuing
employees.
Liquidity continued to be a major concern early in 1997 due to the
carryover of cash problems from 1996 and the need to finance increasing
operating expenses resulting from increased sales. The cash position of PTI
significantly improved during 1997 due to an increase in sales of $1,290,000
with an $80,000 decrease in accounts
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<PAGE> 70
receivable and a $670,000 decrease in costs and revenue recognized in excess of
billings. PTI continued its cost control initiatives in 1997 and, while no
further benefits and overhead reductions were made in 1997, non-project related
operating expenses were carefully controlled (however PTI incurred non-project
transaction expenses in connection with the Merger). While PTI recognized only
$73,000 of net income during 1997, a number of significant expenses incurred
during 1997 will not be paid until 1998 as reflected by an increase in accounts
payable of $343,000. Primarily as a result of these factors, total cash provided
by operating activities during 1997 was $1,481,000.
In addition to increased cash provided by operating activities during
1997, the sale of stock and exercise of stock options by employees in 1997
provided cash of $674,000 which substantially reduced the deficit of cash
experienced early in 1997. Many of the shares that were sold were sold under
Guideline 28 Employee Stock Purchase Plan which was implemented by the PTI Board
in April 1997 and made 25,000 shares of PTI Class A Common Stock available for
sale to full-time employees. All 25,000 shares were purchased late in 1997 after
the announcement of the proposed Merger and such shares may not have been sold
had the Merger not been anticipated.
PTI's liquidity improved in the first quarter of 1998 with an increase in
cash of $694,000. The net increase in cash resulted primarily from a reduction
in accounts receivable of $659,000, deferral of software support fees of
$727,400, and cost and revenue recognition in excess of billings of $380,000,
offset by a reduction in accounts payable of $580,300, deferred taxes of
$269,000, and net loss for the quarter of $337,000.
PTI's liquidity for the remainder of 1998 will be impacted by a number of
significant cash payments that will be due for expenses accrued in prior years
including $138,000 for the Malta settlement, $450,000 for the payment of accrued
benefits under PTI's termination bonus plan and the termination of such plan,
$348,000 for the contribution to the ESOP and $253,000 for accrued 1997 pension
and profit sharing contributions. In addition, PTI's profit sharing contribution
for 1998, yet to be determined, will be payable in 1998.
Capital Resources
At the end of 1997, the Company had a $2,000,000 line of credit secured by
eligible accounts, of which $1,830,000 would be available for borrowing based on
the accounts receivable at the end of 1997. The amounts borrowed under this line
of credit were $895,000 and $400,000 at the end of 1996 and 1995, respectively.
PTI had cash of $571,000 at the end of 1997, and positive cash flow during the
first quarter of 1998 has increased the cash balance to $773,000. The Company
has no capital resources other than the line of credit and cash reserves.
At the end of 1997, PTI had long-term obligations with an aggregate
outstanding balance of $2,231,000, which obligations are secured by mortgages on
PTI's buildings. In addition, PTI leases computer and other equipment and
currently has lease commitments of $363,000 in 1998, $245,000 in 1999, and
$154,000 in 2000. PTI's lease expenses for 1997 were $315,000. PTI has no plans
for significant capital spending in 1998.
PTI believes that its current cash reserves and its line of credit will be
adequate for the foreseeable future to satisfy its capital resource needs in the
conduct of its business as presently conducted.
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<PAGE> 71
PTI SHARE OWNERSHIP
The following table sets forth information with respect to (i) executive
officers and directors of PTI, individually and collectively as a group and (ii)
all persons who are known to PTI to be beneficial owners of more than five
percent of any class of the outstanding PTI Common Stock as of July 15, 1998.
As of the Record Date, there were 246,232.73 shares of PTI Class A Common
Stock outstanding, 50,552.34 shares of PTI Class B Common Stock outstanding,
and 22,100 shares of PTI Class C Common Stock outstanding.
<TABLE>
<CAPTION>
Shares of PTI Common Stock Percentage of PTI Common Stock
Beneficially Owned Outstanding
------------------ -----------
Name Class A Class B Class C(1) Aggregate Class A Class B Class C(1) Aggregate
---- ------- ------- ---------- --------- ------- ------- ---------- ---------
Executive Officers and Directors:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lionel O. Barthold 57,764.41 -- 50.91 57,815.32 23.4% -- * 18.1%
Steven J. Balser 16,528.67 -- 98.91 16,627.58 6.7 -- * 5.2
Ian S. Grant 18,515.00 -- 89.26 18,604.26 7.5 -- * 5.8
Mary A. Sager 5,005.93 -- 50.63 5,056.56 2.0 -- * 1.6
Gordon B. Hirschman 2,500.12 -- 43.66 2,613.78 1.0 -- * *
Dale A. Douglass 1,762.18(2) -- 57.16 1,819.34 * -- * *
F.S. Prabhakara 1,765.00 -- 55.08 1,820.08 * -- * *
As a group 103,841.31(2) -- 445.61 104,356.92 41.7% -- 2.0% 32.7%
(7 persons)
5% Beneficial Owners:
The PTI ESOP -- -- 22,100 22,100 -- -- 100% 6.9%
Donald N. Ewart -- 10,368.24 -- 10,368.24 -- 20.9% -- 3.3
Stephen R. Lambert -- 8,500.00(3) 47.11 8,547.11 -- 17.1 * 2.7
Hyde M. Merrill -- 7,783.00 60.00 7,843.00 -- 15.7 * 2.5
Harrison K. Clark -- 7,065.00 -- 7,065.00 -- 14.2 -- 2.2
Stephen F. Mauser -- 5,500.00 68.93 5,568.93 -- 11.1 * 1.7
</TABLE>
- ------------------
* Percentage is less than 1% of the aggregate number of outstanding shares.
(1) All of the outstanding shares of PTI Class C Common Stock are held of
record by the PTI ESOP. The number of shares and percentages in the table
(other than with respect to the ESOP) reflect the shares of PTI Class C
Common Stock in which the above individuals have an interest as a
participant in the ESOP.
(2) Includes 560 shares of PTI Class A Common Stock which are owned by Mr.
Douglass as trustee for Asa A. Douglass.
(3) Includes 2,500 shares of PTI Class B Common Stock owned by Mr. Lambert's
spouse.
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<PAGE> 72
COMPARISON OF RIGHTS OF HOLDERS OF SWI COMMON STOCK
AND PTI COMMON STOCK
General
PTI is incorporated under the laws of the State of New York and SWI is
incorporated under the laws of the State of Delaware. Shareholders of PTI, whose
rights are currently governed by the NYBCL, the PTI Certificate of
Incorporation, as amended (the "PTI Certificate") and the PTI By-laws, will,
upon consummation of the Merger, become shareholders of SWI and their rights
will be governed by the DGCL, the SWI Certificate and the SWI By-laws.
The Merger will effect several changes in the rights of shareholders as a
result of differences between the NYBCL and the DGCL and differences between the
provisions of the PTI and SWI Certificates and By-laws. The provisions of the
NYBCL and DGCL differ in numerous respects, although recent amendments to the
NYBCL reduced certain of these differences. Summarized below are certain of the
principal differences between the NYBCL and the DGCL affecting the rights of
shareholders as well as a summary of the impact of certain provisions of the PTI
and SWI Certificates and By-laws. The summary is not intended to be relied upon
as an exhaustive list or a detailed description of the provisions discussed and
is qualified in the entirety by the respective corporate codes of the States of
New York and Delaware and by the PTI and SWI Certificates and By-laws.
Dividends
Delaware law places less restrictions on the funds out of which a
corporation can declare and pay a dividend than does New York law. Under New
York law, dividends may be paid only out of surplus. Under Delaware law, a
corporation may, unless otherwise restricted by its certificate of
incorporation, declare and pay dividends out of surplus, or if no surplus
exists, out of net profits for the fiscal year in which the dividend is declared
and/or the preceding fiscal year (provided that the amount of capital of the
corporation is not less than the aggregate amount of the capital represented by
the issued and outstanding stock of all classes having a preference upon the
distribution of assets). The SWI Certificate contains no restrictive provisions
related to dividends.
Vote Required for Certain Transactions; Removal of Directors
The NYBCL requires that, with respect to corporations in existence on
February 23, 1998, certain mergers, consolidations, dissolutions and sales of
all or substantially all of the assets not in the ordinary course of business be
approved by the holders of two-thirds of the outstanding stock entitled to vote
thereon, unless the certificate of incorporation of such corporation includes a
provision permitting approval by a majority of all outstanding shares. The PTI
Certificate does not contain such a provision; therefore, the affirmative vote
of the holders of two-thirds of PTI voting stock is required to approve the
Merger. Under the DGCL, such transactions require approval by the holders of a
majority of the outstanding stock entitled to vote thereon, unless otherwise
expressly provided in the certificate of incorporation, and a vote of the
shareholders of the surviving corporation is not necessary where, in the case of
a merger, (i) no amendment of its certificate of incorporation is effected, (ii)
each share of its stock outstanding immediately prior to the Effective Time is
to be an identical outstanding or treasury share of the surviving corporation
after the Effective Time, and (iii) the merger results in no more than a 20%
increase in its outstanding common stock.
Pursuant to the SWI By-laws, a special meeting of SWI's stockholders can
be called by the Chairman of the Board, the President, the Chairman of the
Executive Committee or the Board of Directors. SWI directors can be removed with
cause by the approval of the holders of a majority of outstanding shares of SWI
entitled to vote or without cause by the approval of two-thirds of SWI's
directors followed by majority stockholder approval. All vacancies (including
vacancies resulting from an increase in the number of directors) will be filled
by SWI's Board, except for vacancies resulting from the removal of a director
which are filled by the stockholders simultaneously with the removal. Amendments
to the SWI By-law relating to the filling of vacancies requires approval of the
holders of two-thirds of the outstanding shares of SWI entitled to vote; other
amendments to the SWI By-laws require approval of the holders of a majority of
the outstanding shares of SWI entitled to vote.
61
<PAGE> 73
Pursuant to the PTI By-laws, a special meeting of shareholders can be
called only by or at the direction of the Board of Directors. The PTI By-laws
provide that PTI's directors may be removed with or without cause by its
shareholders (a majority of votes present at a shareholders' meeting at which a
quorum is present) or by its Board of Directors. Vacancies may be filled by a
regular vote of the shareholders or, except in the case of vacancies resulting
from an increase in the number of directors, by a regular vote of the Board of
Directors.
Dissenters' Rights of Appraisal
Dissenting shareholders have the right to obtain the fair value of their
shares (so called "appraisal rights") in more circumstances under New York law
than under Delaware law. Under Delaware law, a shareholder is entitled to
appraisal rights in the event of certain mergers or consolidations, but not in
the event of a sale, lease, or exchange of all or substantially all of a
corporation's assets or the adoption of an amendment to its certificate of
incorporation, unless such rights are granted in the corporation's certificate
of incorporation. The SWI Certificate does not grant such rights. Under New York
law, a properly dissenting shareholder is entitled to receive the appraised
value of his or her shares when the corporation votes: (i) to sell, lease, or
exchange all or substantially all of its assets, (ii) to adopt an amendment to
its certificate of incorporation which adversely affects the rights of the
shareholder, or (iii) to merge or consolidate.
The availability of appraisal rights to shareholders of PTI who dissent
with respect to the Merger is discussed under "The PTI Annual Meeting -
Dissenters' Rights."
"Anti-Takeover" Provisions
The Certificates and Bylaws of both SWI and PTI contain provisions that
could discourage potential takeover attempts and prevent shareholders from
changing the company's management, including provisions authorizing the Board of
Directors to issue shares of preferred stock in series, and restricting the
ability of shareholders to call a special meeting of shareholders.
The New York Business Combination Statute provides that if a person
acquires 20% or more of the outstanding voting stock of a New York corporation
without the approval of its board of directors (an "interested shareholder")
such person may not engage in certain transactions with the corporation for a
period of five years. The Delaware statute lowers the 20% ownership threshold to
15% and the five year period to three years. Both the New York and Delaware
statutes include certain exceptions to this prohibition; for example, if the
board of directors approves the acquisition of stock or the transaction prior to
the time that the person becomes an interested shareholder. The PTI Board has
approved the Merger pursuant to the New York Business Combination statute, and
SWI is currently subject to the Delaware Business Combination statute.
Corporate Action by Written Consent without a Shareholders' Meeting
The NYBCL permits corporate action without a shareholders' meeting upon
the unanimous written consent of holders of all outstanding shares entitled to
vote on such action or, if the certificate of incorporation so provides, by the
written consent of holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize the proposed corporate
action at a meeting at which all shares entitled to vote thereon were present
and voted. The PTI Certificate does not provide for shareholder action by
written consent. The DGCL provides that, unless the certificate of incorporation
provides otherwise, any action required or permitted to be taken at an annual or
special meeting may be taken without a meeting of shareholders upon the written
consent of holders of outstanding stock having not less than the minimum number
of votes that would be necessary to authorize the proposed corporate action at a
meeting at which all shares entitled to vote thereon were present and voted. The
SWI Certificate requires that any action taken by the shareholders be effected
at an annual or special meeting and prohibits shareholder action by written
consent without a meeting.
62
<PAGE> 74
Classification of the Board of Directors
The NYBCL permits a classified board with as many as four classes (with
each class to be as nearly equal in number as possible), and the DGCL permits a
classified board of directors with as many as three classes. Neither the NYBCL
nor the DGCL specify any minimum number of directors required in each class. The
PTI By-laws provide for two classes of directors, while the SWI By-laws provide
for three classes of directors.
Number of Directors
Under both the NYBCL and the DGCL, a corporation may have as few as one
director, while neither statute sets an upper limit on the number of directors.
Under the NYBCL, the number of directors may be fixed by the by-laws, or by
action of the shareholders or the board of directors (under the specific
provisions of the by-laws adopted by the shareholders), and the number of
directors may be increased or decreased by amendment of the by-laws, or by
action of the shareholders or of the board of directors (under the specific
provisions of a by-law adopted by the shareholders), subject to certain
limitations. Under the DGCL, the number of directors may be fixed in the by-laws
or in the certificate of incorporation, but if fixed in the certificate of
incorporation, may be changed only by amendment of the certificate of
incorporation. If the certificate of incorporation is silent as to the number of
directors, the board of directors may fix or change the authorized number of
directors pursuant to a provision of the by-laws. The SWI By-laws provide that
the number of directors will be ten, but such number can be increased or
decreased to no less than three by a two-thirds vote of the entire SWI Board
or by the vote of the holders of two-thirds of the outstanding shares of
SWI entitled to vote.
Issuance to Officers, Directors and Employees of Rights or Options to Purchase
Shares
The NYBCL requires the affirmative vote of a majority of votes cast at a
meeting of shareholders at which a quorum is present in order to issue to
officers, directors or employees options or rights to purchase stock. The DGCL
does not require stockholder approval of such transactions. However, SWI is
subject to various other applicable legal requirements, such as rules of the
Commission and the NYSE which may make stockholder approval of certain rights or
option plans and grants thereunder necessary or desirable in certain
circumstances.
Loans to Directors
Under the DGCL, loans may be made to employees or officers, even those who
are also directors, if the board of directors finds that the loan may benefit
the corporation. The NYBCL permits loans or guarantees to directors if the board
determines that the loan or guarantee benefits the corporation and the
certificate of incorporation expressly authorizes the board to make such
determination; otherwise, such loans must be authorized by an affirmative vote
of shareholders (excluding, for this purpose, shares of the director who is the
proposed borrower).
Inspection of Shareholders List
Shareholders have broader rights of inspection under Delaware law than
under New York law. The NYBCL provides a right of inspection, upon at least five
days' written demand, to (i) any person who has been a shareholder of record for
at least six months immediately preceding the demand or (ii) any person holding,
or authorized in writing by the holders of, at least 5% of any class of
outstanding shares. The corporation has certain rights calculated to assure
itself that the demand for inspection is not for a purpose that is in the
interest of a business or object other than the business of the corporation. The
new amendments to the NYBCL allow a shareholder meeting the above qualifications
to inspect the shareholders list for any purpose reasonably related to such
person's interest as a shareholder.
63
<PAGE> 75
The DGCL permits a stockholder to inspect the shareholders list for any
purpose reasonably related to such person's interest as a stockholder. In
addition, for a period of at least ten days prior to each stockholders meeting,
a list of stockholders entitled to vote at the meeting shall be open for
examination by any stockholder for any purpose germane to the meeting.
Indemnification of Officers and Directors; Limitation of Liability
Both New York and Delaware law generally permit indemnification, or
reimbursement, of directors and officers for expenses, judgements, fines and
amounts paid in settlement of claims incurred by them by reason of their
position with the corporation, if the director or officer has acted in good
faith and with the reasonable belief that his or her conduct was in the best
interest of the corporation.
The NYBCL and DGCL provisions regarding indemnification by a corporation
of its directors and officers provide that indemnification may be made in
connection with actions brought by or in the right of the corporation (a
"derivative action") except where the director or officer is adjudged to be
liable to the corporation, in which case indemnification is allowed if, and only
to the extent that, an appropriate court determines that in view of all the
circumstances such director or officer is fairly and reasonably entitled to such
indemnification. The NYBCL additionally provides that indemnification may not be
made in connection with derivative actions where a claim is settled or otherwise
disposed of unless, and only to the extent that, an appropriate court determines
that in view of all the circumstances such director or officer is fairly and
reasonably entitled to such indemnification.
The NYBCL and DGCL also provide that the indemnification and advancement
of expenses granted pursuant to, or provided by, such laws is not exclusive of
any other rights to which a director or officer may be entitled. The NYBCL
additionally provides that no indemnification may be made to or on behalf of any
director or officer for liability arising from actions taken in bad faith,
intentional wrongdoing, or where an improper personal benefit was derived. The
DGCL contains no such express limitation.
The NYBCL and the DGCL both permit a corporation's certificate of
incorporation to limit the liability of the directors of the corporation to the
corporation and the shareholders of the corporation for certain breaches of
fiduciary duty, subject to certain limitations. The PTI Board has authorized an
amendment to the PTI Certificate to so limit the liability of the directors of
PTI and has recommended that the shareholders of PTI approve such amendment at
the PTI Annual Meeting. If the amendment is approved and implemented, it will
relate only to acts or omissions occurring after the PTI Certificate is amended.
The SWI Certificate allows for indemnification of officers and directors to the
full extent permitted by Delaware law, and contains a provision authorizing
indemnification of directors for certain breaches of fiduciary duty.
Voting Rights
The PTI Certificate provides that the holders of the Class B Common Stock
of PTI shall not have voting powers for any purpose except as required by law.
Following the Merger, each of the holders of PTI Common Stock, including Class B
Common Stock, will own SWI Common Stock, which will entitle them to one vote for
each share of SWI Common Stock owned. See "- Shareholder Rights Plan" below for
additional information regarding the voting rights of SWI Common Stock and how
they may be impacted by SWI's Shareholder Rights Plan.
Transfer Restrictions
The holders of shares of PTI Class A Common Stock and PTI Class B Common
Stock are subject to the PTI Master Shareholders Agreement, which contains
certain transfer restrictions and grants PTI the right to purchase such shares
under certain circumstances. The Master Shareholders Agreement also grants the
PTI shareholders certain pre-emptive rights. The shares of SWI Common Stock that
will be received by the PTI shareholders in connection with the Merger will not
be subject to any such transfer restrictions or repurchase rights and will not
be entitled to any pre-emptive rights.
64
<PAGE> 76
Shareholder Rights Plan
PTI does not have a shareholder rights plan.
In August 1996, the SWI Board approved a Shareholder Rights Plan and
declared a dividend of one preferred share purchase right (a "Right") for each
outstanding share of SWI Common Stock. The dividend was paid to the holders of
record of SWI Common Stock on September 12, 1996. Each Right entitles the holder
to purchase from SWI one one-hundredth of a share of Series A Junior
Participating Preferred Stock of SWI at a price of $125 per one one-hundredth of
a Preferred Share, subject to adjustment (the "Purchase Price"). The description
and terms of the Rights are set forth in a Rights Agreement dated as of August
15, 1996. The Rights will expire on August 15, 2006, unless extended or unless
the Rights are earlier redeemed or exchanged by SWI.
The Rights are not exercisable until the earlier to occur of: (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired beneficial ownership of
15% or more of the outstanding shares of SWI Common Stock, or (ii) 10 business
days (or such later date decided by the SWI Board) following the commencement
of, or announcement of an intention to make, a tender offer or exchange offer
for 15% or more of the outstanding shares of SWI Common Stock. In such event,
each holder (other than such Acquiring Person) of a Right will have the right to
receive upon exercise of the Right that number of shares of SWI Common Stock
having a market value of two times the Purchase Price. In the event that SWI is
acquired or 50% or more of its assets are sold after a person or group has
become an Acquiring Person, each holder of a Right, upon exercise thereof, will
have the right to receive that number of shares of common stock of the acquiring
company which will have a market value of two times the then existing Purchase
Price.
65
<PAGE> 77
LEGAL OPINIONS
The validity of the SWI Common Stock to be issued in connection with the
Merger will be passed upon for SWI by Palmer & Dodge LLP, Boston, Massachusetts,
counsel for SWI. Palmer & Dodge LLP is acting as counsel for SWI in connection
with certain legal matters relating to the Merger and the transactions
contemplated thereby.
Nixon, Hargrave, Devans & Doyle LLP is acting as counsel for PTI in
connection with certain legal matters relating to the Merger and the
transactions contemplated thereby.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1996 and
for each of the years in the three-year period ended December 31, 1997
incorporated by reference from SWI's Annual Report to Shareholders into SWI's
Annual Report on Form 10-K for the year ended December 31, 1997, have been
incorporated by reference in this Prospectus and Proxy Statement in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The consolidated financial statements of PTI as of December 31, 1997 and
for the year ended December 31, 1997 included in this Prospectus and Proxy
Statement, have been audited by Marvin and Company, P.C., independent
accountants, as set forth in their report appearing elsewhere herein, and are
included in reliance upon such report given under the authority of such firm as
experts in accounting and auditing. Representatives of Marvin and Company, P.C.
are expected to attend the PTI Annual Meeting to respond to appropriate
questions and will have the opportunity to make a statement if they desire.
SOLICITATION COMPENSATION
PTI will bear the cost of solicitation of proxies. In addition to the use
of mails, proxies may be solicited by officers and employees of PTI in person or
by telephone, telegram or other means of communication.
OTHER MATTERS
PTI knows of no other business that will be presented for action by the
shareholders at the PTI Annual Meeting. If other business is properly presented
for consideration at the PTI Annual Meeting, the enclosed proxy authorizes the
person named therein to vote the shares in his or her discretion.
