<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1997
REGISTRATION NO. 333-21565
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
PSW TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7373 74-2796054
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
6300 BRIDGEPOINT PARKWAY, BUILDING 3, SUITE 200, AUSTIN, TEXAS 78730
(512) 343-6666
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
DR. W. FRANK KING
CHIEF EXECUTIVE OFFICER
6300 BRIDGEPOINT PARKWAY, BUILDING 3, SUITE 200
AUSTIN, TEXAS 78730
(512) 343-6666
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
RICHARD R. PLUMRIDGE, ESQ. R.W. SMITH, JR., ESQ.
BABAK YAGHMAIE, ESQ. STEPHEN A. RIDDICK, ESQ.
BROBECK, PHLEGER & HARRISON LLP PIPER & MARBURY L.L.P.
1633 BROADWAY 36 SOUTH CHARLES STREET
NEW YORK, NEW YORK 10019 BALTIMORE, MARYLAND 21202-3010
(212) 581-1600 (410) 539-2530
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ____________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _____________________________________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
MAY 12, 1997
2,850,000 SHARES
[LOGO]
COMMON STOCK
---------
All of the 2,850,000 shares of Common Stock offered hereby are being sold by
PSW Technologies, Inc. ("PSW" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial offering price will be between $8.00 and $10.00 per
share. See "Underwriting" for information relating to the factors to be
considered in determining the initial public offering price. Application has
been made to list the Common Stock for quotation on the Nasdaq National Market
("Nasdaq") under the trading symbol "PSWT."
--------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7 HEREOF.
-------------
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.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS TO
PUBLIC AND COMMISSIONS COMPANY(1)
<S> <C> <C> <C>
Per Share.......................................... $ $ $
Total(2)........................................... $ $ $
</TABLE>
(1) Before deducting expenses of this offering estimated at $1,350,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
427,500 additional shares of Common Stock on the same terms and conditions
as the securities offered hereby, solely to cover over-allotments, if any.
To the extent the option is exercised, the Underwriters will offer the
additional shares at the Price to Public shown above. If the option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1997.
ALEX . BROWN & SONS J.P. MORGAN & CO.
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[Graph of Technology Life Cycle with photograph of ocean wave in background. A
textual quote, three boxes of text and additional text overlaying graph. Line
with arrow pointing from Box 1 to Box 2. Dotted lines border graph. Curve is
marked on graph by dots.
<TABLE>
<S> <C>
Vertical Graph Axis: Business End-User, Technology Vendor
Horizontal Graph Development, Early Adoption, High Growth, Maturity
Axis:
Textual Quote: "Lack of in-house technical skills is by far the most important
reason that companies look for external help when implementing an IT
project." International Data Corp. 1996.
Additional Text: PSW Technologies Provides High-Value Solutions By Exploiting The
Technology Life-Cycle.
Text Box 1: SOFTWARE TECHNOLOGY EXPERTISE -- Technical expertise GAINED by
helping technology vendors get product to market.
Text Box 2: BUSINESS SYSTEMS EXPERTISE -- Technical expertise APPLIED by helping
business end-users accelerate development of critical business
systems.
Text Box 3: GENOVA -- Technical expertise ACCUMULATED through formal
methodologies, courseware and object libraries.]
</TABLE>
------------------------
"Genova" and "PSW Technologies, Inc." are trademarks of the Company. This
Prospectus also includes trademarks and trade names of companies other than the
Company.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS
AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH
STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS
FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH UNDER THE
CAPTION "RISK FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. THE FOLLOWING SUMMARY
IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
PSW Technologies, Inc. is a software services firm that provides high value
solutions to technology vendors and business end-users by mastering and applying
critical emerging technologies. These critical technologies include distributed
computing, object-oriented development, advanced operating systems and systems
management technologies. The Company conducts its business through its two
business units: the Software Technology Unit and the Business Systems Unit.
PSW's Software Technology Unit provides joint project-based development,
porting and testing services to selected technology vendor clients. PSW services
enable these companies to improve the quality and speed to market of their
products which, PSW believes, often result in an earlier flow of revenue and
increased revenues over the long term for such technology vendor clients. The
Company's services also enable these clients to focus on their core
competencies, limit their permanent headcount and relieve temporary workload
spikes. PSW targets companies that are developing technologies which it believes
will be important to, and likely to be widely deployed by, its current and
potential business end-user clients. Through these engagements, PSW often gains
an early and comprehensive understanding of critical emerging technologies and
is therefore well positioned to service the continued needs of these and other
technology vendors, as well as the needs of the business end-user community.
The Company's Business Systems Unit applies PSW's technical expertise to the
design and development of high value, mission critical enterprise business
systems for its Fortune 1000 end-user clients. These systems, which support
multiple functions within the enterprise, typically are long-term strategic
information technology ("IT") solutions designed to enable business end-users to
improve the quality of the services they provide to their customers through
enhanced information capture and control, increased accuracy and efficiency and
decreased costs and response times. The Company focuses on enterprise solutions
due to their greater value to the client than departmental systems, and the
corresponding potential for longer-term relationships.
The Company has developed, and continues to develop, proprietary
methodologies and object libraries which formalize the knowledge and expertise
derived from its research and development projects with key technology vendors
and from its business system design and development projects with business
end-users. These methodologies and object libraries enable PSW to retain and
distribute its institutional knowledge throughout the Company and to achieve
improvements in cost, quality and speed on client projects.
The Company is flexible in structuring the terms of its client engagements,
favoring a time-and-materials pricing model with set project milestones, but
employing a fixed price model per phase in certain circumstances. The Company
works in partnership with its clients at the client site or at PSW's facilities,
as appropriate. This flexible, joint development approach, together with the
Company's utilization of proprietary methodologies, is designed to reduce risks
to PSW and its clients, maximize client satisfaction and allow PSW to transfer
expertise to its clients. In addition, PSW believes that its comprehensive
technical expertise in critical emerging technologies enables it to generate
high levels of repeat business by attracting clients that provide the
opportunity for multi-year, ongoing relationships.
3
<PAGE>
The Company has, until recently, conducted its business and operations as
the software division of Pencom Systems Incorporated, a privately held
corporation ("Pencom"). In October 1996, Pencom contributed certain assets and
associated liabilities of its software division and a portion of a software
contract that had previously been allocated to other operations of Pencom to the
Company in exchange for all of the outstanding Common Stock of the Company and
certain warrants issued to Pencom and certain of its employees to purchase
shares of Common Stock of the Company. The Company believes that, as an
independent entity, it will be better able to meet the mission-critical needs of
its clients for IT solutions by defining its own priorities and maintaining a
focus on its clients' particular needs.
Immediately following the completion of this offering, the current
shareholders of Pencom will own approximately 59% of the outstanding shares of
Common Stock of the Company (56% if the Underwriters over-allotment option is
exercised in full) and will retain the voting power required to elect all
directors and otherwise control the management and affairs of the Company. The
Company and Pencom have entered into a number of agreements for the purpose of
defining certain relationships between them. See "Certain Transactions--Pencom
Relationship." There can be no assurance that any conflicts arising from such
relationships will be resolved in favor of the Company. See "Risk
Factors--Recent Organization; Absence of Operating History as an Independent
Business; Limited Relevance of Historical Financial Information," "--Control by
Shareholders of Pencom; Potential Conflicts of Interest."
Since the commencement of its operations, the Company has elected to operate
as an S corporation under Subchapter S of the Internal Revenue Code of 1986, as
amended (the "Code"). As such, the Company's taxable income was included in the
individual income tax returns of its stockholders (with certain exceptions under
state and local income tax laws). Upon completion of this offering, the
Company's S status will terminate and the Company will be subject to corporate
income taxes. The Company will pay a cash dividend to the S corporation
stockholders in an amount equal to the approximate tax that the S corporation
stockholders will be required to pay on the estimated 1997 taxable income
allocated to them, currently estimated to be approximately $1.2 million. In
addition, the Company will be required to change from the cash basis to the
accrual basis for income tax purposes and will record a tax liability currently
estimated to be approximately $2.2 million. See "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Net
Charge Resulting from S Corporation Termination" and Note 15 of Notes to
Financial Statements.
The Company was incorporated in Delaware in August 1996. The Company's
executive offices are located at 6300 Bridgepoint Parkway, Building 3, Suite
200, Austin, Texas 78730, and its telephone number is (512) 343-6666.
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. See "Risk Factors."
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby.................. 2,850,000 shares
Common Stock outstanding after the
offering................................... 8,396,463 shares(1)
Use of proceeds.............................. To repay indebtedness, to pay certain
corporate income tax obligations of the
Company and to pay dividends to existing
stockholders of the Company in amounts
estimated to approximate certain of their
1997 income tax obligations, and for working
capital and other general corporate purposes.
The Company may also use a portion of the net
proceeds to fund acquisitions of
complementary businesses or technologies,
although no such transaction is currently
contemplated. See "Use of Proceeds" and
"Management's Discussion and Analysis of
Financial Condition and Results of
Operations--Net Charge Resulting from S
Corporation Termination."
Proposed Nasdaq National Market symbol....... PSWT
</TABLE>
- ------------------------
(1) Excludes 1,196,710 shares of Common Stock issuable upon the exercise of
stock options outstanding as of March 31, 1997, at a weighted average
exercise price of $2.77 per share, and warrants to purchase 507,654 shares
of Common Stock at $.04 per share.
5
<PAGE>
SUMMARY FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ------------
(UNAUDITED)
STATEMENTS OF INCOME DATA:
Revenue.............................. $ 6,562 $ 8,725 $ 12,318 $ 21,147 $ 31,274 $ 6,537 $ 10,307
Total operating expenses............. 6,660 9,939 12,022 18,924 29,943 5,904 9,250
Income (loss) from operations........ (98) (1,214) 296 2,223 1,331(2) 633 1,057(3)
Pro forma net income (loss)(4)....... (173) (957) 138 1,326 720(2) 376 600(3)
Pro forma net income (loss) per
share(5)........................... $ (.03) $ (.14) $ .02 $ .19 $ .10(2) $ .05 $ .09(3)
Weighted average common shares and
equivalents outstanding(5)......... 6,881 6,881 6,881 6,881 7,024 6,881 7,024
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(6)
--------- --------------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital........................................................................ $ 1,637 $ 22,402
Total assets........................................................................... 11,938 28,461
Total stockholders' equity............................................................. 4,581 25,196
</TABLE>
- ------------------------
(1) Prior to October 1, 1996, the Company conducted its business and operations
as the software division of Pencom. The information presented above reflects
the financial position and results of operations of the Company and its
predecessor, the software division of Pencom, and such information does not
necessarily reflect what the financial position and results of operations of
the Company would have been had the Company been operated as a separate,
stand-alone company.
(2) After deducting special compensation expense of $2,193,000 ($1,360,000 net
of estimated tax benefit of $833,000, in the case of pro forma net income
and $.19 per share in the case of pro forma net income per share)
attributable to stock-based compensation in connection with the grants of
replacement options to employees who had participated in a Pencom option
plan and compensation related to the cancellation of a note issued by an
officer of the Company to Pencom (see Note 13 of Notes to Financial
Statements).
(3) After deducting special compensation expense of $119,000 ($74,000 net of
estimated tax benefit of $45,000, in the case of pro forma net income and
$.01 per share in the case of pro forma net income per share) attributable
to stock-based compensation in connection with the grants of replacement
options to employees who had participated in a Pencom option plan (See Note
13 of Notes to Financial Statements).
(4) After deducting interest and pro forma provision for income taxes as
described in Note 15 of Notes to Financial Statements.
(5) Computed on the basis described in Note 2 of Notes to Financial Statements.
(6) Adjusted to reflect (i) the sale of 2,850,000 shares of Common Stock offered
hereby at an assumed initial offering price of $9.00 per share and the
application of the net proceeds thereof, (ii) repayment of the note payable
under the Company's credit facility, together with accrued interest, of
approximately $4,700,000 million, (iii) the recording of a net tax liability
of $1,650,000 (see Note 15 of Notes to Financial Statements), and (iv)
payment of a dividend of $1,200,000 to the Company's stockholders of record
prior to completion of this offering for taxes payable on 1997 taxable
income allocated to them, net of a tax benefit of $960,000 to the Company.
See "Capitalization," "Use of Proceeds" and Note 15 of Notes to Financial
Statements.
--------------------------
EXCEPT AS OTHERWISE SPECIFIED, (I) THE INFORMATION CONTAINED IN THIS
PROSPECTUS REFLECTS AN 11,250-FOR-1 FORWARD SPLIT OF THE COMPANY'S ISSUED AND
OUTSTANDING SHARES OF COMMON STOCK EFFECTED ON DECEMBER 18, 1996 AND AN 8-FOR-13
REVERSE SPLIT OF THE COMPANY'S ISSUED AND OUTSTANDING SHARES OF COMMON STOCK
EFFECTED ON APRIL 2, 1997 AND ASSUMES THAT THE OVER-ALLOTMENT OPTION GRANTED TO
THE UNDERWRITERS IS NOT EXERCISED, AND (II) REFERENCES TO THE "COMPANY" OR "PSW"
INCLUDE THE HISTORICAL OPERATING RESULTS AND ACTIVITIES OF, AND ASSETS AND
LIABILITIES ASSIGNED TO, THE BUSINESS AND OPERATIONS WHICH COMPRISE THE COMPANY.
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED BY THIS PROSPECTUS.
CLIENT AND INDUSTRY CONCENTRATION; DEPENDENCE ON LARGE PROJECTS. The
Company has derived, and believes that it will continue to derive, a significant
portion of its revenue from a limited number of large clients. The Company's
five largest clients in each of 1994, 1995, 1996 and the first quarter of 1997,
accounted for approximately 77%, 88%, 82% and 77%, respectively, of its revenues
in each such period. The Company's largest client, International Business
Machines Corp., together with its subsidiaries (collectively, "IBM"), accounted
for approximately 52% and 49% of its revenue in 1996 and the first quarter of
1997, respectively. The volume of work performed for specific clients is likely
to vary from year to year, and a major client in one year may not use the
Company's services in a subsequent year. The loss of, or reduction in PSW
services required by, any large client could have a material adverse effect on
the Company's business, financial condition and results of operations. Most of
the Company's contracts are terminable by the client following limited notice
and without penalty to the client. Further, the level of investment by the
Company's clients in IT projects can be adversely affected by a number of
factors, including changes or developments in the general technology landscape
and the internal budget cycles of such clients. The cancellation of a large
project or a significant reduction in the scope of any such project could have a
material adverse effect on the Company's business, financial condition and
results of operations, and in the past the cancellation of large projects has
adversely impacted the Company's earnings.
The Company has derived and believes it will continue to derive a
significant portion of its revenue from the technology vendor industry. As a
result, the Company's business, financial condition and results of operations
are influenced by economic and other conditions affecting such industry, such as
economic downturns which could lead to a reduction in spending on IT projects,
which in turn could lead to fewer new research and development outsourcing
projects being undertaken. Further, several of the Company's client contracts
limit its ability to provide services to competitors of such clients, thereby
restricting the field of potential future clients. In addition, as a result of
the dynamic nature of the technology vendor industry, the Company may lose
clients due to the acquisition, merger or consolidation of existing clients with
entities which are not current clients of the Company. The occurrence of any of
the foregoing could have a material adverse effect on the Company's business,
financial condition and results of operations.
FIXED-PRICE CONTRACTS AND OTHER PROJECT RISKS. During 1996 and the first
quarter of 1997, approximately 12% and 13%, respectively, of the Company's
revenue was generated on a fixed price, fixed-delivery-schedule ("fixed price")
basis, rather than on a time-and-materials basis. The Company's failure to
accurately estimate the resources required for a fixed price project or its
failure to complete its contractual obligations in a timely manner consistent
with the project plan upon which its fixed price contract is based could have a
material adverse effect on the Company's business, financial condition and
results of operations. In the past, the Company has found it necessary to revise
project plans after commencement of the project and commit unanticipated
additional resources to complete certain projects, which have negatively
affected the profitability of such projects. The Company may experience similar
situations in the future, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company may establish contract prices before the project design
specifications are finalized, which could result in a fixed price that proves to
be too low and therefore adversely affects the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Overview."
Many of the Company's engagements involve projects which are critical to the
operations of its clients' businesses and which provide benefits that may be
difficult to quantify. The Company's failure to meet a client's expectations in
the performance of its services could damage the Company's reputation and
adversely affect its ability to attract new business, and may have a material
adverse effect upon its business,
7
<PAGE>
financial condition and results of operations. The Company has undertaken, and
may in the future undertake, projects in which the Company guarantees
performance based upon defined operating specifications or guaranteed delivery
dates. Unsatisfactory performance or unanticipated difficulties or delays in
completing such projects may result in client dissatisfaction and a reduction in
payment to, or payment of damages by, PSW, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to limit its
liability to clients, including liability arising from the Company's failure to
meet clients' expectations in the performance of services, through contractual
provisions, insurance or otherwise.
MANAGEMENT OF GROWTH. The Company's growth has placed significant demands
on its management and other resources. For example, the Company's staff
increased from 167 full-time employees at December 31, 1994 to 400 full-time
employees at March 31, 1997, and further significant increases are expected. The
Company's ability to manage its growth effectively will require it to continue
to develop and improve its operational, financial and other internal systems, as
well as its business development capabilities, and to continue to attract,
train, retain, motivate and manage its employees. In addition, the Company's
future success will depend in large part on its ability to continue to maintain
high rates of employee utilization, set fixed price fees accurately, maintain
project quality and meet delivery dates, all as the Company seeks to increase
the number of projects in which it is engaged. If the Company is unable to
manage its growth and projects effectively, such inability would have a material
adverse effect on the quality of the Company's services, its ability to retain
key personnel and its business, financial condition and results of operations.
No assurance can be given that the Company's growth will continue to be
achieved, or if achieved, will be maintained or that the Company will be
successful in managing any such growth.
RECENT ORGANIZATION; ABSENCE OF OPERATING HISTORY AS AN INDEPENDENT
BUSINESS; LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION. Prior to
October 1996, the Company conducted its business and operations as the software
division of Pencom. Accordingly, the Company has only a limited independent
operating history upon which an evaluation of the Company and its prospects can
be based. Prior to October 1996, the Company also had limited accounting
capability and depended upon Pencom for most accounting functions. By October 1,
1996, the Company had assumed responsibility for most internal accounting
functions, but continued to depend upon Pencom for limited accounting support in
connection with the Company's year-end audit through January 31, 1997. There can
be no assurance that the Company will be successful in taking control of these
functions from Pencom. The Company has also relied upon, and will continue to
rely upon, Pencom for certain legal services and recruiting functions. See
"Certain Transactions -- Pencom Relationship." The Company's management has only
limited experience operating the Company as a stand-alone company, separate and
apart from Pencom. Except as otherwise described under the caption "Certain
Transactions -- Pencom Relationship," Pencom has no obligation to provide
financial or management assistance to the Company and has no plans to do so. The
inability of the Company to operate successfully as an entity independent from
Pencom would have a material adverse effect on the Company's business, financial
condition and results of operations.
The financial information included herein does not reflect the changes that
will occur in the funding and operations of the Company as a result of this
offering, nor does it necessarily reflect what the results of operations,
financial position and cash flows of the Company would have been had the Company
been operated as a separate, stand-alone business during the periods presented.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
VARIABILITY OF QUARTERLY OPERATING RESULTS. The Company's revenue and
operating results may fluctuate from quarter to quarter based on a number of
factors, including the number, size and scope of projects in which the Company
is engaged, the contractual terms and degree of completion of such projects, any
delays incurred in connection with a project, the Company's success in earning
bonuses or other contingent payments, employee hiring and utilization rates, the
adequacy of provisions for losses, the accuracy of
8
<PAGE>
estimates of resources required to complete ongoing projects and general
economic conditions. A high percentage of the Company's operating expenses,
particularly personnel and rent, are fixed in advance of any particular quarter.
For example, while the number of professional staff the Company employs may be
adjusted to reflect active projects, such adjustments take time and the Company
must maintain a sufficient number of senior professionals to oversee existing
client engagements and to focus on securing new client engagements. As a result,
unanticipated variations in the number or progress toward completion of the
Company's projects or in employee utilization rates may cause significant
variations in operating results in any particular quarter and could result in
adverse changes to the Company's business, financial condition and results of
operations. Any shortfall in revenue or earnings from expected levels or other
failures to meet expectations of securities analysts or the market in general
regarding results of operations could have an immediate and material adverse
effect on the market price of the Company's Common Stock. Given the possibility
of such quarterly fluctuations in revenue or earnings, the Company believes that
comparisons of its quarterly results of operations are not necessarily
meaningful and that such results for one quarter should not be relied upon as an
indication of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Results."
NEED TO ATTRACT AND RETAIN PROFESSIONAL STAFF. The Company's success will
depend in large part upon its ability to attract, train, retain, motivate and
manage highly skilled employees, particularly project managers and other senior
technical personnel. Significant competition exists for employees with the
skills required to perform the services offered by the Company, and the Company
requires that a significant number of such employees travel to client sites to
perform services on its behalf, which may make a position with the Company less
attractive to potential employees. Qualified project managers, software
architects and senior technical and professional staff are in great demand
worldwide and are likely to remain a limited resource for the foreseeable
future. Furthermore, there is a high rate of attrition among such personnel.
There can be no assurance that a sufficient number of highly skilled employees
will continue to be available to the Company, that potential employees will be
willing to travel to client sites, or that the Company will be successful in
training, retaining and motivating current or future employees. The Company's
inability to attract, train and retain skilled employees or the Company's
employees' inability to achieve expected levels of performance could impair the
Company's ability to adequately manage and staff its existing projects and to
bid for or obtain new projects, which in turn would have a material adverse
effect on the Company's business, financial condition and results of operations.
RAPID TECHNOLOGICAL ADVANCES; RISK OF TARGETING EMERGING TECHNOLOGIES. The
Company has derived, and will continue to derive, a substantial portion of its
revenue from projects based on client/server systems. The client/server systems
market is continuing to develop and is subject to rapid technological change.
The Company's future success will also depend in part on its ability to develop
IT solutions which keep pace with continuing changes in information processing
technology, evolving industry standards and changing client preferences. There
can be no assurance that the Company will be successful in addressing these
developments in a timely manner or that if addressed, the Company will be
successful in the marketplace. The Company's delay or failure to address these
developments could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that products or technologies developed, or services offered, by third
parties will not render the Company's services noncompetitive or obsolete. The
Company's Software Technology Unit also seeks to identify emerging technologies
which it believes will develop into critical technologies with broad application
and longevity. Once identified, the Company may commit substantial resources to
provide services to the developers of such technologies. No assurance can be
given that the technologies identified by the Company will develop into critical
technologies with broad application and longevity. The failure of the Company to
align itself with such critical emerging technologies would have a material
adverse affect on its business, financial condition and results of operations.
See "Business -- Industry Background" and "-- PSW's Strategy."
9
<PAGE>
CONTROL BY SHAREHOLDERS OF PENCOM; POTENTIAL CONFLICTS OF
INTEREST. Immediately following this offering, the current shareholders of
Pencom will own approximately 59% of the outstanding shares of Common Stock (56%
if the Underwriters' over-allotment option is exercised in full). In addition,
as of March 31, 1997, the shareholders of Pencom collectively held warrants to
purchase 200,016 shares of Common Stock of the Company at an exercise price of
$0.04 per share (in excess of 2% of the outstanding Common Stock after giving
effect to the sale of the shares of Common Stock offered hereby). As a result,
the current shareholders of Pencom will retain the voting power required to
elect all directors and otherwise control the management and affairs of the
Company, including any determinations with respect to acquisitions,
dispositions, borrowings, issuances of Common Stock or other securities or the
declaration and payment of any dividends on the Common Stock. This concentration
of ownership and voting control may have the effect of delaying or preventing a
change in control of the Company, or causing a change in control of the Company
that may not be favored by the Company's other stockholders. There can be no
assurance that such ability to prevent or cause a change in control of the
Company will not have a material adverse effect on the price of the Common
Stock. See "Principal Stockholders" and "Description of Capital Stock." There
can be no assurance that conflicts of interest between Pencom and the Company
will not arise in a number of areas relating to their past and ongoing
relationships, or that any such conflict of interest will be resolved in a
manner favorable to the Company, including potential competitive business
activities, indemnity arrangements, registration rights, sales or distributions
by the shareholders of Pencom of their shares of Common Stock and the exercise
by the shareholders of Pencom of their ability to control the management and
affairs of the Company. Any adverse change in the Company's relationship with
Pencom or with the Company's existing stockholders could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Certain Transactions -- Pencom Relationship."
The Company and Pencom have entered into a number of agreements for the
purpose of defining certain relationships between them. The Company and Pencom
may also enter into material transactions and agreements in the future. As a
result of the ownership interest in the Company of Pencom's shareholders, the
terms of such agreements were not, and the terms of any future amendments to
those agreements or future agreements may not be, the result of arm's-length
negotiations. In evaluating the terms of any material transactions between the
Company and Pencom or its affiliates, the Company's Board of Directors will
utilize such procedures as it deems appropriate in light of its fiduciary duties
under Delaware law. Three of the seven directors of the Company are also
directors of Pencom. Directors of the Company who are also directors of Pencom
will have conflicts of interest with respect to matters involving or affecting
the Company and Pencom, such as acquisitions, financings and other corporate
opportunities that may be suitable for both the Company and Pencom. There are no
contractual or other restrictions on Pencom's ability to compete with the
Company. Accordingly, circumstances could arise in which Pencom would engage in
activities in competition with the Company. There can be no assurance that such
conflicts or competition will be resolved in favor of the Company. In addition,
there can be no assurance that potential clients and vendors will not be
deterred by the existence of these relationships or by the historical ties
between the Company and Pencom. See "Certain Transactions -- Pencom
Relationship."
COMPETITION. The markets for the Company's services are highly competitive.
The Company believes that it currently competes principally with the internal
information systems and development groups of its prospective clients, as well
as with consulting and software integration firms and other hardware and
application software vendors. In addition, there are a number of systems
integrators who serve similar markets or provide similar services with whom the
Company competes or may compete in the future. Many of these companies have
significantly greater financial, technical and marketing resources than the
Company, generate greater revenues and have greater name recognition than the
Company. There are relatively low barriers to entry into the Company's markets
and the Company has faced, and expects to continue to face, additional
competition from new entrants into its markets.
10
<PAGE>
The Company believes that the principal competitive factors in its markets
include reputation, project management expertise, industry expertise, speed of
development and implementation, technical expertise and the ability to deliver
on a fixed price as well as a time-and-materials basis. The Company believes
that its ability to compete also depends in part on a number of competitive
factors outside of its control, including the ability of its clients or
competitors to hire, retain and motivate project managers and other senior
technical staff; the ownership by competitors of software used by potential
clients; the development by others of products and services that are competitive
with the Company's services; the price at which others offer comparable
services; the ability of its clients to perform the services themselves; and the
extent of its competitors' responsiveness to client needs. There can be no
assurance that the Company will be able to compete effectively on pricing or
other requirements with current and future competitors or that competitive
pressures faced by the Company will not cause the Company's revenue or income to
decline or otherwise materially adversely affect its business, financial
condition and results of operations. The Company has entered into employment
agreements with each of its executive officers. These agreements contain
provisions which, among others, prohibit the employee from disclosing or
otherwise using certain confidential information, assign to the Company
inventions or ideas conceived by the employee during his employment, prohibit
solicitation by the employee of clients and other employees of the Company and
prohibit the employee from accepting any opportunity (whether by contract or
full-time employment) with the Company's clients. Furthermore, the Company's
employment agreement with Dr. W. Frank King, the Company's President and Chief
Executive Officer, contains provisions, which for a period of two years,
restrict Dr. King's ability to provide services to, or solicit the business of,
the Company's clients and prospective clients. There can be no assurance that
any of the foregoing measures will provide the Company with adequate protection.
See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL. The Company's future success will depend in
part upon the continued services of a number of key management employees,
particularly Dr. W. Frank King, Patrick D. Motola, Brian E. Baisley and William
C. Cason, and a number of key technical employees. The loss of the services of
any of the Company's key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company's credit facility prohibits material changes in management. The
Company does not maintain key-person life insurance on any of its employees. In
addition, if one or more of the Company's key employees resigns from the Company
to join a competitor or to form a competing company, any resulting loss of
existing or potential clients to any such competitor could have a material
adverse effect on the Company's business, financial condition and results of
operations. In the event of the loss of any such personnel, there can be no
assurance that the Company would be able to prevent the unauthorized disclosure
or use of its technical knowledge, practices or procedures by such personnel.
SYSTEM INTERRUPTION AND SECURITY RISKS; POTENTIAL LIABILITY AND LACK OF
INSURANCE. The Company's operations are dependent on its ability to protect its
intranet from interruption by damage from telecommunications failure, fire,
earthquake, power loss, unauthorized entry or other events beyond the Company's
control. Most of the Company's computer equipment, including its processing
equipment, is currently located at a single site. There can be no assurance that
unanticipated problems will not cause any significant system outage or data
loss. Despite the implementation of security measures, the Company's
infrastructure may also be vulnerable to computer viruses, hackers or similar
disruptive problems caused by Internet users. Persistent problems continue to
affect public and private data networks. For example, it is common for Internet
service providers to experience system interruptions which cause the Company to
lose access to the Internet, the means by which the Company posts internal
information and provides e-mail and time sheet query and entry. Any damage or
failure that causes interruptions in the Company's operations could have a
material adverse effect on the Company's business, financial condition or
results of operations.
INTELLECTUAL PROPERTY RIGHTS. The Company's future success is dependent in
part upon the maintenance and protection of its intellectual property rights
and, to a lesser extent, upon its ability to license
11
<PAGE>
technology from its clients. The Company relies on a combination of copyrights,
trade secrets and trademarks to protect its intellectual property. There can be
no assurance that the steps taken by the Company to protect its intellectual
property rights will be adequate, that competitors will not be able to develop
similar or functionally equivalent methodologies or products or that the Company
will be able to license technology from its clients in the future. Furthermore,
effective copyright and trade secret protection may be unavailable or limited in
certain foreign countries, and no assurance can be given that foreign copyright
and trade secret laws will adequately protect the Company's intellectual
property rights. Litigation may be necessary to enforce the Company's
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the intellectual property rights of others,
including the Company's clients, or to defend against claims of infringement.
Such litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations. No assurance can be given that infringement
or invalidity claims (or claims for indemnification resulting from infringement
claims against third parties, such as clients) will not be asserted against the
Company or that any such assertions would not have a material adverse effect on
the Company's business, financial condition or results of operations. If
infringement or invalidity claims are asserted against the Company or any of its
licensees, litigation may be necessary to defend the Company or such licensees
against such claims, and in certain circumstances, the Company may choose to
seek to obtain a license under the third party's intellectual property rights.
There can be no assurance that such licenses will be available on terms
acceptable to the Company, if at all. See "Business -- Intellectual Property
Rights."
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE. Prior to this
offering, there has been no public market for the Company's Common Stock.
Although application has been made to list the Company's Common Stock for
quotation on Nasdaq, no assurance can be given that an active public market for
the Common Stock will develop or be sustained after this offering or that the
market price of the Common Stock will not decline below the initial public
offering price. The initial public offering price will be determined by
negotiation among the Company and representatives of the Underwriters. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
The market for securities of early-stage companies has been highly volatile
in recent years as a result of factors often unrelated to a company's
operations. In addition, the Company believes factors such as quarterly
variations in operating results, announcements of technological innovations or
new products or services by the Company or its competitors, general conditions
in the IT industry or the industries in which PSW's clients compete and changes
in earnings estimates by securities analysts, could contribute to the volatility
of the price of the Company's Common Stock. These factors, as well as general
economic conditions such as recessions or changes in interest rates, could
adversely affect the market price of the Common Stock. Furthermore, in the past,
following periods of volatility in the market price of a company's securities,
securities class action claims have been brought against the issuing company.
There can be no assurance that such litigation will not occur in the future with
respect to the Company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, and any adverse determination
in such litigation could also subject the Company to significant liabilities,
all of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of this offering, the
Company will have outstanding 8,396,463 shares of Common Stock (not including
shares issuable upon exercise of outstanding stock options and warrants). The
2,850,000 shares offered hereby will be eligible for immediate sale in the
public market without restriction. All of the shares of Common Stock currently
outstanding are "restricted securities" as defined in Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"). Of such shares,
5,538,463 and 8,000 shares will become eligible for sale upon the expiration of
certain holding periods under Rule 144, subject to certain restrictions,
beginning in October 1997 and January 1998, respectively. Following completion
of this offering, the Company intends to register under the Securities
12
<PAGE>
Act an aggregate of 2,115,000 shares of Common Stock reserved for issuance under
the Company's employee benefit plans, which shares will then be freely tradeable
upon issuance. Finally, beginning 180 days after the completion of this
offering, the holders of an aggregate of 5,546,463 shares of Common Stock and
warrants to purchase an additional 507,654 shares of Common Stock have the right
to require the Company to register such shares under the Securities Act for sale
to the public. Sales of substantial amounts of Common Stock in the public
market, or the perception that such sales may occur, could adversely affect the
prevailing market price of the Common Stock or the ability of the Company to
raise capital through a public offering of its equity securities. See
"Description of Capital Stock -- Registration Rights," "Shares Eligible for
Future Sale" and "Underwriting."