66
<PAGE> 78
INDEX TO FINANCIAL STATEMENTS OF PTI
Page
----
PTI Financial Statements
Financial Statements for three month periods ending March 31, 1998
and March 31, 1997
Consolidated Balance Sheets............................................FS-3
Consolidated Statements of Income (Loss) and Retained Earnings.........FS-5
Summary of Significant Accounting Policies.............................FS-6
Financial Statement for period ending December 31, 1997
Independent Accountants' Report........................................FS-9
Consolidated Balance Sheet............................................FS-10
Consolidated Statement of Income (Loss) and Retained Earnings.........FS-12
Consolidated Statement of Changes In Stockholders' Equity.............FS-13
Consolidated Statement of Cash Flows..................................FS-14
Notes to Consolidated Financial Statements............................FS-15
Financial Statement for periods ending December 31, 1996 and
December 31, 1995
Consolidated Balance Sheets...........................................FS-25
Consolidated Statements of Income (Loss) and Retained Earnings........FS-27
Consolidated Statements of Changes In Stockholders' Equity............FS-28
Consolidated Statements of Cash Flows.................................FS-30
Notes to Consolidated Financial Statements............................FS-31
FS-1
<PAGE> 79
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED FINANCIAL STATEMENTS FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 1998 AND MARCH 31, 1997
FS-2
<PAGE> 80
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current Assets
Cash $ 1,265,455 $ 19,555
Receivables, net of allowance of $781,128 and $558,770 4,233,564 3,675,848
Costs and revenue recognized in excess of billings 1,609,466 2,910,454
Inventory 83,795 41,897
Deferred income taxes 768,400 160,000
Other 141,555 170,263
----------- -----------
Total Current Assets 8,102,235 6,978,017
----------- -----------
Property and Equipment
Land 369,023 369,023
Buildings and improvements 5,185,220 4,905,235
Computers and hardware 4,105,445 4,158,241
Furniture and fixtures 1,542,755 1,529,035
Test site equipment 34,610 34,610
Vehicles 56,903 --
----------- -----------
Total 11,293,956 10,996,144
Less accumulated depreciation 7,683,866 7,263,740
----------- -----------
Net Property and Equipment 3,610,090 3,732,404
----------- -----------
Other Assets
Deferred taxes 125,800 286,800
Investment in and due from affiliates 664,264 775,834
Financing costs, net of amortization of $50,460 and $42,606 10,362 18,216
----------- -----------
Total Other Assets
800,426 1,080,850
----------- -----------
TOTAL ASSETS $12,512,751 $11,791,271
=========== ===========
</TABLE>
FS-3
<PAGE> 81
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND 1997
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current Liabilities
Current installments of long-term debt $ 354,028 $ 349,457
Line-of-credit payable -- 1,000,000
Accounts payable 1,082,990 1,024,439
Accrued expenses 1,743,618 1,251,561
Billings in excess of costs and revenues 474,192 --
Deferred support revenue 917,400 471,359
Customer deposits 194,655 364,530
Income taxes payable 267,108 --
----------- -----------
Total Current Liabilities 5,033,991 4,461,346
----------- -----------
Other Liabilities
Long-term debt, excluding current installments 1,782,713 2,109,460
Guarantee of ESOP loan -- 373,163
Deferred benefits -- 430,310
----------- -----------
Total Other Liabilities 1,782,713 2,912,933
----------- -----------
Stockholders' Equity
Capital stock 134,352 134,352
Capital in excess of par value of common stock 3,200,987 2,531,227
Reduction for ESOP loan guarantee -- (373,163)
Retained earnings 8,323,091 8,096,707
----------- -----------
Total 11,658,430 10,389,123
Less common stock in Treasury, at cost 5,962,383 5,972,131
----------- -----------
Total Stockholders' Equity 5,696,047 4,416,992
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,512,751 $11,791,271
=========== ===========
</TABLE>
FS-4
<PAGE> 82
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7
------- -------
% to % to
Dollars Sales Dollars Sales
------- ----- ------- -----
<S> <C> <C> <C> <C>
Net Sales $3,612,893 100.0 $3,871,499 100.0
Operating Expenses 4,067,081 112.6 4,431,829 114.5
---------- ----- ----------
Loss From Operations (454,188) (12.6) (560,330) (14.5)
Other Income and (Expenses) (32,539) (0.9) (46,152) (1.2)
---------- ----- ---------- -----
Loss Before Income Taxes (486,727) (13.5) (606,482) (15.7)
Provision For Income Taxes (150,129) (4.2) (116,373) (3.0)
---------- ----- ---------- -----
NET LOSS (336,598) (9.3) (490,109) (12.7)
===== =====
Retained Earnings, Beginning of Period 8,659,689 8,586,816
---------- ----------
Retained Earnings, End of Period $8,323,091 $8,096,707
========== ==========
</TABLE>
FS-5
<PAGE> 83
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial Statements
The consolidated financial statements include Power Technologies, Inc. (PTI) and
its wholly owned subsidiaries, Power Technologies Limited (PTL), Power
Technology Development Corp. (PTDC) and PT Southeast Asia; and its affiliated
company, Power Technologies International, Inc. (PTII). The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included and all material intercompany indebtedness and transactions have
been eliminated.
Investments in Affiliates
PTI owns approximately 27% of Hydropower Technologies, Inc. (HTI), 49% of PTI
Asia, and 50% of PTI-Net. PTI's investment in these companies is recorded using
the equity method.
Nature of Operations
The Company provides engineering consulting services, develops computer software
for use by utility companies, develops and conducts educational courses and
assembles computer hardware. Approximately 45% of the Company's revenue is
generated from sales and services to foreign customers, a significant portion of
which are located in Asia.
Foreign Currency Translation
Assets and liabilities of subsidiaries and operations outside the United States
are translated into U.S. dollars at current exchange rates, while income
statement items are translated at average monthly exchange rates. Gains or
losses on such translations are accumulated in a separate component of
Stockholders' Equity and are excluded from net income. Transaction gains and
losses, which were not material, resulting from the settlement of receivables or
payables, or the conversion of currency, are included in the determination of
net income.
Revenue Recognition
Long-Term Contracts
The Company recognizes engineering revenue on a percentage-of-completion
method, primarily based on contract costs incurred compared with total
estimated costs. (Contract costs include both direct and indirect costs.)
When the Company is contractually responsible for materials, equipment and
subcontractor costs, these items are included in revenue and cost of
revenue. Revisions to total estimated contract costs or losses, if any,
are recognized in the period in which they are determined. Contract change
orders in excess of agreed contract prices are included in contract value
when approved by the client.
Revenue recognized in excess of amounts billed is classified as a current
asset. Accounts receivable include amounts representing retainages under
long-term contracts which are due within one year. The Company anticipates
that substantially all of its costs and revenue recognized in excess of
billings will be billed and collected over the next twelve months and
there were no significant amounts included in accounts receivable or costs
and revenue recognized in excess of billings under contracts for claims
subject to uncertainty as to their ultimate realization other than as
provided for in the allowance for uncollectible accounts. Billings in
excess of costs and revenue recognized are classified as a current
liability.
Software and Hardware Sales and Education
Revenue is generally recognized when the product is shipped. Revenue from
education courses is recognized when the course is taught.
FS-6
<PAGE> 84
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Support and Update Fees
Revenue for software support, maintenance, and program updates is
recognized ratably over the support period, generally one year.
Allowance for Uncollectible Accounts
The Company establishes an allowance for uncollectible accounts based on a
periodic review of the status of accounts receivable. Those invoices or
accounts which are determined to be in jeopardy of being uncollected are
included in the allowance.
Use of Estimates
The 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 and the disclosure of
contingent assets and liabilities and the reported revenues and expenses.
Significant estimates used in preparing these financial statements include those
assumed in determining the collectibility of accounts receivable and amounts due
from unconsolidated subsidiaries, earned revenue on long-term contracts and
contingencies. It is at least reasonably possible that the significant estimates
used will change within the next year.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation of buildings is provided
using the straight-line method over a period of 31.5 to 33 years. Depreciation
of property improvements and equipment is provided using the declining balance
method at various rates over estimated useful lives which range from 3 to 15
years. The same depreciation method is used for both financial reporting and tax
purposes.
Income Taxes
Deferred income taxes are recognized in accordance with SFAS No. 109. Under
these provisions, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Tax credits are taken into income as reductions of the income tax provision in
the year in which they are allowed for tax purposes. Tax credit carryforwards
are considered in the calculation of deferred tax assets.
Amortization
Financing costs are amortized on a straight-line basis over the life of the
related loans.
FS-7
<PAGE> 85
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
AUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED
DECEMBER 31, 1997
FS-8
<PAGE> 86
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Power Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Power
Technologies, Inc., (a New York State Corporation) and Subsidiaries as of
December 31, 1997, and the related consolidated statements of income and
retained earnings, changes in shareholders' equity and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Power Technologies,
Inc. and Subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Marvin and Company, P.C.
- --------------------------------
MARVIN AND COMPANY, P.C.
March 25, 1998 (except for footnote 11, for which the date is April 20, 1998,
and footnote 6 - Employee Stock Ownership Plan, for which the date is July 15,
1998).
FS-9
<PAGE> 87
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
Current Assets
Cash $ 571,053
Receivables, net of allowance of $860,515 4,893,439
Costs and revenue recognized in excess of billings 1,586,446
Inventory 83,795
Deferred income taxes (Note 4) 317,400
Other 140,632
-----------
Total Current Assets 7,592,765
-----------
Property and Equipment
Land 369,023
Buildings and improvements 5,185,220
Computers and hardware 4,123,351
Furniture and fixtures 1,532,091
Test site equipment 34,610
Vehicle 35,200
-----------
Total 11,279,495
Less accumulated depreciation 7,595,855
-----------
Net Property and Equipment 3,683,640
-----------
Other Assets
Deferred income taxes (Note 4) 137,900
Investment in and due from affiliates 512,142
Financing costs, net of amortization of $50,460 11,573
-----------
Total Other Assets 661,615
-----------
TOTAL ASSETS $11,938,020
===========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-10
<PAGE> 88
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Current Liabilities
Current installments of long-term debt (Note 3) $ 374,492
Accounts payable 1,663,248
Accrued expenses (Note 2) 1,534,065
Billings in excess of costs and revenues 71,350
Deferred support revenue 190,000
Customer deposits 135,124
Income taxes payable 98,430
-----------
Total Current Liabilities 4,066,709
-----------
Other Liabilities
Long-term debt, excluding current installments (Note 3) 1,856,499
-----------
Stockholders' Equity (Note 5)
Capital Stock PTI:
Class A - $.10 par value, 1,500,000 shares authorized,
984,844 shares issued, 252,660 shares outstanding 98,484
Class B - $.10 par value, 500,000 shares authorized,
158,856 shares issued, 41,921 shares outstanding 16,336
Class C - $.10 par value, 500,000 shares authorized,
22,100 shares issued and outstanding 2,210
Capital Stock PTII:
$.10 par value, 1,000,000 shares authorized,
761,960 shares issued, 310,014 shares outstanding 17,322
Capital in excess of par value of common stock 3,200,987
Retained earnings 8,659,689
Equity adjustment from foreign currency translation (12,819)
-----------
Total 11,982,209
Less common stock in Treasury, at cost 5,967,397
-----------
Total Stockholders' Equity 6,014,812
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,938,020
===========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-11
<PAGE> 89
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (LOSS) AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
% To
Dollars Sales
------- -----
<S> <C> <C>
Net Sales $18,855,291 100.0
Operating Expenses 18,359,676 97.4
----------- -----
Income From Operations 495,615 2.6
Other Income and (Expenses) (397,996) (2.1)
----------- -----
Income Before Income Taxes 97,619 0.5
Provision For Income Taxes (Note 4) 24,746 0.1
----------- ----
NET INCOME 72,873 0.4
====
Retained Earnings, Beginning of Year 8,586,816
-----------
Retained Earnings, End of Year $ 8,659,689
===========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-12
<PAGE> 90
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Balances Stock Sale of Balances
at Acquired for Stock from Net Other at
12/31/96 Treasury Treasury Income Changes 12/31/97
-------- -------- -------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Common Stock
PTI Class A $ 102,080 $ -- $ -- $ -- $ (3,596) $ 98,484
PTI Class B 12,740 -- -- -- 3,596 16,336
PTI Class C 2,210 -- -- -- -- 2,210
PTII (net of stock owned by
PTI) 17,322 -- -- -- -- 17,322
----------- ----------- ----------- ----------- ----------- -----------
Total $ 134,352 $ -- $ -- $ -- $ -- $ 134,352
=========== =========== =========== =========== =========== ===========
Capital in Excess of Par
PTI Class A $ 2,500,984 $ -- $ 669,760 $ -- $ -- $ 3,170,744
PTI Class B 10,353 -- -- -- -- 10,353
PTI Class C 19,890 -- -- -- -- 19,890
PTII -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total $ 2,531,227 $ -- $ 669,760 $ -- $ -- $ 3,200,987
=========== =========== =========== =========== =========== ===========
Retained Earnings
PTI $ 8,577,928 $ -- $ -- $ 72,926 $ -- $ 8,650,854
PTII 8,888 -- -- (53) -- 8,835
----------- ----------- ----------- ----------- ----------- -----------
Total $ 8,586,816 $ -- $ -- $ 72,873 $ -- $ 8,659,689
=========== =========== =========== =========== =========== ===========
Treasury Stock
PTI Class A $(5,681,210) $ (24,890) $ 4,830 $ -- $ -- $(5,701,270)
PTI Class B (242,626) -- -- -- -- (242,626)
PTII (23,403) (98) -- -- -- (23,501)
----------- ----------- ----------- ----------- ----------- -----------
Total $(5,947,239) $ (24,988) $ 4,830 $ -- $ -- $(5,967,397)
=========== =========== =========== =========== =========== ===========
Equity Adjustment From
Foreign Currency
Translation $ 3,655 $ -- $ -- $ -- $ (16,474) $ (12,819)
=========== =========== =========== =========== =========== ===========
Reduction for ESOP Loan
Guarantee $ (380,364) $ -- $ -- $ -- $ 380,364 $ --
=========== =========== =========== =========== =========== ===========
Total Stockholders' Equity $ 4,928,447 $ (24,988) $ 674,590 $ 72,873 $ 363,890 $ 6,014,812
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-13
<PAGE> 91
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash Flows From Operating Activities
Net income $ 72,873
Adjustments to reconcile net income to net cash provided by operations:
Equity adjustment from foreign currency translation (16,474)
Equity in losses of affiliates 92,285
Depreciation 408,148
Amortization 8,858
Deferred income taxes (134,800)
(Increase) decrease in assets:
Receivables 80,042
Costs and revenue recognized in excess of billings (net) 670,271
Inventory (41,898)
Other 21,506
Increase (decrease) in liabilities:
Accounts payable 343,100
Accrued expenses 41,898
Deferred support revenue 47,500
Customer deposits (210,144)
Income taxes payable 97,750
-----------
Net Cash Provided By Operating Activities 1,480,915
-----------
Cash Flows From Investing Activities
Investment in and advances to affiliates (248,365)
Capital expenditures (174,100)
-----------
Net Cash Used By Investing Activities (422,465)
-----------
Cash Flows From Financing Activities
Payments of note payable (895,000)
Payments of long-term debt (394,062)
Proceeds from sale of Treasury stock 674,492
Common stock acquired for Treasury (24,890)
-----------
Net Cash Used By Financing Activities (639,460)
-----------
Net Increase in Cash 418,990
Cash, Beginning of Year 152,063
-----------
Cash, End of Year $ 571,053
===========
Supplemental Disclosure of Cash Flow Information:
Interest Paid $ 258,800
===========
Income Taxes Paid $ 62,000
===========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-14
<PAGE> 92
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial Statements
The consolidated financial statements include Power Technologies, Inc.
(PTI) and its wholly owned subsidiaries, Power Technologies Limited (PTL),
Power Technology Development Corp. (PTDC) and PT Southeast Asia; and its
affiliated company, Power Technologies International, Inc. (PTII). All
material intercompany indebtedness and transactions have been eliminated.
Investments in Affiliates
PTI owns approximately 27% of Hydropower Technologies, Inc. (HTI), 49% of
PTI Asia, and 50% of PTI-Net. PTI's investment in these companies is
recorded using the equity method.
Nature of Operations
The Company provides engineering consulting services, develops computer
software for use by utility companies, develops and conducts educational
courses and assembles computer hardware. Approximately 45% of the
Company's revenue is generated from sales and services to foreign
customers, a significant portion of which are located in Asia.
Foreign Currency Translation
Assets and liabilities of subsidiaries and operations outside the United
States are translated into U.S. dollars at current exchange rates, while
income statement items are translated at average monthly exchange rates.
Gains or losses on such translations are accumulated in a separate
component of Stockholders' Equity and are excluded from net income.
Transaction gains and losses, which were not material, resulting from the
settlement of receivables or payables, or the conversion of currency, are
included in the determination of net income.
Revenue Recognition
Long-Term Contracts
The Company recognizes engineering revenue on a
percentage-of-completion method, primarily based on contract costs
incurred compared with total estimated costs. (Contract costs
include both direct and indirect costs.) When the Company is
contractually responsible for materials, equipment and subcontractor
costs, these items are included in revenue and cost of revenue.
Revisions to total estimated contract costs or losses, if any, are
recognized in the period in which they are determined. Contract
change orders in excess of agreed contract prices are included in
contract value when approved by the client.
Revenue recognized in excess of amounts billed is classified as a
current asset. Accounts receivable include amounts representing
retainages under long-term contracts which are due within one year.
The Company anticipates that substantially all of its costs and
revenue recognized in excess of billings will be billed and
collected over the next twelve months and there were no significant
amounts included in accounts receivable or costs and revenue
recognized in excess of billings under contracts for claims subject
to uncertainty as to their ultimate realization other than
FS-15
<PAGE> 93
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
as provided for in the allowance for uncollectible accounts.
Billings in excess of costs and revenue recognized are classified as
a current liability.
Software and Hardware Sales and Education
Revenue is generally recognized when the product is shipped. Revenue
from education courses is recognized when the course is taught.
Support and Update Fees
Revenue for software support, maintenance, and program updates is
recognized ratably over the support period, generally one year.
Allowance for Uncollectible Accounts
The Company establishes an allowance for uncollectible accounts
based on a periodic review of the status of accounts receivable.
Those invoices or accounts which are determined to be in jeopardy of
being uncollected are included in the allowance.
Use of Estimates
The 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 and
the disclosure of contingent assets and liabilities and the reported
revenues and expenses. Significant estimates used in preparing these
financial statements include those assumed in determining the
collectibility of accounts receivable and amounts due from unconsolidated
subsidiaries, earned revenue on long-term contracts and contingencies. It
is at least reasonably possible that the significant estimates used will
change within the next year.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation of buildings is
provided using the straight-line method over a period of 31.5 to 33 years.
Depreciation of property improvements and equipment is provided using the
declining balance method at various rates over estimated useful lives
which range from 3 to 15 years. The same depreciation method is used for
both financial reporting and tax purposes.
Income Taxes
Deferred income taxes are recognized in accordance with SFAS No. 109.
Under these provisions, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
FS-16
<PAGE> 94
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Tax credits are taken into income as reductions of the income tax
provision in the year in which they are allowed for tax purposes. Tax
credit carryforwards are considered in the calculation of deferred tax
assets.
Amortization
Financing costs are amortized on a straight-line basis over the life of
the related loans.
2. ACCRUED EXPENSES
<TABLE>
<S> <C>
Termination bonus (Note 7) $ 419,060
ESOP contribution 347,921
Pension and profit sharing 229,936
Unused vacation 186,788
Reserve for litigation settlements 288,580
Other 61,780
----------
Total Accrued Expenses $1,534,065
==========
</TABLE>
3. NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<S> <C>
Short-Term
Line-of-credit (A) $ --
==========
Long-Term
Chase Manhattan Bank
IDA Bond payable, 8.66%, due 12/06 (B) $ 780,000
IDA Bond payable, 8.09%, due 12/98 (B) 88,572
Mortgage payable, due 10/04 (C) 934,662
Notes payable-employees/former employees,
interest 8.5%, maturing 1999 164,037
Note payable-former stockholder, 9%, due 10/05 (D) 195,503
Note payable-former stockholder, 8.75%, due 1/00 (D) 38,683
Other 29,534
----------
Total 2,230,991
Less current installments 374,492
----------
Net Long-Term Debt $1,856,499
==========
</TABLE>
(A) PTI has available a secured line of credit of up to $2.0 million under an
agreement expiring June 30, 1998. Advances, bearing interest at lower of
prime or LIBOR + 1.5%, are secured by accounts receivable and other assets
and are guaranteed by PTL. A compensating balance requirement of $100,000
and other drawdown restrictions apply to this debt.
(B) Secured by assignment of mortgage of land and building, accounts
receivable, and other assets. In addition, the Company must meet several
covenants related to working capital and financial position. At December
31, 1997, one covenant was not met; the bank has since waived compliance
with that covenant at December 31, 1997.
FS-17
<PAGE> 95
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
3. NOTES PAYABLE AND LONG-TERM DEBT - (CONTINUED)
(C) Secured by first mortgage on building located at 1482 Erie Boulevard,
Schenectady, New York. Interest at LIBOR + 1.75% (8.7% at December 31,
1997). Guaranteed by subsidiaries and affiliates. In addition, PTI must
meet certain financial and other covenants, which include limits on the
repurchase of PTI stock for the treasury.
(D) Secured by second mortgage on building located at 1473 Erie Boulevard,
Schenectady, New York.
Interest expense for 1997 was $262,714.
Principal payments of long-term debt in each of the next five years and
thereafter are as follows:
<TABLE>
<S> <C>
1998 $ 374,492
1999 354,301
2000 272,687
2001 260,738
2002 236,979
2003 and thereafter 731,794
----------
Total $2,230,991
==========
</TABLE>
Letters of Credit:
The Company has several letters of credit totaling approximately $151,000
outstanding at December 31, 1997, which expire through September 30, 1999.
4. INCOME TAXES
Provision for Income Taxes
<TABLE>
<S> <C>
Current:
Federal $ 53,550
State 45,200
Foreign 60,796
---------
Total Current Provision 159,546
Deferred:
Federal and State (134,800)
---------
Provision For Income Taxes $ 24,746
=========
</TABLE>
The following is an analysis of the difference between the United States
statutory income tax rate and the Company's effective income tax rate:
FS-18
<PAGE> 96
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
4. INCOME TAXES - (CONTINUED)
<TABLE>
<S> <C>
United States statutory income tax rate: 34.0%
Increase (decrease) resulting from:
Surtax exemption (12.2)
State income taxes, net of United States tax effect 5.3
Meals and entertainment 30.7
Foreign tax credits (30.0)
Other 2.5
------
Effective Income Tax Rate: 25.3%
======
</TABLE>
Deferred Tax Assets
Financial accounting presentation requirements and tax basis regulations
result in differences between the basis of certain assets and liabilities
for financial reporting purposes and tax purposes. The tax effects of
these differences, to the extent they are temporary, are recorded as
deferred tax assets and liabilities under SFAS 109, and consist of the
following:
<TABLE>
<S> <C>
Current Assets:
Accrued termination benefits $ 167,600
Deferred compensation 49,100
Accrued vacation 74,700
Reserve for bad debts, less related contingent expenses 319,400
Reserve for litigation settlement 60,000
Deferred support revenue 76,000
---------
746,800
---------
Current Liabilities:
Inventory (49,900)
Percent of completion calculation for contracts in process (379,500)
---------
(429,400)
---------
Net Current Deferred Tax Assets $ 317,400
=========
Long-term Assets:
Deferred compensation $ 32,000
Unrealized losses on investment in affiliates 105,900
---------
Total Long-Term Deferred Tax Assets $ 137,900
=========
</TABLE>
FS-19
<PAGE> 97
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
5. STOCKHOLDERS' EQUITY
PTI
Capital stock consists of the following:
<TABLE>
<S> <C>
Common stock, Class A (voting), $.10 par value, 1,500,000
shares authorized:
Shares issued 984,844
Shares held in Treasury 732,184
---------
Shares outstanding 252,660
=========
Common stock, Class B (non-voting), $.10 par value, 500,000
shares authorized:
Shares issued 158,856
Shares held in Treasury 116,935
---------
Shares outstanding 41,921
=========
Common stock, Class C (voting), $.10 par value, 500,000
shares authorized:
Shares issued and outstanding 22,100
=========
</TABLE>
PTII
Capital stock consists of the following:
Common stock, $.10 par value for shares issued after 11/91, no par prior
to 11/91,
1,000,000 shares authorized:
<TABLE>
<S> <C>
Shares issued 761,960
Shares held in Treasury 451,946
---------
Shares outstanding (including 46,700 shares owned by PTI) 310,014
=========
</TABLE>
6. PENSION AND PROFIT SHARING PLANS
Profit Sharing Plan
Power Technologies, Inc. has a qualified profit sharing plan for the
benefit of its employees. The Plan may be terminated at any time at the
option of the Company. The Company modified the Plan in 1996 to include a
401(k) component, whereby participants may contribute up to 7% of their
salary. The Company will make annual contributions, which may range from
1% to 15% of compensation, as determined by the Board of Directors. The
Company contribution for 1997 is $59,226.
Pension Plan
The Company also has a defined contribution pension plan covering
substantially all of its employees. Employer contributions for eligible
participants in 1997 is 3% of qualifying salaries. The contribution for
1997 is $181,587.
FS-20
<PAGE> 98
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
6. PENSION AND PROFIT SHARING PLANS - (CONTINUED)
Employee Stock Ownership Plan
The Company established an ESOP effective January 1, 1995 covering
substantially all employees.
During 1995, the Plan acquired 22,100 shares of Power Technologies, Inc.
common stock for $430,066, financed by a note payable to the former
stockholder. The note bears interest at 9% and is due in biweekly
installments through 2005. The note allows for advance payment by PTI. The
balance at December 31, 1997 was $347,921. The Company has guaranteed the
note.
The Board of Directors authorized the Company to make an additional
contribution for the Plan year ended December 31, 1997 sufficient to pay
the remaining debt of the ESOP, expressly conditioned upon, and shall not
be made before, the satisfaction or waiver, on or before August 31, 1998,
of all the closing conditions in Sections 6-8 of the Agreement and Plan
of Merger dated April 20, 1998 (see Note 11). The Company has included
the balance of the ESOP note as accrued expense and profit sharing (ESOP)
expense at December 31, 1997.
Contributions to the ESOP are determined by the Company's management, but
the Company must fund the ESOP in an amount at least equal to the annual
principal and interest due on the ESOP note.
The total contribution for 1997 was $417,572, including interest of
$37,208.
7. TERMINATION BONUS PLAN
The Company has a nonqualified termination bonus plan which includes
substantially all full time employees. Under the Plan, employees accrue
three days for each completed year of service with the Company, to a
maximum of thirty days. Upon termination as an employee, participants are
entitled to be paid a "termination bonus" equal to the number of days
accrued multiplied by their daily rate of pay. Effective January 1, 1997,
the Board of Directors agreed to "freeze" the Plan so that no additional
days accrued. On December 28, 1997, the Board of Directors froze the daily
rates used to determine the accrued bonus.
It is the intent of the Company to terminate the Plan and pay accrued
benefits upon consummation of the merger agreement (See Note 11). As such,
the entire balance at December 31, 1997 is included in accrued
liabilities.
FS-21
<PAGE> 99
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
8. LEASE COMMITMENTS
The Company has entered into several leases for office space and for
computer equipment under agreements accounted for as operating leases.
Certain computer equipment is leased under an open ended agreement with
Oliver-Allen Corp; the term of each lease, once accepted, is three years.
The maximum that can be leased each year is $300,000.
Future commitments for leases are as follows:
<TABLE>
<CAPTION>
Computer
Facilities Equipment Total
---------- --------- -----
<S> <C> <C> <C>
1998 $35,000 $327,700 $362,700
1999 9,000 235,500 244,500
2000 -- 154,200 154,200
</TABLE>
Rental expense in 1997 for the leases referred to above is approximately
$315,000.
9. CONCENTRATIONS
Cash in Excess of Insured Limits
The Company's concentration of credit risk consists of cash deposits in
excess of federally insured limits. The amounts subject to credit risk are
approximately $210,000 at December 31, 1997.
Currency Exchange Risk
Amounts, in US dollars, for which the Company is exposed to changes in
foreign currency rates, is as follows:
<TABLE>
<S> <C>
Cash in bank - Australia $ 93,900
Receivables and uncompleted contracts payable in foreign currency 859,500
</TABLE>
10. CONTINGENCIES
The Company is a defendant in a lawsuit filed late in 1993 by a customer
alleging detrimental conflict of interest. The plaintiff is seeking
reimbursement for damages of $450,000, essentially a forfeiture of all
fees paid to the company for consulting services in conjunction with the
project in question. The case has not progressed to a point where the
likelihood of either a favorable or unfavorable outcome, or estimated
range of potential loss, can be reasonably estimated. Any settlement would
not be covered by insurance. The Company has included $150,000 in accrued
expenses at December 31, 1997 as a reserve against potential losses in
this case.
FS-22
<PAGE> 100
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
10. CONTINGENCIES - (CONTINUED)
The Company has been identified as a "potentially responsible party" at an
EPA "superfund site" in Malta, New York. In September 1997, the Company
entered into a Consent Decree relating to the site. Pursuant to Appendix I
of the Decree, PTI's initial payment into the Site Trust Fund will be
$138,580. Once the initial payment is made, the Company shall have no
further obligation to make additional payments to the Fund. However, there
are certain circumstances under which the government and third parties may
subsequently assert claims against PTI with respect to the site. The
Company has included its "initial payment" in accrued expenses at December
31, 1997.
11. PROPOSED MERGER
The Company is presently negotiating a transaction whereby Stone &
Webster, Incorporated ("SWI") would acquire the Company through the merger
of a wholly-owned subsidiary of SWI into the Company. As presently
contemplated, the shareholders of the Company will receive common stock of
SWI having a value, at the time of the closing, of approximately
$9,000,000 (of which shares having a value of approximately $1,000,000
will be placed in escrow until January 15, 2000 to satisfy certain
indemnification obligations). In addition, the shareholders of the Company
may receive additional shares of SWI stock in 2003 based on the earnings
of the Company for the five calendar years starting January 1, 1998. The
maximum amount of such consideration is $8,000,000, and the number of
shares of SWI common stock which are eventually issued will be based on
the stock price used in connection with the initial closing of the merger.
Finally, the shareholders may receive additional cash consideration in
2003 if certain types of revenues are generated by the Company's
"Transasia" project. The Merger Agreement relating to the transaction has
been executed, and the closing of the transaction is subject to certain
conditions. As a result, the merger may not be consummated.
FS-23
<PAGE> 101
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED FINANCIAL STATEMENTS FOR THE PERIODS ENDED
DECEMBER 31, 1996 AND DECEMBER 31, 1995
FS-24
<PAGE> 102
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 and 1995
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current Assets
Cash $ 152,063 $ 196,205
Receivables, net of allowance of $558,770 and $237,000 4,973,481 4,655,050
Costs and revenue recognized in excess of billings 2,185,367 1,021,124
Inventory 41,897 20,249
Deferred income taxes (Note 3) 150,200 247,300
Other 162,138 83,703
----------- -----------
Total Current Assets 7,665,146 6,223,631
----------- -----------
Property and Equipment
Land 369,023 369,023
Buildings and improvements 5,163,310 5,161,412
Computers and hardware 4,004,668 3,859,396
Furniture and fixtures 1,504,673 1,504,673
Test site equipment 34,610 34,610
Vehicle 29,111 29,111
----------- -----------
Total 11,105,395 10,958,225
Less accumulated depreciation 7,187,707 6,672,796
----------- -----------
Net Property and Equipment 3,917,688 4,285,429
----------- -----------
Other Assets
Deferred income taxes (Note 3) 170,300 177,000
Investment in and due from unconsolidated subsidiaries 356,062 96,588
Financing costs, net of amortization of $41,602 and $34,396 20,431 13,764
Total Other Assets 546,793 287,352
----------- -----------
TOTAL ASSETS $12,129,627 $10,796,412
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-25
<PAGE> 103
R
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current Liabilities
Note payable (Note 2) $ 895,000 $ 400,000
Current installments of long-term debt (Note 2) 430,390 350,589
Accounts payable 1,320,148 1,057,586
Accrued expenses 1,061,857 1,207,779
Billings in excess of costs and revenues -- --
Deferred support revenue 142,500 113,000
Customer deposits 345,268 320,847
Income taxes payable 680 4,994
------------ ------------
Total Current Liabilities 4,195,843 3,454,795
------------ ------------
Other Liabilities
Long-term debt, excluding current installments (Note 2) 2,194,663 1,598,376
Guarantee of ESOP loan (Note 6) 380,364 410,020
Deferred benefits 430,310 485,239
------------ ------------
Total Other Liabilities 3,005,337 2,493,635
------------ ------------
Stockholders' Equity (Note 4)
Capital Stock PTI:
Class A - $.10 par value, 1,500,000 shares
authorized, 1,020,800 shares issued,
257,668 and 258,880 shares outstanding 102,080 102,080
Class B - $.10 par value, 500,000 shares
authorized, 122,900 shares issued, 5,965
shares outstanding 12,740 12,740
Class C - $.10 par value, 500,000 shares
authorized, 22,100 shares issued and
outstanding 2,210 2,210
Capital Stock PTII:
$.10 par value, 1,000,000 shares authorized,
761,960 shares issued, 310,014 and 311,110
shares outstanding 17,322 17,322
Capital in excess of par value of common stock 2,531,227 2,248,790
Reduction for ESOP loan guarantee (Note 6) (380,364) (410,020)
Retained earnings 8,586,816 8,435,797
Equity adjustment from foreign currency translation 3,655 6
------------ ------------
Total 10,875,686 10,408,925
Less common stock in Treasury, at cost 5,947,239 5,560,943
------------ ------------
Total Stockholders' Equity 4,928,447 4,847,982
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,129,627 $ 10,796,412
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
FS-26
<PAGE> 104
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
------- -------
% to % to
Dollars Sales Dollars Sales
------- ----- ------- -----
<S> <C> <C> <C> <C>
Net Sales $ 17,564,662 100.0 $ 17,854,549 100.0
Operating Expenses 17,003,841 96.8 17,650,104 98.9
------------ ----- ------------ -----
Income From Operations 560,821 3.2 204,445 1.1
Other Income and (Expenses) (310,725) (1.8) (293,030) (1.6)
------------ ----- ------------ -----
Income Before Income Taxes 250,096 1.4 (88,585) (0.5)
Provision For (Benefit From) Income Taxes
(Note 3) 99,077 0.6 (63,997) (0.4)
------------ ----- ------------ -----
NET INCOME (LOSS) 151,019 0.8 (24,588) (0.1)
===== =====
Retained Earnings, Beginning of Year 8,435,797 8,460,385
------------ -----------
Retained Earnings, End of Year $ 8,586,816 $ 8,435,797
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-27
<PAGE> 105
R
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Balances Stock Sale of Balances
at Acquired for Stock from Net Other at
12/31/95 Treasury Treasury Income Changes 12/31/96
-------- -------- -------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Common Stock
PTI Class A $ 102,080 $ -- $ -- $ -- $ -- $ 102,080
PTI Class B 12,740 -- -- -- -- 12,740
PTI Class C 2,210 -- -- -- -- 2,210
PTII (net of stock
owned by PTI) 17,322 -- -- -- 17,322
----------- --------------- ---------- ------------ --------------- -----------
Total $ 134,352 $ -- $ -- $ -- $ -- $ 134,352
=========== =============== ========== ============ =============== ===========
Capital in Excess of Par
PTI Class A $ 2,218,547 $ -- $ 282,437 $ -- $ -- $ 2,500,984
PTI Class B 10,353 -- -- -- -- 10,353
PTI Class C 19,890 -- -- -- -- 19,890
PTII -- -- -- -- -- --
----------- --------------- ---------- ------------ --------------- -----------
Total $ 2,248,790 $ -- $ 282,437 $ -- $ -- $ 2,531,227
=========== =============== ========== ============ =============== ===========
Retained Earnings
PTI $ 8,426,852 $ -- $ -- $ 151,072 $ -- $ 8,577,924
PTII 8,945 -- -- (53) -- 8,892
----------- --------------- ---------- ------------ --------------- -----------
Total $ 8,435,797 $ -- $ -- $ 151,019 $ -- $ 8,586,816
=========== =============== ========== ============ =============== ===========
Treasury Stock
PTI Class A $(5,295,564) $ (388,114) $ 2,468 $ -- $ -- $(5,681,210)
PTI Class B (242,626) -- -- -- -- (242,626)
PTII (22,753) (650) -- -- -- (23,403)
----------- --------------- ---------- ------------ --------------- -----------
Total $(5,560,943) $ (388,764) $ 2,468 $ -- $ -- $(5,947,239)
=========== =============== ========== ============ =============== ===========
Equity Adjustment From
Foreign Currency
Translation $ 6 $ -- $ -- $ -- $ 3,649 $ 3,655
=========== =============== ========== ============ =============== ===========
Reduction for ESOP
Loan Guarantee $ (410,020) $ -- $ -- $ -- $ 29,656 $ (380,364)
=========== =============== ========== ============ =============== ===========
Total Stockholders' Equity $ 4,847,982 $ (388,764) $ 284,905 $ 151,019 $ 33,305 $ 4,928,447
=========== =============== ========== ============ =============== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-28
<PAGE> 106
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Balances Stock Sale of Balances
at Acquired for Stock from Net Other at
12/31/94 Treasury Treasury Income Changes 12/31/95
-------- -------- -------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Common Stock
PTI Class A $ 104,290 $ -- $ -- $ -- $ (2,210) $ 102,080
PTI Class B 12,740 -- -- -- -- 12,740
PTI Class C -- -- -- -- 2,210 2,210
PTII (net of stock owned by PTI) 17,322 -- -- -- -- 17,322
----------- ------------ ----------- --------- ----------- -----------
Total $ 134,352 $ -- $ -- $ -- $ -- $ 134,352
=========== ============ =========== ========= =========== ===========
Capital in Excess of Par
PTI Class A $ 2,088,393 $ -- $ 150,044 $ -- $ (19,890) $ 2,218,547
PTI Class B 10,353 -- -- -- -- 10,353
PTI Class C -- -- -- -- 19,890 19,890
PTII -- -- -- -- -- --
----------- ------------ ----------- --------- ----------- -----------
Total $ 2,098,746 $ -- $ 150,044 $ -- $ -- $ 2,248,790
=========== ============ =========== ========= =========== ===========
Retained Earnings
PTI $ 8,451,392 $ -- $ -- $ (24,540) $ -- $ 8,426,852
PTII 8,993 -- -- (48) -- 8,945
----------- ------------ ----------- --------- ----------- -----------
Total $ 8,460,385 $ -- $ -- $ (24,588) $ -- $ 8,435,797
=========== ============ =========== ========= =========== ===========
Treasury Stock
PTI Class A $(4,345,983) $ (951,156) $ 1,575 $ -- $ -- $(5,295,564)
PTI Class B (242,626) -- -- -- -- (242,626)
PTII (22,751) (2) -- -- -- (22,753)
----------- ------------ ----------- --------- ----------- -----------
Total $(4,611,360) $ (951,158) $ 1,575 $ -- $ -- $(5,560,943)
=========== ============ =========== ========= =========== ===========
Equity Adjustment From
Foreign Currency
Translation $ (2,414) $ -- $ -- $ -- $ 2,420 $ 6
=========== ============ =========== ========= =========== ===========
Reduction for ESOP Loan
Guarantee $ -- $ -- $ -- $ -- $ (410,020) $ (410,020)
=========== ============ =========== ========= =========== ===========
Total Stockholders' Equity $ 6,079,709 $ (951,158) $ 151,619 $ (24,588) $ (407,600) $ 4,847,982
=========== ============ =========== ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-29
<PAGE> 107
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ 151,019 $ (24,588)
Adjustments to reconcile net income (loss) to net cash provided
by operations:
Equity adjustment from foreign currency translation 3,649 6
Equity in (income) losses of affiliates 21,085 23,821
Depreciation 514,910 641,572
Amortization 7,206 6,876
Deferred benefits (54,929) (46,254)
Deferred taxes 103,800 (61,300)
Loss on sale/disposal of property and equipment -- 25,696
(Increase) decrease in assets:
Receivables (318,431) 791,490
Costs and revenue recognized in excess of billings (1,164,243) 131,076
Inventory (21,648) (10,124)
Other (78,435) (7,703)
Increase (decrease) in liabilities:
Accounts payable 262,562 (37,178)
Accrued expenses (145,922) 80,594
Billings in excess of costs and revenues -- --
Deferred support revenue 29,500 (7,000)
Customer deposits 24,421 102,665
Income taxes payable (4,314) (384,120)
----------- -----------
Net Cash Provided (Used) By Operating Activities (669,770) 1,225,529
----------- -----------
Cash Flows From Investing Activities
Investment in and due from affiliates (280,559) (9,126)
Capital expenditures (147,169) (304,663)
----------- -----------
Net Cash Used By Investing Activities (427,728) (313,789)
----------- -----------
Cash Flows From Financing Activities
Net proceeds (payment) of note payable 495,000 (125,000)
Payment of long-term debt (350,590) (418,544)
Proceeds of long-term debt 1,014,569 61,950
Loan costs (13,873) --
Proceeds from reissuance of Treasury stock 285,364 151,619
Common stock acquired for Treasury (377,114) (674,504)
----------- -----------
Net Cash Provided (Used) By Financing Activities 1,053,356 (1,004,479)
----------- -----------
Net Decrease in Cash (44,142) (92,739)
Cash, Beginning of Year 196,205 288,944
----------- -----------
Cash, End of Year $ 152,063 $ 196,205
=========== ===========
Schedule of Non-Cash Investing and Financing Transactions:
Debt incurred to acquire Treasury stock $ 12,109 $ 276,654
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 262,400 $ 268,800
=========== ===========
Income taxes paid $ 33,200 $ 493,500
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-30
<PAGE> 108
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidated Financial Statements
The consolidated financial statements include Power Technologies, Inc.
(PTI) and its wholly owned subsidiaries, Power Technologies Limited (PTL)
and Power Technology Development Corp. (PTDC); and its affiliated company,
Power Technologies International, Inc. (PTII). All material intercompany
indebtedness and transactions have been eliminated.
Investments in Affiliates
PTI owns approximately 27% of Hydropower Technologies, Inc. (HTI) and 49%
of PTI Asia. PTI's investment in these companies is recorded using the
equity method.
Nature of Operations
The Company provides engineering consulting services, develops computer
software for use by utility companies, develops and conducts educational
courses and assembles computer hardware. Approximately 45% of the
Company's revenue is generated from sales and services to foreign
customers, a significant portion of which are located in Asia.
Foreign Currency Translation
Assets and liabilities of subsidiaries and operations outside the United
States are translated into U.S. dollars at current exchange rates, while
income statement items are translated at average monthly exchange rates.
Gains or losses on such translations are accumulated in a separate
component of Stockholders' Equity and are excluded from net income.
Transaction gains and losses, which were not material, resulting from the
settlement of receivables or payables, or the conversion of currency, are
included in the determination of net income.
Revenue Recognition
Long-Term Contracts
The Company recognizes engineering revenue on a percentage-of-
completion method, primarily based on contract costs incurred
compared with total estimated costs. Contract costs include both
direct and indirect costs. When the Company is contractually
responsible for materials, equipment and subcontractor costs, these
items are included in revenue and cost of revenue. Revisions to
total estimated contract costs or losses, if any, are recognized in
the period in which they are determined. Contract change orders in
excess of agreed contract prices are included in revenue when
approved by the client.
Revenue recognized in excess of amounts billed is classified as a
current asset. Accounts receivable include amounts representing
retainages under long-term contracts which are due within one year.
The Company anticipates that substantially all of its costs and
revenue recognized in excess of billings will be billed and
collected over the next twelve months and there were no significant
amounts included in accounts receivable or costs and revenue
recognized in excess of billings under contracts for claims subject
to uncertainty as to their ultimate realization. Billings in excess
of costs and revenue recognized are classified as a current
liability.
FS-31
<PAGE> 109
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Software and Hardware Sales and Education
Revenue is generally recognized when the product is shipped. Revenue
from education courses is recognized when the course is taught.
Revenue Recognition
Support and Update Fees
Revenue for software support, maintenance, and program updates is
recognized ratably over the support period, generally one year.
Allowance for Uncollectible Accounts
The Company establishes an allowance for uncollectible accounts
based on a periodic review of the status of accounts receivable.
Those invoices or accounts which are determined to be in jeopardy of
being collected are included in the allowance.
Use of Estimates
The 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 and
the disclosure of contingent assets and liabilities and the reported
revenues and expenses. Significant estimates used in preparing these
financial statements include those assumed in determining the
collectibility of accounts receivable and amounts due from unconsolidated
subsidiaries, earned revenue on long-term contracts and contingencies. It
is at least reasonably possible that the significant estimates used will
change within the next year.