DISCRETION AS TO USE OF PROCEEDS. The Company has not yet identified
specific uses of a significant portion of the net proceeds from this offering.
The Company's management will retain broad discretion to allocate the net
proceeds from this offering to uses that the stockholders may not deem
desirable, and there can be no assurance that the proceeds can or will yield a
significant return. It is currently anticipated that the net proceeds will be
used for the repayment of indebtedness, the payment of certain income tax
obligations, and for working capital and other general corporate purposes. See
"Use of Proceeds."
EFFECT OF CERTAIN ANTITAKEOVER PROVISIONS. The Company's Board of Directors
has the authority to issue shares of Preferred Stock and to determine the
designations, preferences and rights and the qualifications or restrictions of
those shares without any further vote or action by the stockholders. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. In addition, the Company will, upon consummation of this
offering, be subject to the antitakeover provisions of Section 203 of the
Delaware General Corporation Law (the "DGCL"). In general, this statute
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
Furthermore, certain other provisions of the Company's Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws may have the effect
of discouraging, delaying or preventing a merger, tender offer or proxy contest,
which could adversely affect the market price of the Company's Common Stock. See
"Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock offered
hereby will suffer an immediate and substantial dilution of the net tangible
book value per share of the Common Stock of $6.00 from the initial offering
price. See "Dilution."
DIVIDEND POLICY. Upon completion of this offering, the Company's status as
a Subchapter S corporation will terminate and the Company will change its method
of tax accounting from the cash to the accrual method. Subsequent to completion
of this offering, the Company will pay a cash dividend to its stockholders of
record immediately prior to completion of this offering in an amount estimated
to approximate the 1997 income tax that such stockholders will be required to
pay on the 1997 taxable income allocated to them. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Net Charge
Resulting from S Corporation Termination." Thereafter, the Company currently
intends to retain any earnings for the operation and expansion of the Company's
business and does not anticipate paying any cash dividends in the foreseeable
future. In addition, upon completion of this offering, the Company's credit
facility will prohibit the payment of any other cash dividends. Any future
determination to pay cash dividends on the Common Stock will be at the sole
discretion of the Board of Directors and will depend upon the Company's
earnings, financial condition, cash requirements, future prospects, contractual
restrictions and other factors deemed relevant by the Board of Directors.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,850,000 shares of
Common Stock offered hereby are estimated to be approximately $22.5 million
($26.1 million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $9.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses. The
Company intends to use a portion of the net proceeds of this offering as
follows: (i) to repay the principal amount, together with accrued interest, of
approximately $5.0 million outstanding under the Company's credit facility, as
amended (the "Credit Facility"), with Texas Commerce Bank National Association,
a subsidiary of The Chase Manhattan Corporation ("TCB"), (ii) to pay an income
tax obligation which will be incurred in connection with the conversion of the
Company from a cash basis to an accrual basis method of tax accounting upon
completion of this offering, currently estimated to be approximately $2.2
million, which amount will be payable by the Company over a period of two years
and (iii) to pay a cash dividend to its existing stockholders currently
estimated to be approximately $1.2 million in respect of their estimated 1997
income tax obligations as described in Note 15 of Notes to Financial Statements.
The Credit Facility expires on November 8, 1997, and loans thereunder bore
interest at a rate of 8.5% at March 31, 1997. The outstanding principal amount
of the Credit Facility at March 31, 1997 was approximately $4.7 million. The
proceeds of the Credit Facility were short term borrowings used for working
capital. Amounts repaid under the Credit Facility may be reborrowed by the
Company from time to time. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The remainder of the net proceeds of this offering will be used for
working capital and other general corporate purposes. The Company may also use a
portion of the net proceeds to fund acquisitions of complementary businesses or
technologies, although no such transaction is currently contemplated.
Pending such uses of the net proceeds, the Company intends to invest such
funds in interest-bearing investment grade securities, certificates of deposit
or obligations issued or guaranteed by the United States government.
DIVIDEND POLICY
After completion of this offering, the Company currently intends to retain
any earnings for the operation and expansion of the Company's business and does
not anticipate paying any cash dividends in the foreseeable future, other than
the cash dividend to its existing stockholders described under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Net Charge Resulting from S Corporation Termination." In addition,
after completion of this offering, the Credit Facility will prohibit the payment
of any other cash dividends. Any future determination to pay cash dividends on
the Common Stock will be at the sole discretion of the Board of Directors and
will depend upon the Company's earnings, financial condition, cash requirements,
future prospects, contractual restrictions and other factors deemed relevant by
the Board of Directors.
14
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1997, the capitalization of
the Company (i) on an actual basis, (ii) on a pro forma basis giving effect to
the items set forth in footnotes (1) and (2) to the table and (iii) on a pro
forma as adjusted basis to give effect to the Company's Amended and Restated
Certificate of Incorporation which will be filed prior to completion of this
offering and to the sale of 2,850,000 shares of Common Stock offered hereby at
an assumed initial public offering price of $9.00 per share, and application of
the estimated net proceeds therefrom as described in footnote (3) to the table.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA(1)(2) AS ADJUSTED(3)
--------- --------------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable to bank.................................................. $ 4,650 $ 3,854 $ --
Dividend payable to stockholders...................................... -- 1,200 --
Stockholders' equity:
Preferred Stock, $.01 par value; none authorized, actual and pro
forma, 1,000,000 authorized, pro forma as adjusted; none issued
and outstanding................................................... -- -- --
Common Stock, $.01 par value; 11,250,000 shares authorized, actual
and pro forma, 34,000,000 shares authorized, pro forma as
adjusted; 5,546,463 shares issued and outstanding, actual and pro
forma, and 8,396,463 shares issued and outstanding, pro forma as
adjusted(4)....................................................... 55 55 84
Additional paid-in capital............................................ 4,237 3,848 26,324
Deferred compensation................................................. (522) (522) (522)
Retained earnings (accumulated deficit)............................... 811 (690) (690)
--------- ------- -------
Total stockholders' equity.......................................... 4,581 2,691 25,196
--------- ------- -------
Total capitalization............................................ $ 9,231 $ 7,745 $ 25,196
--------- ------- -------
--------- ------- -------
</TABLE>
- ------------------------
(1) Adjusted to reflect (i) use of cash at March 31, 1997 of $796,000 to repay a
portion of the note payable to bank, (ii) the elimination of retained
earnings against additional paid-in capital, and (iii) the effect of a
nonrecurring tax charge of $1,650,000 (see Note 15 of Notes to Financial
Statements).
(2) Adjusted to reflect the accrual of a dividend to the stockholders of record
prior to this offering for taxes payable on 1997 taxable income allocated to
them. Such amount has been currently estimated to be approximately
$1,200,000. However, the actual amount will vary and will depend upon the
Company's 1997 results of operations and the timing of this offering (see
Note 15 of Notes to Financial Statements). If the taxes payable by the
stockholders on 1997 taxable income allocated to them are equal to the
currently estimated $1,200,000, actual income tax payable by the Company due
to the conversion from an S corporation would be reduced by approximately
$960,000.
(3) Adjusted to reflect the (i) issuance of 2,850,000 shares at an assumed
initial public offering price of $9.00 per share and the receipt of the
estimated net proceeds therefrom, (ii) repayment of the remaining balance of
the note payable to bank of $3,854,000, and (iii) payment of the dividend to
the stockholders of $1,200,000.
(4) Excludes 1,196,710 shares of Common Stock issuable upon the exercise of
stock options outstanding as of March 31, 1997, at a weighted average
exercise price of $2.77 per share, and warrants to purchase 507,654 shares
of Common Stock at $.04 per share.
15
<PAGE>
DILUTION
As of March 31, 1997, after giving pro forma effect to (i) the effect of a
nonrecurring tax charge to the Company of $1,650,000 and (ii) the accrual of a
dividend, currently estimated to be approximately $1,200,000, payable to the
stockholders of record prior to this offering for taxes payable on 1997 taxable
income allocated to them (see Note 15 of Notes to Financial Statements), the pro
forma net tangible book value of the Company was approximately $2.6 million, or
$.46 per share of Common Stock. Pro forma net tangible book value dilution per
share represents the difference between the amount per share paid by purchasers
of shares of Common Stock in this offering and the pro forma tangible book value
per share immediately after completion of this offering. Net tangible book value
is defined as total assets less intangible assets (deferred offering costs) and
total liabilities. After giving effect to the sale of the 2,850,000 shares of
Common Stock offered hereby (at an assumed initial offering price of $9.00 per
share and after deducting underwriting discounts and commissions and estimated
offering expenses), the adjusted pro forma net tangible book value of the
Company as of March 31, 1997 would have been $25.2 million, or $3.00 per share,
representing an immediate increase in pro forma net tangible book value of $2.54
per share to existing stockholders and immediate dilution of $6.00 per share to
new investors purchasing shares in this offering. The following table
illustrates the per share dilution with respect to the shares offered hereby:
<TABLE>
<S> <C> <C>
Assumed public offering price per share...................... $ 9.00
Pro forma net tangible book value per share prior to this
offering................................................. $ .46
Increase per share attributable to new investors........... 2.54
---------
Adjusted pro forma net tangible book value per share after
this offering.............................................. 3.00
---------
Dilution per share to new investors.......................... $ 6.00
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1997,
the number of shares of Common Stock issued by the Company, the total
consideration paid, and the average price per share paid by existing
stockholders and by new investors in this offering (at an assumed initial public
offering price of $9.00 per share).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................ 5,546,463 66.1% $ 2,006,000(1) 7.3% $ .36
New investors.................................... 2,850,000 33.9 25,650,000 92.7 $ 9.00
---------- ----- ------------- -----
Total...................................... 8,396,463 100.0% $ 27,656,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
The foregoing is based on the number of shares outstanding at March 31,
1997, and excludes an aggregate of 1,196,710 shares issuable upon the exercise
of options outstanding as of March 31, 1997 with a weighted average exercise
price of $2.77 per share, of which options to purchase 393,820 shares of Common
Stock were exercisable as of such date, and warrants to purchase 507,654 shares
of Common Stock at $.04 per share. Additional dilution will occur upon the
exercise of outstanding options and warrants. As of March 31, 1997, options to
purchase an additional 518,290 shares of Common Stock were available for
issuance under the Company's stock option plan. See "Management -- 1996 Stock
Option/ Stock Issuance Plan."
- ------------------------
(1) Represents net book value of assets contributed by Pencom allocated to
5,538,463 shares of Common Stock plus the consideration received for the
8,000 shares issued pursuant to a Stock Purchase Agreement dated as of
January 1, 1997.
16
<PAGE>
SELECTED FINANCIAL DATA
PSW commenced operations as a corporation effective October 1, 1996. Prior
to that date, the Company conducted its business and operations as the software
division of Pencom. The selected financial data presented below have been
derived from the financial statements of the Company and its predecessor and
include the portion of a software contract that had previously been allocated to
Pencom. The financial statements of the Company's predecessor as of December 31,
1992, 1993 and 1994 and for each of the three years in the period ended December
31, 1994 have been audited by Margolin, Winer & Evens LLP, independent
accountants, and the financial statements of the Company and its predecessor as
of December 31, 1995 and 1996 and for the years then ended have been audited by
Ernst & Young LLP, independent auditors. The selected data presented below at
March 31, 1997 and for the three months ended March 31, 1996 and 1997 have been
derived from, and are qualified by reference to, the Company's unaudited
financial statements also appearing herein and which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results of the unaudited
period. The information presented below reflects the financial condition and
results of operations of the Company and its predecessor, and does not
necessarily reflect what the financial position and results of operations of the
Company would have been had the Company been operated as a separate, stand-alone
company for the periods presented prior to October 1, 1996. Operating results
for the three months ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 1997. The
following should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------ -------
<CAPTION>
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenue........................................................ $ 6,562 $ 8,725 $12,318 $21,147 $31,274 $6,537 $10,307
Operating expenses:
Technical staff.............................................. 4,003 6,167 7,385 11,193 16,444 3,556 5,284
Selling and administrative staff............................. 1,211 1,873 2,320 3,755 5,622 1,171 1,886
Other expenses............................................... 1,446 1,899 2,317 3,976 5,684 1,177 1,961
Special compensation expense(1).............................. -- -- -- -- 2,193 -- 119
------- ------- ------- ------- ------- ------ -------
Total operating expenses................................... 6,660 9,939 12,022 18,924 29,943 5,904 9,250
------- ------- ------- ------- ------- ------ -------
Income (loss) from operations.................................. (98) (1,214) 296 2,223 1,331 633 1,057
Interest expense............................................... 181 329 74 84 170 27 89
------- ------- ------- ------- ------- ------ -------
Net income (loss).............................................. $ (279) $(1,543) $ 222 $ 2,139 $ 1,161 $ 606 $ 968
------- ------- ------- ------- ------- ------ -------
------- ------- ------- ------- ------- ------ -------
Unaudited pro forma information:
Historical income (loss) before provision for income taxes... (279) (1,543) 222 2,139 1,161 606 968
Pro forma provision (benefit) for income taxes(2)............ (106) (586) 84 813 441 230 368
------- ------- ------- ------- ------- ------ -------
Pro forma net income (loss).................................. $ (173) $ (957) $ 138 $ 1,326 $ 720 $ 376 $ 600
------- ------- ------- ------- ------- ------ -------
------- ------- ------- ------- ------- ------ -------
Pro forma net income per share(3)............................ $ (.03) $ (.14) $ .02 $ .19 $ .10 $ .05 $ .09
------- ------- ------- ------- ------- ------ -------
------- ------- ------- ------- ------- ------ -------
Weighted average common shares and equivalents
outstanding(3)............................................... 6,881 6,881 6,881 6,881 7,024 6,881 7,024
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................................... $ 990 $ 1,526 $ 1,933 $ 2,756 $ 1,648
Total assets............................................................. 1,660 2,533 3,538 4,982 11,943
Total stockholders' equity............................................... 1,544 2,302 2,675 3,684 3,444
<CAPTION>
MARCH 31,
-----------
1997
-----------
<S> <C>
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Working capital.......................................................... $ 1,637
Total assets............................................................. 11,398
Total stockholders' equity............................................... 4,581
</TABLE>
- ------------------------
(1) See Note 13 of Notes to Financial Statements for an explanation of special
compensation expense.
(2) Computed on the basis described in Notes 12 and 15 of Notes to Financial
Statements.
(3) Computed on the basis described in Note 2 of Notes to Financial Statements.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS
AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH
STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS
FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH UNDER THE
CAPTION "RISK FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
OVERVIEW
PSW Technologies, Inc. is a software services firm that provides high value
solutions to technology vendors and business end-users by mastering and applying
critical emerging technologies. These critical technologies include distributed
computing, object-oriented development, advanced operating systems and systems
management technologies. Technology vendors primarily consist of software
companies who utilize the Company's services to help bring their products to
market faster. Business end-users generally utilize the Company's services to
help define, develop and complete high value, mission critical enterprise
software systems for internal use.
The Company was founded as a separate division of Pencom in 1989 to take
advantage of the large number of subcontractors placed by Pencom with IBM's AIX
organization in Austin, Texas. As these subcontractors completed their
assignments, the most talented were recruited to become part of the permanent
technical staff of the Company. The Company's mission was to seek project
oriented assignments to complement Pencom's existing recruiting and staff
supplementation business.
Dr. W. Frank King was hired in 1992 as the President of the Company to
continue its growth, establish profitability and develop the infrastructure that
would eventually enable it to operate as a separate company. In addition, in
1993, Dr. King focused resources to provide application development services to
address the needs of business end-users.
The Company established a formal sales function in 1994, and began the
GENOVA initiative with an emphasis on the business development methodology. The
Company first became profitable in 1994. In 1995, the Company improved
profitability and initiated its own recruiting function independent of Pencom.
At the end of 1995, the Company organized into its current business unit
structure to provide for more emphasis on each of the two markets served by the
Company.
In 1996, the Company continued its growth and profitability (before special
compensation expense), formalized the GENOVA initiative, completed the licensing
of the GENOVA OBJECT LIBRARIES and established the GENOVA ACADEMY training. On
October 1, 1996, the Company was formed as PSW Technologies, Inc., at which time
the Company assumed responsibility for its own accounting and finance operations
but continued to depend upon Pencom for limited accounting support in connection
with the Company's year-end audit through January 31, 1997.
To date, revenue has been generated principally from time-and-materials
contracts for the Company's software services. Revenue from time-and-materials
contracts is recognized during the period in which the services are provided.
The Company also enters into fixed price contracts for its software services.
Revenue from fixed price contracts is recognized using the
percentage-of-completion method over the term of the client contract, measured
by the labor incurred as a percentage of the estimated total labor used at
completion. Fixed price contract revenue represented approximately 12% and 13%
of the Company's revenue in 1996 and the first quarter of 1997, respectively.
The cumulative impact of revisions in percentage of completion estimates is
reflected in the period in which the revisions are made. Provisions
18
<PAGE>
for estimated losses on uncompleted contracts are made on a contract by contract
basis and are recognized in the period in which such losses are determined.
There can be no assurance of the accuracy of the Company's future work
completion estimates, and operating results may be adversely affected by
inaccurate estimates of contract related labor.
The Company has derived, and believes it will continue to derive, a
significant portion of its revenue from a limited number of large clients. One
client, IBM, accounted for 52% and 49% of revenue in 1996 and the first quarter
of 1997, respectively. The Company's relationship with IBM includes engagements
with IBM Kirkland, IBM Austin, Tivoli Systems, Inc. ("Tivoli") and Lotus
Development Corporation ("Lotus"). The technologies involved in these
engagements include Windows 95, Windows NT, AIX, system management software and
Lotus Notes workgroup software. None of these engagements accounted for more
than 20% of the Company's revenue in 1996 or the first quarter of 1997.
The information presented herein reflects the financial position, results of
operations and cash flows of the Company and its predecessor, the software
division of Pencom, and such information does not necessarily reflect what the
financial position, results of operations and cash flows of the Company would
have been had the Company been operated as a separate, stand-alone business for
the periods presented prior to October 1, 1996.
NET CHARGE RESULTING FROM S CORPORATION TERMINATION
Since its commencement of operations on October 1, 1996, the Company has
elected to operate as an S corporation under Subchapter S of the Code. As such,
the Company's taxable income was included in the individual income tax returns
of its stockholders (with certain exceptions under state and local income tax
laws). Upon completion of this offering, the S status will terminate and the
Company will be subject to corporate income taxes. Additionally, upon completion
of this offering, the Company will be required to change its method of tax
accounting from the cash to the accrual method. The current and deferred tax
effect of these changes will be recorded at the time this offering is completed.
The Company's 1997 taxable income, including the effect of the change in the
method of accounting, will be allocated between the S corporation period and the
subsequent period based upon the number of days in each period. The Company will
be obligated to pay the income taxes related to the taxable income allocated to
the subsequent period and will pay a dividend to the S corporation stockholders
in an amount estimated to approximate the tax that the S corporation
stockholders will be required to pay on the 1997 taxable income allocated to
them. The actual charge to earnings and the dividend to the S corporation
stockholders will be based upon the Company's results of operations in 1997 and
the amount of the 1997 taxable income allocated to the S corporation
stockholders (see Note 15 of Notes to Financial Statements).
SPECIAL COMPENSATION EXPENSE
Special compensation expense in 1996 consisted of stock-based compensation
in connection with the grants of replacement options to the Company's employees
who participated in the Pencom stock option plan and compensation related to the
cancellation of a note issued by an officer of the Company to Pencom, which, in
the aggregate, totaled $2.2 million. Special compensation expense in the first
quarter of 1997 consisted of stock-based compensation in connection with grants
of replacement options to the Company's employees who participated in the Pencom
stock option plan (See Note 8 of Notes to Financial Statement), which, in the
aggregate, totaled $119,000. See Notes 8, 10 and 13 of Notes to Financial
Statements.
PRO FORMA INCOME TAXES
Pro forma income taxes reflect the estimated corporate income tax expense
that the Company would have recognized had it not elected S corporation status
(see Note 15 of Notes to Financial Statements).
19
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenue of certain items
included in the Company's statements of income for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue................................................. 100% 100% 100% 100% 100%
Operating expenses:
Technical staff....................................... 60 53 53 54 52
Selling and administrative staff...................... 19 18 18 18 18
Other expenses........................................ 19 19 18 18 19
Special compensation expense.......................... -- -- 7 -- 1
--- --- --- --- ---
Total operating expenses.......................... 98 90 96 90 90
--- --- --- --- ---
Income from operations.................................. 2 10 4 10 10
Pro forma provision for income taxes.................... 1 4 1 4 4
--- --- --- --- ---
Pro forma net income.................................... 1% 6% 2% 6% 6%
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
FIRST QUARTER OF 1997 COMPARED TO FIRST QUARTER OF 1996
REVENUE
Revenue consists primarily of fees for software services provided. Revenue
was $10.3 million in the first quarter of 1997, an increase of 58% over 1996
first quarter revenue of $6.5 million, principally due to increases in the scope
and number of client projects. Revenue attributable to software services
rendered to technology vendors was $6.3 million and $4.5 million in the first
quarter of 1997 and the first quarter of 1996, respectively, an increase of 40%
in the first quarter of 1997 over the first quarter of 1996. Revenue
attributable to software services rendered to business end-users was $4.0
million and $2.0 million in the first quarter of 1997 and the first quarter of
1996, respectively, an increase of 100% in the first quarter of 1997 over the
first quarter of 1996.
Two customers, including their wholly-owned subsidiaries, accounted for 58%
and 78% of revenue in each of the first quarters of 1997 and 1996, respectively.
No other customer accounted for more than 10% of revenue for those periods.
TECHNICAL STAFF
Technical staff expenses consist of the cost of salaries, payroll taxes,
health insurance and workers' compensation for technical staff personnel
assigned to client projects and unassigned technical staff personnel, and fees
paid to any subcontractors for work performed in connection with a client
project. Technical staff expenses were $5.3 million in the first quarter of
1997, an increase of 49% over 1996 first quarter technical staff expenses of
$3.6 million. The increase in technical staff expenses was primarily due to the
addition of personnel necessary to service growth in the number and size of
customer projects. Technical staff expenses declined to 52% of revenue in the
first quarter of 1997 from 54% in the first quarter of 1996 primarily as a
result of improved pricing and utilization of the technical staff.
SELLING AND ADMINISTRATIVE STAFF
Selling and administrative staff expenses consist of the cost of salaries,
payroll taxes, health insurance and workers' compensation for selling and
administrative personnel, all commissions and bonuses, and the expense of
technical staff personnel assigned to development projects or performing
selling, recruiting or training related tasks. Selling and administrative staff
expenses were $1.9 million in the first quarter of
20
<PAGE>
1997, an increase of 61% from $1.2 million in the first quarter of 1996. The
increase in selling and administrative staff expenses was primarily due to the
addition of personnel necessary to support the Company's growth. Selling and
administrative staff expenses were 18% of revenue in each of the first quarters
of 1997 and 1996.
OTHER EXPENSES
Other expenses consist of all non-staff related costs, such as occupancy
costs, travel, business insurance, business development, recruiting, training
and depreciation. Other expenses were $2.0 million in the first quarter of 1997,
an increase of 67% over other expenses of $1.2 million in the first quarter of
1996. Other expenses increased to 19% of revenue in the first quarter of 1997
from 18% of revenue in the first quarter of 1996 primarily as a result of
non-recurring expenses in connection with the relocation of the Company's
Austin, Texas office, including broker fees, concurrent rents and moving costs.
SPECIAL COMPENSATION EXPENSE
Special compensation expense in the first quarter of 1997 consisted of
stock-based compensation, which, in the aggregate, totaled $119,000 or 1% of
revenue. (See Notes 8 and 13 of Notes to Financial Statements.)
INCOME FROM OPERATIONS
Income from operations increased to $1.1 million in the first quarter of
1997, up 67% from 1996 first quarter income from operations of $633,000. Income
from operations was 10% of revenue in each of the first quarters of 1997 and
1996. If income from operations in the first quarter of 1997 was adjusted to
exclude the special compensation expense referred to above, such income from
operations would have increased by 86% compared with the first quarter of 1996,
and would have represented 11% of revenue.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE
Revenue was $31.3 million in 1996, an increase of 48% over 1995 revenue of
$21.1 million, principally due to increases in the scope and number of client
projects. Revenue attributable to software services rendered to technology
vendors was $20.4 million and $14.0 million in 1996 and 1995, respectively, an
increase of 45% in 1996 compared to 1995. Revenue attributable to software
services rendered to business end-users was $10.9 million and $7.1 million in
1996 and 1995, respectively, an increase of 54% in 1996 compared to 1995.
Two clients, including their subsidiaries, accounted for 66% and 76% of
revenue in 1996 and 1995, respectively. No other client accounted for more than
10% of revenue in 1996 or 1995.
TECHNICAL STAFF
Technical staff expenses were $16.4 million in 1996, an increase of 47% over
1995 technical staff expenses of $11.2 million. The increase in technical staff
expenses was primarily due to the addition of personnel necessary to service
growth in the number and size of client projects. Technical staff expenses were
53% of revenue in both 1996 and 1995.
SELLING AND ADMINISTRATIVE STAFF
Selling and administrative staff expenses were $5.6 million in 1996, up 50%
from $3.8 million in 1995. The increase in selling and administrative staff
expenses was primarily due to the addition of personnel necessary to support the
Company's growth, including increases in sales and recruiting personnel, and
21
<PAGE>
increases in personnel working on the Company's GENOVA initiative. Selling and
administrative staff expenses were 18% of revenue in both 1996 and 1995.
OTHER EXPENSES
Other expenses were $5.7 million in 1996, an increase of 43% over other
expenses of $4.0 million in 1995. Other expenses declined to 18% of revenue in
1996 from 19% in 1995, primarily as a result of the significant increase in
revenue in 1996.
SPECIAL COMPENSATION EXPENSE
Special compensation expense in 1996 consisted of stock-based compensation
and compensation related to the cancellation of a note payable, which, in the
aggregate, totaled $2.2 million, or 7% of revenue. See Notes 10 and 13 of Notes
to Financial Statements.
INCOME FROM OPERATIONS
Income from operations decreased $892,000 to $1.3 million in 1996 from $2.2
million in 1995. If income from operations was adjusted to exclude special
compensation expense, referred to above, income from operations would have grown
59% in 1996 compared with 1995. Income from operations declined to 4% of revenue
in 1996 from 10% in 1995 primarily as a result of special compensation expense
in 1996. If income from operations was adjusted to exclude special compensation
expense, income from operations would have been 11.3% of revenue in 1996,
compared to 10.5% in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUE
Revenue was $21.1 million in 1995, an increase of 72% over 1994 revenue of
$12.3 million, principally due to increases in the scope and number of client
projects. Revenue attributable to software services rendered to technology
vendors was $14.1 million and $8.9 million in 1995 and 1994, respectively, an
increase of 58% in 1995 over 1994. Revenue attributable to software services
rendered to business end-users was $7.1 million and $3.4 million in 1995 and
1994, respectively, an increase of 109% in 1995 over 1994.
In 1994, one client accounted for 54% of revenue. No other client accounted
for more than 10% of revenue in 1994.
TECHNICAL STAFF
Technical staff expenses were $11.2 million in 1995, an increase of 52% over
1994 technical staff expenses of $7.4 million. The increase in technical staff
expenses was primarily due to the addition of personnel necessary to service
growth in the number and size of client projects. Technical staff expenses
declined to 53% of revenue in 1995 from 60% in 1994, primarily as a result of
improved pricing and higher utilization of the technical staff.
SELLING AND ADMINISTRATIVE STAFF
Selling and administrative staff expenses were $3.8 million in 1995, up 62%
from $2.3 million in 1994. The increase in selling and administrative staff
expenses was primarily due to the addition of personnel necessary to support the
Company's growth. Selling and administrative staff expenses declined to 18% of
revenue in 1995 from 19% in 1994, primarily as a result of the significant
increase in revenue in 1995.
22
<PAGE>
OTHER EXPENSES
Other expenses were $4.0 million in 1995, an increase of 72% over other
expenses of $2.3 million in 1994. Other expenses were 19% of revenue in both
1995 and 1994.
INCOME FROM OPERATIONS
Income from operations increased to $2.2 million, or 10% of revenue in 1995,
from $296,000, or 2% of revenue, in 1994.
QUARTERLY RESULTS
The following table presents certain unaudited quarterly results of
operations of the Company for each of the quarters in the two-year period ended
December 31, 1996. In the opinion of management, this information has been
prepared on the same basis as the audited financial statements of the Company
and all necessary adjustments, consisting only of normal recurring adjustments,
have been included in the amounts stated below to present fairly the quarterly
information when read in conjunction with the Company's audited financial
statements and notes thereto included elsewhere in this Prospectus. The results
of operations for any quarter are not necessarily indicative of the results
expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Revenue....................... $ 4,444 $ 5,012 $ 5,631 $ 6,060 $ 6,537 $ 6,950 $ 7,737
Operating expenses:
Technical staff............. 2,379 2,708 2,887 3,219 3,556 3,741 4,287
Selling and administrative
staff..................... 773 899 992 1,091 1,171 1,257 1,299
Other expenses.............. 882 912 1,039 1,143 1,177 1,240 1,417
Special compensation
expense................... -- -- -- -- -- -- 655
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses................ 4,034 4,519 4,918 5,453 5,904 6,238 7,658
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations.................. 410 493 713 607 633 712 79
Interest expense (income)..... 43 (13) 44 10 27 17 59
Pro forma provision (benefit)
for income taxes............ 140 192 254 227 230 264 8
----------- ----------- ----------- ----------- ----------- ----------- -----------
Pro forma net income (loss)... $ 227 $ 314 $ 415 $ 370 $ 376 $ 431 $ 12
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
<S> <C> <C>
DEC. 31, MARCH 31,
1996 1997
----------- -----------
Revenue....................... $ 10,050 $ 10,307
Operating expenses:
Technical staff............. 4,860 5,284
Selling and administrative
staff..................... 1,895 1,886
Other expenses.............. 1,850 1,961
Special compensation
expense................... 1,538 119
----------- -----------
Total operating
expenses................ 10,143 9,250
----------- -----------
Income (loss) from
operations.................. (93) 1,057
Interest expense (income)..... 66 89
Pro forma provision (benefit)
for income taxes............ (60) 368
----------- -----------
Pro forma net income (loss)... $ (99) $ 600
----------- -----------
----------- -----------
</TABLE>
23
<PAGE>
The following table sets forth certain financial data expressed as a
percentage of revenue:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
------------- ----------- ----------- ----------- ------------- ----------- -----------
Revenue....................... 100% 100% 100% 100% 100% 100% 100%
Operating expenses:
Technical staff............. 54 54 51 53 54 54 55
Selling and administrative
staff..................... 17 18 18 18 18 18 17
Other expenses.............. 20 18 18 19 18 18 18
Special compensation
expense................... -- -- -- -- -- -- 9
----- ----- ----- ----- ----- ----- -----
Total operating
expenses................ 91 90 87 90 90 90 99
----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations.................. 9 10 13 10 10 10 1
Interest expense (income)..... 1 -- 1 -- -- -- 1
Pro forma provision (benefit)
for income taxes............ 3 4 5 4 4 4 --
----- ----- ----- ----- ----- ----- -----
Pro forma net income (loss)... 5% 6% 7% 6% 6% 6% --
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
<CAPTION>
<S> <C> <C>
DEC. 31, MARCH 31,
1996 1997
----------- -------------
Revenue....................... 100% 100%
Operating expenses:
Technical staff............. 48 52
Selling and administrative
staff..................... 19 18
Other expenses.............. 18 19
Special compensation
expense................... 16 1
----------- -----
Total operating
expenses................ 101 90
----------- -----
Income (loss) from
operations.................. (1) 10
Interest expense (income)..... 1 --
Pro forma provision (benefit)
for income taxes............ (1) 4
----------- -----
Pro forma net income (loss)... (1)% 6%
----------- -----
----------- -----
</TABLE>
During 1996, the Company was engaged in projects which entitled the Company
to earn bonuses which were contingent on future events. Generally Accepted
Accounting Principles require that revenue in connection with these bonuses not
be recognized until the resolution of those events, which occurred in the fourth
quarter of 1996 and resulted in the recognition of revenue totaling $622,000.
Income from operations excluding special compensation expense would have been
$1.4 million, or 14% of revenue, in the quarter ended December 31, 1996. This
increase over prior quarters was due in large part to the recognition of these
bonuses.
The Company's revenue may fluctuate from quarter to quarter based on such
factors as number, size and timing of projects in which the Company is engaged,
the contractual terms and percentage of completion for fixed price contracts,
delays incurred in connection with a project, the Company's success in earning
bonuses or other contingent payments, availability of technical staff and
technical staff utilization rates, the adequacy of provisions for losses and the
accuracy of estimates of labor required to complete ongoing fixed price projects
and general economic conditions. A high percentage of the Company's expenses,
particularly technical and administrative staff costs, are fixed in advance of
any particular quarter. Unanticipated variations in the number, size or timing
of the Company's projects can adversely affect employee utilization rates.
Accordingly, revenue fluctuations may cause significant variations in operating
results in any particular quarter and could result in an adverse effect on the
Company's business, financial condition and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since commencement of its operations as a separate company on October 1,
1996, the Company has maintained its own cash accounts. Available cash balances
have generally been used to reduce bank borrowings and amounts due to Pencom.
Prior to its incorporation, the Company participated in Pencom's centralized
cash management system while it conducted its business and operations as the
software division of Pencom. In 1994, a cash deficit of $151,000 was financed by
contributions from Pencom. In 1995, cash was used to repay $1.1 million of
contributions by Pencom. In 1996, the Company repaid $2.9 million of
contributions from Pencom.
Historically, the Company's operating activities provided cash of $83,000,
$1.6 million and $2.1 million for the fiscal years 1994, 1995 and 1996,
respectively. At March 31, 1997, the Company had cash of $796,000, a decline of
$2.4 million from $3.2 million at December 31, 1996. During the first quarter of
1997, cash of $965,000 was used to purchase property and equipment and to make
certain leasehold improvements in connection with the relocation of the
Company's Austin, Texas office, and cash of $475,000 was used to reduce the
principal amount outstanding under the Credit Facility. In addition, the
24
<PAGE>
Company's operating activities used cash of $951,000 during the first quarter of
1997. The use of cash by the Company's operating activities during the first
quarter of 1997 was significantly effected by lower cash receipts of
approximately $888,000 attributable to the retention of 73.33% of certain
accounts receivable by Pencom pursuant the Accounts Receivable Agreement between
the Company and Pencom (see "Certain Transactions -- Pencom Relationship" and
Note 10 of Notes to Financial Statements) and the payment of fiscal year 1996
bonuses of approximately $593,000 during the first quarter of 1997.
The Company has a revolving line of credit with TCB providing for borrowings
of up to $6.5 million. Borrowings under the Credit Facility, which expires on
November 8, 1997, are secured by the Company's accounts receivable and bear
interest at the greater of TCB's prime rate or the federal funds rate plus .25
of one percent or, at the election of the Company, a formula based upon the
London Interbank Offered Rate. The Credit Facility includes covenants relating
to the maintenance of certain financial amounts and ratios, including a minimum
tangible net worth and a maximum funded liabilities to earnings before interest,
taxes, depreciation and amortization ratio. Available borrowings under the
Credit Facility are based upon a percentage of the Company's eligible accounts
receivable. As of March 31, 1997, approximately $4.7 million was outstanding
under the Credit Facility. The Company intends to use a portion of the net
proceeds of this offering to repay the then outstanding borrowings under the
Credit Facility.
The Company currently plans to make additional investments in property and
equipment of approximately $1.4 million in 1997, principally for leasehold
improvements, furniture, software, personal computers and other technology
equipment.
The Company anticipates that its existing capital resources, including cash
provided by operating activities and available bank borrowings, together with
the anticipated net proceeds from this offering, will be adequate to fund the
Company's operations for at least the next 12 months. There can be no assurance
that changes will not occur that would consume available capital resources
before such time. The Company's capital requirements depend on numerous factors,
including potential acquisitions, the timing of the receipt of accounts
receivable, employee growth, and the percentage of projects performed at PSW
facilities. There can be no assurance that additional funding, if necessary,
will be available on favorable terms, if at all.
25
<PAGE>
BUSINESS
OVERVIEW
PSW Technologies, Inc. is a software services firm that provides high value
solutions to technology vendors and business end-users by mastering and applying
critical emerging technologies. These critical technologies include distributed
computing, object-oriented development, advanced operating systems and systems
management technologies. The Company seeks to incorporate the knowledge and
expertise derived from its client projects into proprietary methodologies,
thereby enabling PSW to retain and distribute its institutional knowledge
throughout the Company and achieve improvements in cost, quality and speed on
client projects. The Company conducts its business through its two business
units: the Software Technology Unit and the Business Systems Unit.
PSW's Software Technology Unit provides joint project-based development,
porting, and testing services to selected technology vendor clients. PSW
services enable these companies to improve the quality and speed to market of
their products which, PSW believes, often result in an earlier flow of revenue
and increased revenues over the long term for such technology vendor clients.
The Company's services also enable these clients to focus on their core
competencies, limit their permanent headcount and relieve temporary workload
spikes. PSW targets companies that are developing technologies which it believes
will be important to, and likely to be widely deployed by, its current and
potential business end-user clients. Through these engagements, PSW often gains
an early and comprehensive understanding of critical emerging technologies and
is therefore well positioned to service the continued needs of these and other
technology vendors, as well as the needs of the business end-user community.
The Company's Business Systems Unit applies PSW's technical expertise to the
design and development of high value, mission critical enterprise business
systems for its Fortune 1000 end-user clients. These systems, which support
multiple functions within the enterprise, typically are long-term strategic IT
solutions designed to enable business end-users to improve the quality of the
services they provide to their customers through enhanced information capture
and control, increased accuracy and efficiency and decreased costs and response
times. The Company focuses on enterprise solutions due to their greater value to
the client than departmental systems, and the corresponding potential for
longer-term relationships.
The Company is flexible in structuring the terms of its client engagements,
favoring a time-and-materials pricing model with set project milestones, but
employing a fixed price model per phase in certain circumstances. The Company
works in partnership with its clients at the client site or at PSW's facilities,
as appropriate. This flexible, joint development approach, together with the
Company's utilization of proprietary methodologies, is designed to reduce risks
to PSW and its clients, maximize client satisfaction and allow PSW to transfer
expertise to its clients. In addition, PSW believes that its comprehensive
technical expertise in critical emerging technologies enables it to generate
high levels of repeat business by attracting clients that provide the
opportunity for multi-year, ongoing relationships.
INDUSTRY BACKGROUND
The growing worldwide demand for IT services has been driven by the
increasing reliance on IT as a strategic tool for addressing critical business
issues. Deregulation, globalization and technological innovation are
accelerating the rate of change in business, resulting in a more complex and
intensely competitive business environment. Organizations face constant
pressures to improve the quality of products and services, reduce cost and time
to market, improve operating efficiencies and strengthen customer relationships.
These pressures are increasingly causing business managers to utilize IT to seek
to improve the quality of the services they provide to their customers through
enhanced information capture and control, increased accuracy and efficiency and
decreased costs and response times. In order to achieve these objectives,
organizations are modifying their business processes and improving the
responsiveness and flexibility of their information systems which enable and
support the modified processes. These trends,
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together with rapid advances in technology, are primarily driving the move from
traditional host-based legacy computing systems to more flexible and functional
technologies, including client/server architectures, object-oriented programming
languages and tools, distributed database management systems and the latest
networking and communications technologies, such as the Internet.
In order to compete in this business environment, IT departments of Fortune
1000 companies often must deploy custom designed software applications capable
of integrating and managing multiple operating systems, databases, programming
languages and networking protocols throughout the enterprise. At the same time,
competitive conditions and cost pressures are increasingly forcing such
companies to focus on core competencies and reduce or limit the growth of their
IT workforce. According to the International Data Corporation ("IDC"), the U.S.
market for product implementation and systems integration services exceeded $22
billion in 1996, with a projected cumulative annual growth rate of 12.4% through
the year 2000. This market segment is fragmented, with no company having more
than a 5% market share in 1995, according to IDC.
In addition to the increasing demand for more responsive technologies to
address these business challenges, technology as a whole is becoming more
complex and individual technology life-cycles are shortening at a faster rate.
The foregoing has placed increasing pressure on technology vendors to bring new
products and new versions of proven products to market faster and simultaneously
to ensure that those products operate with an increasing number of platforms and
middleware. IDC estimates that research and development expenditures by U.S.
software vendors exceeded $5 billion in 1996. IDC expects the software
applications market to grow at a cumulative annual rate of approximately 15%
through 1999 and anticipates that research and development expenditure growth
will remain strong through that period. Although the Company is not aware of the
percentage of such expenditures that are outsourced, the Company believes that
the software research and development outsourcing market has significant
potential.
The convergence of these trends is resulting in (i) an increasing movement
of Fortune 1000 companies toward joint projects with software service firms that
have a high level of expertise in critical emerging technologies, rather than
relying on their internal resources for the design and implementation of
enterprise business systems and (ii) an increasing need within the research and
development departments of key vendors of critical emerging technologies to
outsource to software service firms a portion of the development, porting and
testing of their existing and new products. In a recent IDC survey, a majority
of respondents stated that the lack of in-house technical expertise was their
primary reason for engaging an external services provider in connection with the
implementation of an IT project. Accordingly, a growing number of business
end-users and technology vendors are seeking the help of software services firms
with strong technical expertise in critical emerging technologies and the
ability to implement high value solutions on a cost-effective and prompt basis.
THE PSW SOLUTION
PSW is a software services firm that provides high value solutions to
technology vendors and business end-users by mastering and applying critical
emerging technologies, including distributed computing, object-oriented
development, advanced operating systems and systems management technologies. The
Company incorporates the knowledge and expertise derived from each of its client
projects into its proprietary methodologies, enabling PSW to retain and
distribute its institutional knowledge throughout the Company and to achieve
improvements in cost, quality and speed on client projects. The Company conducts
its business through two business units: the Software Technology Unit and the
Business Systems Unit.
SOFTWARE TECHNOLOGY EXPERTISE
The Company's Software Technology Unit provides software research and
development services that enable its technology vendor clients to improve the
quality and speed to market of their products and,
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<PAGE>
PSW believes, to achieve an earlier flow of revenue and increased revenues over
the long term. PSW's services also enable these clients to focus on their core
competencies, limit their permanent headcount and relieve temporary workload
spikes.
Drawing upon its strong technical expertise and proven methodologies, PSW
enters into joint projects with the research and development departments of key
technology vendors, many of whom are defining the direction of the IT market.
PSW has accumulated significant experience with several critical emerging
technologies, including Windows NT, object technology and the Internet through
clients such as IBM, Compaq Computer Corporation ("Compaq") and Tivoli, and
relationships with companies such as Microsoft Corp. ("Microsoft"), NeXT
Software, Inc. ("NeXT") and Transarc Corporation ("Transarc"). The Company
believes that joint projects with technology vendors enable it to acquire
expertise in such new technologies ahead of, and in more depth than, its
competitors. Senior management and senior technical consultants from the
Company's Software Technology Unit and Business Systems Unit meet regularly to
assess the technology landscape in order to target emerging opportunities that
will be beneficial to both business units.
The Company's experience with, and knowledge of, technology vendors'
products often leads to significant follow-on work in related projects with
these vendors, other technology vendors and business end-users. At the same
time, PSW's experience with business end-users allows it to assist its
technology vendor clients as they seek to achieve wide-spread adoption of their
technologies and enables PSW to give valuable feedback to such technology
vendors regarding the most appropriate business use for their respective
technologies.
BUSINESS SYSTEMS EXPERTISE
The Company's Business Systems Unit develops high value, mission critical
enterprise business systems designed to enable its Fortune 1000 end-user clients
to improve the quality of the services they provide to their customers through
enhanced information capture and control, increased accuracy and efficiency and
decreased costs and response times. The Company offers services ranging from
business end-user consulting to full system deployments, including
documentation, training, help desk support and ongoing system maintenance.
PSW's technology vendor clients often recommend PSW to business end-users.
Such recommendations, together with PSW's comprehensive knowledge of the
vendor's technology, help to establish PSW's credibility with potential business
end-user clients and often result in a shortened sales cycle and higher sales
productivity. The Company focuses on long-term, strategic enterprise solutions
due to their greater value to the client than departmental systems, and the
corresponding potential for longer-term relationships. In addition, enterprise
system projects are typically larger and more technically complex than
departmental system projects, thereby creating a barrier to entry for most
smaller services firms and increasing the importance of the breadth and depth of
PSW's technical expertise when competing with other firms regardless of their
size.
METHODOLOGY DEVELOPMENT AND KNOWLEDGE ACCUMULATION
The Company seeks to increase the value of its services by achieving
improvements in the cost, quality and speed of client projects through the use
of methodologies and object libraries. GENOVA, PSW's knowledge accumulation
initiative encompasses methodologies, courseware and training, and object
libraries. These assets can be licensed by clients as part of an engagement. In
addition, PSW provides methodology training to clients and to PSW technical
staff. As a result, the methodologies not only directly benefit the project in
question, but also allow the client to maintain and extend its system investment
despite eventual changes in project personnel.
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PSW'S STRATEGY
PSW's objective is to become the leading provider of software services to
technology vendors and business end-users. To accomplish this objective, the
Company will continue to implement the following strategic initiatives:
MAINTAIN AND LEVERAGE LEADERSHIP IN CRITICAL EMERGING TECHNOLOGIES. The
Company seeks to maintain a leadership position in critical emerging
technologies by pursuing joint projects with the research and development
departments of key technology vendors who are defining the direction of the IT
market, and by leveraging its knowledge of the client/server market through
engagements with business end-users. The Company assesses the technology
landscape in order to target emerging opportunities that will be beneficial to
both of its business units. In addition, the Company focuses on the training and
development of its technical professionals to ensure that its technical
expertise extends to multiple levels within the Company.
EXPAND PRESENCE IN THE SOFTWARE RESEARCH AND DEVELOPMENT JOINT PROJECTS
MARKET. The Company seeks to expand its business with its current technology
vendor clients and aggressively pursues new software research and development
joint projects with additional industry-defining technology vendors. Such joint
projects are expected to enable PSW to continue to build its library of
technology skills and its software methodologies.
FOCUS ON THE MISSION CRITICAL, ENTERPRISE BUSINESS SYSTEMS MARKET. The
Company focuses on providing the higher value services associated with the
mission critical, enterprise systems segment of the business systems market. In
order to maintain its competitive position in this market segment, the Company
aggressively leverages its expertise with Windows NT, system management
technologies, object-oriented development and the Internet and develops
additional technical expertise through current and new software research and
development joint projects.
LEVERAGE TECHNOLOGY VENDOR RELATIONSHIPS. The Company's experience with,
and knowledge of, technology vendors' products often leads to significant
follow-on work in related projects with such vendors and other technology
vendors. In addition, technology vendors often recommend PSW to business end-
users. For example, PSW intends to leverage the relationship it has developed
with Tivoli by working closely with Tivoli to offer PSW services to Tivoli
business end-user clients who require consulting, architecture and design of
enterprise system management solutions.
LEVERAGE DIRECT SALES TO DEVELOP REPEAT BUSINESS. The Company focuses on
the development of high levels of repeat business. The Company's direct sales
and marketing activities are targeted toward the development of new clients that
provide the opportunity for repeat business through multi-year,
partnership-oriented projects and/or multiple projects through ongoing
relationships.
DEVELOP, REFINE AND UTILIZE THE GENOVA INITIATIVE. The Company seeks to
achieve quality and speed improvements and provide its clients with high value
software solutions on a cost-effective basis by continuing to develop, refine,
utilize and expand its GENOVA initiative.
PSW SERVICE OFFERINGS
GENERAL
PSW provides IT consulting and software development services to technology
vendors and business end-users. Services are typically provided on a project or
mission basis. In project-based engagements, PSW is retained to complete a
specifically defined set of tasks, such as porting a specific version of client
software to a new release of an operating system. In mission-based engagements,
PSW is retained to manage, on an ongoing basis, a specific mission within the
client organization, such as responsibility for all testing functions for a
client organization. Mission engagements involve multiple projects and releases
which generally come up for renewal on an annual or other periodic basis.
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The Company is flexible in structuring the terms of its client engagements,
favoring a time-and-materials pricing model with set project milestones, but
employing a fixed-price model per phase in certain circumstances. The Company
works in partnership with its clients at the client site or at PSW's facilities,
as appropriate. This flexible, joint development approach, together with the
Company's utilization of proprietary methodologies, is designed to reduce risks
to PSW and its clients, maximize client satisfaction and allow PSW to transfer
expertise to its clients.
SUMMARY OF SERVICES PROVIDED BY PSW TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
MARKET SERVICE DESCRIPTION REPRESENTATIVE CLIENTS(1)
<S> <C> <C> <C>
Testing Testing the client's source IBM (Windows NT/95)
and/or binary code to verify IBM (AIX Graphics)
it conforms to specifications Compaq
and compatibility requirements
Porting Modifying and testing the Tivoli
client's source code to make Lotus
its products function in a Pervasive Software Inc.
different operating
environment
Technology Development Defining requirements, writing SystemSoft Corp.
Vendors specifications, designing, Symbios Logic, Inc.
developing, and testing the
software
Support Specialized, complex support Northern Telecom, Inc.
of software developers or IBM (AIX Developers)
sophisticated end-users SystemSoft Corp.
Advisory Assessment of the client's Scientific Atlanta, Inc.
existing development efforts IBM (AS/400 Notes Port)
or a short-term engagement to
develop a detailed proposal
for a larger project
Object-Oriented Phased development of custom Canon Computer Systems Incorporated
Application enterprise business systems Embarcadero Systems Corporation
Development including requirements, AT&T Wireless Services, Inc.
analysis, design,
implementation, testing, and
deployment
Business Distributed Architecture, development, General Reinsurance Corporation
End-Users Computing integration and testing of J.P. Morgan Securities Inc.
Development middleware for enterprise
systems
Enterprise Assessment of the client's Ameritech Communications, Inc.
Consulting business systems projects Canon Computer Systems Incorporated
including skills,
organization, development
processes, schedule and
resources
</TABLE>
- ------------------------
(1) Represents certain clients for whom work has been performed during 1996 or
1997.
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TECHNOLOGY VENDOR SERVICES
The Company's Software Technology Unit enters into joint projects with the
research and development departments of key technology vendors, many of whom are
defining the direction of the IT market. These technology vendor clients include
systems developers (such as IBM and Scientific Atlanta, Inc. ("Scientific
Atlanta")), software companies (such as Tivoli, Lotus and SystemSoft Corp.
("SystemSoft")), and peripheral manufacturers (such as 3COM Corp. ("3COM")). PSW
project personnel typically interface with the client's Vice President of
Research and Development as well as other senior executives and product
marketing personnel. These joint projects often foster close working
relationships between the Company and these clients, frequently resulting in the
formation of long-term relationships which the Company believes provide
opportunities for repeat business. Further, the Company's joint projects with
technology vendor clients often enable the Company to establish relationships
with other technology vendors. For example, the Company has formed a
relationship with Microsoft as a result of the Windows NT porting services that
PSW provides to its technology vendor clients.
The Company offers the following suite of services to its technology vendor
clients:
Testing Services
The Company assists clients in test planning, test suite development and
test execution. System verification testing involves the design of tests to
ensure that products adhere to the specifications and standards demanded by the
client. Compatibility testing verifies that specific programs and devices work
with new operating system software. Standards compliance testing involves the
development of test suites to verify binary or source code compatibility with
published standards. Current engagements include the Company's system and
compatibility testing of Windows NT and Windows 95 software on IBM computers for
a division of IBM and testing of high end graphics software for the IBM AIX
operating system for another division of IBM.
Porting Services
The Company assists clients in the porting of their software products to
other computing platforms. PSW has extensive operating system experience with
Solaris, AIX, Windows NT, Windows 95, HP/UX and NEXTSTEP, as well as with the
compilers and development tools required to port software. The Company performs
the porting, testing and documentation of the client product to the specified
operating environments. The Company utilizes its GENOVA porting methodology to
efficiently assess the portability of software to Windows NT and other operating
environments, to determine the best approach for completing ports in a timely
manner and for improving future software portability.
The Company is in the process of formalizing its GENOVA porting methodology
to enhance its visibility in future marketing efforts. This process consists of
fully documenting the methodology, developing appropriate sales materials and
targeting specific porting markets such as ports from Unix to Windows NT. For
example, PSW is porting Tivoli's system management software to more than 10
operating environments, including those developed by Silicon Graphics Inc., Sun
Microsystems, Inc., Sequent Computer Systems, Inc., Novell, Inc. and Data
General Corporation. Additionally, the Company has performed AIX ports for Lotus
and is currently responsible for ports to a second operating environment.
Development Services
The Company assists clients in the development of products, the addition of
new capabilities to existing products and the development of specialized
software for clients' customers. PSW's experience in computer architecture,
system performance, operating systems, device drivers and middleware as well as
its software development methodology position the Company to enable its clients
to deliver critical software to the marketplace in a timely fashion. As an
example of a recent development services engagement, SystemSoft chose PSW for
its Windows NT expertise to develop new PC Card software to allow PC Card
devices to "plug and play" and be "hot-swapped" in the Windows NT environment.
Rapid time to market
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was critical to SystemSoft due to the surge in interest in Windows NT as a
desktop operating environment and the need for SystemSoft to provide its
software in advance of similar software expected to be provided within the
operating system.
Support Services
The Company provides customized technical support for complex systems to
software developers or users. Support is provided on-site, on-line and by
telephone. The Company's services include help desk, defect correction and
critical situation support. In its current engagement with Northern Telecom,
Inc., the Company provides support for Northern Telecom HP/UX users worldwide.
Advisory Services
The Company provides advisory services to assess development, porting,
testing, or support projects from a technical, process and project management
viewpoint. The Company utilizes its GENOVA methodology and prior experience to
identify areas of improvement and make recommendations. In addition, assessment
services are often used to allow for the necessary research and evaluation to
develop a more extensive proposal for a client. As an example, Scientific
Atlanta retained the Company to assist in the set-up of build, test, and source
code control procedures. Subsequently, Scientific Atlanta retained the Company
to help organize and plan the overall software activities for one of their
operating divisions.
BUSINESS END-USER SERVICES
The Company's Business Systems Unit focuses on delivering enterprise
solutions for the Company's business end-user clients. These systems, typically
developed by the Company in partnership with the client, are long-term strategic
IT solutions which support multiple functions within the enterprise and which
provide increased flexibility to respond to the client's changing business
needs. The Company offers services ranging from business end-user consulting to
full system deployments, including documentation, training, help desk support
and on-going system maintenance. The Company provides enterprise solutions in a
wide variety of computing environments utilizing leading technologies, including
client/server architectures, object-oriented programming languages and tools,
distributed database management systems and the latest networking and
communications technologies.
The Company offers the following suite of services to its business end-user
clients:
Object-Oriented Application Development Services
PSW provides services to design, construct and deploy custom enterprise
business systems. The GENOVA BUSINESS SYSTEMS DEVELOPMENT METHODOLOGY is used to
define business objectives, gather requirements and perform analysis, and then
design, implement, test and deploy the system. The project team for a typical
engagement consists of PSW personnel and client personnel, with PSW providing
project management and overall technical leadership. Engagement durations
typically last several years and involve deployment of multiple versions of the
business system.
A current example of object-oriented application development services is the
Company's engagement by Embarcadero Systems Corporation ("ESC"), a firm
specializing in the management of shipping container terminals. ESC deemed the
automation of its terminal operations to be a key strategic initiative to
compete in the future. PSW competed with several other software services firms
for the project to develop the entire system, and was chosen on the basis of its
technical expertise, strong relationship with NeXT and GENOVA, which was
reviewed in depth by key executives at ESC. The Company has completed the
project's requirements and design phases and is currently in the implementation
and test phase. PSW's project team includes the project manager, the lead
software architect and object-oriented analyst. This team works on-site in
conjunction with ESC personnel who include test personnel, the user liaison and
a software architect. The project is being implemented in three stages, with ESC
assuming greater responsibility with each stage. To accelerate the development
of the project, ESC licensed the GENOVA SYSTEM
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OBJECT LIBRARIES, which provided the basic system framework for the development
of enterprise applications.
Distributed Computing Services
The Company offers distributed computing services, which typically focus on
the middleware architecture required to support a large enterprise system.
Object-oriented application development projects typically include this as part
of the engagement to build a complete business system. However, some clients
seek the Company's expertise to advise on or help construct and integrate the
underlying architecture, middleware and tools upon which applications will be
developed. The GENOVA methodology is also used for these engagements.
The Company's Orion project with General Reinsurance Corporation ("GenRe")
is a current example of the Company's distributed computing services. This
project provides a high productivity, object-oriented set of developer services
to allow the rapid development of business applications within a cohesive
enterprise system architecture. Services include user interface, security, data
access, exception handling and communications. Technologies used include
Microsoft Visual C++, Microsoft foundation classes, Persistence object storage
for relational databases and Sybase database technology. The architecture
supports a multi-tier implementation with Windows clients and HP/UX servers.
Enterprise Consulting Services
The Company offers enterprise consulting services to assist clients with the
assessment, monitoring and management of projects. PSW utilizes its GENOVA
ASSESSMENT METHODOLOGY, which involves a seven step process to define the focus
of the assessment, conduct the required research, analyze the findings and
provide specific actions and recommendations to the client. The GENOVA BUSINESS
SYSTEMS DEVELOPMENT METHODOLOGY is also used as a benchmark to determine missing
components or deliverables in the client's project or process. The deliverable
in an enterprise consulting engagement consists of a report identifying a
project's strengths and weaknesses, assessing schedule and resource plans and
recommending specific actions. A summary report is typically presented to the
client management sponsoring the assessment.
Current engagements of enterprise consulting services include the Company's
engagement with Ameritech Communications, Inc. ("Ameritech"). The Company
performed at least one assessment per month during 1996 of various Ameritech
projects, including evaluation of the project management for a mainframe
project, and the architectural evaluation of several client/server projects.
THE GENOVA INITIATIVE
GENOVA is a formal PSW initiative to increase the value of its services by
achieving improvements in the cost, quality and speed of client projects. GENOVA
is also a sales and marketing initiative whereby the benefits of GENOVA are
communicated to clients and PSW sales personnel through sales training,
marketing materials, public relations and other programs (such as trade events).
GENOVA currently consists of methodologies, courseware and object library
assets, all of which can be licensed by PSW clients.
Methodologies are fully documented and provide the philosophy, phases,
deliverables, procedures and description of tasks to complete a specific type of
project. In addition, the methodology documentation includes a description of
the team structure, roles and responsibilities of both PSW and client personnel.
Finally, the methodology includes templates, samples, tools, tips and techniques
for completing the defined deliverables. GENOVA methodologies are documented in
HTML so they can be accessed on-line over an intranet.
Courseware consists of the curriculum, charts, exercises, examples and
required systems for various courses targeted to different audiences. For
example, the GENOVA BUSINESS SYSTEMS DEVELOPMENT ACADEMY courseware can be
adapted to project managers, architects, developers, testers or technical
writers. Courses can be customized to last from one day to six weeks. Both the
methodology and courseware are largely independent of any specific development
technology.
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The GENOVA object libraries consist of production level software which has
been developed in client projects using the GENOVA methodology. Applicable
portions of these libraries can be licensed by the client to eliminate portions
of the design, implementation and testing work associated with a project.
Licensing is on a source code basis. The current libraries are designed for
OPENSTEP and are therefore applicable to the Windows NT, Solaris and NEXTSTEP
environments.
SUMMARY OF THE GENOVA INITIATIVE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
TYPE OF ASSET NAME DESCRIPTION
<S> <C> <C>
Methodology GENOVA ON-LINE The Web based reference documentation
of GENOVA methodologies accessible on
PSW's intranet
Methodology GENOVA BUSINESS SYSTEMS The methodology for the requirements
DEVELOPMENT METHODOLOGY gathering, analysis, design,
implementation, testing and deployment
of custom business systems using an
object-oriented approach
Methodology GENOVA ASSESSMENT The seven step methodology to perform
METHODOLOGY an assessment of a software project
Methodology GENOVA PORTING METHODOLOGY The methodology to assess the
(formalization scheduled portability of a technology to a new
for mid-1997) operating environment, perform the port
and improve the portability of the
technology for future ports
Courseware/Training GENOVA BUSINESS SYSTEMS The courseware associated with the
DEVELOPMENT ACADEMY GENOVA BUSINESS SYSTEMS DEVELOPMENT
METHODOLOGY used to train project
managers, architects, developers,
testers and technical writers
Courseware/Training GENOVA NT CERTIFICATION PSW developed courseware to prepare
ACADEMY technical professionals to pass the
Microsoft Windows NT Certification
exams
Object Libraries GENOVA SYSTEM OBJECT Libraries which allow project teams to
LIBRARIES focus on developing business
functionality rather than system
capabilities
Object Libraries GENOVA BUSINESS OBJECT Production level business objects and
LIBRARIES more than 25 business applications
ranging from order entry to warehouse
management to billing
</TABLE>
PROJECT MANAGEMENT
Software development, testing, delivery and deployment is a complex process.
Consequently, PSW employs a number of methods to lower the risk of project
overruns or client dissatisfaction.
The Company believes that successful software projects require a well
designed approach, development process and underlying procedures to organize the
project team to efficiently accomplish numerous interrelated tasks. PSW's GENOVA
methodologies achieve this by defining the specific deliverables required at
each phase of the development process, the tasks required to develop them,
examples and templates. In addition, because the methodologies provide a common
structure between projects, PSW team members can tap the experience, ideas,
measurements and estimates of other teams who have worked on similar
engagements. Technical staff members can get the latest information about
technologies being used on the
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<PAGE>
project from PSW professionals who are working on projects with the technology
vendors who develop and support that technology.
GENOVA methodologies have several common elements that help align client
expectations with the project objectives. All the methodologies consist of a
thorough definition phase where client objectives and user or marketplace
requirements are defined. The definition phase of a project emphasizes
specifications which can be positively verified during the testing phase. GENOVA
methodologies also emphasize proper up front design prior to implementation to
minimize the risk of design flaws. The implementation phase of each methodology
includes a complete testing plan, one of the frequently underestimated parts of
a project.
When a fixed price arrangement is to be used for a large project, PSW prices
the project by phase. For example, a fixed price will be quoted for the
requirements phase only. Once the requirements phase has been completed and the
requirements are well defined, PSW will quote a fixed price for the design
phase. Once the design phase has been completed, the price for the
implementation phase will be quoted. For large business end-user projects, PSW's
experience to date has been that the dynamic, enterprise nature of the project
has resulted in both parties preferring a time and materials arrangement by the
time a project reaches the implementation phase. The phased approach is used
even in time and materials arrangements to provide the client with cost/benefit
checkpoints. The GENOVA assessment process is beginning to be used to internally
assess large projects at key project checkpoints.
On major projects, a PSW executive serves as a contact to key client
executives. Typically the PSW executive will conduct periodic reviews with the
client to get feedback on projects' progress. In addition, the client is
encouraged to call the PSW executive for any problem which transcends or
directly involves the PSW project manager. PSW's senior management team reviews
project reports on a monthly basis to identify and take action on projects which
are experiencing delays or cost overruns.
PSW CASE STUDIES
PSW's business strategy is to identify key future technologies, gain
technical expertise through projects with technology vendors who are defining
the use of such technologies, apply that technical expertise to new projects and
capture the knowledge gained in these engagements through methodologies or other
initiatives. Following are examples of the Company's business strategy as
applied to various client engagements.
OBJECT-ORIENTED TECHNOLOGY
In 1992, PSW management identified the object-oriented approach to software
development as a critical technical capability. The Company targeted NeXT as the
company it felt had the best object-oriented development tools on the market
(NEXTSTEP). PSW gained experience with NeXT by developing an X windows product
for the NEXTSTEP environment, developing NEXTSTEP device drivers for NeXT and
others, utilizing NeXT internally within the Company and becoming a NeXT
authorized training provider.
In 1993, PSW began to work with NeXT's field personnel to perform projects
with PSW's business end-users. Most of these early projects were prototyping and
proof of concept projects. At the end of 1993, PSW management assembled the
initial framework for the GENOVA BUSINESS SYSTEMS DEVELOPMENT METHODOLOGY which
was specifically intended to incorporate the object-oriented approach to
developing business systems. In early 1994, NeXT referred Canon Computer Systems
Incorporated ("Canon Computer Systems") to PSW. Canon Computer Systems selected
PSW over a larger firm due in part to PSW's knowledge of object-oriented
programming and its methodology framework.
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Canon Computer Systems' Object 21 project is a major initiative undertaken
by PSW to automate Canon Computer Systems' core business functions, eliminate
Canon Computer Systems' dependence on mainframe technology, and significantly
improve the efficiency of the business and the accuracy and timeliness of the
information required to manage the business. The project with Canon Computer
Systems as well as other projects resulted in further definition and refinement
of GENOVA. In 1996, PSW licensed the Object 21 technology from Canon Computer
Systems. This technology forms the basis for the GENOVA SYSTEM OBJECT LIBRARIES
and GENOVA BUSINESS OBJECT LIBRARIES.
TRANSACTION MANAGEMENT & DISTRIBUTED COMPUTING
In 1993, PSW management identified distributed computing as a long-term
technology that would be critical to the development of enterprise business
systems. The Company focused primarily on the leading technologies at the time
that were being developed to solve the complex problems involved in distributed
systems, including OSF Distributed Computing Environment ("DCE") and the Encina
transaction management software developed by Transarc. PSW worked closely with
Transarc as a client, helping adapt Encina to several different development
environments. Most notably, Transarc and Powersoft Corporation engaged PSW to
develop EncinaBuilder in 1994, a complete product which allowed PowerBuilder
developers to utilize the capabilities of Encina for Windows.
In 1994, PSW also began to work closely with Transarc's field organization
to provide the software services required to design systems where Encina and DCE
might be required. These efforts developed into the distributed computing
services practice of the Business Systems Unit. PSW has actively worked with
Transarc at clients such as GenRe and J.P. Morgan Securities Inc. In addition,
PSW has actively participated as a Gold Sponsor at Transarc's annual Decorum
conference which has long served as an industry forum for executives and senior
technical professionals involved in distributed computing technologies.