Property, Equipment and Depreciation
Property and equipment are stated at cost. Depreciation of buildings is
provided using the straight-line method over a period of 31.5 to 33 years.
Depreciation of property improvements and equipment is provided using the
declining balance method at various rates over estimated useful lives
which range from 3 to 15 years. The same depreciation method is used for
both financial reporting and tax purposes.
Income Taxes
Deferred income taxes are recognized in accordance with SFAS No. 109.
Under these provisions, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Tax credits are taken into income as reductions of the income tax
provision in the year in which they are allowed for tax purposes. Tax
credit carryforwards are considered in the calculation of deferred tax
assets.
FS-32
<PAGE> 110
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Amortization
Financing costs are amortized on a straight-line basis over the life of
the related loans.
2. NOTES PAYABLE AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Short-Term
Line-of-credit (A) $ 895,000 $ 400,000
========== ==========
Long-Term
Chase Manhattan Bank
IDA Bond payable, 8.66% until 12/96, prime plus 1/2%
until maturity date of 12/06 (B) $ 866,667 $ 953,333
IDA Bond payable, 8.09%, due 12/98 (B) 177,143 265,714
Mortgage payable, due 10/04 (C) 994,974 --
Notes payable-employees/former employees, interest 8.5%,
maturing 1999 292,635 440,771
Note payable-former stockholder, 9%, due 10/05 (D) 212,090 227,197
Note payable-former stockholder, 8.75%, due 1/00 (D) 61,950 61,950
Other 19,594 --
---------- ----------
Total 2,625,053 1,948,965
Less current installments 430,390 350,589
---------- ----------
Net Long-Term Debt $2,194,663 $1,598,376
========== ==========
</TABLE>
(A) PTI has available a secured line of credit of up to $2.0 million under an
agreement expiring June 30, 1997. Advances, bearing interest at lower of
prime or LIBOR + 1.5% (8% at December 31, 1996), are secured by accounts
receivable and other assets, and are guaranteed by PTL. A compensating
balance requirement of $100,000 and other drawdown restrictions apply to
this debt.
(B) Secured by assignment of mortgage of land and building, accounts
receivable, and other assets. In addition, PTI must meet several covenants
related to working capital and financial position.
(C) Secured by first mortgage on building located at 1482 Erie Boulevard,
Schenectady, New York. Interest at LIBOR + 1.75%. Guaranteed by
subsidiaries and affiliates. In addition, PTI must meet certain financial
and other covenants, which include limits on the repurchase of PTI stock
for the treasury.
(D) Secured by second mortgage on building located at 1473 Erie Boulevard,
Schenectady, New York.
Interest expense for 1996 and 1995 was $225,559 and $273,576,
respectively.
FS-33
<PAGE> 111
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
2. NOTES PAYABLE AND LONG-TERM DEBT - (CONTINUED)
Principal payments of long-term debt in each of the next five years and
thereafter are as follows:
<TABLE>
<S> <C>
1997 $ 430,390
1998 351,697
1999 340,766
2000 272,687
2001 260,738
2002 and thereafter 968,775
----------
Total $2,625,053
==========
</TABLE>
3. PROVISION FOR (BENEFIT FROM) INCOME TAXES
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current:
Federal $(33,666) $(114,503)
State 13,469 (10,543)
Foreign 15,474 102,252
-------- ---------
Total Current Provision (4,723) (22,794)
Deferred:
Federal and State 103,800 (41,203)
-------- ---------
Provision For (Benefit From) Income Taxes $ 99,077 $ (63,997)
======== =========
</TABLE>
The following reconciles the 1996 and 1995 tax provisions with the
expected provision obtained by applying statutory rates to pretax income:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected tax provision (benefit) at 34% $ 85,000 $ (30,000)
State income taxes, net of Federal benefit 14,800 (4,100)
Prior year State taxes -- (17,500)
ISO compensation (3,600) (28,100)
Meals and entertainment 12,000 18,500
Other (9,123) (2,797)
-------- ---------
Provision For (Benefit From) Income Taxes $ 99,077 $ (63,997)
======== =========
</TABLE>
FS-34
<PAGE> 112
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
3. PROVISION FOR (BENEFIT FROM) INCOME TAXES - (CONTINUED)
Deferred Tax Assets
Financial accounting presentation requirements and tax basis regulations
result in differences between the basis of certain assets and liabilities
for financial reporting purposes and tax purposes. The tax effects of
these differences, to the extent they are temporary, are recorded as
deferred tax assets and liabilities under SFAS 109, and consist of the
following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current Assets:
Accrued termination benefits $172,100 $194,100
Deferred compensation 20,000 28,400
Accrued vacation 69,100 94,600
Reserve for bad debts, less related contingent expenses 198,700 91,300
Reserve for litigation settlement 60,000 60,000
Deferred support revenue 57,000 45,200
Foreign tax credit carryforward 31,000 --
-------- --------
607,900 513,600
-------- --------
Current Liabilities:
Inventory 26,200 13,800
Percent of completion calculation for contracts in process 431,500 252,500
-------- --------
457,700 266,300
-------- --------
Net Current Deferred Tax Assets $150,200 $247,300
======== ========
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred Tax Assets
Long-Term Assets:
Deferred compensation $ 79,900 $ 99,800
Unrealized losses on subsidiary investments 90,400 77,200
-------- --------
Total Long-Term Deferred Tax Asset $170,300 $177,000
======== ========
</TABLE>
FS-35
<PAGE> 113
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
4. STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
PTI
Capital stock consists of the following:
Common stock, Class A (voting),
$.10 par value, 1,500,000 shares authorized:
Shares issued 1,020,800 1,020,800
Shares held in Treasury 763,132 761,920
--------- ---------
Shares outstanding 257,668 258,880
========= =========
Common stock, Class B (non-voting), $.10 par value, 500,000 shares
authorized:
Shares issued 122,900 122,900
Shares held in Treasury 116,935 116,935
--------- ---------
Shares outstanding 5,965 5,965
========= =========
Common stock, Class C (voting), $.10 par value, 500,000 shares
authorized:
Shares issued and outstanding 22,100 22,100
========= =========
<CAPTION>
1996 1995
---- ----
PTII
Capital stock consists of the following:
Common stock, $.10 par value for shares issued after
11/91, no par prior to 11/91, 1,000,000 shares authorized:
Shares issued 761,960 761,960
Shares outstanding (including 46,700 shares owned by
PTI) 310,014 311,110
--------- ---------
Shares held in Treasury 451,946 450,850
========= =========
</TABLE>
5. STOCK OPTIONS
In December 1984, the Board of Directors approved an Incentive Stock
Option Plan, which provides for the granting of stock options to full-time
employees. In August 1987, March 1989 and July 1991, the Board approved a
plan providing for additional options. The option price is equal to the
fair market value at the time the option is granted. Options will expire
on January 1 of the fifth year following the year of granting, but will
automatically terminate upon notification of intent to terminate
employment. On exercising an option to purchase PTI stock, the employee
receives the right to buy one share of PTII stock at fair market value for
every share of PTI stock purchased.
FS-36
<PAGE> 114
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
5. STOCK OPTIONS - (CONTINUED)
Information regarding the Company's stock option plan is summarized below:
<TABLE>
<CAPTION>
Number
------
<S> <C>
Outstanding at December 31, 1995 24,750
Exercised (18,246)
Terminated (6,504)
-------
Outstanding at December 31, 1996 --
=======
</TABLE>
6. PENSION AND PROFIT SHARING PLANS
Profit Sharing Plan
PTI has a qualified profit sharing plan for the benefit of its employees.
The Plan may be terminated at any time at the option of the Company. The
Company modified the Plan in 1996 to include a 401(k) component, whereby
participants may contribute up to 7% of their salary. The Company will
make annual contributions, which may range from 1% to 15% of compensation,
as determined by the Board of Directors. The Company contribution accrued
for 1996 and 1995 were $66,762 and $72,447, respectively.
Pension Plan
The Company also has a defined contribution pension plan covering
substantially all of its employees. Employer contributions for eligible
participants in 1996 is 8% of qualifying salaries for the first nine
months of 1996. Employer contributions for eligible participants in 1995
is 8% of qualifying salaries. The contributions accrued for the Plan in
1996 and 1995 were $400,612 and $580,621, respectively.
Employee Stock Ownership Plan
The Company established an ESOP effective beginning January 1, 1995
covering substantially all employees.
During 1995, the Plan acquired 22,100 shares of Power Technologies, Inc.
common stock for $430,066, financed by a note payable to the former
stockholder. The note bears interest at 9% and is due in biweekly
installments through 2005. The note allows for advance payment by PTI. The
balances at December 31, 1996 and 1995 were $380,364 and $410,020,
respectively. The Company has guaranteed the note and, accordingly, the
liability is included in the accompanying balance sheets with a
corresponding amount shown as a reduction to stockholders' equity.
Contributions to the ESOP are determined by the Company's management, but
the Company must fund the ESOP in an amount at least equal to the annual
principal and interest due on the ESOP note.
The total contribution for 1996 was $67,154, including interest of
$37,499. The contribution for 1995 was $48,467 including interest of
$28,421.
FS-37
<PAGE> 115
POWER TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
7. LEASE COMMITMENTS
Facilities
The Company has entered into several leases for office space. Future
commitments for facilities leases are as follows:
<TABLE>
<S> <C>
1997 $23,166
1998 22,566
1999 15,411
</TABLE>
Computer Equipment
The Company has entered into an open ended lease agreement with
Oliver-Allen Corp. to lease computer equipment. The term of each lease,
once accepted, is three years. The maximum that can be leased each year is
$300,000. At December 31, 1996, future commitments for equipment leased
under this agreement is as follows:
<TABLE>
<S> <C>
1997 $132,800
1998 132,800
1999 68,300
</TABLE>
8. CONTINGENCIES
The Company is a defendant in a lawsuit filed late in 1993 by a customer
alleging detrimental conflict of interest. The plaintiff is seeking
reimbursement for damages of $450,000, essentially a forfeiture of all
fees paid to the company for consulting services in conjunction with the
project in question. The case has not progressed to a point where the
likelihood of either a favorable or unfavorable outcome, or estimated
range of potential loss, can be reasonably estimated. Any settlement would
not be covered by insurance. The Company has included $150,000 in accrued
expenses at December 31, 1996 and 1995 as a reserve against potential
losses in this case.
The Company has been identified as a "potentially responsible party" at an
EPA "superfund site" in Malta, New York. The Company has established a
reserve of $100,000, included in accrued expenses at December 31, 1996, to
cover potential costs related to this litigation.
FS-38
<PAGE> 116
APPENDIX B
SECTION 623 OF THE NEW YORK BUSINESS CORPORATION LAW
ss. 623. Procedure to enforce shareholder's right to receive payment for shares.
(a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of Section 913 (Share exchanges) shall file a written notice of such election to
dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenters' rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
of any such dividend or distribution other than in cash has been completed, in
lieu thereof, at the election of the corporation, the fair value thereof in cash
as determined by the board as of the time of such expiration or completion, but
without prejudice otherwise to any corporate proceedings that may have been
taken in the interim.
<PAGE> 117
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder or the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will be made by the
corporation promptly upon submission of his certificates. If the corporate
action has not been consummated at the time of the making of the offer, such
advance payment or statement as to advance payment shall be sent to each
shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve-month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporation action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration
of whichever is applicable of the two periods last mentioned, institute a
special proceeding in the supreme court in the judicial district in which the
office of the corporation is located to determine the rights of dissenting
shareholders and to fix the fair value of their shares. If, in the case of
merger or consolidation, the surviving or new corporation is a foreign
corporation without an office in this state, such proceeding shall be brought in
the county where the office of the domestic corporation, whose shares are to be
valued, was located.
<PAGE> 118
(2) If the corporation fails to institute such proceeding within
such period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the expiration
of such twenty day period. If such proceeding is not instituted within such
thirty day period, all dissenter's rights shall be lost unless the supreme
court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid for
their shares, shall be made parties to such proceeding, which shall have the
effect of an action quasi in rem against their shares. The corporation shall
serve a copy of the petition in such proceeding upon each dissenting shareholder
who is a resident of this state in the manner provided by law for the service of
a summons, and upon each nonresident dissenting shareholder either by registered
mail and publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder,
as to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not request
any such determination or if the court finds that any dissenting shareholder is
so entitled, it shall proceed to fix the value of the shares, which, for the
purposes of this section, shall be the fair value as of the close of business on
the day prior to the shareholders' authorization date. In fixing the fair value
of the shares, the court shall consider the nature of the transaction giving
rise to the shareholders' right to receive payment for shares and its effects on
the corporation and its shareholders, the concepts and methods then customary in
the relevant securities and financial markets for determining fair value of
shares of a corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the fair
value of the shares without a jury and without referral to an appraiser or
referee. Upon application by the corporation or by any shareholder who is a
party to the proceeding, the court may, in its discretion, permit pretrial
disclosure, including, but not limited to, disclosure of any expert's reports
relating to the fair value of the shares whether or not intended for use at the
trial in the proceeding and notwithstanding subdivision (d) of section 3101 of
the civil practice laws and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so determined.
(6) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the date the corporate action was
consummated to the date of payment. In determining the rate of interest, the
court shall consider all relevant factors, including the rate of interest which
the corporation would have had to pay to borrow money during the pendency of the
proceeding. If the court finds that the refusal of any shareholder to accept the
corporate offer of payment for his shares was arbitrary, vexatious or otherwise
not in good faith, no interest shall be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees incurred by
the corporation against any or all of the dissenting shareholders who are
parties to the proceeding, including any who have withdrawn their notices of
election as provided in paragraph (e), if the court finds that their refusal to
accept the corporate offer was arbitrary, vexatious or otherwise not in good
faith. The court may, in its discretion, apportion and assess all or any part of
the costs, expenses and fees incurred by any or all of the dissenting
shareholders who are parties to the proceeding against the corporation if the
court finds any of the following: (A) that the fair value of the shares as
determined materially exceeds the amount which the corporation offered to pay;
(B) that no offer or required advance payment was made by the corporation; (C)
that the corporation failed to institute the special proceeding within the
period specified therefor; or (D) that the action of the corporation in
complying with its obligations as provided in this section was arbitrary,
vexatious or otherwise not in good faith. In making any determination as
provided in clause (A), the court may consider the dollar amount or the
percentage, or both, by which the fair value of the shares as determined exceeds
the corporate offer.
<PAGE> 119
(8) Within sixty days after final determination of the proceeding,
the corporation shall pay to each dissenting shareholder the amount found to be
due him, upon surrender of the certificates for any such shares represented by
certificates.
(i) Shares acquired by the corporation upon the payment of the agreed
value therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this
section at a time when the corporation is insolvent or when such payment would
make it insolvent. In such event, the dissenting shareholder shall, at his
option:
(1) Withdraw his notice of election, which shall in such event be
deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if
it is liquidated, be subordinated to the rights of creditors of the corporation,
but have rights superior to the non-dissenting shareholders, and if it is not
liquidated, retain his right to be paid for his shares, which right the
corporation shall be obliged to satisfy when the restrictions of this paragraph
do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment for
his shares cannot be made because of the restrictions of this paragraph. If the
dissenting shareholder fails to exercise such option as provided, the
corporation shall exercise the option by written notice given to him within
twenty days after the expiration of such period of thirty days.
(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporation action
will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as
provided in subparagraph (e)(2) of section 907 (Merger or consolidation of
domestic and foreign corporations). (Last amended by L. 1986, Ch. 117, ss. 3.)
<PAGE> 120
Subject to Completion, Dated July 16, 1998
PROSPECTUS
STONE & WEBSTER, INCORPORATED
2,742,858 SHARES OF COMMON STOCK, PAR VALUE $1.00 PER SHARE
This Prospectus relates to 2,742,858 shares (the "Shares") of the common
stock, par value $1.00 per share (the "Common Stock"), of Stone & Webster,
Incorporated (the "Company"), that may be issued from time to time in connection
with future business combinations, acquisitions and mergers. In general, the
terms of such combinations, acquisitions and mergers will be determined by
direct negotiations between representatives of the Company and the owners or
principal executives of the companies or other entities to be so combined,
acquired or merged or the assets of which are to be so acquired, and the factors
taken into account will include, among other things, the established quality of
management, earning power, cash flow, growth potential, facilities and locations
of the companies or other entities to be acquired or merged, and the market
value of the Common Stock.
The Common Stock is listed on the New York Stock Exchange (the "NYSE")
under the symbol "SW." The closing price of the Common Stock as reported in the
NYSE Composite Transactions on July 14, 1998 was $39.69 per share.
------------------------
See "RISK FACTORS" beginning on page 3 for certain information that should be
considered by prospective investors in deciding whether or not to purchase
shares of Common Stock offered hereby.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Date of this Prospectus is __________ __, 1998.
<PAGE> 121
TABLE OF CONTENTS
AVAILABLE INFORMATION...................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 1
NOTE REGARDING FORWARD-LOOKING STATEMENTS.................................. 2
RISK FACTORS............................................................... 3
General Business; Competition.............................................. 3
Backlog.................................................................... 3
Uncertainty Regarding Client Relationships................................. 3
Size and Uncertainty of Timing of Contracts................................ 3
Uncertainty Regarding International Nature of Business..................... 4
Risk of Technological Changes.............................................. 4
Risks Due to Fixed, Maximum or Unit Priced Contracts....................... 4
Contract Performance Risk.................................................. 5
Uncertainties in Government Contracts...................................... 5
Environmental, Safety and Health Risks..................................... 5
Potential Liability for Services Relating to Toxic and Hazardous Materials
and the Ability to Insure Such Risks..................................... 5
Other Impact of Environmental Regulation................................... 6
Litigation Risks........................................................... 6
Attraction and Retention of Professional Personnel......................... 7
Availability of Additional Acquisition Targets............................. 7
THE COMPANY................................................................ 7
SECURITIES COVERED BY THIS PROSPECTUS...................................... 7
DESCRIPTION OF CAPITAL STOCK............................................... 8
General Description........................................................ 8
Description of Common Stock................................................ 8
Description of Preferred Stock
Description of Series A Junior Participating Preferred Stock and Rights to
Purchase Series A Junior Participating Preferred Stock................... 9
LEGAL OPINION.............................................................. 10
EXPERTS.................................................................... 10
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<PAGE> 122
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy and
information statements filed pursuant to Sections 14(a) and 14(c) of the
Exchange Act and other information filed with the Commission can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and
at the following Regional Offices of the Commission: Midwest Regional Office,
500 West Madison Avenue, Suite 1400, Chicago, Illinois 60661; and Northeast
Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material can also be obtained at prescribed rates from the Public
Reference Section of the Commission at its principal office at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549 or without charge at the
Commission's World Wide Web site (http://www.sec.gov), and can also be inspected
at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
This Prospectus and the accompanying Prospectus Supplement, if any, does
not contain all of the information set forth in the Registration Statement and
the exhibits thereto, certain parts of which are omitted in accordance with the
rules and regulations of the Commission. Statements made in this Prospectus as
to the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and any amendments thereto, including exhibits filed or
incorporated by reference as a part thereof, are available for inspection and
copying at the Commission's offices as described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the
Commission (File No. 1-1228) under the Exchange Act are incorporated by
reference herein.
(1) The Company's annual report on Form 10-K for the fiscal year ended
December 31, 1997, filed with the Commission on March 30, 1998.
(2) The Company's quarterly report on Form 10-Q for the quarter ended
March 31, 1998, filed with the Commission on May 12, 1998.
(3) All other reports filed pursuant to Section 13(a) or 15(d) of the
Exchange Act since the end of the fiscal period covered by the
annual report referred to in (1) above.
(4) The descriptions of the Company's Series A Junior Participating
Preferred Stock and Rights to Purchase Series A Junior Participating
Preferred Stock contained in its Registration Statement on Form 8-A
filed with the Commission on August 16, 1996 and amended by Form
8-A/A filed with the Commission on September 24, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering made pursuant to this Prospectus shall be deemed to
be incorporated by reference in this Prospectus and to be a part hereof from the
date of filing such documents.
Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document which also is or is deemed to be incorporated
herein by reference) modifies
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<PAGE> 123
or supersedes such statement. Any statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
This Prospectus incorporates certain documents by reference that are not
presented herein or delivered herewith. The Company undertakes to provide copies
of such documents (other than exhibits to such documents unless such exhibits
are specifically incorporated by reference), without charge, to any person,
including any beneficial owner, to whom this Prospectus is delivered, upon
written or oral request to the attention of the Corporate Secretary, Stone &
Webster, Incorporated, 245 Summer Street, 8th Floor, Boston, Massachusetts 02210
(telephone (617)589-5111). In order to ensure delivery of the documents, such
requests should be made by at least ten business days before the date at which a
final investment decision must be made.
No person is authorized to give any information or make any representation
not contained in this Prospectus, and, if given or made, such information or
representation should not be relied upon as having been authorized. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy the securities offered by this Prospectus in any jurisdiction where, or to
or from any person to whom, it is unlawful to make such offer or solicitation of
an offer. Neither the delivery of this Prospectus nor any distribution of the
securities offered pursuant to this Prospectus shall create an implication that
there has been no change in the affairs of the Company since the date of this
Prospectus or that the information in this Prospectus or in the documents
incorporated herein by reference is correct as of any time after the dates
hereof or thereof.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the information contained in this Prospectus, including
documents incorporated by reference, and the Prospectus Supplement, if any, may
contain "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Exchange Act. There are a number of important factors that could cause
actual results to differ materially from those indicated by such forward-looking
statements. Such factors include but are not limited to those set forth in this
Prospectus under the heading "Risk Factors."
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<PAGE> 124
RISK FACTORS
The following risk factors, in addition to other information contained or
incorporated by reference in this Prospectus and the Prospectus Supplement, if
any, should be considered carefully by prospective investors in evaluating the
Company and its business before deciding to purchase the Common Stock offered
hereby.
General Business; Competition
The Company is principally engaged, through its subsidiaries, in providing
engineering, construction and consulting services. The principal business
activities of the Company in the engineering, construction and consulting
services areas are highly competitive, with competition from a large number of
well-established, well-financed concerns, both privately and publicly held.
Inasmuch as the Company is primarily a service organization, it competes in its
areas of interest by providing services of the highest quality. The Company
believes it occupies a strong competitive position, but is unable to estimate
with reasonable accuracy its competitive position in the engineering,
construction and consulting services industry. The markets served by the
engineering, construction and consulting businesses of the Company are likewise
highly competitive and, for the most part, require substantial resources and
particularly highly skilled and experienced technical personnel. A large number
of multi-national companies are also competing in the markets served by the
Company's subsidiaries. Intense competition in the engineering, construction and
consulting businesses is expected to continue, presenting the Company with
significant challenges in its ability to maintain strong growth rates while
maintaining and improving acceptable profit margins.