OPERATING SYSTEMS
PSW has significant expertise in the Unix marketplace, having developed
device drivers, standards test suites and other system software associated with
Unix operating systems since 1990. In 1994, PSW sought to expand this expertise
to Microsoft's Windows NT initiative which embodies most of the advanced
operating system concepts that are in Unix systems. As a result of these
efforts, IBM asked PSW to provide test and support personnel in Kirkland,
Washington to help in the effort to port Windows NT to IBM PowerPC computers.
Over time, PSW's role expanded to manage the entire testing mission at IBM
Kirkland and has also expanded to include Windows 95 testing, IBM Intel based
computers and some porting activities for Windows NT Tools.
PSW opened its Bellevue, Washington facility in close proximity to IBM's
Kirkland facility and to Microsoft, to focus primarily on Windows NT work for
other clients. This focus resulted in PSW being selected by Microsoft to develop
and conduct the entire series of presentations, or "track," on Unix to Windows
NT porting for the Fall 1996 Microsoft Developers Conference. The Company has
also been engaged by several new Windows NT clients including SystemSoft and
Tandem Computers Incorporated ("TCI"). In late 1995, PSW began developing
courses to prepare technical professionals to pass Microsoft Windows NT
certification tests. This effort has evolved into the GENOVA WINDOWS NT ACADEMY.
In addition, the Business Systems Unit has utilized PSW's Windows NT
expertise to help several clients migrate to or develop systems for the Windows
NT environment. As Windows NT continues to evolve it is becoming increasingly
applicable to engagements in the distributed computing arena due to various
Microsoft initiatives such as DCOM, Viper, and Wolfpack. PSW expects to use its
knowledge of these technologies to serve clients seeking Windows NT distributed
computing services.
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INTERNET TECHNOLOGY
PSW has established and is leveraging relationships with technology vendors
at the forefront of Internet technology. PSW's work for Lotus involved porting
the Notes Domino technology which has been rapidly adopted to exploit and
leverage the Internet. In addition, PSW has utilized NeXT's Web Objects product
to build dynamic Web pages for clients. Within PSW's GENOVA OBJECT LIBRARY teams
and GENOVA BUSINESS SYSTEMS DEVELOPMENT ACADEMY class, Java is being introduced
and utilized.
PSW business end-user projects with Canon Computer Systems, ESC, U.S.
Bancorp, Compaq and Associates Bancorp, Inc. will all utilize Internet
technology as part of the overall system design. For example, with Compaq, PSW
is putting Compaq technical support information, previously available only on
compact disc, on the Web so it can be updated more frequently and made more
accessible.
SYSTEM MANAGEMENT
More recently, PSW has targeted system management as critical to the
successful deployment of enterprise systems. As a result of the Company's Unix
expertise and project management capabilities, Tivoli engaged PSW to port
Tivoli's software to a wide variety of Unix computing platforms on an ongoing
basis. PSW intends to work closely with Tivoli to offer PSW services to Tivoli
customers who require consulting, architecture, and design of system management
solutions for enterprise systems.
MARKETING AND SALES
MARKETING
Strategic market planning is performed by the executive staff of the
Company, which actively seeks guidance from a number of sources to make
strategic decisions. These sources include PSW clients, senior technical staff
members, sales personnel and numerous executive contacts throughout the
industry. The executive staff meets off-site quarterly to discuss strategic
issues and actions. Action items are identified and tracked between meetings.
Senior technical staff members meet twice a year at the PSW Technology Forum to
share their views and produce a set of strategic actions for themselves and for
the executive staff to pursue business opportunities resulting from changes in
the technology landscape.
Corporate marketing controls and promotes key corporate messages, consistent
marketing programs and materials and ongoing public relations. This is
accomplished by working in coordination with business unit initiatives and
through a program of regular communication of newsworthy items to key press and
industry analysts. Public relations is the primary vehicle used to promote
corporate image through the use of client case studies and placement of
technical articles by senior technical staff.
Service marketing is performed within the sales and marketing function and
primarily supports the sales process by producing qualified leads. The Company
focuses on implementing a "value chain" that seeks to align the communication
and delivery of the highest value services possible to the client. This includes
marketing, sales, project management, methodologies, recruiting, training and
any other initiatives required to deliver consistent, high quality service. The
marketing emphasis is on communicating the value of the service to the client
and demonstrating PSW's capabilities to deliver the service effectively.
The Company's marketing programs emphasize relationships with technology
vendors to shorten the sales cycle and increase the productivity of PSW's sales
resources. Technology vendor leads are generated by pursuing Windows NT porting
opportunities and by targeting specific technology vendors who support Unix but
do not yet have Windows NT products, by working closely with Microsoft and by
communicating PSW's porting and Windows NT expertise. Business end-user leads
are generated through these forums, as well as relationships with technology
vendor and other partnership arrangements. For example, Canon Computer Systems
and ESC were referred to PSW by NeXT, and GenRe was referred to PSW by Transarc.
PSW works closely with these companies during the sales process to present a
unified proposal to the client. At the same time, PSW does not resell hardware
or software products of these or any other
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technology vendor, maintaining its independence to recommend the appropriate
solution to each of its clients.
The Company believes there is a significant need to architect, design,
implement, and integrate system management solutions for business end-user
clients. Accordingly, the Company expects to leverage its expertise with the
Tivoli Management Environment software and its existing relationship with Tivoli
to implement field programs designed to significantly increase the productivity
of the PSW sales force in identifying and closing Tivoli-related business.
A significant part of the Company's marketing strategy is to continue to
formalize and improve its GENOVA methodologies and to make GENOVA a more
integral part of its marketing programs. For example, the Software Technology
Unit is developing sales materials to be used with the first formal version of
the GENOVA porting methodology in conjunction with its porting services
marketing efforts. In addition, GENOVA will continue to be central to the
marketing programs to business end-user clients.
SALES
PSW's sales force consists of Business Development Managers. Business
Development Managers identify appropriate business opportunities and client
needs. Senior Managers provide high level technical consulting early in the
client relationship to thoroughly explore the client's needs and to propose
solutions. These solutions often result in PSW projects involving project
managers and technical professionals, in which case the Senior Manager will help
set up and oversee the project and serve as the primary account manager.
Business Development Managers are paid a commission based on the gross
margin of business they obtain. This payment structure is designed to motivate
Business Development Managers to identify and obtain high value business. Senior
Managers are salaried and receive an incentive bonus based on two factors: the
amount of revenue they book based on proposals they have written; and the amount
of personal billings achieved. The sales and marketing organization utilizes a
formal proposal process to identify engagements in which the Company's technical
skills and project management capabilities are well suited to meet the needs of
prospective clients. The proposal process also involves reviews with the client,
which are designed to ensure that the engagement is based upon a jointly
developed proposal. In some cases, the client pays for an assessment to analyze
the project and make a detailed proposal. Time schedules and cost estimates are
prepared by the Senior Manager and project manager responsible for execution of
the project. A pricing model is used to determine whether the engagement will
meet or exceed the business unit's margin targets for new business. Pricing for
fixed price projects or projects involving a commission must be approved by the
Senior Vice President in charge of the business unit.
PSW serves clients throughout the United States. The Company seeks to
establish sites in those areas that have a high concentration of technology
vendors. Current sites include Austin, Boston, and Seattle. Each site has a site
manager and sales resources to grow the Company's business and base of clients.
In addition, the Company has established sales offices in Jersey City, New
Jersey and Chicago, Illinois in order to focus on business end-user
opportunities. Once an engagement is started, key personnel travel or relocate
to the project site and new personnel are added by both local and national
recruiting efforts.
The Company has recently reorganized its sales and marketing functions by
combining the separate sales forces of its Software Technology and Business
Systems Units into a single sales organization. This change was effected in
order to enable to Company to better leverage its technology vendor partnerships
in identifying and establishing business end-user clients, to enhance its
cross-selling opportunities (such as porting and testing services to business
end-user clients) and to increase its overall sales and marketing productivity.
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EMPLOYEES
PSW's workforce has grown significantly over the past two years, increasing
from 167 full-time employees at December 31, 1994 to 400 full-time employees at
March 31, 1997. PSW believes that attracting and retaining superior and
innovative technical professionals, project managers and executive management is
a critical element in its ability to deliver high quality services to its
clients. Accordingly, PSW focuses on identifying and recruiting highly qualified
technical professionals at all levels within the Company. In order to retain
these professionals, the Company maintains a culture and implements numerous
programs that emphasize the importance of its employees, including training,
career development and incentive programs.
None of the Company's employees is covered by a collective bargaining
agreement. Substantially all of the Company's employees have executed an
invention assignment and confidentiality agreement. In addition, the Company
requires that all new employees execute such agreements as a condition of
employment by the Company. Management considers its relations with its employees
to be good.
SELECTION AND RECRUITING
Prior to October 1995, the Company relied significantly upon the recruiting
services of Pencom for its technical staff hires. Since that time, the Company
has decreased its reliance on Pencom by building its internal recruiting
infrastructure for technical staff hires, with Pencom accounting for less than
15% and 10% of the Company's hires in 1996 and the first quarter of 1997,
respectively. Currently, the Company is a party to recruiting agency agreements
with Pencom and several other outside recruiting firms.
Because recruiting is critical to achieving the differing business
objectives of PSW's two business units, each unit is responsible for its own
recruiting needs. Within its Software Technology Unit, the Company utilizes
recruiting administrators to assist site managers and project managers in the
recruiting process. Within its Business Systems Unit, the Company utilizes
dedicated recruiters to support management in identifying, staffing and building
pipelines for the skill types required to meet the Company's sales efforts. Each
business unit implements a comprehensive interview and evaluation process, which
typically includes a full day of technical interviews.
In addition, PSW has established an employee referral program pursuant to
which existing employees receive a cash incentive for each person they refer who
becomes a PSW employee. This referral program has provided the Company with a
cost-effective means of identifying and recruiting high quality employees.
TRAINING
The Company has developed strong internal training programs for its
technical employees, including its Windows NT certification program for
technical professionals working with the Windows NT operating environment, and
the GENOVA BUSINESS SYSTEMS DEVELOPMENT ACADEMY coursework, which trains
employees in object-oriented business systems development using the GENOVA
methodology. In addition, the Company offers several management training
programs to its senior employees, including Communications & Leadership,
Overview of Management, Interviewing Effectively and Legally, Performance
Reviews, and Progressive Discipline and Termination. Finally, PSW conducts
semi-annual Technology Forums and Business Forums to increase communications and
sharing among both business units and across all locations and disciplines
within the Company.
CAREER DEVELOPMENT
The Company has developed a separate Plans and Controls department within
each business unit which is designed, among other things, to ensure that project
assignments are consistent with each employee's career aspirations and that each
employee receives meaningful quarterly and annual performance reviews. In
addition, the Company's "technical career ladder" enables highly qualified
technical professionals to reach the level of ARCHITECT, a position which
entails substantial professional authority.
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Finally, the Company typically offers redeployment and/or relocation to
employees upon business changes, such as the expiration of an engagement.
INCENTIVES
The Company implements a number of compensation and other incentive programs
designed to promote employee retention. Technical professionals are compensated
in accordance with the Company's merit pay program, which is based on
competitive salary ranges and is designed to reward employees based on their
individual job level and their performance in that job level. In addition, the
Company implements a "battle pay" program to compensate employees for extended
on-site work away from home. The Company also issues Common Stock options to all
PSW employees, with senior management and technical personnel receiving options
at levels intended to build a significant and long-term commitment to the
Company. Finally, the Company provides a competitive and comprehensive benefits
program which includes health care, escalating vacation time and life insurance.
COMPETITION
The markets for the Company's services are highly competitive. The Company
believes that it currently competes principally with the internal information
systems and development groups of its prospective clients, as well as with
consulting and software integration firms and other hardware and application
software vendors. In addition, there are a number of systems integrators who
serve similar markets or provide similar services with whom the Company competes
or may compete in the future. Many of these companies have significantly greater
financial, technical and marketing resources than the Company, generate greater
revenues and have greater name recognition than the Company. There are
relatively low barriers to entry into the Company's markets and the Company has
faced and expects to continue to face additional competition from new entrants
into its markets.
The Company believes that the principal competitive factors in its markets
include reputation, project management expertise, industry expertise, speed of
development and implementation, technical expertise and ability to deliver on a
fixed-price as well as a time and materials basis. The Company believes that its
ability to compete also depends in part on a number of competitive factors
outside its control, including the ability of its clients or competitors to
hire, retain and motivate project managers and other senior technical staff; the
ownership by competitors of software used by potential clients; the development
by others of products and services that are competitive with the Company's
services; the price at which others offer comparable services; the ability of
its clients to perform the services themselves; and the extent of its
competitors' responsiveness to client needs. There can be no assurance that the
Company will be able to compete effectively on pricing or other requirements
with current and future competitors or that competitive pressures faced by the
Company will not cause the Company's revenue or income to decline or otherwise
materially adversely affect its business, financial condition and results of
operations. The Company has entered into employment agreements with each of its
executive officers. These agreements contain provisions which, among others,
prohibit the employee from disclosing or otherwise using certain confidential
information, assign to the Company inventions or ideas conceived by the employee
during his employment, prohibit solicitation by the employee of clients and
other employees of the Company and prohibit the employee from accepting any
opportunity (whether by contract or full-time employment) with the Company's
clients. Furthermore, the Company's employment agreement with Dr. W. Frank King,
the Company's President and Chief Executive Officer, contains provisions, which
for a period of two years, restrict Dr. King's ability to provide services to,
or solicit the business of, the Company's clients and prospective clients. There
can be no assurance that any of the foregoing measures will provide the Company
with adequate protection. See "Risk Factors -- Competition."
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INTELLECTUAL PROPERTY RIGHTS
The Company's future success is dependent in part upon the maintenance and
protection of its intellectual property rights and, to a lesser extent, upon its
ability to license technology from its clients. The Company relies on a
combination of copyrights, trade secrets and trademarks to protect its
intellectual property. There can be no assurance that the steps taken by the
Company to protect its intellectual property rights will be adequate, that
competitors will not be able to develop similar or functionally equivalent
methodologies or products or that the Company will be able to license technology
from its clients in the future. Furthermore, effective copyright and trade
secret protection may be unavailable or limited in certain foreign countries,
and no assurance can be given that foreign copyright and trade secret laws will
adequately protect the Company's intellectual property rights. Litigation may be
necessary to enforce the Company's intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the intellectual
property rights of others, including the Company's clients, or to defend against
claims of infringement. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on the Company's
business, financial condition and results of operations. No assurance can be
given that infringement or invalidity claims (or claims for indemnification
resulting from infringement claims against third parties, such as clients) will
not be asserted against the Company or that any such assertions would not have a
material adverse effect on the Company's business, financial condition or
results of operations. If infringement or invalidity claims are asserted against
the Company or any of its licensees, litigation may be necessary to defend the
Company or such licensees against such claims, and in certain circumstances the
Company may choose to seek to obtain a license under the third party's
intellectual property rights. There can be no assurance that such licenses will
be available on terms acceptable to the Company, if at all. See "Risk Factors --
Intellectual Property Rights."
FACILITIES
The Company's executive offices and primary facility are located in Austin,
Texas, in a leased facility of approximately 36,300 square feet. The lease for
the Austin facility includes an additional 10,000 square feet of space in an
adjoining building which is expected to become available in the first half of
1998. This lease expires on December 31, 2003 with respect to both premises and
is renewable at the option of the Company for an additional five-year term. The
Company also has a right of first refusal on additional space in such facilities
exercisable during the primary term of the lease. The Austin facility is located
in the high tech center of Austin near other leading technology firms, and
includes sophisticated laboratory, network and server facilities to support
PSW's operations and project work on a variety of computing platforms.
PSW has approximately 6,700 square feet of additional office space in
Bellevue, Washington, strategically located near Microsoft and the IBM Kirkland
Programming Center. This facility primarily provides office and laboratory space
for the Company's Windows NT porting center, and also supports sales. PSW also
has space in Jersey City, New Jersey and Chicago, Illinois.
PSW employees are also located at client sites throughout the United States,
including Chicago, Raleigh, Atlanta, Costa Mesa, Dallas, Boston and Stamford.
Additional office expansion is anticipated in 1997. The Company believes that
its existing facilities are adequate to meet its current needs and that suitable
additional or alternative space will be available in the future on commercially
reasonable terms, if and as needed.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND OTHER SIGNIFICANT EMPLOYEES
The executive officers, directors and certain other significant employees of
the Company and their ages as of March 31, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Dr. W. Frank King(1)........................... 57 President, Chief Executive Officer and Director
Patrick D. Motola.............................. 42 Senior Vice President of Operations, Chief Financial
Officer and Secretary
William C. Cason............................... 48 Senior Vice President, Business Systems Services
Brian E. Baisley............................... 54 Senior Vice President, Software Technology Services
Dennis P. Thompson............................. 42 Vice President, Sales and Marketing
Keith D. Thatcher.............................. 39 Vice President of Finance and Treasurer
Julie M. Kirk.................................. 46 Vice President, Human Resources
Michael G. McCown.............................. 35 Vice President, Business Systems Marketing
Wade E. Saadi(1)(2)............................ 47 Chairman of the Board of Directors
Edward C. Ateyeh, Jr.(2)....................... 44 Director
Thomas A. Herring(3)........................... 46 Director
Kevin B. Kurtzman(3)........................... 49 Director
Michael J. Maples(2)........................... 53 Director
Jonathan D. Wallace, Esq.(3)................... 42 General Counsel and Director
</TABLE>
- ------------------------
(1) Member of the Pricing Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
Dr. King has served as President, Chief Executive Officer and a Director of
PSW since October 1, 1996. From 1992 to October 1, 1996, Dr. King served as
President of the Company. From 1988 to 1992, Dr. King was Senior Vice President
of the Software Business group of Lotus, a software publishing company. Prior to
joining Lotus, Dr. King was with IBM, a technology company, for 19 years, where
his last position was Vice President of Development for the Personal Computing
Division. Dr. King earned a doctorate in electrical engineering from Princeton
University, a master's degree in electrical engineering from Stanford
University, and a bachelor's degree in electrical engineering from the
University of Florida. He serves on the boards of directors of State of the Art,
Inc., Excalibur Technologies Corporation, SystemSoft, Auspex Systems Inc. and
Natural Microsystems, Inc.
Mr. Motola has served as the Senior Vice President of Operations, Chief
Financial Officer and Secretary of PSW since October 1, 1996. From May 1993 to
October 1, 1996, Mr. Motola served as Vice President and General Manager of the
Company. From January 1992 to May 1993, Mr. Motola served as Vice President of
Marketing at Software Publishing Corp., a PC software company. Prior thereto,
Mr. Motola was Vice President of Business Development at Metaphor Computer
Systems, a software and
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systems company, from April 1989 to December 1991. Mr. Motola also held various
positions at IBM from 1976 to 1989 within the Personal Systems and Workstation
Divisions, including System Manager of OS/2 Extended Edition and AIX Development
Manager in the original RISC/UNIX system project. Mr. Motola earned a master's
degree in management science from Stanford University, a master's degree in
computer science from the University of Texas at Austin, and a bachelor's degree
in electrical engineering and computer science from the University of California
at Berkeley.
Mr. Cason has served as the Senior Vice President, Business Systems Services
of PSW since October 1, 1994. From October 1994 to October 1996, Mr. Cason was a
Vice President, and from September 1993 to October 1994, he was Director of
Transaction Systems, of the Company. From May 1986 to September 1993, he served
at Soft Switch Inc., an electronic mail software product company, with roles
including Vice President of UNIX Development, Vice President of Business
Development and Vice President of Operations. Prior thereto, Mr. Cason was at
IBM's Development Lab in Austin, Texas for nine years. Mr. Cason earned a
bachelor's degree in electrical engineering from the University of Texas at
Austin and has completed post-graduate coursework toward a master's degree in
electrical engineering.
Mr. Baisley has served as the Senior Vice President, Software Technology
Services of PSW since October 1, 1996. From October 1994 to October 1996, Mr.
Baisley was a Vice President, and from October 1993 to October 1994, he was
Director of Technical Support Services, of the Company. From 1963 to September
1993, Mr. Baisley held a variety of positions with IBM, including Senior Manager
of the IBM National Technical Support Center in Dallas, Texas. While at IBM, Mr.
Baisley was also involved in providing consulting services to software companies
that were migrating products to IBM systems.
Mr. Thompson has served as Vice President, Sales and Marketing of PSW since
May 1997. From October 1996 to May 1997, he was Vice President, Software
Technology Sales and Marketing. From September 1994 to October 1996, he was a
Business Development Manager for the Company. From 1988 to 1994, Mr. Thompson
was the Director of Field Sales at Revelation Technologies, Inc., a software
development company which publishes application development tools. Prior
thereto, Mr. Thompson served as a consultant to the petroleum industry in the
use of personal computers for the exploration and production of oil and gas. Mr.
Thompson earned a bachelor's degree in communications from Bethany College.
Mr. Thatcher has served as the Vice President of Finance and Treasurer of
PSW since October 1, 1996. From October 1994 to June 1996, Mr. Thatcher was
Chief Financial Officer, Secretary and Treasurer of Tanisys Technology, Inc., a
technology start-up company involved in developing commercial applications for
capacitive touch technology. Prior thereto, Mr. Thatcher served as Vice
President and Treasurer for Kinetic Concepts, Inc., a medical services and
products company, from 1987 to 1994. From 1985 to 1987, Mr. Thatcher was
employed by Peat Marwick Main & Co. as an audit manager. Mr. Thatcher earned a
bachelor's degree in accountancy from Northern Arizona University.
Ms. Kirk has served as Vice President, Human Resources and Administration of
PSW since December 1996. From December 1995 to December 1996, Ms. Kirk was the
Director of Human Resources and Administration, and from May 1992 to December
1995, she was the Manager of Human Resources, of the Company. Prior to joining
the Company, Ms. Kirk was with Union Pacific Corporation for 17 years and held
various human resource positions in the Personnel and Purchasing and Materials
Departments.
Mr. McCown has served as Vice President, Business Systems Marketing of PSW
since January 1997. From May 1996 to January 1997, Mr. McCown served as Senior
Manager of the Company and was responsible for the Business Systems element of
Genova. From July 1995 to April 1996, Mr. McCown was President of Objective
Insight, Inc., a software consulting company. Prior thereto, Mr. McCown held
various positions with GTE Government Systems Corporation, a telecommunications
company, and the United States Department of Defense. Mr. McCown earned a
bachelor's degree in electrical engineering and computer science from the
University of California at Berkeley.
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Mr. Saadi has served on the Board of Directors of PSW since October 1, 1996.
He is the founder of Pencom, and has served as its President and Chief Executive
Officer since its inception in 1973. Under Mr. Saadi's direction, Pencom grew
from a two-person enterprise to a company with over 800 employees, including
PSW. In 1996, Mr. Saadi won the Technology Entrepreneur of the Year
Award-Registered Trademark- in New York City. Mr. Saadi is a governor of the
board of the Collectors Club and a regional vice president of the United States
Philatelic Classics Society. Mr. Saadi attended the Polytechnic Institute of
Brooklyn where he majored in chemical engineering.
Mr. Ateyeh has served on the Board of Directors of PSW since October 1,
1996. He is presently the Executive Vice President of Pencom, where he has been
employed since 1977. Mr. Ateyeh served as President of Pencom's software
division from 1989 to 1992. He also founded Pencom's System Administration
division in 1994 and serves as its President. Mr. Ateyeh earned a bachelor of
science degree from the University of Notre Dame. Mr. Ateyeh received the
UniForum Pioneers of UNIX Award and chaired the UNIX EXPO Advisory Board and
Conference Committee from 1984 to 1990. He is presently a member of the IT
Conference Board, IEEE, Usenix and UniForum.
Mr. Herring has served on the Board of Directors of PSW since January 1997.
From May 1996 to the present, Mr. Herring has served as Chief Executive Officer
of Numega Technologies, Inc., a developer of automatic error detection and
advanced Windows debugging tools. From July 1995 to May 1996, Mr. Herring was
Vice President of Corporate Marketing of Sybase, Inc., a software company. Prior
thereto, he served as Vice President of Worldwide Marketing and Business
Development for Powersoft Corporation, a developer of client/server development
tools, from June 1990 to July 1995. Mr. Herring earned a bachelor's degree in
marketing and a master's degree in statistics, economics and mathematics from
Texas Technical University. Mr. Herring was selected as the 1995 Software
Industry Sales and Marketing Executive of the Year by Upside Magazine. He serves
on the Steering Committee on Information Management of the Graduate School of
Business of the University of Texas at Austin, and on the board of directors of
Wayfarer Communications, an Internet software company.
Mr. Kurtzman has served on the Board of Directors of PSW since December
1996. Mr. Kurtzman has been with Margolin, Winer & Evens LLP, a certified public
accounting firm, since 1972 and is a Partner and a member of its executive
committee and an Audit and Business Advisory Partner. Mr. Kurtzman is a former
officer and director of CPA Associates International. Mr. Kurtzman received a
bachelor's degree in accounting from Queens College of the City University of
New York.
Mr. Maples has served on the Board of Directors of PSW since December 1996.
Mr. Maples held several positions with Microsoft, a technology company, from
April 1988 through July 1995, where his last position was Executive Vice
President of Worldwide Products. Prior thereto, Mr. Maples held various
positions with IBM over the course of 23 years, the last of which was Director
of Software Strategy. Mr. Maples earned a master's degree from Oklahoma City
University and a bachelor's degree in electrical engineering from the University
of Oklahoma. Mr. Maples sits on the educational advisory boards of the
Engineering Coalition of Schools for Excellence in Education and Leadership, the
Engineering School at the University of Oklahoma and the College of Engineering
at the University of Texas at Austin, and on the board of directors of Lexmark
International Inc., a global printer manufacturer.
Mr. Wallace has served as PSW's General Counsel and as a member of its Board
of Directors since October 1, 1996. He has served as Pencom's Vice President of
Operations and legal counsel from February 1990 to the present. Prior thereto,
he was engaged in the private practice of law for 10 years, specializing in
computer-related legal matters. Mr. Wallace earned a bachelor's degree from
Columbia University and graduated from Harvard Law School.
BOARD OF DIRECTORS AND COMMITTEES
At each annual stockholder meeting commencing with the 1998 annual meeting,
the successors to the Directors whose terms expire are elected to serve from the
time of their election and qualification until the
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next annual meeting of stockholders following their election and until a
successor has been duly elected and qualified. There are no family relationships
among any of the directors and executive officers of the Company.
The Pricing Committee of the Board of Directors will approve the final terms
and form of the Underwriting Agreement to be entered into in connection with
this offering, and in connection with this offering, will determine the number
of shares of Common Stock to be sold by the Company, the public offering price
per share and the Underwriters' discount.
The Compensation Committee of the Board of Directors determines the salaries
and incentive compensation of the officers of the Company and provides
recommendations for the salaries and incentive compensation of the other
employees and the consultants of the Company. The Compensation Committee also
administers various incentive compensation, stock and benefit plans.
The Audit Committee of the Board of Directors reviews, acts on and reports
to the Board of Directors with respect to various auditing and accounting
matters, including the selection of the Company's auditors, the scope of the
annual audits, fees to be paid to the auditors, the performance of the Company's
independent auditors and the accounting practices of the Company.
The Board of Directors may from time to time establish certain other
committees to facilitate the management of the Company.
DIRECTOR COMPENSATION
The Nonemployee Board Members are paid $3,750 per calendar quarter, which
may be in the form of Common Stock options or cash at the discretion of each
eligible director. Nonemployee Board Members are members of the Board of
Directors who are not employees of PSW or of Pencom.
45
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by PSW and Pencom for
1996 to the Company's Chief Executive Officer and each of the four other most
highly compensated executive officers of the Company who received compensation
in excess of $100,000 in respect of services performed on behalf of the Company
during 1996 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------- -------------
OTHER ANNUAL OPTIONS/
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) SARS(#)
- -------------------------------------------------------- ---------- ---------- ---------------- -------------
<S> <C> <C> <C> <C>
Dr. W. Frank King 310,071 363,226 654,907 212,308
Chief Executive Officer(1)............................
Patrick D. Motola 161,630 40,000 -- 133,848
Chief Financial Officer...............................
Brian E. Baisley 134,500 30,000 -- 61,540
Senior Vice President, Software Technology Services...
William C. Cason 134,500 30,000 -- 61,540
Senior Vice President, Business Systems Services......
William S. Wimberley, Jr. 134,322 33,600 -- 21,539
Vice President, Business Systems
--Central Region (2)..................................
</TABLE>
- ------------------------
(1) Dr. King's bonus consists of an amount paid to him pursuant to his
employment agreement with Pencom dated October 19, 1992. Dr. King's other
annual compensation consists of the forgiveness of a promissory note,
including interest thereon, from Dr. King to Pencom. See Note 10 of Notes to
Financial Statements.
(2) Mr. Wimberley's employment with the Company ended as of May 9, 1997.
46
<PAGE>
STOCK OPTION INFORMATION
The following table sets forth certain information regarding option grants
made pursuant to the Company's 1996 Stock Option/Stock Issuance Plan during 1996
to each of the Named Executive Officers, including options granted in
substitution for options issued by Pencom pursuant to the Pencom stock option
plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------
PERCENTAGE
NUMBER OF OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS ASSUMED ANNUAL RATES OF STOCK PRICE
UNDERLYING GRANTED EXERCISE APPRECIATION FOR OPTION TERM(2)
OPTIONS TO EMPLOYEES PRICE EXPIRATION ------------------------------------
NAME GRANTED (#) IN 1996(1) ($/SH) DATE 0% ($) 5% ($) 10% ($)
- ----------------------------- ------------ ------------- ----------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dr. W. Frank King............ 212,308 20.5% 3.90 10/02/06 -- 520,726 1,319,621
Patrick D. Motola............ 133,848 12.9 .04 10/02/06 516,653 844,941 1,348,598
Brian E. Baisley............. 24,616 2.4 .04 10/02/06 95,018 155,394 248,020
12,308 1.2 .43 10/02/06 42,708 72,896 119,210
12,308 1.2 2.58 10/02/06 16,247 46,434 92,748
12,308 1.2 3.90 10/02/06 -- 30,188 76,502
William C. Cason............. 24,616 2.4 .04 10/02/06 95,018 155,394 248,020
12,308 1.2 .43 10/02/06 42,708 72,896 119,210
12,308 1.2 2.58 10/02/06 16,247 46,434 92,748
12,308 1.2 3.90 10/02/06 -- 30,188 76,502
William S. Wimberley, Jr..... 12,308 1.2 .04 10/02/06 47,509 77,697 124,010
9,231 0.9 .43 10/02/06 32,032 54,672 89,408
</TABLE>
- ------------------------
(1) Based on an aggregate of 1,035,485 options granted to employees in fiscal
1996, including options granted to the Named Executive Officers.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options at the end of the 10-year option term. The assumed 0%, 5%
and 10% rates of stock appreciation are mandated by rules of the Securities
and Exchange Commission and do not represent the Company's estimate of the
future market price of the Common Stock. These amounts do not take into
account any other appreciation in the price of the Common Stock from the
date of grant to the current date.
47
<PAGE>
No options were exercised by the Named Executive Officers in 1996. The
following table sets forth for each of the Named Executive Officers certain
information concerning the value of unexercised options at the end of 1996:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1996 (#) AT DECEMBER 31, 1996(1)($)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Dr. W. Frank King......................................... -- 212,308 -- 501,047
Patrick D. Motola......................................... 68,324 65,524 424,294 407,558
Brian E. Baisley.......................................... 24,616 36,924 150,465 148,496
William C. Cason.......................................... 24,616 36,924 150,465 148,496
William S. Wimberley, Jr.................................. 8,462 13,077 51,647 78,640
</TABLE>
- ------------------------
(1) Based on an estimated fair value of the Company's Common Stock at December
31, 1996 ($6.25 per share), as determined by the Company's Board of
Directors, less the exercise price payable for such shares.
1996 STOCK OPTION/STOCK ISSUANCE PLAN
The Company's 1996 Stock Option/Stock Issuance Plan (the "1996 Plan") was
adopted by the Board of Directors and approved by the stockholders effective
October 1, 1996. 1,715,000 shares of Common Stock have been authorized for
issuance under the 1996 Plan, of which 518,290 were available for grant as of
March 31, 1997. In no event may any one participant in the 1996 Plan receive
option grants or direct stock issuances for more than 750,000 shares in the
aggregate per calendar year.
The 1996 Plan is divided into four separate components: (i) the
Discretionary Option Grant Program under which eligible individuals may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
Common Stock at an exercise price determined by the Plan Administrator, (ii) the
Stock Issuance Program under which such individuals may, in the Plan
Administrator's discretion, be issued shares of Common Stock directly, through
the purchase of such shares at a price determined by the Plan Administrator or
as a bonus tied to the performance of services, (iii) the Automatic Option Grant
Program under which option grants will automatically be made at periodic
intervals to eligible Board members to purchase shares of Common Stock at an
exercise price equal to 100% of their fair market value on the grant date and
(iv) the Director Fee Option Grant Program pursuant to which eligible Non-
employee Board Members may apply a portion of the annual retainer fee otherwise
payable to them in cash each year to the acquisition of special option grants.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee as
Plan Administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances, the time or times
when such option grants or stock issuances are to be made, the number of shares
subject to each such grant or issuance, the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
Federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding. The administration of the Automatic Option Grant and Director Fee
Option Grant Programs will be self-executing in accordance with the express
provisions of each such program.
48
<PAGE>
Upon an acquisition of the Company by merger or asset sale, each outstanding
option and unvested stock issuance will be subject to accelerated vesting under
certain circumstances.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made, at
the sole direction of the Plan Administrator, in cash or in shares of Common
Stock.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program in return for
the grant of new options for the same or different number of option shares with
an exercise price per share based upon the fair market value of the Common Stock
on the new grant date.
Under the Automatic Option Grant Program, each individual who becomes a
Nonemployee Board Member on or after the date hereof will receive a 16,000 share
option grant on the date such individual joins the Board, provided such
individual has not been in the prior employ of the Company. In addition, at each
Annual Stockholders Meeting, beginning with the 1998 Annual Meeting, each
individual who is to continue to serve as a Nonemployee Board Member after the
meeting and has served as a Nonemployee Board Member for at least six months
will receive an additional option grant to purchase 4,000 shares of Common Stock
whether or not such individual has been in the prior employ of the Company.
Each automatic grant will have a term of 10 years, subject to earlier
termination following the optionee's cessation of Board service. Each automatic
option will be immediately exercisable; however, any shares purchased upon
exercise of the option will be subject to repurchase should the optionee's
service as a Nonemployee Board Member cease prior to vesting in the shares. The
initial 16,000 share grant will vest in four equal and successive annual
installments over the optionee's period of Board service. Each additional 4,000
share grant will vest upon the optionee's completion of one year of Board
service measured from the grant date. However, each outstanding option will
immediately vest upon (i) certain changes in the ownership or control of the
Company or (ii) the death or disability of the optionee while serving as a Board
member.
Under the Director Fee Option Grant Program, each Nonemployee Board Member
may elect to apply all or a portion of any annual retainer fee otherwise payable
in cash to the acquisition of an option. The option grant will automatically be
made on the first trading day in January for the year for which the election is
to be in effect. The option will have an exercise price per share equal to the
fair market value of the option shares on the grant date, and the number of
shares subject to the option will be such that the value of the option (as
determined by using the Black-Scholes option valuation model) shall be equal to
the amount of the retainer fee applied to the program. The option will become
exercisable for 50% of the option shares upon completion of 6 months of service
during the calendar year of the option grant and with respect to the balance of
the shares in a series of 6 successive equal monthly installments upon the
optionee's completion of each additional month of Board service during the
calendar year of the option grant. The option will be subject to full and
immediate vesting upon certain changes in the ownership or control of the
Company.
The Board may amend or modify the 1996 Plan at any time. The 1996 Plan will
terminate on October 1, 2006, unless sooner terminated by the Board or pursuant
to certain other provisions of the Plan.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors on February 3, 1997 and the stockholders on March 17,
1997. The Purchase Plan is designed to allow eligible employees of the Company
to purchase shares of Common Stock, at semi-annual intervals, through periodic
payroll deductions under the Purchase Plan, and a reserve of 400,000 shares of
Common Stock has been established for this purpose.
49
<PAGE>
The Purchase Plan will be implemented in a series of successive purchase
periods, each generally with a duration of six months. The initial purchase
period will begin on the date hereof and will end on the last business day in
October 1997. Thereafter, purchase periods will begin on the first business day
in November and May of each year and will end on the last business day of April
and October, respectively. Shares of Common Stock will be purchased for each
participant at the end of each purchase period.
Payroll deductions may not exceed 15% of base salary for each purchase
period, and each employee's purchases are limited to 500 shares per purchase
period. The purchase price per share will be 85% of the lower of (i) the fair
market value of the Common Stock on the start date of the purchase period or
(ii) the fair market value on the semi-annual purchase date.
The Purchase Plan will terminate on the last business day in April 2007.
EXECUTIVE BONUS PLAN
The Company's annual Executive Bonus Plan generally awards cash and/or
Common Stock options to executive officers of the Company according to a formula
based upon specified pre-tax profit levels.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company has entered into an employment agreement with Dr. W. Frank King
dated October 1, 1996 (the "King Agreement"). Pursuant to the King Agreement,
the Company agreed to pay Dr. King an annual base salary of $348,000 and to
provide customary fringe benefits. In addition, the Company agreed to issue to
Dr. King options under the 1996 Plan to purchase an aggregate of 212,308 shares
of Common Stock at $3.90 per share. 80,000 of such options vest on December 31,
1997. The remaining 132,308 of such options vest on December 31, 2002, subject
to partial or full acceleration of vesting to December 31, 1998 based upon the
Company's 1998 performance measured against certain specified financial goals.
The King Agreement terminates on September 30, 1998.
The Company has entered into employment agreements with no defined
termination dates with each of Messrs. Motola, Baisley and Cason dated July 1,
1993, October 19, 1993 and September 27, 1993, respectively (the "Executive
Agreements"). Pursuant to the Executive Agreements, the Company agreed to pay
Messrs. Motola, Baisley and Cason annual base salaries of $140,000, $60,000 and
$120,000, respectively, and to provide customary fringe benefits. In addition,
the Company has adopted a Senior Vice President Bonus Plan pursuant to which it
has granted to each of Messrs. Motola, Baisley and Cason options to purchase
25,000 shares of the Company's Common Stock at a purchase price equal to the
fair market value of such shares on the date of grant. Upon achievement of
certain specified pre-tax profit levels, the vesting of these options will be
partially or fully accelerated and the participants in the plan will be entitled
to receive certain additional cash bonus payments.
The Executive Agreements contain provisions which, among others, prohibit
the employee from disclosing or otherwise using certain confidential
information, assign to the Company inventions or ideas conceived by the employee
during his employment, prohibit solicitation by the employee of clients and
other employees of the Company and prohibit the employee from accepting any
opportunity (whether by contract or full-time employment) with the Company's
clients. Pursuant to the terms of the Executive Agreements, either party may
terminate the employment relationship without cause upon two weeks' prior
written notice to the other party. The Company may terminate the employment
relationship in its sole discretion without cause, effective immediately, upon
payment of two weeks' salary to the employee or immediately with cause upon
written notice.
The Compensation Committee as Plan Administrator of the 1996 Plan will have
the authority to provide for the accelerated vesting of outstanding options held
by the Chief Executive Officer and any other executive officer or the shares of
Common Stock subject to direct issuances held by such individual, in connection
with certain changes in control of the Company or the subsequent termination of
the officer's employment following the change in control event.
50
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
PSW did not have a Compensation Committee of the Board of Directors in 1996.
Dr. King and Messrs. Wade E. Saadi, Ateyeh and Wallace participated in
deliberations of PSW's Board of Directors concerning executive officer
compensation during 1996. Dr. King also served as a director of Pencom in 1996
and Mr. Wade E. Saadi, an executive officer of Pencom, participated in
deliberations of PSW's Board of Directors concerning executive officer
compensation during 1996.
Messrs. Wade E. Saadi, Ateyeh, Edgar G. Saadi and Wallace served as
directors of Pencom in 1996, and Dr. King was an executive officer of Pencom
during 1996 and served on PSW's Board of Directors at such time.
KEY-PERSON LIFE INSURANCE
The Company does not maintain key-person life insurance policies on the
lives of any of its executive officers.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
The Company's Certificate of Incorporation provides that, except to the
extent prohibited by the DGCL, its directors shall not be personally liable to
the Company or its stockholders for monetary damages for any breach of fiduciary
duty as directors of the Company. Under Delaware law, the directors have a
fiduciary duty to the Company that is not eliminated by this provision of the
Certificate of Incorporation and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available. In addition, each director will continue to be subject to liability
under Delaware law for breach of the director's duty of loyalty to the Company,
for acts or omissions which are found by a court of competent jurisdiction to be
not in good faith or involving intentional misconduct, for knowing violations of
law, for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by Delaware law. This provision also does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws. If commercially feasible, the Company
intends to obtain liability insurance for its officers and directors.
The Certificate of Incorporation also provides that the Company shall
indemnify, to the fullest extent permitted by Section 145 of the DGCL, all of
its present and former officers and directors, and any party agreeing to serve
as an officer, director or trustee of any entity at the Company's request, in
connection with any civil or criminal proceeding threatened or instituted
against such party by reason of actions or omissions while serving in such
capacity. Indemnification by the Company includes payment of expenses in defense
of the indemnified party in advance of any proceeding or final disposition
thereof. The rights to indemnification provided in this provision do not
preclude the exercise of any other indemnification rights by any party pursuant
to any law, agreement or vote of the stockholders or the disinterested directors
of the Company.
Section 145 of the DGCL generally allows the Company to indemnify the
parties described in the preceding paragraph for all expenses, judgments, fines
and amounts in settlement actually paid and reasonably incurred in connection
with any proceedings so long as such party acted in good faith and in a manner
reasonably believed to be in or not opposed to the Company's best interests and,
with respect to any criminal proceedings, if such party had no reasonable cause
to believe his or her conduct to be unlawful. Indemnification may only be made
by the Company if the applicable standard of conduct set forth in Section 145
has been met by the indemnified party upon a determination made (i) by the Board
of Directors by a majority vote of the directors who are not parties to such
proceedings (even though less than a quorum), or (ii) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion, or (iii) by the stockholders.
51
<PAGE>
CERTAIN TRANSACTIONS
PENCOM RELATIONSHIP
OWNERSHIP OF COMMON STOCK
Pursuant to an Asset Contribution Agreement (the "Asset Contribution
Agreement") dated as of October 1, 1996 by and between Pencom and the Company,
Pencom contributed certain assets and associated liabilities of its software
division and a portion of a software contract that had previously been allocated
to other operations of Pencom to the Company in exchange for (i) all of the
outstanding Common Stock of the Company, which Common Stock was immediately
distributed to Pencom's shareholders, (ii) certain warrants issued to Pencom,
which were immediately distributed to Pencom's shareholders and (iii) warrants
issued to certain of Pencom's employees to purchase shares of Common Stock of
the Company (the "Spin-Off").
ACCOUNTING SUPPORT
Prior to October 1, 1996, the Company had limited accounting capability and
depended upon Pencom for most accounting functions. By October 1, 1996, the
Company had assumed responsibility for most internal accounting functions, but
continued to depend upon Pencom for limited accounting support in connection
with the Company's year-end audit through January 31, 1997.
CONTRACTUAL ARRANGEMENTS
In connection with the Spin-Off, in September 1996, Pencom forgave
promissory notes from Dr. W. Frank King and Jonathan D. Wallace in the aggregate
principal amounts of $591,107 and $186,247, respectively, plus accrued interest,
issued to Pencom in connection with Dr. King's and Mr. Wallace's annual
purchases of common stock of Pencom. In April 1997, Pencom advanced $235,000 and
$100,000 to Dr. W. Frank King and Jonathan D. Wallace, respectively. The amounts
advanced to Dr. King and Mr. Wallace are evidenced by Promissory Notes, each
dated as of April 9, 1997, bearing interest at a rate of 8.50% per annum. All
amounts under Dr. King's promissory note are due and payable to Pencom upon the
earlier of April 9, 1998 or the termination of his employment with the Company.
All amounts under Mr. Wallace's promissory note are due and payable upon demand
by Pencom.
The Company and Pencom have also entered into an Accounts Receivable
Agreement dated October 1, 1996 whereby Pencom transferred a 26.67% interest in
the proceeds of certain accounts receivable to the Company in connection with
the Spin-Off.
The Company and Pencom have entered into a letter agreement whereby Pencom
agreed to provide certain accounting, personnel and legal services to PSW from
October 1, 1996 to April 30, 1997 for a fee of $7,000 per month.
The Company and Pencom have entered into a Recruiting Services Agreement
dated January 20, 1997 whereby Pencom provides certain recruiting services to
the Company (the "Recruiting Agreement"). The term of the Recruiting Agreement
is one year and it may be terminated by either party upon 10 days' written
notice. The total fee payable by the Company to Pencom under the Recruiting
Agreement for the placement of a candidate ranges from 17% to 25% of the
candidate's first year's compensation based upon the position level of the
candidate and the number of successful hires for which a fee has been paid to
Pencom in 1997. The Company believes that such fee arrangement is in accordance
with industry standards.
On October 31, 1996, the Company entered into a lease for its office space
in Austin, Texas, with Investors Life Insurance Company of North America, which
lease was guaranteed by Pencom. Pencom's guarantee of the lease will be released
upon the occurrence of certain events, including the Company's
52
<PAGE>
satisfaction of certain financial conditions and the failure of the Company to
be in default under the Credit Facility. The Company anticipates that this
guarantee will be released upon completion of this offering. This lease provides
for annual rent of approximately $717,000 in 1997.
The Company entered into an agreement with Pencom effective as of January
31, 1997 whereby the Company guaranteed Tivoli's obligations under Pencom's
sublease agreement with Tivoli. Such sublease agreement expires on September 30,
2000 and provides for annual rent of approximately $333,000 in 1997.
STOCKHOLDERS AGREEMENT
The Company is party to a Stockholders Agreement dated as of October 1, 1996
with Dr. King and Messrs. Wade E. Saadi, Edgar G. Saadi, Ateyeh and Wallace
pursuant to which such stockholders have agreed to certain restrictions and
conditions on the transfer of the Common Stock held by them, including rights of
first offer, tag-along and drag-along rights. Unless earlier terminated upon the
agreement of the Company and a two-thirds majority of such stockholders, the
Stockholders Agreement will terminate upon the earlier of the completion of this
offering or September 30, 2001.
REGISTRATION RIGHTS AGREEMENT
The Company has entered into an agreement with each of its existing
stockholders and the warrantholders pursuant to which such stockholders and
warrantholders were granted certain registration rights. See "Description of
Capital Stock -- Registration Rights."
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with all of its executive
officers. See "Management -- Employment Agreements."
SECURITIES ISSUANCES AND PURCHASES
Pursuant to the Asset Contribution Agreement dated October 1, 1996 between
the Company and Pencom, the Company issued (i) 5,538,463 shares of Common Stock
to Pencom and (ii) warrants to purchase 507,654 shares of Common Stock to Pencom
and certain employees of Pencom at an exercise price of $.04 per share, in
consideration of the contribution by Pencom to the Company of certain assets and
associated liabilities of Pencom's software division and a portion of a software
contract that had previously been allocated to other operations of Pencom, which
net assets amounted to approximately $2.1 million.
In October 1996, Pencom distributed 1,615,385, 1,615,385, 1,615,385, 415,384
and 138,462 shares of Common Stock to Wade E. Saadi, Edgar G. Saadi, Edward C.
Ateyeh, Jr., Dr. W. Frank King and Jonathan D. Wallace, respectively. On such
date, Pencom distributed an additional 138,462 shares of Common Stock to Dr.
King in exchange for the 60 shares of the common stock of Pencom owned by Dr.
King. Wade E. Saadi is the Chairman of the Board of Directors of the Company.
Mr. Ateyeh is a Director of the Company. Dr. King is the President, Chief
Executive Officer and a Director of the Company. Mr. Wallace is the General
Counsel and a Director of the Company.
Pursuant to a Stock Purchase Agreement dated as of January 1, 1997, the
Company sold, and Michael J. Maples purchased, 8,000 shares of Common Stock at a
price of $6.25 per share. Mr. Maples is a Director of the Company.
From October 2, 1996 through March 31, 1997, the Company granted executive
officers and directors options to purchase a total of 630,392 shares of Common
Stock with exercise prices ranging from $.04 per share to $9.00 per share and a
weighted average exercise price of $3.37 per share.
53
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of March 31, 1997 and as
adjusted to reflect the completion of this offering with respect to the
following: (i) each person or entity known by the Company to be the beneficial
owner of more than five percent of the Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers, and (iv) all directors
and executive officers of the Company as a group. Except as indicated in the
footnotes to the table, the persons and entities named in the table have sole
voting and investment power with respect to all shares beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING (1) OFFERING (1)
--------------------- ---------------------
NUMBER PERCENT NUMBER PERCENT
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Wade E. Saadi(2)(3)............................................... 1,680,390 29.9% 1,680,390 19.9%
Edgar G. Saadi(2)(3).............................................. 1,680,390 29.9 1,680,390 19.9
Edward C. Ateyeh, Jr.(2)(3)....................................... 1,680,390 29.9 1,680,390 19.9
Dr. W. Frank King(4).............................................. 553,846 10.0 553,846 6.6
Jonathan D. Wallace, Esq.(5)...................................... 143,463 2.6 143,463 1.7
Michael J. Maples................................................. 8,000 * 8,000 *
Patrick D. Motola(6).............................................. 85,186 1.5 85,186 1.0
Brian E. Baisley(7)............................................... 27,693 * 27,693 *
William C. Cason(8)............................................... 27,693 * 27,693 *
William S. Wimberley, Jr.(9)...................................... 8,462 * 8,462 *
Kevin B. Kurtzman................................................. * * * *
Thomas A. Herring................................................. * * * *
All directors and executive officers as a group (11 persons)...... 4,215,123 72.3% 4,215,123 48.6%
</TABLE>
- ------------------------
* Represents less than 1% of outstanding Common Stock or voting power.
(1) Shares beneficially owned and percentage of ownership are based on 5,546,463
shares of Common Stock outstanding before this offering and 8,396,463 shares
of Common Stock outstanding after completion of this offering. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or disposition power with
respect to securities.
(2) The address of Messrs. Wade E. Saadi, Edgar G. Saadi and Ateyeh is c/o
Pencom Systems Incorporated, 40 Fulton Street, New York, New York 10038.
(3) Includes 65,005 shares issuable upon exercise of warrants held by each of
Messrs. Wade E. Saadi, Edgar G. Saadi and Ateyeh that are exercisable within
the 60-day period following March 31, 1997.
(4) The address of Dr. King is the address of the Company's principal executive
offices.
(5) Includes 5,001 shares issuable upon exercise of warrants held by Mr. Wallace
that are exercisable within the 60-day period following March 31, 1997.
(6) Includes 85,186 shares issuable upon exercise of options held by Mr. Motola
that are exercisable within the 60-day period following March 31, 1997.
(7) Includes 27,693 shares issuable upon exercise of options held by Mr. Baisley
that are exercisable within the 60-day period following March 31, 1997.
(8) Includes 27,693 shares issuable upon exercise of options held by Mr. Cason
that are exercisable within the 60-day period following March 31, 1997.
(9) Includes 8,462 shares issuable upon exercise of options held by Mr.
Wimberley that are exercisable within the 60-day period following March 31,
1997.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Upon completion of this offering, the Company will be authorized to issue
34,000,000 shares of Common Stock, $.01 par value. Each holder of Common Stock
is entitled to one vote for each share held. Following this offering, the
holders of Common Stock, voting as a single class, will be entitled to elect all
of the directors of the Company. In all matters other than the election of
directors, when a quorum is present at any stockholders' meeting, the
affirmative vote of the majority of shares present in person or represented by
proxy shall decide any question before such meeting. Directors are elected by a
plurality of the votes of the shares present in person or represented by proxy
at a stockholders' meeting. The holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock would be entitled to share in
the Company's assets remaining after the payment of liabilities and the
satisfaction of any liquidation preference granted to the holders of any
outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive or other subscription rights. The shares of Common Stock are not
convertible into any other security. The outstanding shares of Common Stock are,
and the shares being offered hereby will be, upon issuance and sale fully paid
and nonassessable.
At March 31, 1997, there were outstanding 5,546,463 shares of Common Stock,
held of record by six stockholders, options to purchase an aggregate of
1,196,710 shares of Common Stock at a weighted average exercise price of $2.77
per share and warrants to purchase 507,654 shares of Common Stock at $.04 per
share. See "Management -- 1996 Stock Option/Stock Issuance Plan."
PREFERRED STOCK
Upon completion of this offering, the Company will be authorized to issue up
to 1,000,000 shares of Preferred Stock, $.01 par value, with such voting rights,
designations, preferences and rights, and such qualifications, limitations or
restrictions thereof, as may be determined by the Board of Directors providing
for such series. Although the Company has no current plans to issue any shares
of Preferred Stock, the issuance of Preferred Stock or of rights to purchase
Preferred Stock could be used to discourage an unsolicited acquisition proposal.
In addition, the possible issuance of Preferred Stock could discourage a proxy
contest, make more difficult the acquisition of a substantial block of the
Company's Common Stock or limit the price that investors might be willing to pay
in the future for shares of the Company's Common Stock.
The Company believes that the Preferred Stock will provide the Company with
increased flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs that might arise. Having such
authorized shares available for issuance will allow the Company to issue shares
of Preferred Stock without the expense and delay of a special stockholders'
meeting. The authorized shares of Preferred Stock, as well as shares of Common
Stock, will be available for issuance without further action by stockholders,
unless such action is required by applicable law or the rules of any stock
exchange on which the Company's securities may be listed.
REGISTRATION RIGHTS
After this offering, the holders of 5,546,463 shares of Common Stock and
warrants to purchase 507,654 shares of Common Stock (the "Registrable
Securities") will be entitled to certain demand rights with respect to the
registration of such Common Stock under the Securities Act. Under the terms of a
Registration Rights Agreement between the Company and the holders of the
Registrable Securities, subject to certain restrictions, at any time after 180
days after the date of this Prospectus the holders of more than 50% of the
Registrable Securities are entitled to demand that the Company register their
55
<PAGE>
Registrable Securities under the Securities Act. The Company is not required to
effect more than three such registrations pursuant to such demand registration
rights. In addition, under such agreement, if the Company proposes to register
any of its securities under the Securities Act, either for its own account or
for the account of other security holders, subject to certain restrictions, such
holders of Registrable Securities are entitled to notice of such registration
and are entitled to include their Registrable Securities therein. The Company is
required to include any Registrable Securities in an unlimited number of such
registrations. Once the Company is eligible to use a Form S-3 registration
statement to register shares of Common Stock, subject to certain restrictions,
holders of 30% of the Registrable Securities are also entitled to require the
Company on two separate occasions in any 12-month period to file a Form S-3
registration statement under the Securities Act at the Company's expense with
respect to their Registrable Securities. Registration of Registrable Securities
pursuant to any of the foregoing rights would result in such shares becoming
freely tradable without restriction under the Securities Act immediately upon
the effectiveness of such registration.
DELAWARE ANTITAKEOVER STATUTE AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Company is subject to Section 203 of the DGCL which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any business
combination with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the Board of Directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
(x) by persons who are directors and also officers and (y) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the Board of Directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder.
Additionally, the Company's Board of Directors has the authority to issue
shares of Preferred Stock and to determine the designations, preferences and
rights and the qualifications or restrictions of those shares without any
further vote or action by the stockholders. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company.
Furthermore, certain other provisions of the Company's Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws may have the effect
of discouraging, delaying or preventing a merger, tender offer or proxy contest,
which could adversely affect the market price of the Company's Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
8,396,463 shares of Common Stock. Of these shares, the 2,850,000 shares offered
hereby (plus up to 427,500 additional shares if the Underwriters exercise their
over-allotment option) will be freely tradeable without restriction or further
registration (except by affiliates of the Company or persons acting as
underwriters) under the Securities Act. All of the remaining 5,546,463 shares of
Common Stock (the "Restricted Shares") may not be sold unless they are
registered under the Securities Act or are sold pursuant to an exemption from
registration, such as the exemption provided by Rule 144 promulgated under the
Securities Act.
In general, commencing 90 days after the completion of this offering, Rule
144, as currently in effect, allows a person who has beneficially owned
Restricted Shares for at least two years, including persons who may be deemed
affiliates of the Company, to sell, within any three-month period, up to the
number of Restricted Shares that does not exceed the greater of (i) one percent
of the then outstanding shares of Common Stock, and (ii) the average weekly
trading volume during the four calendar weeks preceding the date on which notice
of the sale is filed with the Securities and Exchange Commission. A person who
is not deemed to have been an affiliate of the Company at any time during the 90
days preceding a sale and who has beneficially owned his or her Restricted
Shares for at least three years would be entitled to sell such Restricted Shares
without regard to the volume limitations described above and the other
conditions of Rule 144. Upon the completion of this offering, none of the
Restricted Shares will be immediately eligible for sale in the public market
without restriction pursuant to Rule 144 of the Securities Act. The holders of
approximately 5,538,463 shares of the Company's Common Stock will have
beneficially owned such shares for one year beginning in October 1997, and the
holder of an additional 8,000 shares will have beneficially owned such shares
for one year beginning in January 1998, at which time such stockholders may sell
such shares under Rule 144, subject to the volume and other limitations
contained in that Rule.
Notwithstanding the foregoing, the Company and its directors, executive
officers and stockholders, who in the aggregate own all of the 5,546,463
Restricted Shares, have agreed with the Underwriters not to directly or
indirectly make or cause any offering, sale or other disposition of any shares
of Common Stock for a period of 180 days after the date of this Prospectus
without the written consent of Alex. Brown & Sons Incorporated, which may be
granted at any time without notice. See "Underwriting." In addition, the Company
intends to file a registration statement on Form S-8 to register 2,115,000
shares subject to the Company's 1996 Plan and Purchase Plan upon completion of
this offering. Market sales of a substantial number of shares of Common Stock,
or the availability of such shares for sale in the public market, could
adversely affect prevailing market prices of the Common Stock.
In addition, after this offering, the holders of 5,546,463 shares of Common
Stock and warrants to purchase 507,654 shares of Common Stock will be entitled
to certain rights with respect to registration of such Common Stock under the
Securities Act. Registration of such Restricted Shares under the Securities Act
would result in such shares becoming freely tradeable without restriction under
the Securities Act immediately upon the effectiveness of such registration. See
"Description of Capital Stock -- Registration Rights."
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and J.P. Morgan Securities Inc. have severally
agreed to purchase from the Company the following respective numbers of shares
of Common Stock at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------------------------- -------------
<S> <C>
Alex. Brown & Sons Incorporated....................................................................
J.P. Morgan Securities Inc.........................................................................
-------------
Total........................................................................................ 2,850,000
-------------
-------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares are
purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the initial public offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession of not in excess of
$ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After
the initial public offering, the public offering price and other selling terms
may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 427,500
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 2,850,000, and the Company will be
obligated pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,850,000 shares are being offered.
The Underwriting Agreement contains covenants of indemnity and contribution
among the Underwriters and the Company against certain civil liabilities,
including liabilities under the Securities Act.
The Company and its directors, executive officers and stockholders, who in
the aggregate own 5,546,463 shares of Common Stock, have agreed not to directly
or indirectly make or cause any offering,
58
<PAGE>
sale or other disposition of any such Common Stock beneficially owned by them
for a period of 180 days after the date of this Prospectus without the prior
written consent of Alex. Brown & Sons Incorporated.
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock offered hereby will be determined by negotiation between the Company and
the Representatives of the Underwriters. Among the factors to be considered in
such negotiations are the prevailing market conditions, the results of
operations of the Company in recent periods, the market capitalizations and
stages of development of other companies which the Company and the
Representatives of the Underwriters believe to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant.
To facilitate the offering of the Common Stock, the Underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Specifically, the Underwriters may over-allot shares of the
Common Stock in connection with this offering, thereby creating a short position
in the Underwriters' syndicate account. Additionally, to cover such
over-allotments or to stabilize the market price of the Common Stock, the
Underwriters may bid for, and purchase, shares of the Common Stock in the open
market. Any of these activities may maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The Underwriters are not required to engage in these activities, and, if
commenced, any such activities may be discontinued at any time. The
Representatives, on behalf of the syndicate of Underwriters, also may reclaim
selling concessions allowed to an Underwriter or dealer, if the syndicate
repurchases shares distributed by that Underwriter or dealer.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, New York, New York. Certain legal
matters in connection with this offering will be passed upon for the
Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.
EXPERTS
The financial statements of the Company at December 31, 1995 and 1996 and
for the years then ended, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, and for
the year ended December 31, 1994, by Margolin, Winer & Evens LLP, independent
accountants, as set forth in their respective reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Certain items are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is hereby made to the Registration Statement, including
exhibits, schedules and reports filed as part thereof. Statements contained in
this Prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the office of
59
<PAGE>
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
Registration Statement may be obtained from the Commission at prescribed rates
from the Public Reference Section of the Commission at such address, and at the
Commission's regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly
available through the Commission's site on the Internet's World Wide Web,
located at http:// www.sec.gov. The Registration Statement, including all
exhibits thereto and amendments thereof, have been filed with the Commission
through EDGAR.
In addition, the Company intends to furnish its stockholders with annual
reports containing audited financial statements examined by an independent pubic
accounting firm.
60
<PAGE>
PSW TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors--Ernst & Young LLP.......................................................... F-2
Report of Independent Accountants--Margolin, Winer & Evens LLP............................................. F-3
Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (unaudited)............................. F-4
Statements of Income for the years ended December 31, 1994, 1995 and 1996 and the three months ended March
31, 1996 and 1997 (unaudited)............................................................................ F-5
Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 and the three
months ended March 31, 1997 (unaudited).................................................................. F-6
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and the three months ended
March 31, 1996 and 1997 (unaudited)...................................................................... F-7
Notes to Financial Statements.............................................................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
of PSW Technologies, Inc.
We have audited the accompanying balance sheets of PSW Technologies, Inc. as
of December 31, 1995 and 1996, and the related statements of income,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PSW Technologies, Inc. at
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
New York, New York
February 3, 1997, except for paragraph 2
of Note 3, as to which the date is May 12, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
PSW Technologies, Inc.
We have audited the accompanying statements of income, stockholders' equity,
and cash flows of PSW Technologies, Inc. for the year ended December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of PSW
Technologies, Inc. for the year ended December 31, 1994 in conformity with
generally accepted accounting principles.