Backlog
The dollar amount of the Company's backlog as stated at any given time is
not necessarily indicative of the future earnings of the Company related to the
performance of such work. Clients frequently revise the scope of the services
for which they have contracted with subsidiaries of the Company, especially on
projects subject to regulatory approval or which require environmental
permitting/licensing. Scope increases and decreases of substantial magnitude are
commonplace on such projects and directly affect the Company's backlog. In
addition, delays, suspensions and cancellations of projects included within the
Company's backlog may occur. Recently, the Trans-Pacific Petrochemical Indotama
("TPPI") project in Indonesia, which represents approximately $500 million of
the Company's current backlog of approximately $2.5 billion, was suspended. A
prolonged suspension or cancellation of the TPPI project, or the delay,
suspension or cancellation of other projects included in the Company's backlog,
could have a material adverse effect on the Company's business or results of
operations.
Uncertainty Regarding Client Relationships
Although the Company's subsidiaries in the engineering, construction and
consulting services business have numerous clients and the Company historically
has not had a continuing dependence on any single client, one or a few clients
has in the past and may in the future contribute a substantial portion of the
Company's consolidated revenues in any one year, or over a period of several
consecutive years, due to the size of major engineering and construction
projects. The unexpected loss of business from any one of such customers could
have a material adverse effect on the Company's business or results of
operations.
Size and Uncertainty of Timing of Contracts
The Company's contract award prospects include a number of large-scale
domestic and international projects. The large size and uncertain timing of
these projects can create variability in the Company's contract award pattern.
Consequently, future contract award trends are difficult to predict with
certainty. In addition, the timing of receipt of revenue by the Company from
engineering and construction projects can be affected by a number of factors
outside the control of the Company and its subsidiaries. Frequently, the
subsidiary's services on a project take place over extended periods of time, and
are subject to unavoidable delays from weather conditions, unavailability of
material and equipment from vendors, changes in the scope of services requested
by
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<PAGE> 125
clients, or labor disruptions. Uncertainty of the timing of contract execution
and performance can also present difficulties in matching workforce size with
contract needs. In some cases, the Company must maintain and bear the cost of
maintaining the availability of a workforce larger than called for under
existing contracts in anticipation of future workforce needs in connection with
the execution and performance of contracts not yet received, which may
ultimately be delayed, modified or canceled.
Uncertainty Regarding International Nature of Business
A significant portion of the Company's business services are and are
expected to continue to be performed for clients located outside of the United
States. During 1997, services performed for and products sold to clients outside
the U.S. accounted for approximately 50.2% of the Company's total revenues. The
Company's international operations and offices in foreign countries give rise to
political and economic uncertainties relating to, among other things, U.S. and
foreign trade restrictions; foreign government stability; foreign economic
stability; tariffs; export controls; government regulation (including the
Foreign Corrupt Practices Act); patent and trademark availability, protection
and registration; foreign exchange restrictions which limit the repatriation of
investments and earnings therefrom; changes in taxation or international tax
treaties; military action and other hostilities or confiscation of property. The
Company attempts to hedge against such risks, where possible, using contractual
protection and insurance coverage. However, there can be no assurance that such
measures will be effective in reducing the risks associated with international
operations.
The Company's revenues from the Asian region have created a particular
risk resulting from the Asian financial crisis. Projects in which the Company is
involved, including the TPPI project, have been suspended or delayed, and
perhaps jeopardized, by such crisis. The Company may experience decreases in
demand for its products and services as a result of the continuation of
financial instability in Asia which could have a material adverse effect on the
Company's business and results of operations.
The Company is subject to currency exchange risks to the extent that its
purchases and sales occur outside the U.S. and to the extent that it is unable
to denominate its purchases or sales in U.S. dollars, or otherwise shift to its
customers or suppliers, the risks of currency exchange rate fluctuations. The
Company attempts to hedge against currency risks, where possible, by using
foreign exchange contracts and avoiding concentrations of credit risk. However,
there can be no assurance that such measures will be effective in reducing the
risks associated with international operations.
Risk of Technological Changes
The Company believes that it has a leading position in technology
associated with the design and construction of plants which produce ethylene,
which it protects and develops with patent registrations, license restrictions,
and a research and development program. This technology position is subject to
the risk that others may develop competing processes which could affect the
Company's pre-eminent position.
Risks Due to Fixed, Maximum or Unit Priced Contracts
An increasing number of the Company's contracts for the provision of
engineering and construction services are fixed, maximum or unit price
contracts. Under fixed, maximum or unit price contracts, the Company's
subsidiaries agree to perform the contract for a fixed price and as a result,
benefit from costs savings, but are unable to recover for any cost overruns.
Under fixed price incentive contracts, the Company shares with the customer any
savings up to a negotiated ceiling price and carries some or all of the burden
of costs exceeding the negotiated ceiling price. Contract prices are established
based in part on cost estimates which are subject to a number of assumptions,
such as assumptions regarding future economic conditions. If in the future these
estimates prove inaccurate, or circumstances change, cost overruns can occur and
can cause a material adverse effect on the Company's business and results of
operations.
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Contract Performance Risk
In certain circumstances, the Company or its subsidiaries guarantee
facility completion by a scheduled acceptance date or achievement of certain
acceptance and performance testing levels. Failure to meet any such schedule or
performance requirements could result in additional costs and the amount of such
additional costs could exceed project profit margins. Performance problems for
existing and future contracts, whether fixed, maximum or unit priced, could
cause actual results of operations to differ materially from those anticipated
by the Company.
Uncertainties in Government Contracts
Several of the Company's subsidiaries' significant contracts are contracts
with agencies of the U.S. Government. Generally, Government contracts are
subject to oversight audits by Government representatives, to profit and cost
controls and limitations, and to provisions permitting modification or
termination, in whole or in part, without prior notice at the Government's
convenience and with payment of compensation only for work done and commitments
made at the time of termination. In the event of termination, the Company
generally will receive some allowance for profit on the work performed. In some
cases, Government contracts are subject to the uncertainties surrounding
congressional appropriations or agency funding. Government business is subject
to specific procurement regulations and a variety of socio-economic and other
requirements. Failure to comply with such regulations and requirements could
lead to suspension or debarment, for cause, from future Government contracting
or subcontracting for a period of time. Among the causes for debarment are
violations of various statutes, including those related to employment practices,
the protection of the environment, the accuracy of records and the recording of
costs.
Environmental, Safety and Health Risks
It is impossible to predict the full impact of future legislative or
regulatory developments relating to environmental protection and occupational
health and safety issues on the Company's operations, because the standards to
be met, as well as the technology and length of time available to meet those
standards, continue to develop and change. The Company's business is primarily
that of a professional service provider. Therefore, although regulations and
statutes which relate to manufacturing and other non-service operations are not
likely to adversely impact the Company's business directly, they may adversely
impact the Company's subsidiaries' clients, causing a decrease in demand for the
Company's services.
Potential Liability for Services Relating to Toxic and Hazardous Materials and
the Ability to Insure Such Risks
The Company's engineering and consulting services involve professional
judgments about the nature of soil and water conditions and other physical
conditions, including the extent to which toxic and hazardous materials are
present, and about the probable effect of procedures to mitigate problems or
otherwise impact those conditions. If those judgments and the recommendations
based upon them do not result in the anticipated consequences, losses to the
Company's subsidiaries' clients can occur for which such clients may seek to
hold the Company liable. In addition, projects often involve nuclear, hazardous
and/or highly regulated material, the improper characterization, handling, or
disposal of which could constitute violations of federal, state or local
statutes, and result in criminal and civil liabilities.
The Company and its subsidiaries attempt to insure against risks for
professional liability, workers compensation, and general and automobile claims
up to certain policy limits. There can be no assurance that the dollar amount of
the Company's liabilities, if any, will not exceed the insurance coverage
limits. In addition, there can be no assurance that environmental impairment
insurance coverage will continue to be available in the insurance market.
5
<PAGE> 127
Other Impact of Environmental Regulation
Much of the Company's subsidiaries' business is generated either directly
or indirectly as a result of federal and state laws, regulations and programs
related to environmental issues. United States regulatory enforcement has
fluctuated, and one of the key environmental laws, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), has
not yet received congressional reauthorization. Accordingly, changes of
environmental laws and regulations, or changes in governmental policies
regarding the funding, implementation or enforcement of such programs, could
have a material adverse effect on the Company's business. In addition, such laws
and regulations often subject the Company's subsidiaries to stringent regulation
in the conduct of their operations. The principal federal environmental
legislation affecting the Environmental/Infrastructure Division of the Company's
principal engineering subsidiary and its clients include: the National
Environmental Policy Act of 1969 ("NEPA"), the Resource Conservation and
Recovery Act of 1976 ("RCRA"), the Clean Air Act, the Federal Water Pollution
Control Act, and the Superfund Amendments and Reauthorization Act of 1986
("SARA"). It is possible that additional laws and regulations may be adopted
which could have significant impact on the Company and the clients of its
subsidiaries.
Although the liabilities imposed by CERCLA, as amended by SARA, (and other
environmental legislation) are usually more directly related to the Company's
clients, they could, under certain circumstances, give rise to liability on the
part of the Company as a result of its subsidiaries efforts in completing client
assignments that involve transportation or disposal of contaminated samples or
other hazardous materials belonging to its clients or arising from certain
historic activities as discussed below under Litigation Risks. Liabilities
imposed by CERCLA can be joint and several where other parties are involved.
Litigation Risks
The Company and certain subsidiaries have been named as defendants, along
with others, in legal actions claiming damages in connection with engineering
and construction projects and other matters. Most of the legal actions involve
claims for personal injury or property damage which occur from time to time in
connection with services performed relating to project or construction sites and
other actions that arise in the normal course of business, including
employment-related claims and contractual disputes. Such contractual disputes
normally involve claims relating to the performance of equipment design or other
engineering services or project construction services provided by subsidiaries
of the Company.
The Company and certain of its subsidiaries have possible liabilities
relating to environmental pollution. While no governmental authority has sought
redress from the Company or its subsidiaries (except in the case of one
subsidiary in connection with claims made with respect to clients of that
subsidiary) nor has the Company been determined to be a Potentially Responsible
Party by the federal or any state or local governmental authority, some
information has been requested from the Company with regard to environmental
matters, and there can be no assurance that the Company will not be named as a
party in such matters. Based on presently known facts and existing laws and
regulations, the Company believes that it has valid legal defenses and that the
costs associated with such matters, including legal costs, should be mitigated
by the presence of other entities which may be Potentially Responsible Parties,
by contractual indemnities, and by insurance coverage, but there can be no
assurance that such defenses will prevail, that the presence of such mitigating
factors will prove adequate or that the Company will not be held liable in
connection with such matters in amounts that would have a material adverse
effect on the Company's business and results of operations.
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<PAGE> 128
Attraction and Retention of Professional Personnel
The Company's ability to attract and retain qualified engineers,
scientists and other professionals, either through direct hiring or acquisition
of other firms employing such professionals, will be an important factor in
determining the Company's future success. The market for these professionals is
competitive, and there can be no assurance that the Company and its subsidiaries
will be successful in its efforts to attract and retain such professionals.
Availability of Additional Acquisition Targets
The Company's ongoing acquisition program is an element of its growth
strategy for expanding its services. Consequently, the future growth of the
Company depends in part upon the successful continuation of its acquisition
program. The Company may encounter substantial competition in its efforts to
acquire companies or entities which meet its acquisition criteria. There can be
no assurance that the Company will succeed in locating or acquiring appropriate
acquisition candidates at price levels and on terms and conditions that the
Company considers appropriate.
THE COMPANY
The business of the Company is described in the Company's most recent
Annual Report on Form 10-K, which is incorporated herein by reference. See
"Incorporation of Certain Documents by Reference."
SECURITIES COVERED BY THIS PROSPECTUS
The shares of Common Stock covered by this Prospectus consist of
2,742,858 shares which may be issued or delivered from time to time in
connection with future business combinations, mergers and acquisitions. The
consideration for such combinations, mergers and acquisitions may consist of
cash, assumption of liabilities, evidences of debt, Common Stock or a
combination thereof. In general, the terms of such combinations, mergers and
acquisitions will be determined by direct negotiations between representatives
of the Company and the owners or principal executives of the companies or other
entities to be so combined, acquired or merged or the assets of which are to be
acquired, and the factors taken into account will include, among other things,
the established quality of management, earning power, cash flow, growth
potential, facilities and locations of the companies or other entities to be
acquired or merged, and the market value of the Common Stock. It is anticipated
that the shares of the Common Stock issued or delivered in connection therewith
will be valued at a price reasonably related to the market value of the Common
Stock either at the time the terms of the combination, acquisition or merger
are tentatively agreed upon, or at or about the time or times such shares are
issued or delivered.
Persons who directly or indirectly control, are controlled by, or are
under common control with, companies or other entities which are acquired by or
merged or combined with the Company may be deemed to be engaged in a
distribution of securities, and therefore underwriters of securities within the
meaning of Section 2(11) of the Securities Act, if such persons offer or sell
any Shares covered by this Prospectus other than in accordance with the
provisions of paragraph (d) of Rule 145 under the Securities Act or pursuant to
an effective registration statement. Rule 145(d) provides that such persons will
not be deemed to be underwriters if (a) among other things, (i) the Company has
complied with certain reporting requirements of the Exchange Act, (ii) the
amounts of such shares sold fall within certain volume limitations, (iii) such
shares are sold only in brokers' transactions within the meaning of Section 4(4)
of the Securities Act or in a manner otherwise permitted by Rule 144 under the
Securities Act, (iv) such persons do not solicit or arrange for the solicitation
of orders to buy such shares in anticipation of or in connection with the sale
thereof, and (v) such persons do not make any payments in connection with the
offer or sale thereof to any persons other than the brokers executing the orders
to sell such shares; (b) such persons are not affiliates of the Company and have
been the beneficial owners of the Shares for at least one year, and the Company
has complied with certain reporting requirements of the Exchange Act; or (c)
such persons are not, and have not been for at least three months, affiliates of
the Company and have been the beneficial owners of the Shares for at least two
years.
7
<PAGE> 129
DESCRIPTION OF CAPITAL STOCK
General Description
The Restated Certificate of Incorporation, as amended, of the Company (the
"Restated Certificate") authorizes the issuance of 2,000,000 shares of
Preferred Stock, no par value, and 40,000,000 shares of Common Stock, $1.00 par
value per share. At June 30, 1998, there were 12,793,789 shares of Common Stock
outstanding and no shares of Preferred Stock outstanding. Should Preferred
Stock be issued in the future, holders thereof will have preferential rights
over holders of Common Stock with respect to dividends, liquidation and certain
other matters and may be entitled to vote under certain circumstances.
The following description summarizes certain provisions of the Restated
Certificate relating to the Common Stock, Preferred Stock, Series A Junior
Participating Preferred Stock and Rights to Purchase Series A Junior
Participating Preferred Stock. For a full description, reference is made to the
Restated Certificate which is an exhibit to the Registration Statement of which
this Prospectus is a part.
Description of Common Stock
Dividends Rights
Subject to the preferential rights of holders of Preferred Stock should
any Preferred Stock be issued in the future, holders of Common Stock are
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefor.
Voting Rights and Other Matters
Subject to the voting rights of holders of Preferred Stock should
Preferred Stock be issued in the future, holders of the Common Stock exclusively
possess voting power for all purposes. The voting rights are non-cumulative.
The directors of the Company are divided into three classes with the
number of directors fixed by or in accordance with the By-laws divided equally
so far as possible among the classes. At each annual election, one class of
directors is elected by vote of a majority of the Company's outstanding voting
stock for a term of three years. Special voting provisions apply to any change
in the number of directors, to the filling of vacancies on the Board of
Directors when not filled by the remaining directors and to the removal of
directors without cause under certain circumstances. In addition, with certain
exceptions, the Restated Certificate requires the affirmative vote of two-thirds
of the Company's outstanding voting stock to authorize specified corporate
transactions (including certain mergers, sale of substantially all of the
Company's assets and the like) involving the Company, or any subsidiary of the
Company, and any owner of 5% or more of the Company's outstanding voting stock.
The foregoing special voting provisions may only be changed upon a specified
vote of the directors and/or stockholders of the Company.
In addition to the provisions referred to in the preceding paragraph, the
Restated Certificate contains provisions pertaining to so-called "front-end
loaded" tender offers and similar transactions where an initial acquisition of a
substantial portion of the outstanding stock of a company is followed by a
second step transaction (such as a merger) in which the shares held by the
stockholders who did not participate in the first transaction are to be acquired
at a lower price. These provisions require that a second step transaction
initiated by a holder of at least 10% of the outstanding voting stock of the
Company be approved by 80% of all outstanding voting stock and a majority of the
publicly held voting stock (i.e., not including the 10% holder's shares).
Neither the Company and its subsidiaries nor any trustee or Committee under any
employee pension, stock ownership, savings or similar employee benefit plan is
considered a 10% holder. The aforementioned votes will not be required where the
purchase of the Company's shares by the 10% holder in the second step
transaction is for consideration equal to or greater than the highest price
previously paid by the 10% holder to acquire shares of a class or an amount
bearing the same or a greater percentage relationship to the then market price
of shares of any class of which the 10% holder has previously acquired shares as
the highest price per share paid by the 10% holder in the earlier transaction(s)
by which the 10% holder achieved that status, bears to the lower of the market
price of shares of such
8
<PAGE> 130
class of shares immediately prior to the public disclosure of, or the
commencement of, such earlier transaction(s). The consideration must be payable
either in cash or in the same form of consideration given for the majority of
the shares of the class previously acquired by the 10% holder. Any amendment of
the provisions described in this paragraph requires the approval of 80% of all
outstanding voting stock and a majority of the publicly held voting stock (i.e.,
not including the shares held by the 10% holder). The Restated Certificate also
requires the Board of Directors, when evaluating a merger, reorganization,
tender offer or other similar proposal, to consider all relevant factors,
including the social, legal and economic effects of the transaction as well as
alternative measures of the Company's value.
Liquidation Rights
Subject to the preferential rights of holders of Preferred Stock should
any Preferred Stock be issued in the future, in the event of any liquidation,
dissolution or winding up of the Company, or any reduction of its capital
resulting in any distribution of its assets to its stockholders, the holders of
Common Stock are entitled to receive, pro rata, all the remaining assets of the
Company available for distribution to its stockholders.
Pre-emptive Rights
No holder of shares of Common Stock has preferential, pre-emptive or other
rights to subscribe for or purchase any stock of the Company of any class, or
securities convertible into stock.
Liability for Future Calls or Assessments
All outstanding shares of Common Stock are fully paid and non-assessable.
Limitations on Rights of Common Stock
See " -- Description of Preferred Stock" below for a description of the
limitations that would be placed on the Common Stock by the rights of the
Preferred Stock, should any Preferred Stock be issued in the future. See " --
Description of Series A Junior Participating Preferred Stock and Rights to
Purchase Series A Junior Participating Preferred Stock" below for a description
of the provisions that would have the effect of delaying, deferring or
preventing a change of control of the Company in the event of an extraordinary
corporate transaction.
Description of Preferred Stock
Preferred Stock may be issued from time to time in one or more series and
the Company's board of directors (the "Board"), without further approval of the
shareholders, is authorized to fix the dividend rights and terms, conversion
rights, voting rights, redemption rights and terms, liquidation preferences,
sinking or purchase fund or agreement and any other rights, preferences,
privileges and restrictions applicable to each such series of Preferred Stock.
The purpose of authorizing the Board to determine such rights and preferences is
to eliminate delays associated with a shareholder vote on specific issuances.
The issuance of Preferred Stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could, among other things,
adversely affect the voting power of holders of Common Stock and, under certain
circumstances, make it more difficult for a third party to gain control of the
Company.
The Restated Certificate authorizes the issuance of 2,000,000 shares of
Preferred Stock. At June 30, 1998 no shares of Preferred Stock had been issued.
Description of Series A Junior Participating Preferred Stock and Rights to
Purchase Series A Junior Participating Preferred Stock
The descriptions of the Series A Junior Participating Preferred Stock and
the Rights to Purchase Series A Junior Participating Preferred Stock are
contained in the Company's Registration Statements filed under Section 12 of the
Exchange Act, which are incorporated herein by reference. See "Incorporation of
Certain Documents by Reference."
9
<PAGE> 131
LEGAL OPINION
The validity of the Shares offered hereby will be passed upon by Palmer &
Dodge LLP, Boston, Massachusetts, counsel for the Company.
EXPERTS
The consolidated financial statements as of December 31, 1997 and 1996 and
for each of the years in the three-year period ended December 31, 1997
incorporated by reference from the Company's Annual Report to Shareholders into
the Company's Annual Report on Form 10-K for the year ended December 31,
1997, have been incorporated by reference in this Prospectus in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
10
<PAGE> 132
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 145 of the DGCL grants the Company the power to indemnify each
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that he 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, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgements, 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
Company, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful, provided, however, no
indemnification shall be made in connection with any proceeding brought by or in
the right of the Company where the person involved is adjudged to be liable to
the Company except to the extent approved by a court.
Paragraph 14 of Article Sixth of the Company's Restated Certificate of
Incorporation as amended (the "Restated Certificate") provides that the Company
shall indemnify each director, officer, employee and agent of the Company, his
or her, heirs, executors, administrators and all other persons whom the Company
is authorized to indemnify under the provisions of the DGCL, to the fullest
extent permitted by law, (a) against all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him or her in connection with any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Company), or in connection with
any appeal therein or otherwise, and (b) against all expenses (including
attorneys' fees) actually and reasonably incurred by him or her in connection
with the defense or settlement of any action or suit by or in the right of the
Company, or in connection with any appeal therein, or otherwise.
Pursuant to Section 102(b)(7) of the DGCLs, Paragraph 15 of Article Sixth
of the Company's Restated Certificate eliminates a director's personal liability
for monetary damages to the Company and its stockholders for breaches of
fiduciary duty as a director, except in circumstances involving a breach of a
director's duty of loyalty to the Company or its stockholders, acts or omissions
not in good faith, intentional misconduct, knowing violations of the law, the
unlawful payment of dividends or repurchase of stock, or a transaction from
which the director derived an improper personal benefit.
The Company has purchased form the American International Group a
Directors and Officers Liability and Company Reimbursement policy under which
the directors and officers of the Company and its subsidiaries are insured
against loss arising from any claim made against them by reason of any wrongful
act in their respective capacities as directors and officers.