MARGOLIN, WINER & EVENS LLP
Garden City, New York
May 31, 1995
F-3
<PAGE>
PSW TECHNOLOGIES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------- MARCH 31, MARCH 31,
1995 1996 1997 1997
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
(NOTE 15)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash......................................................................... $ 34 $ 3,182 $ 796 $ 796
Accounts receivable, net of allowance for doubtful accounts of $45, $120 and
$150 in 1995, 1996 and 1997................................................ 3,849 6,118 7,604 7,604
Due from related party (Note 10)............................................. -- 323 107 107
Unbilled revenue under customer contracts.................................... 100 244 153 153
Prepaid expenses and other current assets.................................... 71 280 334 334
--------- --------- ------------ ------------
Total current assets........................................................... 4,054 10,147 8,994 8,994
Property and equipment, net.................................................... 928 1,796 2,824 2,824
Deferred offering costs........................................................ -- -- 120 120
--------- --------- ------------ ------------
Total assets................................................................... $ 4,982 $ 11,943 $ 11,938 $ 11,938
--------- --------- ------------ ------------
--------- --------- ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank......................................................... $ -- $ 5,125 $ 4,650 $ 4,650
Due to related party (Note 10)............................................... -- 581 -- --
Accounts payable and accrued expenses........................................ 1,298 2,566 2,212 2,212
Deferred revenue............................................................. -- 227 495 495
Dividend payable............................................................... -- -- -- 1,200
Deferred income taxes.......................................................... -- -- -- 660
--------- --------- ------------ ------------
Total current liabilities...................................................... 1,298 8,499 7,357 9,217
Deferred income taxes.......................................................... -- -- -- 30
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 1 and 3):
Preferred stock, par value $.01 per share, 1,000,000 shares authorized and
none issued and outstanding at December 31, 1995 and 1996.................. -- -- -- --
Common stock, par value $.01 per share, 34,000,000 shares authorized and
5,538,463 shares issued and outstanding at December 31, 1995 and 1996 and
5,546,463 shares issued and outstanding at March 31, 1997 (unaudited)...... 55 55 55 55
Additional paid-in capital................................................... 4,947 4,187 4,237 3,848
Deferred compensation........................................................ -- (641) (522) (522)
Retained earnings (accumulated deficit)...................................... (1,318) (157) 811 (690)
--------- --------- ------------ ------------
Total stockholders' equity..................................................... 3,684 3,444 4,581 2,691
--------- --------- ------------ ------------
Total liabilities and stockholders' equity..................................... $ 4,982 $ 11,943 $ 11,938 $ 11,938
--------- --------- ------------ ------------
--------- --------- ------------ ------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
PSW TECHNOLOGIES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
Revenue............................................. $ 12,318 $ 21,147 $ 31,274 $ 6,537 $ 10,307
Operating expenses:
Technical staff................................... 7,385 11,193 16,444 3,556 5,284
Selling and administrative staff.................. 2,320 3,755 5,622 1,171 1,886
Other expenses, including related party
transactions of $532, $1,018, $910, $217 and $96
(Note 10)....................................... 2,317 3,976 5,684 1,177 1,961
Special compensation expense (Note 13)............ -- -- 2,193 -- 119
--------- --------- --------- --------- ---------
Total operating expenses............................ 12,022 18,924 29,943 5,904 9,250
--------- --------- --------- --------- ---------
Income from operations.............................. 296 2,223 1,331 633 1,057
Interest expense, including related party
transactions of $74, $84, $104, $27 and $0 (Note
10)............................................... 74 84 170 27 89
--------- --------- --------- --------- ---------
Net income.......................................... $ 222 $ 2,139 $ 1,161 $ 606 $ 968
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Unaudited pro forma information (Note 15):
Historical income before provision for income
taxes........................................... $ 222 $ 2,139 $ 1,161 $ 606 $ 968
Pro forma provision for income taxes.............. 84 813 441 230 368
--------- --------- --------- --------- ---------
Pro forma net income.............................. $ 138 $ 1,326 $ 720 $ 376 $ 600
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net income per share.................... $ .02 $ .19 $ .10 $ .05 $ .09
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares and equivalents
outstanding....................................... 6,881 6,881 7,024 6,881 7,024
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-5
<PAGE>
PSW TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
(NOTES 1 AND 3)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
$.01 PAR VALUE ADDITIONAL EARNINGS TOTAL
----------------------- PAID-IN DEFERRED (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNTS CAPITAL COMPENSATION DEFICIT) EQUITY
---------- ----------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993.............. 5,538,463 $ 55 $ 5,926 $ -- $ (3,679) $ 2,302
Capital contributions, net................ -- -- 151 -- -- 151
Net income................................ -- -- -- -- 222 222
---------- --- ----------- ------------- ------------- ------------
Balance at December 31, 1994.............. 5,538,463 55 6,077 -- (3,457) 2,675
Distributions, net........................ -- -- (1,130) -- -- (1,130)
Net income................................ -- -- -- -- 2,139 2,139
---------- --- ----------- ------------- ------------- ------------
Balance at December 31, 1995.............. 5,538,463 55 4,947 -- (1,318) 3,684
Distributions, net........................ -- -- (2,939) -- -- (2,939)
Deferred compensation related to stock
options (Note 8)........................ -- -- 2,179 (2,179) -- --
Amortization of deferred compensation
(Note 8)................................ -- -- -- 1,538 -- 1,538
Net income................................ -- -- -- -- 1,161 1,161
---------- --- ----------- ------------- ------------- ------------
Balance at December 31, 1996.............. 5,538,463 55 4,187 (641) (157) 3,444
Issuance of common stock (unaudited)...... 8,000 -- 50 -- -- 50
Amortization of deferred compensation
(unaudited) (Note 8).................... -- -- -- 119 -- 119
Net income (unaudited).................... -- -- -- -- 968 968
---------- --- ----------- ------------- ------------- ------------
Balance at March 31, 1997 (unaudited)..... 5,546,463 $ 55 $ 4,237 $ (522) $ 811 $ 4,581
---------- --- ----------- ------------- ------------- ------------
---------- --- ----------- ------------- ------------- ------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
PSW TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................................... $ 222 $ 2,139 $ 1,161 $ 606 $ 968
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Special compensation................................................. -- -- 2,193 -- 119
Depreciation and amortization........................................ 271 288 424 82 162
Bad debt expense..................................................... 43 52 75 -- 30
Changes in operating assets and liabilities:
Accounts receivable................................................ (1,073) (1,181) (2,344) (1,878) (1,516)
Due from related party............................................. -- -- (323) -- 216
Unbilled revenue under customer contracts.......................... -- (100) (144) 42 91
Prepaid expenses and other current assets.......................... -- (45) (864) 59 (54)
Other assets....................................................... 2 -- -- -- --
Due to related party............................................... -- -- 581 -- (581)
Accounts payable and accrued expenses.............................. 404 648 1,154 (147) (654)
Deferred revenue................................................... 214 (214) 227 -- 268
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities...................... 83 1,587 2,140 (1,236) (951)
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Acquisition of property and equipment.................................... (220) (444) (1,247) (245) (965)
--------- --------- --------- --------- ---------
Net cash used in investing activities.................................... (220) (444) (1,247) (245) (965)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Proceeds (repayments) from line of credit, net........................... -- -- 5,125 -- (475)
Capital contributions (distributions), net............................... 151 (1,130) (2,870) 1,451 --
Issuance of common stock................................................. -- -- -- -- 50
Deferred offering costs.................................................. -- -- -- -- (45)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities...................... 151 (1,130) 2,255 1,451 (470)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash.......................................... 14 13 3,148 (30) (2,386)
Cash, beginning of period................................................ 7 21 34 34 3,182
--------- --------- --------- --------- ---------
Cash, end of period...................................................... $ 21 $ 34 $ 3,182 $ 4 $ 796
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................................ $ 74 $ 84 $ 154 $ 27 $ 48
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-7
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED MARCH
31, 1996 AND 1997 (INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 ARE UNAUDITED)
1. NATURE OF BUSINESS
PSW Technologies, Inc. ("PSW" or the "Company") is a software services firm,
in one industry segment, that provides high value solutions to technology
vendors and business end-users by mastering and applying critical emerging
technologies. These critical technologies include distributed computing, object-
oriented development, advanced operating systems and systems management
technologies. The Company conducts its business through its two business units:
the Software Technology Unit and the Business Systems Unit. PSW's Software
Technology Unit provides joint project-based development, porting and testing
services to selected technology vendor clients. The Company's Business Systems
Unit applies PSW's technical expertise to the design and development of high
value, mission critical enterprise business systems for its Fortune 1000
end-user clients.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Pencom Systems Incorporated ("Pencom") provided software services via a
separate division (the "Software Division") that commenced operations in October
1989. In addition, a portion of a software services contract was allocated
between the other operations of Pencom and the Software Division. Effective
October 1, 1996, Pencom contributed to PSW the business of the Software
Division, including the portion of the software contract that had previously
been allocated to the other operations of Pencom (see Note 3). In exchange for
the net assets contributed, Pencom received all of the then issued and
outstanding shares of PSW and, PSW issued warrants to Pencom and to certain
Pencom employees to purchase an aggregate of 507,654 shares of PSW's common
stock at $.04 per share. The shares and warrants issued to Pencom were
immediately thereafter distributed to Pencom shareholders. This exchange has
been accounted for in a manner similar to a pooling of interests and,
accordingly, the accompanying financial statements include the operations of the
Software Division and the aforementioned portion of the software services
contract allocated to other operations of Pencom for all periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions, including estimates to complete contracts, that affect the reported
amounts in the financial statements and accompanying notes. Actual results could
differ from those estimates.
SHARE INFORMATION
All outstanding share amounts included in the accompanying financial
statements have been adjusted to reflect an 11,250-for-1 forward stock split on
December 18, 1996 and, the 8-for-13 reverse stock split described in Note 3.
F-8
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenue from time and materials contracts is recognized during the period in
which the services are provided.
Revenue from fixed price contracts is recognized using the
percentage-of-completion method, measured by the percentage of units of labor
incurred to the date of measurement relative to the estimated total units of
labor at completion. The cumulative impact of revisions in estimates of the
percentage to complete is reflected in the period in which the revisions are
made. Provisions for estimated losses on uncompleted contracts are made on a
contract by contract basis and are recognized in the period in which such losses
are determined. Revenue earned in excess of billings is classified as unbilled
revenue under customer contracts. Billings in excess of earned revenue are
classified as deferred revenue. Revenue excludes reimbursable expenses.
COST AND EXPENSES
Technical staff consists of the cost of (i) salaries, payroll taxes, health
insurance and workers' compensation for technical staff personnel assigned to
client projects, (ii) unassigned technical staff personnel and (iii) fees paid
to subcontractors for work performed in connection with customer projects.
Selling and administrative staff consists of (i) the cost of salaries,
payroll taxes, health insurance and workers' compensation for selling and
administrative personnel, (ii) all commissions and bonuses and (iii) the cost of
technical staff personnel assigned to development projects or performing
selling, recruiting or training related tasks.
Pencom allocated certain expenses to the Software Division, including
corporate and officers' salaries, interest and rent. Interest was allocated
based upon interest incurred by Pencom on its secured debt (see Note 6).
Corporate and officers' salaries were allocated based upon the percentage of
time expended by certain individuals on Software Division matters. Rent was
allocated based on square footage and/or employee head count. It is management's
opinion that the estimated cost of the allocated expenses on a stand alone basis
would not produce materially different results than those reflected in these
financial statements.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash balances and trade accounts
receivable. The Company invests its excess cash in highly liquid investments
(short-term bank deposits). At December 31, 1996 and March 31, 1997,
substantially all cash was held in one bank. The Company does not require
collateral from its customers. The Company maintains allowances for potential
credit losses and such losses were not material for any of the periods
presented. The Company's customers are headquartered primarily in North America.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
F-9
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are computed based on the cost of the related
assets, using the straight-line method over the estimated useful lives of the
assets which range from five to seven years. Leasehold improvements are
amortized over the term of the related lease or estimated life of the leasehold
improvements, whichever is shorter.
STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years beginning
after December 31, 1995 and prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS 123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations with pro forma disclosure of what net income and
earnings per share would have been had the Company adopted the new fair value
method. The Company intends to continue to account for its stock based
compensation plans in accordance with the provisions of APB 25.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share is based upon pro forma net income divided by
weighted average number of shares of common stock outstanding during the
respective periods, retroactively adjusted to reflect the stock splits. The
weighted average number of common shares outstanding has been computed in
accordance with Staff Accounting Bulletin 83 ("SAB 83") of the Securities and
Exchange Commission. SAB 83 requires that shares of common stock and options,
issued within a one-year period prior to the initial filing of a registration
statement relating to an initial public offering (see Note 14) at amounts below
the public offering price, be considered outstanding for all periods presented
in the Company's Registration Statement. In October and December 1996, the
Company issued options and warrants to purchase 1,593,365 shares of common stock
at prices ranging from $.04 to $6.25 per share including 759,451 replacement
options (see Note 8). In the three months ended March 31, 1997, the Company
issued options to purchase 52,486 shares at prices ranging from $7.96 to $8.93
per share. Accordingly, for purposes of calculating pro forma net income per
share amounts, such options and warrants (net of options subsequently cancelled)
have been considered outstanding for all periods presented. In addition,
weighted average common shares and equivalents outstanding for the year ended
December 31, 1996 and the three months ended March 31, 1997 include the number
of shares that would be sold by the Company to pay a dividend to the
stockholders of record prior to the completion of the public offering to pay
income taxes (see Note 12). For purposes of calculating pro forma net income per
share, the initial public offering price was assumed to be $9 per share.
The estimated number of shares assumed to be sold by the Company to repay
the note payable to bank (net of the cash balance at December 31, 1996 and March
31, 1997) had no effect on pro forma net income per share for the year ended
December 31, 1996 and for the three months ended March 31, 1997.
F-10
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE, which is required to be adopted on December 31,
1997. Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. Statement 128 will not have a
material impact on pro forma net income per share for the years ended December
31, 1994, 1995 and 1996 or the three months ended March 31, 1996 and 1997.
DEFERRED OFFERING COSTS
Deferred offering costs represent costs incurred in connection with the
initial public offering of the Company's common stock (substantially
representing professional fees) and have been deferred pending the successful
completion of the offering, at which time these costs will be charged against
the proceeds from said offering. In the event that the offering is not
successful, these costs would be charged to operations. $45,000 of deferred
offering costs were paid as of March 31, 1997.
UNAUDITED INFORMATION
The unaudited financial statements at March 31, 1997 and for the three
months ended March 31, 1996 and 1997 reflect adjustments, all of which are of a
normal recurring nature, which are, in the opinion of management, necessary to a
fair presentation. The results for the interim periods presented are not
necessarily indicative of full year results.
3. STOCKHOLDERS' EQUITY
Effective October 1, 1996, in connection with the contribution of the
business of the Software Division, the Company issued 5,538,463 shares of common
stock and warrants to purchase an aggregate of 507,654 shares of common stock at
$.04 per share. All warrants were exercisable upon issuance. In exchange for the
shares and warrants issued, PSW received an assignment of a 26.67% interest in
the proceeds to be received from the accounts receivable as of September 30,
1996 and substantially all the other assets and liabilities of the Software
Division. The net assets contributed amounted to approximately $2,100,000.
On February 3, 1997, the Company's Board of Directors approved an 8-for-13
reverse stock split, which was effected on April 2, 1997 and a change in the
Company's authorized capital stock from 11,250,000 to 34,000,000 shares of
common stock of $.01 par value and 1,000,000 shares of preferred stock of $.01
par value, which will be effected prior to the completion of the initial public
offering (see Note 14).
Pencom had initially funded operating deficits and working capital needs of
the Software Division. The net capital contribution in 1994 represents such
funding. In 1995 and 1996, net distributions were made to Pencom.
COMMON STOCK RESERVED FOR ISSUANCE
At February 3, 1997, the Company has reserved approximately 2,700,000 shares
of its common stock for issuance in connection with warrants outstanding, shares
issuable under the Company's stock purchase and stock option plans and the 8,000
shares sold to a director.
F-11
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Furniture and fixtures....................................... $ 225 $ 521 $ 844
Computer equipment........................................... 1,356 2,251 2,698
Computer software............................................ 205 266 404
Leasehold improvements....................................... 41 59 341
--------- --------- -----------
1,827 3,097 4,287
Less accumulated depreciation and amortization............... 899 1,301 1,463
--------- --------- -----------
$ 928 $ 1,796 $ 2,824
--------- --------- -----------
--------- --------- -----------
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Trade payables................................................. $ 352 $ 945 $ 829
Accrued vacation............................................... 195 307 352
Accrued bonuses................................................ 453 600 155
Payroll and other taxes payable................................ 199 161 239
Other accounts payable and accrued expenses.................... 99 553 637
--------- --------- -----------
$ 1,298 $ 2,566 $ 2,212
--------- --------- -----------
--------- --------- -----------
</TABLE>
6. NOTE PAYABLE TO BANK
In November 1996, the Company obtained a revolving line of credit from a
bank providing for borrowings of up to $6.5 million. Borrowings under this line
of credit, which expires on November 8, 1997, are secured by the Company's
accounts receivable and bear interest at the greater of the bank's prime rate or
the federal funds rate plus .25 of one percent or, at the election of the
Company, a formula based upon the London Interbank Offered Rate ("LIBOR"), as
defined (a weighted average rate of approximately 8% and 8.5% at December 31,
1996 and March 31, 1997). The line of credit includes covenants relating to the
maintenance of certain financial amounts and ratios, including a minimum
tangible net worth, as defined, and funded liabilities to earnings, as defined.
The line of credit also includes a prohibition on the payment of dividends
except for the payment of a dividend to stockholders of record prior to the
offering for payment of their income taxes (see Note 12). Available borrowings
under the line of credit are based upon a percentage of the Company's eligible
accounts receivable. As of December 31, 1996 and March 31, 1997, $5.1 million
and $4.7 million, respectively, were outstanding under the line of credit.
Interest expense includes interest allocated by Pencom through September 30,
1996. The allocation represented the Software Division's share of interest
payments paid by Pencom under its line of credit and
F-12
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. NOTE PAYABLE TO BANK (CONTINUED)
was based on the ratio of the monthly balance of the Software Division's
accounts receivable to total accounts receivable of the Software Division and
Pencom. This line of credit was secured by all accounts receivable and fixed
assets of Pencom and bore interest at a rate based on the bank's prime rate or
alternative LIBOR pricing, based on LIBOR plus 2.5% (8.25% at September 30,
1996).
7. SIGNIFICANT CUSTOMERS
One customer and two of its recently acquired subsidiaries accounted for
approximately 54%, 59% and 52% of total revenue for the years ended December 31,
1994, 1995 and 1996, respectively (63% and 49% for the three months ended March
31, 1996 and 1997, respectively). Another customer accounted for approximately
9%, 17% and 14% of total revenue for the years ended December 31, 1994, 1995 and
1996, respectively (15% and 9% for the three months ended March 31, 1996 and
1997, respectively). These customers accounted for approximately 38% and 8%,
respectively, of accounts receivable at December 31, 1996 (approximately 47% and
19% at December 31, 1995, and 36% and 15% at March 31, 1997). No other customer
accounted for more than 10% of revenue in 1994, 1995, 1996 or the three months
ended March 31, 1997.
8. STOCK OPTION AND STOCK PURCHASE PLANS
STOCK OPTION PLAN
Pencom had a stock option plan for the benefit of its employees including
Software Division employees ("Pencom Option Plan"). Under the terms of that
plan, all options granted prior to an initial public offering of Pencom common
stock were exercisable for an "assumed" number of shares. All options were
exercisable at the later of an initial public offering or the employees' fourth
anniversary as an employee and expired on the tenth anniversary of the grant.
Also under the terms of the plan, if the Software Division was incorporated into
a separate entity and adopted a stock option plan or similar plan, this Pencom
Option Plan and all options granted under it could be terminated. Because the
measurement date and option exercise price were contingent upon future events,
no charge was reported for financial statement purposes.
Effective October 1, 1996, the Company's Board of Directors and stockholders
approved and adopted the PSW Technologies, Inc. 1996 Stock Option/Stock Issuance
Plan (the "1996 Plan"). The aggregate number of shares issuable under the 1996
Plan has been increased to 1,715,000 shares of the Company's common stock for
issuance to employees, directors and consultants of the Company. Incentive stock
options as defined in Section 422A of the Internal Revenue Code of 1986 and
nonqualified stock options may be issued under the 1996 Plan. The exercise price
for incentive stock options may not be less than fair market value on the date
of grant, or such greater amount necessary to qualify as an incentive stock
option.
Pursuant to the organization of the Company and the contribution of net
assets of the Software Division, the Company granted replacement options for
shares of its common stock under the 1996 Plan to its employees who participated
in the Pencom Option Plan and the Pencom Option Plan was terminated. The
replacement options were granted for the same number of shares and at the same
exercise price as those shares granted to the employees under the Pencom Option
Plan. The grant date determining vesting was the original grant date under the
Pencom Option Plan. Under APB 25, the difference between the estimated fair
market value of the Company's common stock and the options' exercise price on
the date of
F-13
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
issuance was determined to be approximately $2,179,000. This charge is being
amortized for financial reporting purposes over the vesting period of the
options and the amount recognized as expense during the year ended December 31,
1996 amounting to approximately $1,538,000 is included in special compensation
expense ($119,000 for the three months ended March 31, 1997) (see Note 13).
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value of the options was estimated at the date of grant using a Black-
Scholes option pricing model with the following assumptions for vested and
non-vested options:
<TABLE>
<CAPTION>
ASSUMPTION VESTED NON-VESTED
- ---------------------------------------------------------------- --------- ------------------
<S> <C> <C>
Risk-free interest rate......................................... 5.93% 6.23% to 6.83%
Dividend yield.................................................. 0% 0%
Volatility factor of the expected market price of the Company's
common stock.................................................. .374 .374
Average life.................................................... 3 years 6 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options under SFAS 123 is amortized to expense over the options' vesting period.
For the year ended December 31, 1996, pro forma net income and pro forma net
income per share under SFAS 123 amounted to approximately $658,000 and $.09,
respectively ($579,000 and $.08, respectively, for the three months ended March
31, 1997).
F-14
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
ASSUMED
SHARES UNDER
PENCOM OPTION
PLAN 1996 PLAN EXERCISE PRICE
------------- ----------- --------------
<S> <C> <C> <C>
Outstanding December 31, 1993.............. 179,385 --
Granted during the year.................... 245,585 --
------------- -----------
Outstanding December 31, 1994.............. 424,970 --
Granted during the year.................... 166,739 --
------------- -----------
Outstanding December 31, 1995.............. 591,709 --
Granted during the year.................... 167,742 1,085,711
Cancelled/replaced during the year......... (759,451) (8,803)
-------------
Balance at December 31, 1996............... -- 1,076,908 $ .04 to $6.25
------------- ----------- --------------
------------- ----------- --------------
Granted during the period -- 137,219
Cancelled during the period................ -- (17,417)
------------- -----------
Balance at March 31, 1997.................. -- 1,196,710 $ .04 to $9.00
------------- ----------- --------------
------------- ----------- --------------
Exercisable at December 31, 1996........... -- 363,540
------------- -----------
------------- -----------
Exercisable at March 31, 1997.............. -- 393,820
------------- -----------
------------- -----------
</TABLE>
The weighted average exercise price of options granted/outstanding under the
1996 Plan during and as of the year ended December 31, 1996 was $2.00 per share.
The weighted average exercise price of options granted during the three months
ended March 31, 1997 and outstanding as of March 31, 1997 was $8.71 and $2.77,
respectively. The weighted average exercise price of options exercisable at
December 31, 1996 was $.12 per share ($.14 at March 31, 1997). The options
outstanding under the 1996 Plan generally vest in four equal annual installments
commencing on the first anniversary of the grant and expire 10 years after the
date of grant. The weighted-average fair value of options granted during the
year ended December 31, 1996 amounted to $2.80 ($4.19 during the three months
ended March 31, 1997).
EMPLOYEE STOCK PURCHASE PLAN
On February 3, 1997, the Board of Directors adopted the Company's Employee
Stock Purchase Plan (the "Purchase Plan") that allows eligible employees to
purchase shares of common stock, at semi-annual intervals, through periodic
payroll deductions under the Purchase Plan, and a reserve of 400,000 shares of
common stock has been established for this purpose. The stockholders of the
Company approved the Purchase Plan on March 17, 1997.
The Purchase Plan will be implemented in a series of successive offering
periods, each generally with a duration of six months. The initial purchase
period will begin on the date of the initial public offering (see Note 14) and
will end on the last business day in October 1997. Thereafter, purchase periods
will begin on the first business day in November and May of each year and will
end on the last business day of April and
F-15
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
October, respectively. Shares of common stock will be purchased for each
participant at the end of each purchase period.
Payroll deductions may not exceed 15% of base salary for each purchase
period and each employee's purchases are limited to 500 shares per purchase
period. The purchase price per share will be eighty-five percent of the lower of
(i) the fair market value of the common stock on the start date of the purchase
period or (ii) the fair market value at the end of the semi-annual purchase
period. The Purchase Plan will terminate on the last business day of April,
2007.
9. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan (the "Plan") pursuant to
Section 401(k) of the Internal Revenue Code for employees who are at least 21
years of age. Eligible employees can elect to reduce their current compensation
up to the statutory prescribed limit and have the amount of such reduction
contributed to the Plan. The Plan also allows for the Company to make
contributions on behalf of eligible employees. A similar plan in which employees
of the Software Division were eligible to participate is maintained by Pencom.
No contributions were made to the plans in 1994, 1995, 1996 or the three months
ended March 31, 1997 by the Software Division or PSW.
10. RELATED PARTY TRANSACTIONS
The Company utilizes non-exclusive recruiting services provided by Pencom.
Management believes that the terms and fees paid in connection with such
recruiting services are comparable to agreements maintained by the Company with
other unrelated recruiting firms. In addition, certain expenses were allocated
by Pencom to the Software Division. Management believes that the allocations
were reasonable. Services provided and expenses allocated to PSW were as follows
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
Services performed by related party:
Recruiting services........................... $ 60 $ 447 $ 316 $ 49 $ 38
Legal and accounting.......................... -- -- 21 -- 21
Allocated Expenses:
Rent.......................................... 254 329 448 23 37
Corporate and officers' salaries.............. 218 242 125 45 --
--------- --------- --------- ----- ---
Total expenses included in other
expenses................................ 532 1,018 910 217 96
Interest...................................... 74 84 104 27 --
--------- --------- --------- ----- ---
Total related party expenses.................... $ 606 $ 1,102 $ 1,014 $ 244 $ 96
--------- --------- --------- ----- ---
--------- --------- --------- ----- ---
</TABLE>
The Company will continue to use these recruiting services on a
non-exclusive basis pursuant to an agreement entered into with Pencom. The
Company has also entered into an agreement with Pencom for
F-16
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
certain accounting and legal services for the period October 1, 1996 through
April 30, 1997 at a fee of $7,000 per month.
In recognition of establishing an independent, profitable company, in 1996,
the Software Division cancelled a note receivable, including unpaid interest,
due from an officer and shareholder of the Company that resulted in a charge
against income of $655,000 which has been included in special compensation
expense.
Assets contributed by Pencom on October 1, 1996 included an assignment of a
26.67% interest in the proceeds to be received from the accounts receivable of
the Software Division as of September 30, 1996. "Due from related party" as of
December 31, 1996, represents the amount due in connection with this agreement.
"Due to related party" includes approximately $309,000 that relates to a payment
received on behalf of Pencom which was transferred to Pencom subsequent to year
end. Other amounts due to related party represent expenses paid on the Company's
behalf by Pencom.
11. COMMITMENTS AND CONTINGENCIES
The Company leases its office space through noncancellable operating lease
arrangements including a lease for its office in Texas which was entered into on
October 31, 1996. PSW's obligations under this lease are guaranteed by Pencom.
Other than for the lease related to the Texas office, the other leases are held
by Pencom and will be assigned to PSW. Future minimum rental commitments
(including amounts payable under leases held by Pencom) are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31 (IN THOUSANDS):
- -------------------------------------------------------------------------------------
<S> <C>
1997............................................................................... $ 897
1998............................................................................... 1,064
1999............................................................................... 1,108
2000............................................................................... 1,125
2001............................................................................... 1,113
Thereafter......................................................................... 2,173
---------
Total................................................................................ $ 7,480
---------
---------
</TABLE>
The premises previously occupied by the Company in Texas were leased by
Pencom. In connection with the office relocation, the Company transferred
leasehold improvements with a net book value of approximately $69,000 to Pencom.
Pencom has sub-leased these premises. However, the Company will enter into an
agreement with Pencom to guarantee Pencom's sub-lease income. Future minimum
sub-lease rental income that the Company will guarantee is as follows:
<TABLE>
<S> <C>
YEARS ENDING DECEMBER 31 (IN THOUSANDS):
- -------------------------------------------------------------------------------------
1997............................................................................... $ 283
1998............................................................................... 366
1999............................................................................... 380
2000............................................................................... 285
---------
Total................................................................................ $ 1,314
---------
---------
</TABLE>
F-17
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense, including rent allocated by Pencom, for the years ended
December 31, 1994, 1995 and 1996 was approximately $254,000, $329,000 and
$601,000, respectively ($123,000 and $268,000 for the three months ended March
31, 1996 and 1997).
The Company has entered into an employment agreement with its President and
Chief Executive Officer dated October 1, 1996. Pursuant to the agreement, the
Company agreed to pay an annual base salary of $350,000, and to provide
customary fringe benefits. In addition, the Company agreed to issue options
under the 1996 Plan to purchase an aggregate of 212,308 shares of common stock
at $3.90 per share. 80,000 of such options vest on December 31, 1997. The
remaining 132,308 of such options vest on December 31, 2002, subject to partial
or full acceleration to December 31, 1998 based upon the Company's 1998
performance measured against certain specified financial goals. The agreement
terminates on September 30, 1998.
12. INCOME TAXES
Pencom and PSW have elected to be treated as S Corporations under Subchapter
S of the Internal Revenue Code for federal income tax purposes. Consequently,
PSW is not subject to federal income taxes because its stockholders include
PSW's income in their personal income tax returns.
Upon completion of the public offering, PSW will terminate its Subchapter S
status and the Company will be subject to federal income taxes. Additionally,
the Company will be required to change its method of accounting from the cash
basis to the accrual basis for income tax reporting purposes. The current and
deferred tax effects of these changes will be recorded at the time the offering
is completed (see Note 15).
The provision for pro forma income taxes on net income using an effective
tax rate of 38% differs from the amounts computed by applying the applicable
federal statutory rates (34%) due to state and local taxes.
13. SPECIAL COMPENSATION EXPENSE
As described in Notes 8 and 10, charges to income were made related to the
Replacement Options issued to employees and the cancellation of a note from an
officer and stockholder of the Company which totaled $2,193,000 for the year
ended December 31, 1996. These transactions reduced income from operations, pro
forma net income and pro forma net income per share for the year ended December
31, 1996 and the three months ended March 31, 1997 as follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ---------------
<S> <C> <C>
Operating income.......................................... $ (2,193) $ (119)
Pro forma net income...................................... (1,360) (74)
Pro forma net income per share............................ (.19) (.01)
</TABLE>
Deferred compensation as of March 31, 1997 of approximately $522,000 will be
amortized over the remaining vesting periods in 1997, 1998, 1999 and 2000.
F-18
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. INITIAL PUBLIC OFFERING
The Company intends to enter into an Underwriting Agreement for an initial
public offering of 2,850,000 shares of its common stock.
15. PRO FORMA ADJUSTMENTS (UNAUDITED)
PRO FORMA BALANCE SHEET
Had the Company changed its method of accounting and ceased to operate as an
S Corporation on March 31, 1997, approximately $6,000,000 of additional income
would have been subject to current income taxes on the accrual basis of
accounting. At an effective tax rate of 38%, the additional income tax payable
over 2 years would have been approximately $2,280,000. In addition, a deferred
tax asset would have been recorded for compensatory stock options (see Note 8)
which would have been deductible for income tax purposes upon the exercise of
the options. Such deferred tax benefit would have amounted to approximately
$630,000.
The Company's stockholders will be obligated to pay the 1997 income taxes
related to the period through the completion of the offering. The Company will
declare a dividend to its stockholders of record immediately prior to the
completion of the public offering for an amount estimated to approximate the
1997 income taxes payable by the stockholders. Such dividend has currently been
estimated to be approximately $1,200,000 and may be paid in cash prior to or
after the offering. Such estimate is based upon numerous assumptions including
taxable income for 1997, date of completion of the public offering, elections
made by the stockholders and the income attributable to the conversion from the
cash to accrual method of accounting at the date of completion of the offering.
The actual dividend could vary significantly from the currently estimated
amount. If the taxes payable by the stockholders on the portion of 1997 taxable
income allocated to them is equal to the currently estimated $1,200,000, the
actual additional income tax payable by the Company due to the conversion from
an S corporation, will be reduced by approximately $960,000. In addition, upon
conversion from an S corporation, retained earnings at March 31, 1997 would have
been eliminated against additional paid in capital. The pro forma balance sheet
at March 31, 1997 gives effect to these items.
STATEMENTS OF INCOME
The unaudited pro forma adjustments on the statements of income reflect an
adjustment to record a provision for income taxes on income as if the Company
had not been an S corporation.
F-19
<PAGE>
[Photograph of five persons in office, two of which are viewing a computer
terminal. Shaded rectangle underlying to photograph.
Shaded language in background large font: return on investment.
<TABLE>
<S> <C>
Text: Genova(-TM-) PSW's initiative that enables improvement in the cost, quality
and speed of client projects.
Text: Heading -- Methodology (1-circled). The ability to apply technology in a
manner that consistently produces predictable, high-quality
results is, itself, a technical discipline. Genova project
methodologies document the means by which PSW's client
engagements produce new enterprise business systems, assess the
risks of an existing IT project, and port software to new system
platforms.
Text: Heading -- Training & Courseware (2-circled). The Genova Academy allows both
PSW and its clients to gain valuable technical and methodology
experience. The Academy includes an array of on-line and
classroom courseware which provide training for the members of
business system development projects, as well as engineers
seeking Microsoft Windows NT-Registered Trademark- certification.
Text: Heading -- Reusable Software (3-circled) Genova object libraries enable
clients to shorten project schedules by taking advantage of
software developed through previous PSW engagements. Using the
libraries and other Genova software tools, PSW increases its
efficiency by not having to recreate software for each new
project.]
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Dilution.................................................................. 16
Selected Financial Data................................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 18
Business.................................................................. 26
Management................................................................ 42
Certain Transactions...................................................... 52
Principal Stockholders.................................................... 54
Description of Capital Stock.............................................. 55
Shares Eligible for Future Sale........................................... 57
Underwriting.............................................................. 58
Legal Matters............................................................. 59
Experts................................................................... 59
Additional Information.................................................... 59
Index to Financial Statements............................................. F-1
</TABLE>
--------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2,850,000 SHARES
[LOGO]
COMMON STOCK
-------------
PROSPECTUS
-------------
ALEX. BROWN & SONS
INCORPORATED
J..P MORGAN & CO.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
------------
<S> <C>
SEC registration fee............................................................ $ 13,905
NASD filing fee................................................................. 5,089
Nasdaq National Market listing fee.............................................. 38,491
Printing and engraving.......................................................... 175,000
Legal fees and expenses......................................................... 450,000
Accounting fees and expenses.................................................... 225,000
Directors and Officers insurance................................................ 300,000
Blue sky fees and expenses...................................................... 5,000
Transfer agent fees............................................................. 10,000
Miscellaneous................................................................... 127,515
------------
Total....................................................................... $ 1,350,000
------------
------------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Act"). Article IX of the Registrant's Amended and Restated
Certificate of Incorporation provides for indemnification of its directors and
officers and permissible indemnification of employees and other agents to the
maximum extent permitted by the Delaware General Corporation Law. Reference is
also made to Section 8 of the Underwriting Agreement contained in Exhibit 1.1
hereto, which sets forth certain indemnification provisions. If commercially
feasible, the Registrant intends to obtain liability insurance for its officers
and directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has sold and issued the following securities during the past
three years (all information gives effect to an 11,250-for-1 forward split of
the Registrant's issued and outstanding shares of Common Stock effected on
December 18, 1996 and an 8-for-13 reverse split of the Registrant's issued and
outstanding Common Stock effected on April 2, 1997):
(a) ISSUANCES OF COMMON STOCK
On October 1, 1996, the Registrant issued 5,538,463 shares of Common Stock
to Pencom Systems Incorporated ("Pencom") in consideration of the contribution
by Pencom to the Registrant of certain assets and associated liabilities of
Pencom's software division and a portion of a software contract that had
previously been allocated to other operations of Pencom, which net assets
amounted to approximately $2.1 million.
On January 1, 1997, the Registrant sold 8,000 shares of Common Stock to
Michael J. Maples at a price of $6.25 per share.
II-1
<PAGE>
(b) OPTION ISSUANCES TO EMPLOYEES AND DIRECTORS
From October 2, 1996 to March 31, 1997, the Registrant granted options to
purchase a total of 1,196,710 shares of Common Stock at exercise prices ranging
from $.04 to $9.00 per share to employees and directors of the Registrant.
(c) WARRANT ISSUANCES
On October 1, 1996, the Registrant issued warrants to purchase 507,654
shares of Common Stock to Pencom and certain Pencom employees at an exercise
price of $.04 per share in connection with the Spin-Off.
The above securities were offered and sold by the Registrant in reliance
upon an exemption from registration under either (i) Section 4(2) of the
Securities Act as transactions not involving any public offering or (ii) Rule
701 under the Securities Act. No underwriters were involved in connection with
the sales of securities referred to in this Item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
**1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant, as amended to date.
**3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant to be filed prior to
completion of the public offering.
**3.3 Bylaws of the Registrant.
**3.4 Form of Amended and Restated Bylaws of the Registrant to be effective upon the completion of the
public offering.
4.1 Specimen Common Stock Certificate.
**4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of Incorporation and Bylaws of
the Registrant defining rights of holders of Common Stock of the Registrant.
**5.1 Opinion of Brobeck, Phleger & Harrison LLP.
**10.1 Bridgepoint Lease Agreement dated October 31, 1996 between the Registrant and Investors Life Insurance
Company of North America.
**10.2 Lease Guarantee effective January 31, 1997 between the Registrant and Pencom Systems Incorporated.
**10.3 Office Lease dated April 25, 1996 between G&W Investment Partners and Pencom Systems Incorporated, as
amended.
**10.4 Agreement of Lease dated May 13, 1996 between Newport L.G.-I, Inc. and Pencom Systems Incorporated.
**+10.5 Software Development Agreement having an effective date of March 9, 1994 between the Registrant and
Canon Computer Systems, Inc., as amended.
+10.6 Software Licensing Agreement having an effective date of June 13, 1996 between the Registrant and
Canon Computer Systems Incorporated.
**10.7 Service Agreement No. 200.504 dated as of November 26, 1990 between the Registrant and International
Business Machines Corporation, as amended to date.
**10.8 Software Task Order Agreement dated as of November 20, 1995 between the Registrant and Tivoli Systems,
Inc., as amended.
**10.9 Loan Agreement dated November 16, 1995 between Tivoli Systems Inc. and the Registrant.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
**+10.10 Software & Methodology Licensing Agreement dated as of November 4, 1996 between the Registrant and
Embarcadero Systems Corporation.
**10.11 Reseller Agreement dated November 4, 1996 between the Registrant and Embarcadero Systems Corporation.
10.12 Credit Agreement dated November 8, 1996 between the Registrant and Texas Commerce Bank National
Association, as amended.
**10.13 Promissory Note dated November 8, 1996 from the Registrant to Texas Commerce Bank National
Association.
**10.14 Accounts Receivable Agreement dated October 1, 1996 between the Registrant and Pencom Systems
Incorporated.
**10.15 Letter Agreement dated October 2, 1996 between the Registrant and Pencom Systems Incorporated.
**10.16 Recruiting Services Agreement dated January 20, 1997 between the Registrant and Pencom Systems
Incorporated.
10.17 Stockholders Agreement dated October 1, 1996 between the Registrant and certain stockholders of the
Registrant.
10.18 Registration Rights Agreement dated October 1, 1996 between the Registrant and certain stockholders
and warrantholders of the Registrant.
**10.19 Promissory Note dated October 19, 1995 from Dr. William Frank King to Pencom Systems Incorporated.
**10.20 Employment Agreement dated October 19, 1992 between Dr. William Frank King and Pencom Systems
Incorporated.
**10.21 Employment Agreement dated October 1, 1996 between Dr. W. Frank King and the Registrant.
**10.22 Employment Agreement dated July 1, 1993 between the Registrant and Patrick Motola.
**10.23 Employment Agreement dated September 27, 1993 between the Registrant and William Cason.
**10.24 Employment Agreement dated October 19, 1993 between the Registrant and Brian Baisley.
**10.25 Employment Agreement dated July 18, 1994 between the Registrant and William Sutton Wimberley, Jr.
**10.26 1996 Stock Option/Stock Issuance Plan.
**10.27 Employee Stock Purchase Plan.
**10.28 PSW Profit Sharing Plan.
**10.29 Description of Executive Bonus Plan.
**10.30 Stock Purchase Agreement dated as of January 1, 1997 between Michael J. Maples and the Registrant.
**10.31 Stock Subscription dated October 1, 1996 between Pencom Systems Incorporated and the Registrant.
**10.32 Asset Contribution Agreement dated October 1, 1996 between Pencom Systems Incorporated and the
Registrant.
**10.33 Assignment and Assumption Agreement dated October 1, 1996 between the Registrant and Pencom Systems
Incorporated.
**10.34 Warrant dated October 1, 1996 issued by the Registrant to Pencom Systems Incorporated.
**10.35 Warrant dated October 1, 1996 issued by the Registrant to Stephen Markman.
**10.36 Warrant dated October 1, 1996 issued by the Registrant to Thomas Pallister.
**10.37 Warrant dated October 1, 1996 issued by the Registrant to Joy Venegas.
11.1 Computation of pro forma net income per share.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Margolin, Winer & Evens LLP.
**23.3 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
**24. Power of Attorney.
**27.1 Financial Data Schedule.
**27.2 Financial Data Schedule.
**27.3 Financial Data Schedule.
**27.4 Financial Data Schedule.
**27.5 Financial Data Schedule.
27.6 Financial Data Schedule.
27.7 Financial Data Schedule.
</TABLE>
- ------------------------
** Previously filed.
+ The Company has applied for confidential treatment with respect to certain
portions of these documents.
(b) Financial Statement Schedules
Schedule (II) -- Valuation and Qualifying Accounts
All other Financial Statement Schedules have been omitted because the
information required to be set forth therein is not applicable or not required
under the instructions contained in Regulation S-X or because the information is
included elsewhere in Financial Statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1993 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 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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1993, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424 (b) (1) or
(4) or 497 (h) under the Securities Act of 1993 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1993, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 4 TO REGISTRATION STATEMENT NO. 333-21565 TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF AUSTIN, STATE OF TEXAS, ON THIS 7TH DAY OF MAY, 1997.
PSW TECHNOLOGIES, INC.
By: /s/ DR. W. FRANK KING
-----------------------------------------
Dr. W. Frank King
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON MAY 7, 1997:
SIGNATURE TITLE
--------------------------------- ------------------------------------------
By: /s/ DR. W. FRANK KING President, Chief Executive Officer and
------------------------------ Director
Dr. W. Frank King (Principal Executive Officer)
By: /s/ PATRICK D. MOTOLA Senior Vice President of Operations,
------------------------------ Chief Financial Officer and Secretary
Patrick D. Motola (Principal Financial Officer)
By: /s/ KEITH D. THATCHER Vice President of Finance and Treasurer
------------------------------ (Principal Accounting Officer)
Keith D. Thatcher
By: *WADE E. SAADI Chairman of the Board of Directors
------------------------------
Wade E. Saadi
By: *EDWARD C. ATEYEH, JR. Director
------------------------------
Edward C. Ateyeh, Jr.
By: *JONATHAN D. WALLACE, ESQ. Director
------------------------------
Jonathan D. Wallace, Esq.
By: *KEVIN B. KURTZMAN Director
------------------------------
Kevin B. Kurtzman
By: *MICHAEL J. MAPLES Director
------------------------------
Michael J. Maples
By: *THOMAS A. HERRING Director
------------------------------
Thomas A. Herring
*By: /s/ DR. W. FRANK KING
------------------------------
Dr. W. Frank King
Attorney-in-Fact
II-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
PSW Technologies, Inc.
We have audited the financial statements of PSW Technologies, Inc. as of
December 31, 1995 and 1996 and for the years then ended and have issued our
report thereon dated February 3, 1997, except for paragraph 2 of Note 3, as to
which the date is May 12, 1997 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed in
Item 16(b) of this Registration Statement for the years ended December 31, 1995
and 1996. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 3, 1997
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
PSW Technologies, Inc.
We have audited the statements of income, stockholders' equity and cash
flows of PSW Technologies, Inc. for the year ended December 31, 1994 and have
issued our report thereon dated May 31, 1995 (included elsewhere in this
Registration Statement). Our audit also included the financial statement
schedule for the year ended December 31, 1994 listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
MARGOLIN, WINER & EVENS LLP
Garden City, New York
May 31, 1995
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
- ---------- ----------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
**1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant, as amended to date.
**3.2 Form of Amended and Restated Certificate of Incorporation of the Registrant to be filed prior
to completion of the public offering.
**3.3 Bylaws of the Registrant.
**3.4 Form of Amended and Restated Bylaws of the Registrant to be effective upon the completion of
the public offering.
4.1 Specimen Common Stock Certificate.
**4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of Incorporation and
Bylaws of the Registrant defining rights of holders of Common Stock of the Registrant.
**5.1 Opinion of Brobeck, Phleger & Harrison LLP.
**10.1 Bridgepoint Lease Agreement dated October 31, 1996 between the Registrant and Investors Life
Insurance Company of North America.
**10.2 Lease Guarantee effective January 31, 1997 between the Registrant and Pencom Systems
Incorporated.
**10.3 Office Lease dated April 25, 1996 between G&W Investment Partners and Pencom Systems
Incorporated, as amended.
**10.4 Agreement of Lease dated May 13, 1996 between Newport L.G.-I, Inc. and Pencom Systems
Incorporated.
**+10.5 Software Development Agreement having an effective date of March 9, 1994 between the Registrant
and Canon Computer Systems, Inc., as amended.
+10.6 Software Licensing Agreement having an effective date of June 13, 1996 between the Registrant
and Canon Computer Systems Incorporated.
**10.7 Service Agreement No. 200.504 dated as of November 26, 1990 between the Registrant and
International Business Machines Corporation, as amended to date.
**10.8 Software Task Order Agreement dated as of November 20, 1995 between the Registrant and Tivoli
Systems, Inc., as amended.
**10.9 Loan Agreement dated November 16, 1995 between Tivoli Systems Inc. and the Registrant.
**+10.10 Software & Methodology Licensing Agreement dated as of November 4, 1996 between the Registrant
and Embarcadero Systems Corporation.
**10.11 Reseller Agreement dated November 4, 1996 between the Registrant and Embarcadero Systems
Corporation.
10.12 Credit Agreement dated November 8, 1996 between the Registrant and Texas Commerce Bank National
Association, as amended.
**10.13 Promissory Note dated November 8, 1996 from the Registrant to Texas Commerce Bank National
Association.
**10.14 Accounts Receivable Agreement dated October 1, 1996 between the Registrant and Pencom Systems
Incorporated.
**10.15 Letter Agreement dated October 2, 1996 between the Registrant and Pencom Systems Incorporated.
**10.16 Recruiting Services Agreement dated January 20, 1997 between the Registrant and Pencom Systems
Incorporated.
10.17 Stockholders Agreement dated October 1, 1996 between the Registrant and certain stockholders of
the Registrant.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
- ---------- ----------------------------------------------------------------------------------------------- -----------
<C> <S> <C>
10.18 Registration Rights Agreement dated October 1, 1996 between the Registrant
and certain stockholders and warrantholders of the Registrant.
**10.19 Promissory Note dated October 19, 1995 from Dr. William Frank King to Pencom
Systems Incorporated.
**10.20 Employment Agreement dated October 19, 1992 between Dr. William Frank King
and Pencom Systems Incorporated.
**10.21 Employment Agreement dated October 1, 1996 between Dr. W. Frank King and the
Registrant.
**10.22 Employment Agreement dated July 1, 1993 between the Registrant and Patrick
Motola.
**10.23 Employment Agreement dated September 27, 1993 between the Registrant and
William Cason.
**10.24 Employment Agreement dated October 19, 1993 between the Registrant and Brian
Baisley.
**10.25 Employment Agreement dated July 18, 1994 between the Registrant and William
Sutton Wimberley, Jr.
10.26 1996 Stock Option/Stock Issuance Plan.
**10.27 Employee Stock Purchase Plan.
**10.28 PSW Profit Sharing Plan.
**10.29 Description of Executive Bonus Plan.
**10.30 Stock Purchase Agreement dated as of January 1, 1997 between Michael J.
Maples and the Registrant.
**10.31 Stock Subscription dated October 1, 1996 between Pencom Systems Incorporated
and the Registrant.
**10.32 Asset Contribution Agreement dated October 1, 1996 between Pencom Systems
Incorporated and the Registrant.
**10.33 Assignment and Assumption Agreement dated October 1, 1996 between the
Registrant and Pencom Systems Incorporated.
**10.34 Warrant dated October 1, 1996 issued by the Registrant to Pencom Systems
Incorporated.
**10.35 Warrant dated October 1, 1996 issued by the Registrant to Stephen Markman.
**10.36 Warrant dated October 1, 1996 issued by the Registrant to Thomas Pallister.
**10.37 Warrant dated October 1, 1996 issued by the Registrant to Joy Venegas.
11.1 Computation of pro forma net income per share.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Margolin, Winer & Evens LLP.
23.3 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
**24. Power of Attorney.
**27.1 Financial Data Schedule.
**27.2 Financial Data Schedule.
**27.3 Financial Data Schedule.
**27.4 Financial Data Schedule.
**27.5 Financial Data Schedule.
27.6 Financial Data Schedule.
27.7 Financial Data Schedule.
</TABLE>
- ------------------------
** Previously filed.
+ The Company has applied for confidential treatment with respect to certain
portions of these documents.
<PAGE>
Exhibit 3.1
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 03:00 PM 08/23/1996
960247590 - 2656550
CERTIFICATE OF INCORPORATION
OF
PSW TECHNOLOGIES, INC.
(Under Section 102 of the General Corporation Law)
The undersigned, being a natural person and acting as incorporator of the
corporation hereby being formed under the General Corporation Law, certifies
that:
FIRST: The name of the corporation (hereinafter called the "Corporation")
is PSW TECHNOLOGIES, INC.
SECOND: The address, including street number, city and county, of the
registered office of the Corporation in the State of Delaware is Corporation
Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle
19801, and the name of the registered agent of the Corporation in the State of
Delaware at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful business,
to promote any lawful purpose, and to engage in any lawful act or activity for
which corporations may be organized under the Delaware General Corporation Law.
FOURTH: The aggregate number of shares which the Corporation shall have
the authority to issue is 1,500, all of which shall be without par value and
shall be designated "Common Shares."
FIFTH: No director shall be personally liable to the Corporation or any
stockholder for monetary damages for breach of fiduciary duty as a director,
except for any matter in respect of which such director shall be liable under
Section 174 of Title 8 of the Delaware Code (relating to the Delaware General
Corporation Law) or any amendment thereto or successor provision thereto or
shall be liable by reason that, in addition to any and all other requirements
for such liability, such director (i) shall have breached his or her duty of
loyalty to the Corporation or its stockholders, (ii) shall not have acted in
good faith or in failing to act, shall not have acted in good faith, (iii) shall
have acted in a manner involving intentional misconduct or a knowing violation
of law or (iv) shall have derived an improper personal benefit. Neither the
amendment nor repeal of this Article FIFTH, nor the adoption of any provision of
the Certificate of Incorporation inconsistent with this Article FIFTH, shall
eliminate or reduce the effect of this Article FIFTH in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article
FIFTH, would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
SIXTH: Election of directors need not be by written ballot.
SEVENTH: The Board of Directors is authorized to adopt, amend or repeal
by-laws of the Corporation.
EIGTH: (a) Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding,
<PAGE>
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director,
officer, employee or agent of the Corporation or any of its direct or indirect
subsidiaries or is or was serving at the request of the Corporation as a
director, officer, employee or agent of any other corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"), whether the
basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than permitted prior
thereto), against all expense, liability and loss (including, without
limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties,
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith, and such indemnification shall continue as
to an indemnitee who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the indemnitee's heirs, executors and
administrators; provided, however, that, except as provided in paragraph (c) of
this Article EIGHTH with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such Indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
(b) The right to indemnification conferred in paragraph (a) of this
Article EIGHTH shall include the right to be paid by the Corporation the
expenses incurred in defending any proceeding for which such right to
indemnification is applicable in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Article EIGHTH or otherwise.
(c) The rights to indemnification and to the advancement of expenses
conferred in paragraphs (a) and (b) of this Article EIGHTH shall be contract
rights. If a claim under paragraph (a) or (b) of this Article EIGHTH is not paid
in full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
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<PAGE>
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by an indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the Corporation shall be entitled to recover such advancement of
expenses upon a final adjudication that, the indemnitee has not met any
applicable standard for indemnification set forth in the Delaware General
Corporation Law. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or stockholders) that the indemnitee has
not met such applicable standard of conduct, shall create a presumption that the
indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article EIGHTH or otherwise, shall be on the
Corporation.
(d) The rights to indemnification and to the advancement of expenses
conferred in this Article EIGHTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, this certificate of
incorporation, by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
(e) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
(f) The Corporation's obligation, if any, to indemnify any person who was
or is serving as a director, officer, employee or agent of any direct or
Indirect subsidiary of the Corporation or, at the request of the Corporation, of
any other corporation or of a partnership; joint venture, trust or other
enterprise shall be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint venture, trust,
or other enterprise.
(g) Any repeal or modification of the foregoing provisions of this Article
EIGHTH shall not adversely affect any right or protection hereunder of any
person in respect of any act or omission occurring prior to the time of such
repeal or modification.
NINTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
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<PAGE>
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, or this Corporation, as the case may be,
and also on this Corporation.
TENTH: The name and address of the incorporator are as follows:
NAME MAILING ADDRESS
Peter W. Smith c/o Squadron Ellenoff, Plesent &
Sheinfeld, LLP
551 Fifth Avenue
New York, New York 10176
/s/ Peter W. Smith
Signed on: August 23, 1996 ----------------------------------
Peter W. Smith, Incorporator
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<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 12/18/1996
960373512 - 2656550
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PSW TECHNOLOGIES, INC.
I, the undersigned, being the Secretary of PSW Technologies, Inc., a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "Corporation"),
DO HEREBY CERTIFY:
FIRST: That the Fourth Article of the Certificate of Incorporation
be, and it hereby is, amended to read in its entirety as follows:
"The aggregate number of shares which
the Corporation shall have the authority
to issue is 11,250,000, par value of
$.01 per share, all of which shall be
designated 'Common Shares.'"
SECOND: That this amendment was duly adopted in accordance with the
provisions of section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, I have signed this certificate this 6th day of
December, 1996.
/s/ Patrick Motola
---------------------------------
Patrick Motola, Secretary
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 04/02/1997
971106925 - 2656550
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PSW TECHNOLOGIES, INC.
Pursuant to Section 242
of the General Corporation
Law of the State of Delaware
---------------------------
PSW Technologies, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation") DOES HEREBY CERTIFY:
FIRST: That ARTICLE FOURTH, of the Certificate of Incorporation of
the Corporation is amended by deleting the first paragraph hereof in its
entirety and inserting in lieu thereof:
"The aggregate number of shares which the Corporation shall have
authorized to issue is eleven million two hundred and fifty thousand
(11,250,000), par value $.01 per share, all of which shall be designated
Common Shares. Each thirteen (13) shares of the Corporation's Common Stock,
par value $.01 per share, issued and outstanding as of the date this
Certificate of Amendment is filed shall be converted and reclassified into
eight (8) shares of the Corporation's Common Stock, par value $.01 per
share, so that each share of the Corporation's Common Stock issued and
outstanding is hereby converted and reclassified. No fractional interests
resulting from such conversion shall be issued, but in lieu thereof, the
Corporation will issue to the holder one share of the Corporation's Common
Stock for any fractional share of post-conversion Common Stock to which
such holder was otherwise entitled to receive."
SECOND: That the foregoing amendment has been duly adopted in
accordance with the provisions of Section 228 and 242 of the General
Corporation Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, said Corporation has caused this certificate to be
signed by Dr. W. Frank, its President and Patrick D. Motola, its Secretary,
this 18th day of March 1996.
By: /s/ W. Frank King
--------------------------------
President
Dr. W. Frank King
ATTEST:
/s/ Patrick D. Motola
- -----------------------------------
Secretary
Patrick D. Motola
<PAGE>
<TABLE>
EXHIBIT 4.1
NUMBER [LOGO] SHARES
PSW TECHNOLOGIES, INC.
COMMON STOCK INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CUSIP 69364J 103
SEE REVERSE FOR CERTAIN DEFINITIONS
<S> <C> <C>
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF
PSW TECHNOLOGIES, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney
upon the surrender of this Certificate properly endorsed.
This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
[Corporate Seal]
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
Chase Mellon Shareholder Services, LLC
By TRANSFER AGENT
AND REGISTRAR,
AUTHORIZED SIGNATURE.
<PAGE>
PSW Technologies, Inc. will furnish without charge to each stockholder who so requests the powers, designations, preference and
relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Such request may be made to the Corporation or the Transfer Agent.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT --_________________ Custodian _________________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as tenants Act___________________________________________
in common (State)
UNIF TRF MIN ACT --_______________ Custodian (until age____)
(Cust)
_________ under Uniform Transfers
(Minor)
to Minors Act_________________________
(State)
Additional abbreviations may also be used though not in the above list.
For value received,_______________________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE:____________________________
_________________________________________________________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
_________________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________ Shares
of the common stock represented by the within certificate, and do hereby irrevocably constitute and appoint
________________________________________________________________________________________________________________________ Attorney
to transfer the said stock the books of the within-named Corporation with full power of substitution in the premises.
Dated:________________________
X_____________________________________________________________________________________
X_____________________________________________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S)
AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER
Signature(s) Guaranteed
By _______________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBER-
SHIP IN AN APPROVED SIGNATURE GUARANTEE PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15
</TABLE>
<PAGE>
Exhibit 10.6*
SOFTWARE LICENSING AGREEMENT
THIS SOFTWARE LICENSING AGREEMENT (this "Agreement"), made and entered by
and between Pencom Systems Incorporated, doing business as PSW Technologies
(hereinafter "PSW"), a New York corporation with its principal offices at 9050
Capital of Texas Highway North Austin, Texas 78759, and Canon Computer Systems
Incorporated (hereinafter "CCSI"), a California corporation with its principal
offices at 2995 Redhill Avenue, Costa Mesa, California 92626:
WITNESSETH:
WHEREAS, pursuant to that certain Software Development Agreement between
Pencom Systems Incorporated and CCSI dated March 9, 1994, as amended by the
Phase Three Amendment to Software Development Agreement dated March 7, 1995
("Development Agreement"), CCSI hired Pencom to develop a wholesale distribution
system based on object oriented technology for tracking CCSI's imports and
exports, monitoring inventory, processing customer orders, tracking distribution
of CCSI products, and generating sales and marketing reports.
WHEREAS, on February 15, 1996, Pencom Software, a division of Pencom
Systems, Inc., changed its name to PSW Technologies;
WHEREAS, PSW desires to license back from CCSI certain of the object
oriented technology it developed for CCSI under the Development Agreement;
WHEREAS, CCSI is willing to grant such rights and licenses on the terms
and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and intending to be legally bound, the parties hereby agree as follows:
Section 1
DEFINITION OF TERMS
The definition of terms set forth in this Section 1 shall apply in this
Agreement (in addition to terms expressly defined elsewhere herein) including
any and all exhibits, addenda, and amendments made to or incorporated herein now
or in the future.
1.1 "Deliverables." Any and all tangible products developed by PSW for
CCSI under the Development Agreement, including all object diagrams, functional
specifications, prototypes, reports, conversion tools, class libraries, the
"source" code and object code, and all necessary Documentation therefor and
further including enhancements, modifications, and corrections made to the
Deliverables by PSW pursuant to support, training, and maintenance services
provided to CCSI or otherwise at the request and expense of PSW.
* Confidential treatment is requested for certain portions of Exhibit 10.6
pursuant to Rule 406 under the Securities Act of 1933.
<PAGE>
1.2 "Documentation." All textual material relating to the Deliverables,
including flow charts, operating instructions, and related technical
information. Documentation shall also include customary end-user materials, such
as user manuals and training materials and sample source code used for training
and documentation purposes.
1.3 "Object 21 Systems Library." Those certain Deliverables as specified
in Schedule A that DO NOT contain specific rules or information pertaining to
CCSI's unique business methods.
l.4 "Object 21 Business Library." Those certain Deliverables as specified
in Schedule A that DO contain specific rules or information pertaining to CCSI's
unique business methods.
1.5 "Object 21 Library." The Object 21 Systems Library and the Object 21
Business Library.
1.6 "CCSI Enhancements." Changes, corrections, modifications, or
additions, including all new releases and applications, made by CCSI to the
Object 21 Library and related Documentation.
1.7 "PSW Enhancements." Changes, corrections, modifications, or additions,
including all new releases and applications, made by PSW to the Object 21
Library and related Documentation apart from its obligations pursuant to the
Development Agreement and not at CCSI's request and expense, including the
conversion of the Object 21 Library from the NeXTSTEP language into a more open
platform (e.g. OpenSTEP).
1.8 "Product." Any deliverables licensed by PSW that includes the Object
21 Library, CCSI Enhancements, PSW Enhancements, or related Documentation.
"Product" may include one or more separately priced PSW offerings.
1.9 "Customer." Any end user customers to whom PSW or Resellers may market
and sell the Product, either directly or indirectly, under the terms and
conditions of this Agreement.
1.10 "Reseller." Any of PSW's authorized resellers.
1.11 "Direct Customer." Any Resellers and any end user Customers to whom
PSW directly markets and sells the Product.
1.12 "Computer Business." The Computer Business shall be defined to
include the research, development, production, marketing, selling, distribution,
or leasing of computer hardware, computer hardware peripherals, integrated
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<PAGE>
document management systems or cameras, or the performance of development,
consulting, training, or maintenance services relating to computer hardware,
computer hardware peripherals, integrated document management systems, or
cameras.
Section 2
GRANT OF LICENSES FROM CCSI TO PSW
2.1 Scope of License Grant. CCSI hereby grants to PSW, and PSW hereby
accepts, the following nontransferable worldwide rights and licenses:
2.1.1 a royalty-free right to use, execute, modify, and reproduce
(in any medium) the Object 21 Library, the CCSI Enhancements and related
Documentation for internal business purposes.
2.1.2 a royalty-bearing license to distribute the Product to Direct
Customers.
2.1.3 a royalty-bearing license to authorize Resellers to distribute
the Product to Customers, either on a stand-alone basis or for use in
conjunction with Resellers' computer application programs.
The foregoing rights and licenses shall be nonexclusive, except that the United
States license shall be exclusive for five (5) years from the date hereof.
2.2 Customer License. Any distribution of the Product by PSW to Customers
shall be pursuant to the terms and conditions of PSW's Customer license in the
form attached hereto as Schedule B or to a form that contains the minimum terms
and conditions of and is no less restrictive in protecting CCSI's interests than
such agreement attached hereto as Schedule B. Any distribution of the Product by
PSW to Resellers and then by Resellers to Customers shall be pursuant to the
terms and conditions of PSW's Reseller agreement in the form attached hereto as
Schedule C or to a form that contains the minimum terms and conditions of and is
no less restrictive in protecting CCSI's interests than such agreement attached
hereto as Schedule C. PSW agrees to provide and to require its Resellers to
provide in a conspicuous manner one copy of the Customer license attached as
Schedule 2 to Schedule C hereto with each Product. PSW agrees to report to CCSI
any known or suspected violation(s) of the Customer license agreement or
Reseller agreements and to reasonably cooperate with CCSI in any enforcement
actions taken by CCSI. If a conflict arises between Schedule B and any other
Customer license agreement, the terms of Schedule B shall prevail. If a conflict
arises between Schedule C and any other Reseller agreements, the terms of
Schedule C shall prevail. PSW shall undertake reasonable efforts to enforce the
terms of any license agreement between
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<PAGE>
PSW or its Resellers and a Customer as it relates to the Products. No Customers
shall have any right to sublicense the Product unless they are also a Reseller.
2.3 Reseller Agreement. Any distribution of the Product by PSW to
Resellers, whether for further distribution on a stand-alone basis or for use in
conjunction with Resellers' computer application programs, shall be pursuant to
the terms and conditions of the PSW's Reseller agreement in the form attached
hereto as Schedule C or to a form that contains the minimum terms and conditions
of and is no less restrictive in protecting CCSI's interests than the Reseller
agreement attached hereto as Schedule C. PSW agrees to report to CCSI any known
or suspected violation(s) of the Reseller agreement and to reasonably cooperate
with CCSI in any enforcement actions taken by CCSI. If a conflict arises between
Schedule C and any other Reseller agreement, the terms of Schedule C shall
prevail. Resellers shall be bound by the restriction contained in Section 2.5.
2.4 Continuing Rights of CCSI. Subject to the rights granted in this
Section 2, CCSI shall retain all ownership of and full rights to continue to
use and market the Deliverables and the CCSI Enhancements and all right, title
and interest in and to all copyrights, patent rights or trade secret rights
associated with the Deliverables and the CCSI Enhancements.
2.5 Marketing Restrictions. PSW shall not directly or indirectly market or
license the Object 21 Business Library to any Customer engaged in whole or in
part in the Computer Business unless prior written authorization is received
from CCSI.
Section 3
GRANT OF LICENSE FROM PSW TO CCSI
3.1 PSW Enhancements. PSW hereby grants to CCSI, and CCSI hereby accepts,
a royalty-free, irrevocable, nonexclusive, and fully paid-up license to use,
execute, modify, reproduce (in any medium), and distribute the PSW Enhancements
for internal CCSI use and to sublicense any or all of such rights to the
affiliates of CCSI's ultimate parent Canon Inc. for their internal use.
3.2 PSW Determination of Marketing and Pricing. Except as provided herein,
PSW shall retain full discretion with respect to all decisions relating to
distribution and marketing of the Product, including, without limitation, the
determination to introduce or withdraw the Product, and the terms, conditions,
and pricing of the Product. PSW shall use its best efforts to promote the
Product or to continue any such promotion once commenced.
3.3 PSW Ownership. All PSW Enhancements shall be owned exclusively by PSW.
Nothing herein shall be construed to assign or transfer any intellectual
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<PAGE>
property rights in the Deliverables or CCSI Enhancements, in which CCSI retains
all right, title, and interest subject only to the rights and license herein
granted.
Section 4
DELIVERY
4.1 Deliverables. As of the date hereof, PSW acknowledges that it already
has in its possession a copy of the Object 21 Library and related Documentation.
4.2 CCSI Enhancements. CCSI shall deliver copies of any CCSI Enhancements
to PSW at PSW's request CCSI shall keep PSW advised as to its plans for
preparation of any CCSI Enhancements.
4.3 PSW Enhancements. PSW shall provide to CCSI any PSW Enhancements made
by PSW during the term of this Agreement. PSW shall keep CCSI advised as to its
plans for preparation of PSW Enhancements. PSW agrees that, at a minimum, no
later than one (1) year from implementation of the Deliverables pursuant to the
Development Agreement it shall deliver to CCSI at no charge the converted Object
21 Systems Library from the NeXTSTEP language into the OpenSTEP platform in both
object and source code format.
Section 5
ROYALTY PAYMENTS AND REPORTS
5.1 Royalty Payments. In consideration of the rights in and licenses to
the Object 21 Library and CCSI Enhancements granted by this Agreement, PSW shall
pay to CCSI a [*] royalty on Net Sales Revenue of the Products on
a calendar quarterly basis. "Net Sales Revenue" means gross sales revenue less
customary trade discounts actually given, returns actually credited, and
transportation and taxes separately itemized and actually charged to and paid by
the Direct Customers. No other costs incurred in the manufacture, sales,
distribution, license, or lease of the Product shall be deducted in calculating
the royalty obligation of PSW. It is understood that PSW may increase or
decrease any prices, charges, or fees relating to any Product without notice to
or approval of CCSI. Royalties shall be paid by check to CCSI within thirty (30)
days after the last of each such quarter.
5.2 Royalty Reports. At the same time PSW makes its royalty payment to
CCSI pursuant to Section 5.1, PSW shall furnish to CCSI a royalty report
including (a) the number of Products shipped during such calendar quarter, (b)
which Object 21 Library Deliverables, CCSI Enhancements, and PSW Enhancements
are incorporated within or used in the development of the Product; and (c) and
any and all other information necessary for the determination of royalties under
this Agreement.
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<PAGE>
5.3 Royalty Records. PSW shall keep or cause to be kept full and accurate
accounts and records of all transactions made by it and by its Resellers under
this Agreement in form such that all amounts owing hereunder to CCSI may be
readily and accurately determined. PSW shall use commercially reasonable efforts
to assure that its Resellers are (a) accurately reporting to PSW all
transactions with Customers and (b) otherwise complying with this Agreement. All
books of account and records kept under this Section 5 shall be retained by PSW
for at least two (2) years after the termination of this Agreement.