II-1
<PAGE> 133
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits
Number Exhibits
------ --------
*2 Agreement and Plan of Merger among Stone & Webster,
Incorporated, Stone & Webster Management Consultants, Inc.,
Stone & Webster Acquisition Corp., Power Technologies, Inc.
and the Principal Shareholders of Power Technologies, Inc.
named therein, dated as of April 20, 1998 (filed herewith).
Pursuant to Item 601(b)(2) of Regulation S-K, the schedules
referred to in the Merger Agreement are omitted. The
Registrant hereby undertakes to furnish supplementary a copy
of any omitted schedule to the Commission upon request.
3 Articles of Incorporation and By-laws:
* (i) The Restated Certificate of Incorporation of Registrant,
as amended.
* (ii) The By-laws of Registrant, as amended.
4 Instruments defining the rights of security holders, including
indentures:
(i) As of December 31, 1997, Registrant and its subsidiaries
had outstanding long-term debt (excluding current portion)
totaling approximately $22,510,000 principally in connection
with mortgages relating to real property for a subsidiary's
office building, and in connection with capitalized lease
commitments for the acquisition of certain computer equipment.
None of these agreements is filed herewith because the amount
of indebtedness authorized under each such agreement does not
exceed 10 percent of the total assets of the Registrant and
its subsidiaries on a consolidated basis; the Registrant
hereby undertakes to furnish copies of such agreements to the
Commission upon request.
** (ii) Rights Agreement, dated as of August 15, 1996, between
Stone & Webster, Incorporated and ChaseMellon Shareholder
Services, L.L.C., which includes the form of Right Certificate
as Exhibit A and the Summary of Rights to Purchase Common
Shares as Exhibit B (incorporated by reference to Exhibit 1.1
to Registrant's Registration Statement on Form 8-A filed on
August 16, 1996.)
*5 Opinion of Palmer & Dodge LLP.
*8.1 Opinion of Palmer & Dodge LLP as to certain federal income tax
matters.
*8.2 Opinion of Nixon, Hargrave, Devans & Doyle LLP as to certain
federal income tax matters.
10 Material Contracts:
** (a) 1997 Stock Plan for Non-employee Directors of Stone &
Webster, Incorporated (incorporated by reference to Exhibit
10(c) to Registrant's Form 10-K for the fiscal year ended
December 31, 1996).
(b) Form of agreements between Registrant and Named Executive
Officers of Registrant, dated as of August 31, 1995 and
subsequent dates, relating to certain employment arrangements
that would become operable only in the event of a "change of
control" (as defined in the form of agreement) (filed
herewith).
II-2
<PAGE> 134
** (c) The following forms of agreements with H. Kerner Smith
relating to employment with Registrant as Chairman, President
and Chief Executive Officer are incorporated by reference to
Exhibit 10(e) to the Registrant's Form 10-K for the fiscal
year ended December 31, 1995: a form of Employment Agreement
filed therewith as Exhibit 10(e)(i); a form of Change of
Control Employment Agreement filed therewith as Exhibit
10(e)(ii); and a form of Stock Option Grant filed therewith as
Exhibit 10(e)(iii). An Amendment dated January 15, 1997 to the
Employment Agreement (10)(e)(i) is incorporated by reference
to Exhibit 10(e)(iv) of Registrant's Form 10-K for the fiscal
year ended December 31, 1996.
** (d) Non-employee Director Deferral Plan (incorporated by
reference to Exhibit 10(f) to Registrant's Form 10-K for the
fiscal year ended December 31, 1997).
** (e) Annual Incentive Compensation Plan, as approved at the
Registrant's 1998 Annual Meeting of Shareholders on May 14,
1998 (incorporated by reference to Exhibit 10(g) to
Registrant's Form 10-K for the fiscal year ended December 31,
1997).
* (f) Long-Term Incentive Compensation Plan, as approved and
amended at the Registrant's 1998 Annual Meeting of
Shareholders on May 14, 1998.
**13 (i) 1997 Annual Report to Shareholders for the fiscal year
ended December 31, 1997 (Financial Section) (incorporated by
reference to Exhibit 13(i) to Registrant's Form 10-K for the
fiscal year ended December 31, 1997).
** (ii) Report of Independent Accountants (incorporated by
reference to Exhibit 13(iii) to Registrant's Form 10-K for the
fiscal year ended December 31, 1997).
**21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21 to Registrant's Form 10-K for the fiscal year ended
December 31, 1997).
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants to Stone & Webster, Incorporated (filed herewith).
23.2 Consent of Marvin and Company, P.C., independent accountants
to Power Technologies, Inc. (filed herewith).
*23.3 Consents of Palmer & Dodge LLP (contained in Exhibits 5 and
8.1).
*23.4 Consent of Nixon, Hargrave, Devans & Doyle LLP (contained in
Exhibit 8.2).
*24 Power of Attorney.
99.1 Power Technologies, Inc. Proxy and Voting Instructions
Form (filed herewith).
99.2 Form of Shareholders' Committee Agreement (filed herewith).
- ----------
* Indicates exhibit previously filed on June 29, 1998.
** Indicates exhibit previously filed with the Securities and Exchange
Commission and incorporated herein by reference. Exhibits filed with periodic
reports of Stone & Webster, Incorporated were filed under Commission File No.
1-1228.
(b) Financial Statement Schedules
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<PAGE> 135
(i) Financial Statement Schedules have been previously filed as part
of Registrant's Form 10-K for the fiscal year ended December 31, 1997.
Item 22. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment any
of the securities which remain unsold at the termination of the offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement 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.
(5) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to the
request.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.
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 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 Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 136
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has
duly caused this Amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the city of Boston,
Commonwealth of Massachusetts, on July 16, 1998.
STONE & WEBSTER, INCORPORATED
By: /s/ H. Kerner Smith
------------------------------------
H. Kerner Smith, Chairman, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 1
to Registration Statement has been signed by the following persons in the
capacities indicated and on July 16, 1998.
Signature Title
/s/ H. Kerner Smith Chairman, President and Chief
- -------------------------- Executive Officer
H. Kerner Smith (Principal Executive Officer)
* Executive Vice President
- -------------------------- (Duly Authorized Officer and Chief Financial
Thomas L. Langford Officer)
* Vice President and Controller
- -------------------------- (Duly Authorized Officer and Principal
Daniel P. Levy Accounting Officer)
* Director
- --------------------------
Donna F. Bethell
Director
- --------------------------
Frank J.A. Cilluffo
* Director
- --------------------------
Elvin R. Heiberg III
<PAGE> 137
* Director
- --------------------------
Kent F. Hansen
* Director
- --------------------------
David N. McCammon
* Director
- --------------------------
J. Angus McKee
* Director
- --------------------------
John P. Merrill, Jr.
* Director
- --------------------------
Bernard W. Reznicek
* Director
- --------------------------
Peter M. Wood
* By /s/ H. Kerner Smith
---------------------
H. Kerner Smith
Attorney-in-Fact
<PAGE> 138
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
------ -----------------------
*2 Agreement and Plan of Merger among Stone & Webster,
Incorporated, Stone & Webster Management Consultants, Inc.,
Stone & Webster Acquisition Corp., Power Technologies, Inc.
and the Principal Shareholders of Power Technologies, Inc.
named therein, dated as of April 20, 1998 (filed herewith).
Pursuant to Item 601(b)(2) of Regulation S-K, the schedules
referred to in the Merger Agreement are omitted. The
Registrant hereby undertakes to furnish supplementary a copy
of any omitted schedule to the Commission upon request.
3 Articles of Incorporation and By-laws:
* (i) The Restated Certificate of Incorporation of Registrant,
as amended (filed herewith).
* (ii) The By-laws of Registrant, as amended (filed herewith).
4 Instruments defining the rights of security holders, including
indentures:
(i) As of December 31, 1997, Registrant and its subsidiaries
had outstanding long-term debt (excluding current portion)
totaling approximately $22,510,000 principally in connection
with mortgages relating to real property for a subsidiary's
office building, and in connection with capitalized lease
commitments for the acquisition of certain computer equipment.
None of these agreements is filed herewith because the amount
of indebtedness authorized under each such agreement does not
exceed 10 percent of the total assets of the Registrant and
its subsidiaries on a consolidated basis; the Registrant
hereby undertakes to furnish copies of such agreements to the
Commission upon request.
** (ii) Rights Agreement, dated as of August 15, 1996, between
Stone & Webster, Incorporated and ChaseMellon Shareholder
Services, L.L.C., which includes the form of Right Certificate
as Exhibit A and the Summary of Rights to Purchase Common
Shares as Exhibit B (incorporated by reference to Exhibit 1.1
to Registrant's Registration Statement on Form 8-A filed on
August 16, 1996.)
*5 Opinion of Palmer & Dodge LLP.
*8.1 Opinion of Palmer & Dodge LLP as to certain federal income tax
matters.
*8.2 Opinion of Nixon, Hargrave, Devans & Doyle LLP as to certain
federal income tax matters.
10 Material Contracts:
** (a) 1997 Stock Plan for Non-employee Directors of Stone &
Webster, Incorporated (incorporated by reference to Exhibit
10(c) to Registrant's Form 10-K for the fiscal year ended
December 31, 1996).
(b) Form of agreements between Registrant and Named Executive
Officers of Registrant, dated as of August 31, 1995 and
subsequent dates, relating to certain employment arrangements
that would become operable only in the event of a "change of
control" (as defined in the form of agreement) (filed
herewith).
<PAGE> 139
** (c) The following forms of agreements with H. Kerner Smith
relating to employment with Registrant as Chairman, President
and Chief Executive Officer are incorporated by reference to
Exhibit 10(e) to the Registrant's Form 10-K for the fiscal
year ended December 31, 1995: a form of Employment Agreement
filed therewith as Exhibit 10(e)(i); a form of Change of
Control Employment Agreement filed therewith as Exhibit
10(e)(ii); and a form of Stock Option Grant filed therewith as
Exhibit 10(e)(iii). An Amendment dated January 15, 1997 to the
Employment Agreement (10)(e)(i) is incorporated by reference
to Exhibit 10(e)(iv) of Registrant's Form 10-K for the fiscal
year ended December 31, 1996.
** (d) Non-employee Director Deferral Plan (incorporated by
reference to Exhibit 10(f) to Registrant's Form 10-K for the
fiscal year ended December 31, 1997).
** (e) Annual Incentive Compensation Plan, as approved at the
Registrant's 1998 Annual Meeting of Shareholders on May 14,
1998 (incorporated by reference to Exhibit 10(g) to
Registrant's Form 10-K for the fiscal year ended December 31,
1997).
* (f) Long-Term Incentive Compensation Plan, as approved and
amended at the Registrant's 1998 Annual Meeting of
Shareholders on May 14, 1998.
**13 (i) 1997 Annual Report to Shareholders for the fiscal year
ended December 31, 1997 (Financial Section) (incorporated by
reference to Exhibit 13(i) to Registrant's Form 10-K for the
fiscal year ended December 31, 1997).
** (ii) Report of Independent Accountants (incorporated by
reference to Exhibit 13(iii) to Registrant's Form 10-K for the
fiscal year ended December 31, 1997).
**21 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21 to Registrant's Form 10-K for the fiscal year ended
December 31, 1997).
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants to Stone & Webster, Incorporated (filed herewith).
23.2 Consent of Marvin and Company, P.C., independent accountants
to Power Technologies, Inc. (filed herewith).
*23.3 Consents of Palmer & Dodge LLP (contained in Exhibits 5 and
8.1).
*23.4 Consent of Nixon, Hargrave, Devans & Doyle LLP (contained in
Exhibit 8.2).
*24 Power of Attorney (included in the signature page hereto).
99.1 Power Technologies, Inc. Proxy and Voting Instructions Form
(filed herewith).
99.2 Form of Shareholders' Committee Agreement (filed herewith).
- ----------
* Indicates exhibit previously filed on June 29, 1998.
** Indicates exhibit previously filed with the Securities and Exchange
Commission and incorporated herein by reference. Exhibits filed with periodic
reports of Stone & Webster, Incorporated were filed under Commission File No.
1-1228.
<PAGE> 1
EXHIBIT 10(b)
CHANGE OF CONTROL EMPLOYMENT AGREEMENT
AGREEMENT by and between STONE & WEBSTER, INCORPORATED*, a Delaware
corporation (the "Company"), and (the "Executive"), dated as of
(this "Agreement").
The Board of Directors of the Company (the "Board"), has determined
that it is in the best interests of the Company and its shareholders to assure
that the Company will have the continued dedication of the Executive,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company. The Board believes it is imperative to diminish
the inevitable distraction of the Executive by virtue of the personal
uncertainties and risks created by a pending or threatened Change of Control and
to encourage the Executive's full attention and dedication to the Company
currently and in the event of any threatened or pending Change of Control, and
to provide the Executive with compensation and benefits arrangements upon a
Change of Control which ensure that the compensation and benefits expectations
of the Executive will be satisfied and which are competitive with those of other
corporations.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions.
(a) The "Effective Date" shall mean the first date during the Change
of Control Period (as defined in Section 1(b) on which a Change of Control (as
defined in Section 2) occurs. Anything in this Agreement to the contrary
notwithstanding, if a Change of Control occurs and if the Executive's employment
with the Company is terminated prior to the date on which the Change of Control
occurs, and if it is reasonably demonstrated by the Executive that such
termination of employment (i) was at the request of a third party who has taken
steps reasonably calculated to effect a Change of Control or (ii) otherwise
arose in connection with or anticipation of a Change of Control, then for all
purposes of this Agreement the "Effective Date" shall mean the date immediately
prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing
on the date hereof and ending on the third anniversary of the date hereof;
provided, however, that commencing on the date one year after the date hereof,
and on each annual anniversary of such date (such date and each annual
anniversary thereof shall be hereinafter referred to as the "Renewal Date"),
unless previously terminated, the Change of Control Period shall be
automatically extended so as to terminate three* years from such Renewal Date,
unless at least 60 days prior to the Renewal Date the Company shall give notice
to the Executive that the Change of Control Period shall not be so extended.
2. Change of Control.
For the purpose of this Agreement, a "Change of Control" shall mean:
(a) The beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") by any individual, entity or group (within the meaning of Section 13(d)(3)
or 14(d)(2) of the Exchange Act) (a "Person") of 20% or more of either (i) the
then-outstanding shares of common stock of the Company (the "Outstanding Company
Common Stock") or (ii) the combined voting power of the then-outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided, however, that
for purposes of this subsection (a), the following accumulations and
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition or accumulation by the Company,
(iii) any acquisition or accumulation by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any
<PAGE> 2
corporation controlled by the Company, (iv) any acquisition or accumulation by
any corporation pursuant to a transaction which complies with clauses (i), (ii)
and (iii) of subsection (c) of this Section 2, or (v) the beneficial ownership
of 20% or more of either the Outstanding Company Common Stock or the Outstanding
Company Voting Securities by a Person if such beneficial ownership occurs solely
because (x) of a change in the aggregate number of shares of Outstanding Company
Common Stock or Outstanding Company Voting Securities since the last date on
which such Person acquired beneficial ownership of any Outstanding Company
Common Stock or Outstanding Company Voting Securities or (y) such Person
acquired such beneficial ownership in the good faith belief that such
acquisition would not cause such beneficial ownership to equal or exceed 20% of
the Outstanding Company Common Stock or Outstanding Company Voting Securities
then outstanding and such Person relied in good faith in computing the
percentage of its beneficial ownership on publicly filed reports or documents of
the Company which are inaccurate or out-of-date; or
(b) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies by
or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of the
Company (a "Business Combination"), in each case, unless, following such
Business Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately prior
to such Business Combination beneficially own, directly or indirectly, more than
50% of, respectively, the then-outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then-outstanding shares of common
stock, or the combined voting power of the then-outstanding voting securities
entitled to vote generally in the election of directors, as the case may be, of
the corporation resulting from such Business Combination, except to the extent
that such ownership existed prior to the Business Combination and (iii) at least
a majority of the members of the board of directors of the corporation resulting
from such Business Combination were members of the Incumbent Board at the time
of the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
Notwithstanding clause (v) of subsection (a) of this Section 2, if any Person
whose beneficial ownership is not a Change of Control due to such clause (v)
does not reduce such Person's percentage of beneficial ownership of Outstanding
Company Common Stock or Outstanding Company Voting Securities to less than 20%
by the close of business on the fifth business day after notice from the Company
(the date of notice being the first day) that such Person's beneficial ownership
of Outstanding Company Common Stock or Outstanding Company Voting Securities
equals or exceeds 20%, such Person's beneficial ownership shall be a Change of
Control at the end of such five business day period (and such clause (v) shall
no longer apply); provided, however, that if such Person asserts in writing to
the Company by the end of such five business day period that a reduction in such
Person's percentage of beneficial ownership would subject such reduction to the
operation of Section 16(b) of the Exchange Act ("Section 16(b)") the period
during which the beneficial ownership of such Person must be reduced to less
than 20% so as
2
<PAGE> 3
not to constitute a Change in Control shall be extended to the date that is the
third business day immediately following the date which is the earlier of (i)
six (6) months following the receipt by such Person of the notice from the
Company of beneficial ownership of 20% or more or (ii) the date upon which such
reduction would no longer be subject to Section 16(b). For purposes of this
definition, the determination whether any Person acted in "good faith" shall be
conclusively determined by the Board, acting by a vote of those directors of the
Company who, at such time, shall constitute the Incumbent Board.
3. Employment Period.
The Company hereby agrees to continue the Executive in its employ,
and the Executive hereby agrees to remain in the employ of the Company subject
to the terms and conditions of this Agreement, for the period commencing on the
Effective Date and ending on the third* anniversary of such date (the
"Employment Period").
4. Terms of Employment.
(a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities shall be at least commensurate in all material
respects with the most significant of those held, exercised and assigned
at any time during the 120-day period immediately preceding the Effective
Date and (B) the Executive's services shall be performed at the location
where the Executive was performing services immediately preceding the
Effective Date or any office or location less than 35 miles from such
location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive
agrees to devote reasonable attention and time during normal business
hours to the business and affairs of the Company and, to the extent
necessary to discharge the responsibilities assigned to the Executive
hereunder, to use the Executive's reasonable best efforts to perform
faithfully and efficiently such responsibilities. During the Employment
Period it shall not be a violation of this Agreement for the Executive to
(A) serve on corporate, civic or charitable boards or committees, (B)
deliver lectures, fulfill speaking engagements or teach at educational
institutions, (C) manage personal investments and (D) engage in activities
permitted under Section 2(d) of the Employment Agreement, so long as such
activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance
with this Agreement. It is expressly understood and agreed that to the
extent that any such activities have been conducted by the Executive prior
to the Effective Date, the continued conduct of such activities (or the
conduct of activities similar in nature and scope thereto) subsequent to
the Effective Date shall not thereafter be deemed to interfere with the
performance of the Executive's responsibilities to the Company.
(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive shall
receive an annual base salary ("Annual Base Salary"), which shall be paid
at a monthly rate, at least equal to twelve times the highest monthly base
salary paid or payable, including any base salary which has been earned
but deferred, to the Executive by the Company and its affiliated companies
in respect of the twelve-month period immediately preceding the month in
which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and
thereafter at least annually. Any increase in Annual Base Salary shall not
serve to limit or reduce any other obligation to the Executive under this
Agreement. Annual Base Salary shall not be reduced after any such increase
and the term Annual Base Salary as utilized in this Agreement shall refer
to Annual Base Salary as so increased. As used in this Agreement, the term
"affiliated companies" shall include any company controlled by,
controlling or under common control with the Company.
*See attached schedule.
3
<PAGE> 4
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive
shall be awarded, for each fiscal year ending during the Employment
Period, an annual bonus (the "Annual Bonus") in cash at least equal to the
Executive's highest bonus under the Employment Agreement or the Company's
annual contingent (or incentive) compensation plans or any comparable
bonus under any predecessor or successor plan, for the last three full
fiscal years prior to the Effective Date (annualized in the event that the
Executive was not employed by the Company for the whole of such fiscal
year) (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no
later than the end of the third month of the fiscal year next following
the fiscal year for which the Annual Bonus is awarded, unless the
Executive shall elect to defer the receipt of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive shall be entitled to participate in all incentive,
savings and retirement plans, practices, policies and programs applicable
generally to other peer executives of the Company and its affiliated
companies (including, but not limited to, the Company's Restricted Stock
Plan, Employee Investment Plan, Employee Stock Ownership Plan,
Payroll-based Employee Stock Ownership Plan, Employee Retirement Plan,
Supplemental Retirement Plan and Stock Option Plan), but in no event shall
such plans, practices, policies and programs provide the Executive with
incentive opportunities (measured with respect to both regular and special
incentive opportunities, to the extent, if any, that such distinction is
applicable), savings opportunities and retirement benefit opportunities,
in each case, less favorable in the aggregate, than the most favorable of
those provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in effect
at any time during the 120-day period immediately preceding the Effective
Date or if more favorable to the Executive, those provided generally at
any time after the Effective Date to other peer executives of the Company
and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be
eligible for participation in and shall receive all benefits under welfare
benefit plans, practices, policies and programs provided by the Company
and its affiliated companies (including, without limitation, medical,
prescription, dental, disability, employee life (and, if applicable,
supplemental term life insurance), group life, accidental death and travel
accident insurance plans and programs) to the extent applicable generally
to other peer executives of the Company and its affiliated companies, but
in no event shall such plans, practices, policies and programs provide the
Executive with benefits which are less favorable, in the aggregate, than
the most favorable of such plans, practices, policies and programs in
effect for the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive, those
provided generally at any time after the Effective Date to the other peer
executives of the Company and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses
incurred by the Executive in accordance with the most favorable policies,
practices and procedures of the Company and its affiliated companies in
effect for the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive
shall be entitled to fringe benefits, including, without limitation, tax
and financial planning services, payment of club dues, and, if applicable,
use of an automobile and payment of related expenses, in accordance with
the most favorable plans, practices, programs and policies of the Company
and its affiliated companies in effect for the Executive at any time
during the 120-day period immediately preceding the Effective Date or, if
more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal
4
<PAGE> 5
secretarial and other assistance, at least equal to the most favorable of
the foregoing provided to the Executive by the Company and its affiliated
companies at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as provided
generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall
be entitled to paid vacation in accordance with the most favorable plans,
policies, programs and practices of the Company and its affiliated
companies as in effect for the Executive at any time during the 120-day
period immediately preceding the Effective Date or, if more favorable to
the Executive, as in effect generally at any time thereafter with respect
to other peer executives of the Company and its affiliated companies.