5.4 Royalty Base Confirmation. PSW shall, upon written request once each
calendar year, provide access to records with respect to the licenses granted
under this Agreement, during normal business hours, to an independent accounting
organization chosen and compensated by CCSI for purposes of a confirming audit
with respect to royalty payments. PSW shall promptly make any payments due as a
result of the audit, and PSW shall reimburse CCSI for the costs of such audit if
the audit determines that any such report pursuant to Section 5.2 is understated
by more than five percent (5%).
Section 6
COPYRIGHT NOTICES AND ENFORCEMENT
6.1 Copyright Notices. PSW shall not remove any existing copyright or
other proprietary rights notices from the Object 21 Library. PSW agrees that any
Product distributed to Resellers or Direct Customers shall contain an
appropriate copyright notice in the name of CCSI as to the CCSI-owned portions
of the Product.
6.2 Enforcement of Copyright. PSW shall be responsible to enforce CCSI and
PSW copyright infringement by Customers of the Product to the extent reasonable
under the circumstances. A failure by PSW to so enforce rights against
infringers of such copyrights within a reasonable period of time after
appropriate notification, if such failure results in a material loss of value of
licenses granted to PSW herein, shall be considered a material breach of this
Agreement by PSW.
Section 7
INDEMNIFICATION AND INSURANCE
7.1 Indemnity for Product. PSW agrees to indemnity and hold harmless CCSI
and its affiliates, officers, agents, directors, and employees, against any and
all claims, actions, proceedings, expenses, damages and liabilities (including
but not limited to any governmental investigations, complaints and actions) and
reasonable attorney's fees, arising out of or in connection with (a) any breach
of this Agreement by PSW, including its representations, warranties and
covenants, (b) any Product or any information contained therein and the use
thereof, and (c) any claim or action
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<PAGE>
for personal injury, death or other cause of action involving product liability
claims arising from or relating to any Product.
7.2 Infringement of Intellectual Property Rights. PSW shall, at its own
expense, defend any claim or demand made, or suit instituted, against CCSI or
its affiliates, officers, agents, directors, and employees, which is based on an
allegation that (a) any Product sold, licensed, or distributed by PSW hereunder
infringes or violates any copyright, patent, trademark, or trade name of any
third party, (b) any Product contains, embodies or incorporates any trade secret
or proprietary information of any third party, or (c) the use, license or
modification of the Product constitutes a violation of the trade secrets or
proprietary rights of such third party, and shall indemnity, hold harmless and
defend CCSI or its affiliates, officers, agents, directors, and employees
against any claim, loss, expense or judgment, including reasonable attorney's
fees, which arises from any of the preceding allegations (a) through (c),
provided that CCSI gives PSW prompt notice in writing of any such allegations
and permits PSW through PSW's counsel to defend the same and gives PSW all
available information, assistance and authority to enable PSW to assume such
defense. PSW shall be permitted to control the defense of any such suit,
including appeals from any judgment therein and any negotiations for the
settlement or compromise thereof, with authority to enter into a settlement or
compromise with the prior written consent of CCSI, which will not be
unreasonably withheld. PSW shall have the affirmative obligation to diligently
and effectively defend against any such claim. If CCSI determines that PSW is
not diligently and effectively defending against such a claim, CCSI shall have
the absolute right and option to intervene in any such suit and participate or
assume control of the defense of the suit but will not have any obligation to do
so. CCSI shall have no obligation to defend PSW, or to pay any such costs,
damages, and attorney fees for any claim based upon the combination, operation,
or use of the Product.
7.3 Insurance. PSW agrees to maintain during the term of this Agreement
general liability insurance covering claims arising under the indemnification
provisions as set forth above in Sections 7.1 and 7.2, which insurance shall be
in amounts and of a type customarily maintained by companies similarly situated,
providing at least one million dollars ($1,000,000.00) coverage per occurrence.
Upon execution of this Agreement, PSW shall provide to CCSI a certificate of
insurance flaming CCSI and its affiliates, including their respective officers,
directors, agents and employees, as additional named insureds on such insurance
coverage. PSW's purchase of the commercial general liability insurance shall not
relieve PSW of any other of its obligations or liabilities under this Agreement
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<PAGE>
Section 8
TERM AND TERMINATION
8.1 Basic Term. This Agreement shall be effective on the date first above
written and shall remain in force unless it terminates as provided below.
8.2 Termination for Default. This Agreement shall terminate upon the
bankruptcy or insolvency of either party.
8.3 Termination for Breach. In the event of a material breach of this
Agreement by either party, the other party may terminate this Agreement by
giving thirty (30) days' prior written notice thereof; provided that this
Agreement shall not terminate if the party in breach has cured the breach of
which it has been notified prior to the expiration of the thirty (30) days.
8.4 Post-Termination Provisions. In the event of any termination of the
entire Agreement, then (a) the provisions of Sections 3, 5.3, 6, 7, and 9 shall
survive as necessary to effectuate their purposes and shall bind the parties and
their legal representatives, successors, and assigns, and (b) Customer licenses
and Reseller agreements then existing by virtue of rights exercised prior to the
effective date of termination under this Agreement and any royalty obligations
of PSW with respect thereto shall survive and continue.
Section 9
CONFIDENTIAL INFORMATION
9.1 CCSI Information. In connection with this Agreement, CCSI has provided
and shall provide PSW with certain information that is proprietary and
confidential to CCSI and necessary or useful for PSW to exploit the licenses
granted hereunder.
9.2 Confidentiality. The term "Confidential Information" as used herein
shall mean any information disclosed by CCSI to PSW pursuant to Section 9.1
above in a written or other tangible form clearly identified as being
confidential. Oral or visual information shall not be considered as Confidential
Information unless it is designated confidential at the time of oral or visual
disclosure and reduced to a writing clearly marked as being confidential that is
sent to PSW by CCSI within thirty (30) days after such oral or visual
disclosure. For the purpose of this Agreement, any Deliverable or CCSI
Enhancement shall be deemed Confidential Information.
9.3 Treatment of Confidential Information. During this Agreement and
thereafter, PSW shall keep the Confidential Information in strict confidence and
-8-
<PAGE>
shall not disclose it to any person, firm or corporation outside PSW, nor use
the same for any purpose other than performing the Agreement. In addition, PSW
agrees to safeguard the Confidential Information by restricting its internal
dissemination to only those employees within PSW having a need to know the
Confidential Information for purposes of this Agreement. PSW has full
responsibility to ensure that all employees who are given access to the
Confidential Information maintain the confidentiality of the Confidential
Information, whether or not such employees continue to be employees of PSW.
9.4 Exceptions to Treatment of Confidential Information. Notwithstanding
Section 9.3 above, PSW shall have no confidential obligation and no use
restriction hereunder with respect to any Confidential Information that:
(1) is already known to PSW at the time of disclosure thereof
as evidenced by written records;
(2) is or becomes publicly known through no wrongful act of PSW
at or subsequent to the time of disclosure thereof; or
(3) is permitted for release by prior written consent of CCSI.
These exceptions shall not apply to information that is classified as
Confidential Information pursuant to the Development Agreement.
9.5 Tangible Embodiments. Any and all written or tangible embodiments of
information disclosed to PSW by CCSI hereunder shall be and remain the property
of CCSI, and PSW agrees promptly to return such tangible embodiments, including
any copy thereof, to CCSI upon termination of this Agreement.
9.6 PSW Information. It is understood that CCSI does not desire to receive
any confidential information from PSW and accordingly, with respect to any
information provided by PSW, including all PSW Enhancements, CCSI shall have no
confidential obligation and no use restriction and CCSI may freely use such
information for any purpose permitted under the license granted in Section 3.1.
9.7 Intellectual Property. Except to the extent necessary to perform PSW's
obligations hereunder or as otherwise provided herein, no license or right,
expressed or implied, is hereby conveyed or granted to PSW for any invention,
patent application, patent, copyright, know-how, trade secret or other
intellectual property of CCSI.
9.8 Trademarks. No license or right, expressed or implied, is hereby
conveyed or granted to PSW to use any trademark of CCSI or any of its affiliates
in any advertising, marketing, or distribution of the Products by PSW, without
the prior express written consent of CCSI. PSW shall have the right to include
CCSI in a
-9-
<PAGE>
list of its customers and to refer in PSW marketing materials to the development
work PSW has performed for CCSI, provided that PSW shall obtain CCSI's prior
written consent to such usage, which consent shall not unreasonably be refused.
9.9 Enforcement. PSW understands and agrees that the obligations and
restrictions provided herein are necessary and reasonable in order to protect
the business of CCSI, and CCSI would be irreparably harmed by any breach or
threatened breach hereof. In addition to any other remedies available for breach
thereof, CCSI shall be entitled to obtain injunctive relief against a threatened
breach or continuation of any such breach, without the necessity of providing
actual damages.
9.10 Confidentiality of Terms. Neither party shall, without written
authorization of the other, disclose to any third party the terms and conditions
of this Agreement except as may be necessary to establish or assert rights
hereunder or as required by law; provided, however, that either party may, on a
confidential basis, disclose this Agreement to its accountants, attorneys, and
financing organizations.
Section 10
RELATIONSHIP TO DEVELOPMENT AGREEMENT
Nothing in this Agreement shall be construed as amending or limiting the
Development Agreement. All rights and obligations thereunder remain valid and
binding on the parties, including without limitation Section 4 of the Phase
Three Amendment to the Development Agreement.
Section 11
GENERAL
11.1 Entire Agreement. The provisions herein constitute the entire
agreement between the parties with respect to the subject matter hereof and
supersede all prior agreements, oral or written, and all other communications
relating to the subject matter hereof. No amendment or modification of any
provision of this Agreement will be effective unless set forth in a document
that purports to amend this Agreement and is executed by both parties.
11.2 Assignment. PSW shall not sell, transfer, assign, or subcontract any
right or obligation hereunder except as expressly provided herein without the
prior written consent of CCSI. Any act in derogation of the foregoing shall be
null and void. Notwithstanding the foregoing two sentences, PSW may assign this
Agreement in connection with the sale, reorganization, or other disposition of
all or substantially all of the assets of PSW or any affiliate or subsidiary or
division thereof, provided that (1) any such assignee agrees in writing with
CCSI to comply with PSW's obligations under this Agreement, and (2) in the case
of an assignment
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<PAGE>
in which PSW survives, PSW remains subject to all of its obligations under this
Agreement. Subject to the foregoing, this Agreement shall be for the benefit of
and be binding upon the parties' successors.
11.3 Force Majeure. Except for failures to make any payment when due,
neither party shall be held liable for failure to fulfill its obligations
hereunder if such failure is due to a natural calamity, act of government, or
similar cause beyond the control of such party.
11.4 Governing Law. The validity, construction, and performance of this
Agreement shall be governed by the substantive law of the State of
California, without regard to its conflicts of law provisions.
11.5 Severability. If any provision of this Agreement is held by a court
of competent jurisdiction to be contrary to law, the remaining provisions of the
Agreement will remain in full force and effect.
11.6 Compliance with Laws and Regulations. CCSI and PSW shall comply with
all laws, rules, and regulations of competent public authorities relating to the
duties, obligations, and performance under this Agreement and shall procure all
licenses and pay all fees and other charges required thereby.
11.7 Notices. Any notices required or permitted to be made or given by
either party hereto pursuant to this Agreement will be deemed sufficiently made
or given on the fifth day after the date of mailing if sent to such party by
certified mail, postage prepaid, addressed as set forth below or to such other
address as a party shall designate by written notice given to the other party.
As of the date hereof, any notice to be given to CCSI shall be addressed
to:
Canon Computer Systems, Inc.
2995 Red Hill Avenue
Costa Mesa, California 92626
Attention: Director, Information Systems
Canon Computer Systems, Inc.
2995 Red Hill Avenue
Costa Mesa, California 92626
Attention: General Counsel
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<PAGE>
As of the date hereof, any notice to be given to PSW shall be addressed to:
PSW Technologies
9050 Capital of Texas Highway North
Austin, Texas 78759
Attention: President
PSW Technologies
9050 Capital of Texas Highway North
Austin, Texas 78759
Attention: Vice President and General Manager
11.8 Waiver. A failure of either party to exercise any right provided for
herein shall not be deemed a waiver of any right under this Agreement.
11.9 Rights Outside of Agreements. Subject to Section 10, nothing
contained in this Agreement shall be construed as limiting rights that the
parties may enjoy outside the scope of the licenses granted and the obligations
and restrictions set forth or treated herein.
IN WITNESS THEREOF, the parties have caused this Agreement to be signed below by
their duly authorized representatives and to be effective as of the later date
written below:
PSW
Pencom Systems Incorporated
By: /s/ [Illegible]
----------------------------------------------
Date: 26 May 1996
CCSI
Canon Computer Systems, Inc.
By: /s/ Michael Rusert
----------------------------------------------
Michael Rusert, Vice President, Operations
Date: June 13, 1996
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<PAGE>
SOFTWARE LICENSING AGREEMENT
SCHEDULE A
[* Confidential treatment has been requested for pages A-1 through A-14]
<PAGE>
SOFTWARE LICENSING AGREEMENT
SCHEDULE B
Minimum Terms for Customer License Agreement
(The following terms are the minimum terms which will be included in any
Customer license agreement. In the minimum terms, PSW Technologies will be
referred to as PSW and the end user licensing the Product will be referred to as
CLIENT.)
Section 1
DEFINITION OF TERMS
The definition of terms set forth in this Section 1 shall apply in this
Agreement (in addition to terms expressly defined elsewhere herein) including
any and all exhibits, addenda, and amendments made to or incorporated herein now
or in the future.
1.1 "Deliverables." Any and all tangible products delivered by PSW for
CLIENT under this Agreement, including all object diagrams, functional
specifications, prototypes, reports, conversion tools, class libraries, the
"source" code and object code, and all necessary Documentation therefor and
further including enhancements, modifications, and corrections made to the
Deliverables by PSW pursuant to support, training, and maintenance services
provided to CLIENT by PSW.
1.2 "Documentation." All textual material relating to the Deliverables,
including flow charts, operating instructions, and related technical
information. Documentation shall include user manuals, help text, training
materials, and sample source code used for training and documentation purposes.
1.3 "PSW Systems Library." Those Deliverables in Schedule 1 that are
specified to be part of the PSW Systems Library.
1.4 "PSW Business Library." Those Deliverables in Schedule 1 that are
specified to be part of the PSW Business Library.
1.5 "PSW Object Library." The combination of the PSW Systems Library and
the PSW Business Library.
1.6 "CLIENT Enhancements." Changes, corrections, modifications, or
additions, including all new releases and applications, made by CLIENT to the
PSW Object Library and related Documentation.
B-1
<PAGE>
1.7 "PSW Enhancements." Changes, corrections, modifications, or additions,
including all new releases and applications, made by PSW to the PSW object
Library and related Documentation.
1.8 "Computer Business." The Computer Business shall be defined to include
the research, development, production, marketing, selling, distribution, or
leasing of computer hardware, computer hardware peripherals, integrated document
management systems or cameras, or the performance of development, consulting,
training, or maintenance services relating to computer hardware, computer
hardware peripherals, integrated document management systems, or cameras.
1.9 "PSW Licensors." Other parties who have licensed portions of the
Deliverables to PSW under separate agreements.
Section 2
GRANT AND SCOPE OF RIGHTS FROM PSW TO CLIENT
2.1 Scope of License. PSW grants to CLIENT the right to use, execute,
modify, and reproduce, and distribute for internal use the licensed portions of
the PSW Object Library as specified in Schedule 1 and any PSW Enhancements.
Schedule 2 specifies the extent of the CLIENT's business as it pertains to this
license.
2.2 License Restrictions. CLIENT is not authorized to distribute or
sublicense the PSW Object Library or PSW Enhancements to any party currently in
or planning to enter the Computer Business as defined in Section 1. CLIENT is
not authorized to operate a service bureau utilizing any Deliverables, CLIENT
Enhancements, or PSW Enhancements.
2.3 Representation and Warranty of CLIENT Business. If CLIENT is licensing
any portion of the PSW Business Library, CLIENT represents and warrants by
signing this Agreement that neither it nor its subsidiaries, affiliates, or
divisions is are not currently in, nor planning to enter the Computer Business
as defined in Section 1. If CLIENT is licensing any portion of the PSW Business
Library and either it or any of its subsidiaries, affiliates, or divisions
desires to enter the Computer Business, then prior to entering such Computer
Business CLIENT shall return all licensed portions of the PSW Business Library
to PSW and shall provide a sworn statement to PSW averring that no copies of the
PSW Business Library remain on any computer system or otherwise within its
possession or control.
(Sections 3 and 4 intentionally omitted)
B-2
<PAGE>
Section 5
CONFIDENTIAL INFORMATION
5.1 PSW Information. In connection with this Agreement, PSW has provided
and shall provide CLIENT with certain information that is proprietary and
confidential to PSW or the PSW Licensors and necessary or useful for CLIENT to
exploit the licenses granted hereunder.
5.2 Confidentiality. The term "Confidential Information" as used herein
shall mean any information disclosed by PSW to CLIENT pursuant to Section 5.1
above in a written or other tangible form clearly identified as being
confidential. Oral or visual information shall not be considered as Confidential
Information unless it is designated confidential at the time of oral or visual
disclosure and reduced to a writing clearly marked as being confidential that is
sent to CLIENT by PSW within thirty (30) days after such oral or visual
disclosure. For the purpose of this Agreement, any Deliverable or PSW
Enhancement shall be deemed Confidential Information.
5.3 Treatment of Confidential Information. During this Agreement and
thereafter, CLIENT shall keep the Confidential Information in strict confidence
and shall not disclose it to any person, firm or corporation outside CLIENT, nor
use the same for any purpose other than performing the Agreement. In addition,
CLIENT agrees to safeguard the Confidential Information by restricting its
internal dissemination to only those employees within CLIENT having a need to
know the Confidential Information for purposes of this Agreement. CLIENT has
full responsibility to ensure that all employees who are given access to the
Confidential Information maintain the confidentiality of the Confidential
Information, whether or not such employees continue to be employees of CLIENT.
5.4 Exceptions to Treatment of Confidential Information. Notwithstanding
Section 5.3 above, CLIENT shall have no confidential obligation and no use
restriction hereunder with respect to any Confidential Information that:
(1) is already known to CLIENT at the time of disclosure thereof as
evidenced by written records;
(2) is or becomes publicly known through no wrongful act of CLIENT at
or subsequent to the time of disclosure thereof; or
(3) is permitted for release by prior written consent of PSW.
5.5 Tangible Embodiments. Any and all written or tangible embodiments of
information disclosed to CLIENT by PSW hereunder shall be and remain the
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<PAGE>
property of PSW, and CLIENT agrees promptly to return such tangible embodiments,
including any copy thereof, to PSW upon termination of this Agreement.
5.6 Intellectual Property. Except to the extent necessary to perform
CLIENT's obligations hereunder or as otherwise provided herein, no license or
right, expressed or implied, is hereby conveyed or granted to CLIENT for any
invention, patent application, patent, copyright, know-how, trade secret or
other intellectual property of PSW or PSW Licensors.
5.7 Trademarks. No license or right, expressed or implied, is hereby
conveyed or granted to CLIENT to use any trademark of PSW without the prior
express written consent of PSW or any trademark of any PSW Licensors without the
prior express written consent of such PSW Licensor.
5.8 Enforcement. CLIENT understands and agrees that the obligations and
restrictions provided herein are necessary and reasonable in order to protect
the business of PSW and the PSW Licensors, and PSW and the PSW Licensors would
be irreparably harmed by any breach or threatened breach hereof. In addition to
any other remedies available for breach thereof, PSW and the PSW Licensors shall
be entitled to obtain injunctive relief against a threatened breach or
continuation of any such breach, without the necessity of providing actual
damages.
5.9 Confidentiality of Other Parties. CLIENT acknowledges that portions of
the PSW Object Library may be licensed by PSW from other parties. To the degree
that the identity of and terms of those license agreements are made known to
CLIENT for the execution of this Agreement, CLIENT shall keep this Confidential
Information in strict confidence and shall not disclose it to any person, firm
or corporation except as required to execute this Agreement; provided, however,
that either party may, on a confidential basis, disclose those Agreements to its
accountants, attorneys, and financing organizations.
Section 6
REPRESENTATIONS AND WARRANTIES
CLIENT acknowledges and agrees that any representations and warranties regarding
the Deliverables are provided by PSW and that its sole remedy for breach
hereunder shall be against PSW and not against the PSW Licensors. THE PSW
LICENSORS EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO
THE DELIVERABLES OR THE RESULTS OBTAINED FROM USING THE SAME, INCLUDING ANY
IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
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<PAGE>
Section 7
LIMITATION OF LIABILITY
UNDER NO CIRCUMSTANCES SHALL PSW OR THE PSW LICENSORS BE LIABLE FOR SPECIAL,
EXEMPLARY, INCIDENTAL AND/OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO
LEGAL FEES, LOSS OF PROFITS, LOSS OR INACCURACY OF DATA, OR LOSS RESULTING FROM
BUSINESS DISRUPTION, EVEN IF PSW OR THE PSW LICENSORS HAVE BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
Section 8
THIRD-PARTY BENEFICIARY
CLIENT acknowledges that the Deliverables and Confidential Information include
that of the PSW Licensors and that the PSW Licensors are third-party
beneficiaries of this Agreement with all the rights of PSW to enforce the
obligations of this Agreement against CLIENT.
Section 9
U.S. GOVERNMENT RESTRICTED RIGHTS
If this license is acquired under a U.S. Government contract, use, duplication
or disclosure by the U.S. Government is subject to restrictions as set forth in
DFARS 252.227-7013(c)(ii) for Department of Defense contracts and as set forth
in FAR 52.227-19(a)-(d) for civilian agency contracts. PSW and the PSW Licensors
reserve all unpublished rights under the United States copyright laws.
(remainder of Customer license agreement intentionally omitted)
B-5
<PAGE>
SOFTWARE LICENSING AGREEMENT
SCHEDULE B
Minimum Terms for Customer License Agreement
Schedule 1
(include Deliverables containing relevant objects from Schedule A of the
Software License Agreement between CCSI and PSW and indicate which objects they
contain.)
B-6
<PAGE>
SOFTWARE LICENSING AGREEMENT
SCHEDULE B
Minimum Terms for Customer License Agreement
Schedule 2
(description of the locations, sites, divisions, and legal entities defining
the boundaries of the CLIENT's business for purposes of this agreement)
B-7
<PAGE>
SOFTWARE LICENSING AGREEMENT
SCHEDULE C
Minimum Terms for Reseller Agreement
(The following terms are the minimum terms which will be included in the
Reseller Agreement. In the minimum terms, Reseller will be referred to as
RESELLER, and the Customer license agreement will be referred to as an End User
License Agreement. The Reseller agreement will serve as an extension to the
Customer license agreement, which is attached as Schedule B of the Software
Licensing Agreement. All Resellers must be licensed first as a Customer.)
WITNESSETH:
WHEREAS, pursuant to that certain End User License Agreement between PSW
and RESELLER dated _____________, RESELLER desires the right to resell portions
of the Deliverables and PSW Object Library to other parties.
WHEREAS, PSW is willing and able to grant such rights and licenses on the
terms and conditions set forth herein;
Section 1
DEFINITION OF TERMS
The definition of terms set forth in this Section 1 shall apply in this
Agreement (in addition to terms expressly defined elsewhere herein) including
any and all exhibits, addenda, and amendments made to or incorporated herein now
or in the future.
1.1 "De1iverables." Any and all tangible products delivered by PSW for
RESELLER under this Agreement, including all object diagrams, functional
specifications, prototypes, reports, conversion tools, class libraries, the
"source" code and object code, and all necessary Documentation therefor and
further including enhancements, modifications, and corrections made to the
Deliverables by PSW pursuant to support, training, and maintenance services
provided to RESELLER by PSW.
1.2 "Documentation." All textual material relating to the Deliverables,
including flow charts, operating instructions, and related technical
information. Documentation shall include user manuals, help text, training
materials, and sample source code used for training and documentation purposes.
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1.3 "PSW Systems Library." Those Deliverables in Schedule 1 that are
specified to be part of the PSW Systems Library.
l.4 "PSW Business Library." Those Deliverables in Schedule 1 that are
specified to be part of the PSW Business Library.
1.5 "PSW Object Library." The combination of the PSW Systems Library and
the PSW Business Library.
1.6 "PSW Enhancements." Changes, corrections, modifications, or additions,
including all new releases and applications, made by PSW to the PSW Object
Library and related Documentation.
1.7 "RESELLER Enhancements." Changes, corrections, modifications, or
additions, including all new releases and applications, made by RESELLER to the
PSW Object Library and related Documentation.
1.8 "Computer Business." The Computer Business shall be defined to include
the research, development, production, marketing, selling, distribution, or
leasing of computer hardware, computer hardware peripherals, integrated document
management systems or cameras, or the performance of development, consulting,
training, or maintenance services relating to computer hardware, computer
hardware peripherals, integrated document management systems, or cameras.
1.9 "PSW Licensors". Other parties who have licensed portions of the
Deliverables to PSW under separate agreements.
1.10 "Customer." Any end user customers to whom RESELLER directly markets
and sells the Product and who sign an End User License Agreement as minimally
defined in Schedule 2.
1.11 "Product" Any deliverables licensed by PSW that includes the Object
21 Library, CCSI Enhancements, PSW Enhancements, Documentation, or other
Deliverables. "Product" may include one or more separately priced PSW
offerings.
1.12 "End User License Agreement." The license agreement signed by an end
user customer of the reseller as minimally specified in Schedule 2.
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Section 2
GRANT AND SCOPE OF RIGHTS FROM PSW TO RESELLER
2.1 Scope of Rights Granted. PSW hereby grants to RESELLER, and RESELLER,
hereby accepts, a nontransferable, nonexclusive right to distribute the
Deliverables to Customers.
2.2 Rights Restrictions. RESELLER is not authorized to distribute or
sublicense the PSW Business Library or PSW Enhancements to any party currently
in or planning to enter the Computer Business as defined in Section 1.
2.3 End User License Agreement. Any distribution of the Product by
RESELLER shall be pursuant to the terms and conditions of the End User License
Agreement in the form attached hereto as Schedule 2. The terms and conditions of
such End User License shall serve as the minimum documentation distributed by
RESELLER defining each Customer's rights and obligations regarding the Product
and RESELLER agrees to provide in a conspicuous manner one copy of the End User
License with each Product. Although RESELLER shall not be liable to PSW for any
Customer's failure to comply with the terms and conditions of the End User
License agreement, RESELLER agrees to report to PSW any known or suspected
violation(s) of the Customer license agreement and to reasonably cooperate with
PSW in any enforcement actions taken by PSW.
Section 3
OWNERSHIP
3.1 Continuing Rights. PSW and PSW Licensors shall retain full ownership
of and full rights to continue to use and market the Deliverables and the PSW
Enhancements and all rights, title and interest in and to all copyrights, patent
rights or trade secret rights associated with the Deliverables and the PSW
Enhancements.
3.2 Copyrights. RESELLER shall not remove any existing copyright or other
proprietary rights notices from the PSW Object Library, PSW Enhancements, or the
Deliverables.
Section 4
TERM
4.1 Basic Term. This agreement shall be effective on the date first above
written and shall remain in force until __________________ (date when RESELLER
rights terminate).
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4.2 Loss of Rights by PSW. In the event that PSW shall lose any of its
sublicenses or rights due to breach, bankruptcy, insolvency, or any other event,
the rights and obligations in this agreement shall continue until the
termination date.
Section 5
CONFIDENTIAL INFORMATION
Treatment of Confidential Information as defined in the End User License
agreement shall apply to this Agreement as well.
Section 6
REPRESENTATIONS AND WARRANTIES
RESELLER acknowledges and agrees that any representations and warranties
regarding the Deliverables are provided by PSW and that its sole remedy for
breach hereunder shall be against PSW and not against the PSW Licensors. THE PSW
LICENSORS EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO
THE DELIVERABLES OR THE RESULTS OBTAINED FROM USING THE SAME, INCLUDING ANY
IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
Section 7
LIMITATION OF LIABILITY
UNDER NO CIRCUMSTANCES SHALL PSW OR THE PSW LICENSORS BE LIABLE FOR SPECIAL,
EXEMPLARY, INCIDENTAL AND/OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO
LEGAL FEES, LOSS OF PROFITS, LOSS OR INACCURACY OF DATA, OR LOSS RESULTING FROM
BUSINESS DISRUPTION, EVEN IF PSW OR THE PSW LICENSORS HAVE BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES.
Section 8
THIRD-PARTY BENEFICIARY
RESELLER acknowledges that the Deliverables and Confidential Information include
that of the PSW Licensors and that the PSW Licensors are third-party
beneficiaries of this Agreement with all the rights of PSW to enforce the
obligations of this Agreement against RESELLER.
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Section 9
U.S. GOVERNMENT RESTRICTED RIGHTS
If this license is acquired under a U.S. Government contract, use, duplication
or disclosure by the U.S. Government is subject to restrictions as set forth in
DFARS 252.227-7013(c)(ii) for Department of Defense contracts and as set forth
in FAR 52.227-19(a)-(d) for civilian agency contracts. PSW and the PSW Licensors
reserve all unpublished rights under the United States copyright laws.
(remainder of reseller agreement intentionally omitted)
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SOFTWARE LICENSING AGREEMENT
SCHEDULE C
Schedule 1
(include Deliverables containing relevant objects from Schedule A of the
Software License Agreement between CCSI and PSW and indicate which objects they
contain)
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SOFTWARE LICENSING AGREEMENT
SCHEDULE C
Minimum Terms for Reseller Agreement
Schedule 2 - Minimum Terms for Customer License Agreement
(The following terms are the minimum terms for Customers which will be included
in any Customer license agreement conveyed by a PSW Reseller. In the minimum
terms, the Reseller will be referred to as RESELLER and the Customer the Product
will be referred to as CLIENT.)
Section 1
DEFINITION OF TERMS
The definition of terms set forth in this Section 1 shall apply in this
Agreement (in addition to terms expressly defined elsewhere herein) including
any and all exhibits, addenda, and amendments made to or incorporated herein now
or in the future.
1.1 "Deliverables." Any and all tangible products delivered by RESELLER
for CLIENT under this Agreement, including all object diagrams, functional
specifications, prototypes, reports, conversion tools, class libraries, the
"source" code and object code, and all necessary Documentation therefor and
further including enhancements, modifications, and corrections made to the
Deliverables by RESELLER pursuant to support, training, and maintenance services
provided to CLIENT by RESELLER.
1.2 "Documentation." All textual material relating to the Deliverables,
including flow charts, operating instructions, and related technical
information. Documentation shall include user manuals, help text, training
materials, and sample source code used for training and documentation purposes.
1.3 "RESELLER Systems Library." Those Deliverables in Schedule 1 that are
specified to be part of the RESELLER Systems Library.
1.4 "RESELLER Business Library." Those Deliverables in Schedule 1 that are
specified to be part of the RESELLER Business Library.
1.5 "RESELLER Object Library." The combination of the RESELLER Systems
Library and the RESELLER Business Library.
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1.6 "CLIENT Enhancements." Changes, corrections, modifications, or
additions, including all new releases and applications, made by CLIENT to the
RESELLER Object Library and related Documentation.
1.7 "RESELLER Enhancements." Changes, corrections, modifications, or
additions, including all new releases and applications, made by RESELLER to the
RESELLER Object Library and related Documentation.
1.8 "Computer Business." The Computer Business shall be defined to include
the research, development, production, marketing, selling, distribution, or
leasing of computer hardware, computer hardware peripherals, integrated document
management systems or cameras, or the performance of development, consulting,
training, or maintenance services relating to computer hardware, computer
hardware peripherals, integrated document management systems, or cameras.
1.9 "RESELLER Licensors." Other parties who have licensed portions of the
Deliverables to RESELLER under separate agreements.
Section 2
GRANT AND SCOPE OF RIGHTS FROM RESELLER TO CLIENT
2.1 Scope of License. RESELLER hereby grants to CLIENT the right to use,
execute, modify, and reproduce, and distribute for internal use the licensed
portions of the RESELLER Object Library as specified in Schedule 1 and any
RESELLER Enhancements. Schedule 2 specifies the extent of the CLIENT's business
as it pertains to this license.
2.2 License Restrictions. CLIENT is not authorized to distribute or
sublicense the RESELLER Object Library or RESELLER Enhancements to any party
currently in or planning to enter the Computer Business as defined in Section 1.
CLIENT is not authorized to operate a service bureau utilizing any Deliverables,
CLIENT Enhancements, or RESELLER Enhancements.
2.3 Representation and Warranty of CLIENT Business. If CLIENT is licensing
any portion of the RESELLER Business Library, CLIENT represents and warrants by
signing this Agreement that neither it nor its subsidiaries, affiliates, or
divisions are not currently in, nor planning to enter the Computer Business
as defined in Section 1. If CLIENT is licensing any portion of the RESELLER
Business Library and either it or any of its subsidiaries, affiliates, or
divisions desires to enter the Computer Business, then prior to entering such
Computer Business CLIENT shall return all licensed portions of the RESELLER
Business Library to RESELLER and shall provide a sworn statement to RESELLER
averring that no copies of the
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RESELLER Business Library remain on any computer system or otherwise within its
possession or control.
Section 3
OWNERSHIP
3.1 RESELLER Enhancements. RESELLER shall own all RESELLER Enhancements.
3.2 CLIENT Enhancements. CLIENT shall own all CLIENT