5. Termination of Employment.
(a) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 12(b) of this Agreement of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company shall
terminate effective on the 30th day after receipt of such notice by the
Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. The Company may terminate the Executive's employment
during the Employment Period for Cause. For purposes of this Agreement, "Cause"
shall mean:
(i) the willful and continued failure of the Executive to perform
substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due to
physical or mental illness), after a written demand for substantial
performance is delivered to the Executive by the Board or the Chief
Executive Officer of the Company which specifically identifies the manner
in which the Board or Chief Executive Officer believes that the Executive
has not substantially performed the Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or
gross misconduct which is materially and demonstrably injurious to the
Company.
For purposes of this provision, no act or failure to act, on the
part of the Executive, shall be considered "willful" unless it is done, or
omitted to be done, by the Executive in bad faith or without reasonable belief
that the Executive's action or omission was in the best interests of the
Company. Any act, or failure to act, based upon authority given pursuant to a
resolution duly adopted by the Board (or, if applicable, upon the instructions
of the Chief Executive Officer or a senior officer of the Company) or based upon
the advice of counsel for the Company shall be conclusively presumed to be done,
or omitted to be done, by the Executive in good faith and in the best interests
of the Company. Anything in this Section 5(b) or elsewhere in this Agreement to
the contrary notwithstanding, the employment of the Executive shall in no event
be considered to have been terminated by the Company for Cause if termination of
the Executive's employment took place (a) as the result of bad judgment or
negligence on the part of the Executive, or (b) as the result of an act or
omission without the intent of gaining therefrom directly or indirectly a profit
to which the Executive was not legally entitled, or (c) because of an act or
omission believed by the Executive in good faith to have been in or not opposed
to the interests of the Company, or (d) for any act or omission in respect of
which a determination could properly be made that the Executive met the
applicable standard of conduct prescribed for indemnification or reimbursement
or payment of expenses under the By-laws of the Company or the laws of the State
of Delaware or the directors' and officers' liability insurance
5
<PAGE> 6
of the Company, in each case as in effect at the time of such act or omission,
or (e) as the result of an act or omission which occurred more than twelve
calendar months prior to the Executive's having been given notice of the
termination of the Executive's employment for such act or omission unless the
commission of such act or such omission could not at the time of such commission
or omission have been known to a member of the Board (other than the Executive,
if the Executive is then a member of the Board), in which case more than twelve
calendar months from the date that the commission of such act or such omission
was or could reasonably have been so known, or (f) as the result of a continuing
course of action which commenced and was or could reasonably have been known to
a member of the Board (other than the Executive) more than twelve calendar
months prior to notice having been given to the Executive of the termination of
the Executive's employment.
The cessation of employment of the Executive shall not be deemed to
be for Cause unless and until there shall have been delivered to the Executive a
copy of a resolution duly adopted by the affirmative vote of not less than three
quarters of the entire membership of the Board at a meeting of the Board called
and held for such purpose (after reasonable notice is provided to the Executive
and the Executive is given an opportunity, together with counsel, to be heard
before the Board), finding that, in the good faith opinion of the Board, the
Executive is guilty of the conduct described in subparagraph (i) or (ii) above,
and specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason.
(i) For purposes of this Agreement, "Good Reason" shall mean the
following involuntary circumstances:
A. the assignment to the Executive of any duties inconsistent in any
respect with the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as contemplated
by Section 4(a) of this Agreement, or any other action by the Company which
results in a diminution in such position, authority, duties or responsibilities,
excluding for this purpose an isolated, insubstantial and inadvertent action not
taken in bad-faith and which is remedied by the Company promptly after receipt
of notice thereof given by the Executive;
B. any failure by the Company to comply with any of the provisions
of Section 4(b) of this Agreement, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;
C. the Company's requiring the Executive to be based at any office
or location other than as provided in Section 4(a)(i)(B) hereof or to relocate
his personal residence or the Company's requiring the Executive to travel on
Company business to a substantially greater extent than required immediately
prior to the Effective Date;
D. any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
E. any failure by the Company to comply with and satisfy Section
11(c) of this Agreement.
For purposes of this Section 5(c)(i), any good faith determination
of "Good Reason" made by the Executive shall be conclusive.
(ii) For purposes of this Agreement, "Good Reason" shall also mean
the following voluntary circumstance: anything in this Agreement to the contrary
notwithstanding, a termination by the Executive for any reason during the 30-day
period immediately following the first anniversary of the Effective Date shall
be deemed to be a termination for Good Reason for all purposes of this
Agreement.
(d) Notice of Termination. Any termination by the Company for Cause,
or by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance
6
<PAGE> 7
with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice
of Termination" means a written notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive's employment under the
provision so indicated and (iii) if the Date of Termination (as defined below)
is other than the date of receipt of such notice, specifies the termination date
(which date shall be not more than thirty days after the giving of such notice).
The failure by the Executive or the Company to set forth in the Notice of
Termination any fact or circumstance which contributes to a showing of Good
Reason or Cause shall not waive any right of the Executive or the Company,
respectively, hereunder or preclude the Executive or the Company, respectively,
from asserting such fact or circumstance in enforcing the Executive's or the
Company's rights hereunder.
(e) Date of Termination. "Date of Termination" (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.
6. Obligations of the Company upon Termination.
(a) Good Reason; Other Than for Cause, Death or Disability. If,
during the Employment Period, the Company shall terminate the Executive's
employment other than for Cause or Disability or the Executive shall terminate
employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (a) the Executive's Annual Base Salary through the
Date of Termination to the extent not theretofore paid, (b) the product of (x)
the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or
payable, including any bonus or portion thereof which has been earned but
deferred (and annualized for any fiscal year consisting of less than twelve full
months or during which the Executive was employed for less than twelve full
months), for the most recently completed fiscal year during the Employment
Period, if any (such higher amount being referred to as the "Highest Annual
Bonus") and (y) a fraction, the numerator of which is the number of days in the
current fiscal year through the Date of Termination, and the denominator of
which is 365 and (c) any compensation previously deferred by the Executive
(together with any accrued interest or earnings thereon) and any accrued
vacation pay, in each case to the extent not theretofore paid (the sum of the
amounts described in clauses (a), (b), and (c) shall be hereinafter referred to
as the "Accrued Obligations"); and
B. the amount equal to the product of (a) three* and (b) the sum of
(x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus; and
C. an amount equal to the excess of (a) the actuarial equivalent of
the benefit under the Company's qualified defined benefit retirement plan (the
"Retirement Plan") (utilizing actuarial assumptions no less favorable to the
Executive than those in effect under the Company's Retirement Plan immediately
prior to the Effective Date), and any excess or supplemental retirement plan in
which the Executive participates pursuant to the Employment Agreement or
otherwise (together, the "SERP") which the Executive would receive if the
Executive's employment continued for three* years after the Date of Termination
assuming for this purpose that all accrued benefits are fully vested, and,
assuming that the Executive's compensation in each of the three* years is that
required by Section 4(b)(i) and Section 4(b)(ii), over (b) the actuarial
equivalent of the Executive's actual benefit (paid or payable), if any, under
the Retirement Plan and the SERP as of the Date of Termination;
(ii) for three* years after the Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits
*See attached schedule.
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<PAGE> 8
to the Executive and/or the Executive's family at least equal to those which
would have been provided to them in accordance with the plans, programs,
practices and policies described in Section 4(b)(iv) of this Agreement as if the
Executive's employment had not been terminated or, if more favorable to the
Executive, as in effect generally at any time thereafter with respect to other
peer executives of the Company and its affiliated companies and their families,
provided, however, that if the Executive becomes reemployed with another
employer and is eligible to receive medical or other welfare benefits under
another employer-provided plan, the medical and other welfare benefits described
herein shall be secondary to those provided under such other plan during such
applicable period of eligibility. For purposes of determining eligibility (but
not the time of commencement of benefits) of the Executive for retiree benefits
pursuant to such plans, practices, programs and policies, the Executive shall be
considered to have remained employed until three* years after the Date of
Termination and to have retired on the last day of such period;
(iii) for three* years after the Executive's Date of Termination,
the Company shall, at its sole expense as incurred, provide the Executive with
outplacement services the scope and provider of which shall be selected by the
Executive in the Executive's sole discretion provided, however that the maximum
amount of expense to be incurred by the Company pursuant to this Section
6(a)(i)C in any one calendar year shall not exceed 10% of the Executive's Annual
Base Salary; and
(iv) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to receive
under any plan, program, policy or practice or contract or agreement of the
Company and its affiliated companies.
(b) Death. If the Executive's employment is terminated by reason of
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than for payment of Accrued Obligations and the
timely payment or provision of any amounts or benefits required to be paid or
provided or which the Executive is eligible to receive under any plan, program,
policy, practice, contract or agreement of the Company or any of its affiliated
companies, including, without limitation, those amounts or benefits to be paid
or provided pursuant to the plans, programs, practices, policies, agreements or
contracts referred to in Section 4(b)(iii) or (iv) of this Agreement
(collectively, the "Other Benefits"). Accrued Obligations shall be paid to the
Executive's estate or beneficiary, as applicable, in a lump sum in cash within
30 days of the Date of Termination. With respect to the provision of Other
Benefits, the term "Other Benefits" as utilized in this Section 6(b) shall
include, without limitation, and the Executive's estate and/or beneficiaries
shall be entitled to receive, benefits at least equal to the most favorable
benefits provided by the Company and affiliated companies to the estates and
beneficiaries of peer executives of the Company and such affiliated companies
under such plans, programs, practices and policies relating to death benefits,
if any, as in effect with respect to other peer executives and their
beneficiaries at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive's estate and/or the
Executive's beneficiaries, as in effect on the date of the Executive's death
with respect to other peer executives of the Company and its affiliated
companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by
reason of the Executive's Disability during the Employment Period, this
Agreement shall terminate without further obligations to the Executive, other
than for payment of Accrued Obligations and the timely payment or provision of
Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum
in cash within 30 days of the Date of Termination. With respect to the provision
of Other Benefits, the term "Other Benefits" as utilized in this Section 6(c)
shall include, and the Executive shall be entitled after the Disability
Effective Date to receive, disability and other benefits at least equal to the
most favorable of those generally provided by the Company and its affiliated
companies to disabled executives and/or their families in accordance with such
plans, programs, practices and policies relating to disability, if any, as in
effect generally with respect to other peer executives and their families at any
time during the 120-day period immediately preceding the Effective Date or, if
more favorable to the Executive and/or the Executive's family, as in effect at
any time thereafter generally with respect to other peer executives of the
Company and its affiliated companies and their families.
*See attached schedule.
8
<PAGE> 9
(d) Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) the Executive's Annual Base Salary through the Date
of Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) other benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.
7. Nonexclusivity of Rights.
Nothing in this Agreement shall prevent or limit the Executive's
continuing or future participation in any plan, program, policy or practice
provided by the Company or any of its affiliated companies and for which the
Executive may qualify, nor, subject to Section 12(f), shall anything herein
limit or otherwise affect such rights as the Executive may have under any
contract or agreement with the Company or any of its affiliated companies.
Amounts which are vested benefits or which the Executive is otherwise entitled
to receive under any such plan, policy, practice or program of or any such
contract or agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
8. Full Settlement.
(a) No Set-Off. Except as provided for in Section 6(a)(ii), the
Company's obligation to make the payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any
set-off, counterclaim, recoupment, defense or other claim, right or action which
the Company may have against the Executive or others.
(b) No Mitigation Obligation. The Executive's benefits hereunder
shall be considered severance pay in consideration of the Executive's past
service, and pay in consideration of the Executive's continued service from the
date hereof and in no event shall the Executive be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Executive under any of the provisions of this Agreement and, except as
provided for in Section 6(a)(ii), such amounts shall not be reduced whether or
not the Executive obtains other employment.
(c) Expenses. In order that the purpose of this Agreement not be
frustrated, it is the intent of the Company that the Executive not be required
to incur the expenses associated with the enforcement of the Executive's rights
under this Agreement by litigation or other legal action because the cost and
expense thereof would substantially detract from the benefits intended to be
extended to the Executive hereunder, nor be bound to negotiate any settlement of
the Executive's rights hereunder under threat of incurring such expenses.
Accordingly, if following the Effective Date it should appear to the Executive
that the Company has failed to comply with any of its obligations under this
Agreement or, if at any time, in the event that the Company or any other person
takes any action to declare this Agreement void or unenforceable, or institutes
any litigation or other legal action designed to deny, diminish or to recover
from, the Executive the benefits intended to be provided to the Executive
hereunder, and that the Executive has complied with all of the Executive's
obligations under this Agreement, the Company irrevocably authorizes the
Executive from time to time to retain counsel of the Executive's choice at the
expense of the Company as provided in this Section 8(c), to represent the
Executive in connection with the initiation or defense of any litigation or
other legal action, whether by or against the Company or any director, officer,
stockholder or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior attorney-client relationship between the
Company and such counsel (other than a counsel acting on behalf of the Company
in connection with this Agreement), the Company irrevocably consents to the
Executive's entering into an attorney-client relationship with such counsel, and
in that connection the Company and the Executive agree that a confidential
relationship shall exist between the Executive and such counsel. The Company
agrees to pay as incurred, to the full extent permitted by law, all costs and
expenses which the Executive may reasonably incur as
9
<PAGE> 10
a result of any contest (regardless of the outcome thereof) by the Company, the
Executive or others of the validity or enforceability of, or liability under,
any provision of this Agreement or any guarantee of performance thereof
(including, without limitation, as a result of any contest by the Executive
about the amount of any payment pursuant to this Agreement), plus in each case
interest on any delayed payment at the applicable Federal rate provided for in
Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the
"Code"). Included within such costs and expenses shall be the reasonable fees
and expenses of counsel selected from time to time by the Executive as
hereinabove provided, which fees and expenses shall be paid or reimbursed to the
Executive by the Company on a regular, periodic basis upon presentation by the
Executive of a statement or statements prepared by such counsel in accordance
with its customary practices.
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by the Company
to or for the benefit of the Executive (whether paid or payable or distributed
or distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of
the Code or any interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Coopers &
Lybrand LLP or such other certified public accounting firm as may be designated
by the Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by the Company.
Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by
the Company to the Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made ("Underpayment"),
consistent with the calculations required to be made hereunder. In the event
that the Company exhausts its remedies pursuant to Section 9(c) and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Underpayment that has occurred
and any such Underpayment shall be promptly paid by the Company to or for the
benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the Executive is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which it gives such notice to the Company (or such shorter
period ending on the date that any payment of taxes with respect to such claim
is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the Executive
shall:
10
<PAGE> 11
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect
to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively
to contest such claim, and
(iv) permit the Company to participate in any proceedings relating
to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance;
and further provided that any extension of the statute of limitations relating
to payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.
(d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 9(c), the Executive becomes entitled to receive
any refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 9(c) promptly pay to the
Company the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the Executive
of an amount advanced by the Company pursuant to Section 9(c), a determination
is made that the Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify the Executive in writing of its
intent to contest such denial of refund prior to the expiration of 30 days after
such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
10. Confidential Information.
The Executive shall hold in a fiduciary capacity for the benefit of
the Company all secret or confidential information, knowledge or data relating
to the Company or any of its affiliated companies, and their respective
businesses, which shall have been obtained by the Executive during the
Executive's employment by the Company or any of its affiliated companies and
which shall not be or become public knowledge (other than by acts by the
Executive or representatives of the Executive in violation of this Agreement).
After termination of the Executive's employment with the Company, the Executive
shall not, without the prior written consent of the Company or as may otherwise
be required by law or legal process, communicate or divulge any such
information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
11. Successors.
11
<PAGE> 12
(a) This Agreement is personal to the Executive and without the
prior written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
12. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of New York, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive
If to the Company: Stone & Webster, Incorporated
245 Summer Street
Boston, MA 02210
Attention: Chief Financial Officer
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation, the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c)(i)A-E of this Agreement, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.
(f) The Executive and the Company acknowledge that the employment of
the Executive by the Company is currently subject to the terms and conditions of
the Employment Agreement and, subject to Section 1(a) of this Agreement and the
Employment Agreement, the Executive's employment may be terminated by either the
Executive or the Company prior to the Effective Date, in which case the
Executive shall have no further rights under this Agreement. From and after the
Effective Date, except as otherwise specifically provided in any prior
12
<PAGE> 13
agreement, this Agreement shall supersede any other agreement between the
parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
STONE & WEBSTER, INCORPORATED*
By:
-------------------------- --------------------------
Name:
Title:
* See attached schedule
13
<PAGE> 14
Schedule to Form of
Change of Control Employment Agreement
filed as Exhibit 10(b)
A. The following Named Executive Officers have entered into a Change of
Control Employment Agreement (the "Agreement") on this form:
(a) H. Kerner Smith
(b) Edward J. Walsh
(c) Robert C. Wiesel
(d) Thomas L. Langford
(e) Daniel P. Levy
B. All terms of the individual Agreements are substantially identical except
that:
(a) Mr. Levy's Agreement provides for an "Employment Period" of two rather
than three years and provides that the benefits payable pursuant to
Sections 6(a)(i), 6(a)(ii) and 6(a)(iii) are calculated over a two year
rather than a three year period following the Date of Termination (as
defined in the Agreement).
(b) Mr. Wiesel's Agreement is with Stone & Webster Engineering Corporation,
a wholly-owned subsidiary of Registrant, and is guaranteed by
Registrant.
14
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration
Statement on Form S-4 of our report dated February 12, 1998, on our audits of
the consolidated financial statements of Stone & Webster, Incorporated as of
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997.
We also consent to the reference to our firm under the captions "Experts"
and "Selected Financial Data".
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
July 13, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF MARVIN AND COMPANY, P.C., INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 25, 1998 with respect to the consolidated
financial statements of Power Technologies, Inc. as of and for the year ended
December 31, 1997, and the use of our review report dated March 25, 1998 with
respect to the consolidated financial statements of Power Technologies, Inc. as
of and for the years ended December 31, 1996 and 1995, included in the joint
Prospectus and Proxy Statement of Stone & Webster, Incorporated and Power
Technologies, Inc. that is made part of the Registration Statement on Form S-4
of Stone & Webster, Incorporated for the registration of its shares of common
stock and certain rights relating to shares of its common stock and preferred
stock.
/s/ Marvin and Company, P.C.
Schenectady, New York
July 14, 1998
<PAGE> 1
EXHIBIT 99.1
POWER TECHNOLOGIES, INC.
REVOCABLE PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF SHAREHOLDERS AUGUST 11, 1998
(Class A and/or Class B Common Stock)
The undersigned hereby appoints Gordon B. Hirschman and Mary A. Sager, or each
of them, as Proxies with full power of substitution to represent the undersigned
and to vote all shares of Class A and Class B Common Stock of Power
Technologies, Inc. (the "Company") which the undersigned would be entitled to
vote at the 1998 Annual Meeting of Shareholders of the Company to be held on
August 11, 1998 and any adjournment thereof.
PROPOSAL ONE - To elect four of the following persons as directors to serve
until the 2000 annual meeting of shareholders and until their successors have
been elected and have qualified: Dale A. Douglass, James W. Feltes, Timothy F.
Laskowski, David J. Lawrence, N. Dag Reppen and Mary A. Sager.
FOR the following nominess
(write in names of nominees for whom you desire to vote):
_____________________________ _____________________________
_____________________________ _____________________________
PROPOSAL TWO - To amend the Certificate of Incorporation of the Company to limit
the liability of the directors of the Company to the Company and the
shareholders of the Company for certain breaches of fiduciary duties.
For |_| Against |_| Abstain |_|
PROPOSAL THREE - To approve and adopt the Agreement and Plan of Merger (the
"Merger Agreement"), dated April 20, 1998 among the Company, the directors and
certain shareholders of the Company, Stone & Webster, Incorporated ("SWI"),
Stone & Webster Acquisition Corp. ("Merger Sub"), a wholly-owned subsidiary of
SWI, and Stone & Webster Management Consultants, Inc., and the transactions
contemplated thereby including the merger of the Merger Sub with and into the
Company as contemplated by the Merger Agreement, a copy of which has been
distributed to the shareholders of the Company.
For |_| Against |_| Abstain |_|
Upon receipt of this proxy when properly executed, the Proxies will vote the
shares of Class A and B Common Stock of the Company held by the undersigned in
the manner directed hereon. If no direction is made, such shares will be voted
"FOR" proposals 2 and 3. Proxies which are executed without specification as to
proposal 1 will not be voted as to proposal 1.
Please mark, sign and date this voting instruction card and return it using the
enclosed envelope.
Dated: ________________, 1998 Name of Shareholder:
Signature:
--------------------------
Signature:
--------------------------
(Please sign as name appears at above. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.)
<PAGE> 2
POWER TECHNOLOGIES, INC.
REVOCABLE VOTING INSTRUCTION CARD
FOR ANNUAL MEETING OF SHAREHOLDERS AUGUST 11, 1998
(Class C Common Stock)
The undersigned hereby directs the trustee of the Power Technologies, Inc.
Employee Stock Ownership Plan (the "ESOP") to vote all shares of Class C Common
Stock of Power Technologies, Inc. (the "Company") which the ESOP is entitled to
vote at the 1998 Annual Meeting of Stockholders of the Company to be held on
August 11, 1998 and any adjournment thereof and which are allocated to the
account of the undersigned pursuant to the ESOP in the manner set forth below:
PROPOSAL ONE - To elect four of the following persons as directors to serve
until the 2000 annual meeting of shareholders and until their successors have
been elected and have qualified: Dale A. Douglass, James W. Feltes, Timothy F.
Laskowski, David J. Lawrence, N. Dag Reppen and Mary A. Sager.
FOR the following nominees
(Write in names of nominees for whom you desire to vote):
_____________________________ _____________________________
_____________________________ _____________________________
PROPOSAL TWO - To amend the Certificate of Incorporation of the Company to limit
the liability of the directors of the Company to the Company and the
shareholders of the Company for certain breaches of fiduciary duties.
For |_| Against |_| Abstain |_|
PROPOSAL THREE - To approve and adopt the Agreement and Plan of Merger (the
"Merger Agreement"), dated April 20, 1998 among the Company, the directors and
certain shareholders of the Company, Stone & Webster, Incorporated ("SWI"),
Stone & Webster Acquisition Corp. ("Merger Sub"), a wholly-owned subsidiary of
SWI, and Stone & Webster Management Consultants, Inc., and the transactions
contemplated thereby including the merger of the Merger Sub with and into the
Company as contemplated by the Merger Agreement, a copy of which has been
distributed to the shareholders of the Company.
For |_| Against |_| Abstain |_|
Upon receipt of this voting instruction card when properly executed, the ESOP
trustee will vote the shares of Class C Common Stock of the Company allocated to
the account of the undersigned in the manner directed hereon. If no direction is
made, such shares will be voted "FOR" proposals 2 and 3. Voting instruction
cards which are executed without specification as to proposal 1 will not be
voted as to proposal 1.
Please mark, sign and date this voting instruction card and return it using the
enclosed envelope. In order for your shares to be voted at the 1998 Annual
Meeting of Stockholders of the Company, this voting instruction card must be
returned to and received by the ESOP trustee by no later than 5:00 p.m. EST on
August 10, 1998.
Dated: ________________, 1998 Name of Shareholder:
Signature:
--------------------------
Signature:
--------------------------
(Please sign as name appears at above. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.)
<PAGE> 1
EXHIBIT 99.2
SHAREHOLDERS' COMMITTEE AGREEMENT
This Shareholders' Committee Agreement made as of this __________ day
of _______________, 1998, by and among the shareholder executing this Agreement
(the "Shareholder") and F.S. Prabhakara, Mary A. Sager, and Douglas E. Welsh
(individually, a "Member" and collectively the "Committee").
Stone & Webster, Incorporated and certain of its affiliates
(collectively, "SW") have entered into an Agreement and Plan of Merger, dated
April 20, 1998 (the "Merger Agreement"), with Power Technologies, Inc. ("PTI")
and certain of its shareholders. The Merger Agreement provides for the merger
(the "Merger") of a subsidiary of Stone & Webster, Incorporated with and into
PTI, with PTI being the surviving corporation. PTI has delivered a
Prospectus/Proxy Statement and a copy of the Merger Agreement, and certain
information about PTI relating to the Merger and the other transactions
contemplated by the Merger Agreement (collectively, with the Merger, the
"Transaction") to each of the shareholders of PTI. Unless otherwise defined
herein, capitalized terms used herein mean what they mean in the Merger
Agreement.
Pursuant to the Merger Agreement, the Initial Escrow Shares will be
deposited with the Escrow Agent to satisfy certain indemnification obligations
of the Participating Holders and the Fund Shares will be deposited in a separate
escrow account for the purpose of satisfying expenses and compensation of the
Shareholders' Committee (collectively, "Administrative Expenses"). The Initial
Escrow Shares will be distributed to the Participating Holders or returned to SW
pursuant to the terms of the Escrow Agreement and the Fund Shares will be
distributed to the Participating Holders to the extent they are not used to
satisfy Administrative Expenses. Also, the Merger Agreement entitles the
Participating Holders to Contingent Merger Consideration, which Contingent
Merger Consideration may be reduced by the amount of any Unsatisfied Claims for
which SW is entitled to indemnification under the Merger Agreement. Finally, the
Participating Shareholders will have certain indemnification rights against SW.
The Merger Agreement contemplates the appointment of a Shareholders'
Representative for the purpose of representing the collective interests of the
Participating Holders and acting and making decisions on their behalf with
respect matters arising under the Merger Agreement and the Escrow Agreement, and
the Committee will perform this function pursuant to this Agreement and
corresponding agreements with other Participating Holders.
1. APPOINTMENT.
(a) APPOINTMENT AND ACCEPTANCE. The Shareholder hereby
appoints the Committee to act as his or her representative as contemplated by
the Merger Agreement and the Escrow Agreement in connection with all matters
relating to the Transaction. Without limiting the generality of the foregoing,
the Committee is authorized to represent the Shareholder in connection with (a)
any indemnification claim against or by the Participating Holders pursuant to
the Merger Agreement, (b) the determination of the amount of the Contingent
Merger Consideration to which the Participating Holders are entitled pursuant to
the Merger Agreement and (c) the administration of the Escrow Agreement and any
disputes or issues that arise thereunder. The Committee hereby accepts such
appointment and agrees to serve as the Shareholders' Representative for the
Shareholder as contemplated by the Merger Agreement and the Escrow Agreement.
(b) INDEMNIFICATION CLAIMS. The Committee may, but is not
obligated to enforce, collect or recover any claim as to which indemnity may be
sought on behalf of the Shareholder under the Merger Agreement. The Committee
shall in no event have any obligation for the payment of, or the collection of,
any amounts to which the Shareholder may be entitled under this Agreement, the
Merger Agreement or the Escrow Agreement.
(c) LIMITATION ON POWERS. Notwithstanding anything in
this Agreement to the contrary, the Committee shall not have the authority to
waive, or agree to any amendment to, the Shareholder's rights under the Merger
Agreement or the Escrow Agreement except that:
(i) The Committee may waive or agree to an
amendment to the Shareholder's rights if such amendment is approved by
the affirmative vote of "Represented Shareholders" holding two-thirds
of the aggregate "Represented Interests" (such terms being defined
below);
(ii) The Committee may agree to the payment of a
reduced amount of Contingent Merger Consideration on an accelerated
basis (except for acceleration pursuant to Section 1.10(i) of the
Merger Agreement) in lieu of the actual Contingent Merger Consideration
provided for in the Merger Agreement, provided, however, that the
aggregate Closing Market Value of Contingent Merger Consideration shall
not be less than $6,000,000 if paid on or before 12/31/1998, $6,500,000
if paid between 1/1/1999 and 12/31/1999, $7,000,000 if paid between
1/1/2000 and 12/31/2000, $7,500,000 if paid between
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1/1/2001 and 12/31/2001, or $8,000,000 if paid at any time on or after
1/1/2002; and
(iii) The settlement of a bona fide dispute
relating to the rights to which the Participating Holders are entitled
shall not constitute a "waiver" or "amendment" of any rights subject to
this paragraph (c).
For purposes of this Agreement, the Participating Holders who execute
Shareholders' Committee Agreements in the form of this Agreement (including the
Shareholder) are referred to as the "Represented Shareholders" and each
Represented Shareholder shall be deemed to own a number of "Represented
Interests" equal to the number of Participating Shares owned by such Represented
Shareholder.
(d) POWER OF ATTORNEY. Subject to paragraph (c) above,
the Committee shall have full power and authority for the Shareholder, on his or
her behalf and in his or her name, place and stead, to take any and all actions
that the Committee may deem necessary or desirable under the Merger Agreement
and the Escrow Agreement, in its absolute discretion, as fully as the
Shareholder could do if present. The Shareholder hereby grants each Member,
acting individually after the approval of a matter by the Committee as provided
herein, an irrevocable power of attorney, in the name, place and stead of the
Shareholder, to execute and deliver any agreements, waivers, stock certificates
or other documents, to commence and defend litigation and other proceedings, and
to take such other actions as are necessary or desirable to enforce or protect
the Shareholder's rights under the Merger Agreement and the Escrow Agreement and
to implement decisions made or actions taken by the Committee.
(e) RATIFICATION. Any action taken by the Committee or
any Member pursuant to and in compliance with this Agreement is hereby ratified,
confirmed and approved by the Shareholder.
(f) RELIANCE; IRREVOCABILITY. It is anticipated that the
Committee, SW, and the other Represented Shareholders will all act, or refrain
from acting, in reliance upon this Agreement, and in consideration of that
reliance, and the mutual covenants expressed in this Agreement, the powers of
the Committee are, and shall be deemed, coupled with an interest and
irrevocable, and shall not terminate upon, or be affected by, the death,
incompetency or other disability of the Shareholder or any other Represented
Shareholder.
2. ACTION BY THE COMMITTEE.
(a) MEETINGS OF THE COMMITTEE. The Members may act only
through the Committee, however, the Members may individually implement actions
approved by the Committee. Meetings of the Committee shall be held at such times
as may from time to time be fixed by resolution of the Committee or called by
any Member of the Committee. Meetings of the Committee shall be held at such
place, within or without the State of New York, as from time to time may be
fixed by resolution of the Committee.
(b) NOTICE OF MEETINGS. Notice of meetings of the
Committee fixed by resolution of the Committee need not be given. Notice of each
other meeting shall be mailed to each Member by the Member calling the meeting,
addressed to each Member's residence or usual place of business, at least three
days before the day on which the meeting is to be held, or shall be sent to the
Member by telegraph, cable, wireless, or similar means so addressed or shall be
delivered personally, by telephone or by facsimile with confirmation received,
at least twenty-four (24) hours before the time the meeting is to be held. Each
notice shall state the time and place of the meeting but need not state the
purposes thereof. Notices of any such meeting need not be given to any Member
who submits a signed waiver of notice, whether before or after the meeting, or
who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice.
(c) QUORUM AND MANNER OF ACTING. At each meeting of the
Committee the presence of two Members shall constitute a quorum for the
transaction of business, and the vote of two or more Members present at the time
of the vote shall be the act of the Committee. Notwithstanding the foregoing, if
there is for any reason only one Member, such Member may act only for the
purpose of filling vacancies on the Committee.
(d) ACTION WITHOUT A MEETING. Any action required or
permitted to be taken by the Committee may be taken without a meeting if all
Members consent in writing to the adoption of a resolution authorizing the
action. The resolution and the written consents thereto by the Members shall be
filed with the minutes of the proceedings of the Committee.
(e) PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE.
Any one or more Members may participate in a meeting of the Committee by means
of a conference telephone or similar communications equipment allowing all
<PAGE> 3
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persons participating in the meeting to hear each other at the same time.
Participation by such means shall constitute presence in person at a meeting.
(f) CONFERRING WITH REPRESENTED SHAREHOLDERS. In
performing its duties hereunder and as contemplated hereby and by the Merger
Agreement and Escrow Agreement, the Committee may, but need not, confer and
consult with any or all of the Represented Shareholders. All decisions made and
actions taken by the Committee in connection with this Agreement, the Merger
Agreement and the Escrow Agreement shall be final and binding on the
Shareholder, whether or not the Committee consulted with the Shareholder in the
course of making any such decision or taking any such action.
(g) RELIANCE ON DOCUMENTS. The Committee shall be
entitled to rely upon any order, judgment, award, certification, demand, notice,
instrument or other writing delivered to it under this Agreement, the Merger
Agreement or the Escrow Agreement without being required to determine the
authenticity or the correctness of any fact stated therein or the propriety or
validity of the service thereof. The Committee may act in reliance upon any
instrument or signature believed by it to be genuine and may assume that any
persons purporting to give notice or receipt of advice or make any statement or
execute any document in connection with the provisions hereof has been duly
authorized to do so.
(h) RETAINING THIRD-PARTIES. The Committee may engage
such third parties at such cost as the Committee shall in its sole discretion
deem necessary or appropriate for the adequate performance of its duties
hereunder and may rely on the advice of such third parties with respect to
matters within their professional or expert competence.
3. ACTION BY THE REPRESENTED SHAREHOLDERS.
(a) CALL OF MEETINGS. Meetings of the Represented
Shareholders may be called at any time by the holders of twenty-five percent
(25%) of the Represented Interests or by the Committee and shall be held on such
day and at such hour as is fixed in the call of the meeting. If all Members of
the Committee have resigned or are otherwise unable to act, the holders of ten
percent (10%) of the Represented Interests may call a meeting.
(b) PLACE OF MEETINGS. Meetings of the Represented
Shareholders shall be held at the principal office of PTI or at such other
place, within or without the State of New York, as may be fixed by the
Committee.
(c) NOTICE OF MEETINGS. Notice of each meeting of
Represented Shareholders shall be in writing and shall state the place, date,
and hour of the meeting and shall state the purpose or purposes for which the
meeting is called and who called the meeting. A copy of the notice of any
meeting shall be given by the Committee or the Represented Shareholders calling
the meeting, personally or by mail, not less than ten (10) nor more than sixty
(60) days before the date of the meeting, to each Represented Shareholder. If
mailed, such notice is given when deposited in the United States mail, with
postage thereon prepaid, directed to the Represented Shareholder at such address
as appears on such Represented Shareholders' Shareholders' Committee Agreement,
or, if such Represented Shareholder shall have filed with the Committee a
written request that notices be mailed to some other address, then directed to
the Represented Shareholder at such other address. Notice of meetings of
Represented Shareholders need not be given to any Represented Shareholder who
submits a signed waiver of notice, in person or by proxy, whether before or
after the meeting. The attendance of any Represented Shareholder at a meeting,
whether in person or by proxy, without protesting prior to the conclusion of the
meeting the lack of notice of such meeting, shall constitute a waiver of notice
by him. The Committee shall provide the Represented Shareholders with access to
the names and addresses of the Represented Shareholders upon reasonable request.
(d) PROXIES. Every Represented Shareholder may authorize
another person or persons to act for him by proxy. No proxy shall be valid after
the expiration of eleven months from the date thereof unless otherwise provided
in the proxy. Every proxy shall be revocable at the pleasure of the Represented
Shareholder executing it, except as otherwise provided by law. The authority of
the holder of a proxy to act shall not be revoked by the incompetence or death
of the Represented Shareholder who executed the proxy unless, before the
authority is exercised, written notice of an adjudication of such incompetence
or of such death is received by the Committee. Proxies which contain a faxed
signature shall be treated in the same manner as proxies with original
signatures.
(e) ACTION WITHOUT A MEETING. Whenever Represented
Shareholders are required or permitted to take any action by vote, such action
may be taken without a meeting on written consent, setting forth the action so
taken, signed by the holders of enough Represented Interests to approve the
action so taken.
<PAGE> 4
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4. FEES AND EXPENSES.
(a) COMPENSATION. Each Member shall be entitled to an
annual retainer of $1,000 for serving as a member of the Committee and shall be
paid $250 for each Committee meeting which they attend (up to a maximum of four
meetings per year). In addition, each Member shall be entitled to be reimbursed
for any out-of-pocket expenses incurred by such Member in performing his or her
duties as a Member; however, Members will not be entitled to travel expenses for
attending Committee Meetings. The Members will no longer be entitled to
compensation hereunder after the amount of the Contingent Merger Consideration
has been finally determined and all other issues under the Merger Agreement and
Escrow Agreement have been resolved. The annual retainer shall be pro rated in
the final year based on the portion of the year during which they are entitled
to compensation.
(b) PAYMENT OF COMPENSATION AND EXPENSES. The
compensation and reimbursement of the members of the Committee and any costs,
fees and expenses of any third parties engaged by the Committee in connection
with the performance of its duties as contemplated hereby shall be paid in the
following manner:
(i) first, to the extent permitted by the Escrow
Agreement, from the proceeds of the sale of such portion of the Initial
Escrow Shares as is necessary to satisfy such costs as contemplated by
the Escrow Agreement;
(ii) second, from the proceeds of the sale of the
Fund Shares until all of such Fund Shares have been sold; and
(iii) finally, out of the Contingent Merger
Consideration payable pursuant to the Merger Agreement, the Committee
being hereby authorized to direct SW to pay the necessary portion of
the Contingent Merger Consideration to the Committee in order to
satisfy such compensation and expenses.
5. RELEASE AND INDEMNIFICATION.
(a) RELEASE AND INDEMNIFICATION. No Member shall be
liable to the Shareholder for any acts or omissions as a member of the Committee
except for his or her own bad faith or willful misconduct. Except with respect
to claims based upon such bad faith or willful misconduct that are successfully
asserted against such Member, the Shareholder and the other Represented
Shareholders shall jointly and severally indemnify and hold harmless each Member
from and against any and all damages, losses, liabilities, claims, actions,
costs and expenses, including reasonable attorneys' fees and disbursements,
arising out of and in connection with the Merger Agreement, the Escrow Agreement
or this Agreement and the performance of his or her duties hereunder or
thereunder. Such Member shall not be liable for any mistake of fact or of law or
any error of judgment. Each Member and the Committee is authorized to comply
with and obey laws, orders, judgments, decrees, and regulations of any
governmental authority, court, tribunal, or arbitrator. If a Member complies
with any such law, order, judgment, decree, or regulation, such Member shall not
be liable to the Shareholder or to any other person even if such law, order,
judgment, decree or regulation is subsequently reversed, modified, annulled, set
aside, vacated, found to have been entered without jurisdiction, or found to be
in violation or beyond the scope of any constitution or law. If (i) a Member is
uncertain as to the Committee's duties or rights hereunder, (ii) has received
any notice, advice, direction or other document from any other party with
respect to this Agreement, the Merger Agreement or the Escrow Agreement which,
in the Member's opinion, is in conflict with any of the provisions of this
Agreement, the Merger Agreement or the Escrow Agreement, or (iii) is aware that
a dispute has arisen with respect to this Agreement, the Merger Agreement or the
Escrow Agreement, each Member and the Committee shall be entitled, without
liability to the Shareholder, to use their best efforts to perform their duties
under this Agreement, the Merger Agreement and the Escrow Agreement until the
Committee is directed otherwise in writing by an order, decree, or judgment of a
court of competent jurisdiction which has been finally affirmed on appeal or
which by lapse of time or otherwise is no longer subject to appeal or by an
accountants' or arbitrators' determination as provided in the Merger Agreement
or the Escrow Agreement.
(b) PERIOD OF INDEMNITY. The aforesaid indemnities shall
remain in full force and effect against any of the parties for a period equal to
the applicable statute of limitation for such claim; provided, however, that if
prior to the expiration of such period any claim for indemnification has been
asserted but not fully determined, such period will be extended as to such
claim, until it is finally concluded. All rights, protections and indemnities
contemplated herein shall be available to each Member with respect to actions or
omissions while a member of the Committee despite such Member's resignation or
removal from the Committee.
(c) SATISFACTION OF INDEMNIFICATION OBLIGATIONS. The
obligations of Shareholder to indemnify the Members shall be satisfied in the
same manner as Administrative Expenses are satisfied. If a Member is entitled to
indemnification after all such amounts are exhausted, the Shareholder shall be
individually liable in an amount equal to the
<PAGE> 5
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amount of indemnification multiplied by a fraction, the numerator of which this
the number of Represented Interests owned by the Shareholder and the denominator
of which is the number of Represented Interests owned by all of the Represented
Shareholders.
6. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSORS.
(a) RESIGNATION. Any Member may resign at any time by
giving 30 days written notice thereof to the other Members of the Committee.
(b) REMOVAL. Any Member may be removed at any time by the
affirmative vote of Represented Shareholders who hold a majority of the
Represented Interests.
(c) FILLING VACANCIES. If any Member shall resign, be
removed or become incapable of acting, or if a vacancy shall otherwise occur on
the Committee, the remaining Members of the Committee shall appoint a successor
to take the place of such Member and fill such vacancy. Such successor Member
shall execute a counterpart to this Agreement and thereupon, without any further
act, deed or conveyance, shall become vested with all the rights, powers and
duties of the retiring Member. If all Members of the Committee resign or are
otherwise unable to act, the Represented Shareholders may appoint new Members to
the Committee by a plurality vote at a meeting of Represented Shareholders at
which Represented Shareholders holding a majority of the Represented Interests
are present.
7. CONTENTS OF AGREEMENT; PARTIES IN INTEREST. This Agreement and
the agreements referred to herein set forth the entire understanding of the
parties hereto with respect to the transactions contemplated hereby. This
Agreement shall not be amended except by a written instrument duly executed by
each of the parties hereto; provided that Sections 2(a) and (c) may not be
amended without the prior written consent of SW. Any and all previous agreements
and understandings between or among the parties regarding the subject matter
hereof, whether written or oral, are superseded by this Agreement and the
documents referred to herein.
8. ASSIGNMENT AND BINDING EFFECT. This Agreement may not be
assigned by any party hereto without the prior written consent of the other
parties. All of the terms and provisions of this Agreement shall be binding upon
and inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto.
9. WAIVER. Any term or provision of this Agreement may be waived
at any time by the party entitled to the benefit thereof by a written instrument
duly executed by such party.
10. NOTICES. Any notice, request, demand, waiver, consent
approval, or other communication which is required or permitted to be given to
any party hereunder shall be in writing and shall be deemed given only if
delivered to the party personally or sent to the party by telegram, facsimile
transmission, registered or certified mail (return receipt requested), with
postage and registration or certification fees thereon prepaid, or by prepaid
documented air courier. Any such notice shall be deemed to have been given (a)
when received, if delivered in person, (b) on the date sent if telegraphed, sent
by prepaid documented air courier, sent by facsimile transmission and, in the
case of facsimile transmission, confirmed in writing within three business days
thereafter, and (c) three days following the date sent if mailed by registered
or certified mail (return receipt requested). Notices shall be sent to the
Committee at the following address:
Shareholders' Committee
c/o Power Technologies, Inc.
Post Office Box 1058
1482 Erie Boulevard
Schenectady, New York 12301-1058
Facsimile: (518) 395-2664
with a copy to:
Nixon, Hargrave, Devans & Doyle LLP
Post Office Box 1051
Clinton Square
Rochester, New York 14603
Attn: Roger W. Byrd, Esq.
Facsimile: (716) 263-1600
<PAGE> 6
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Notices shall be sent to the Shareholder at the address set forth on the
signature page of this Agreement. The Committee or the Shareholder may specify
an alternate address in a notice duly given to the other parties as provided
herein.
11. JURISDICTION. The parties hereby irrevocably consent to the
jurisdiction of the courts of New York and of any federal court located in such
state in connection with any action or proceeding arising out of or relating to
this Agreement, any document or instrument delivered pursuant to, in connection
with, or simultaneously with this Agreement, or a breach of this Agreement or of
any such document or instrument.
12. GOVERNING LAW. This Agreement shall be governed and
interpreted and enforced in accordance with the laws of the State of New York
without regard to its conflicts of laws principles.
13. NO BENEFIT TO OTHERS. Except as contemplated by Section 2(f)
of this Agreement, the representations, warranties, covenants and agreements
contained in this Agreement are for the sole benefit of the parties hereto and
their respective heirs, executors, personal representatives, successors and
assigns, and they shall not be construed as conferring, and are not intended to
confer, any rights on any other person.
14. SECTION HEADINGS. All section headings are for convenience
only and shall in no way modify or restrict any of the terms or provisions
hereof.
IN WITNESS WHEREOF, the parties hereto, intending to be
legally bound hereby, have duly executed this Agreement on the date first above
written.
COMMITTEE: SHAREHOLDER:
________________________________ ________________________________
F.S. Prabhakara (Name)
________________________________ ________________________________
Mary A. Sager (Street Address)
________________________________ ________________________________
Douglas E. Welsh (City, State, Zip)
Telephone:______________________
Facsimile: _____________________
SUCCESSOR COMMITTEE MEMBERS:
________________________________ ________________________________
(Signature) (Signature)
________________________________ ________________________________
(Name) (Name)
________________________________ ________________________________
(Signature) (Signature)
________________________________ ________________________________
(Name) (Name)
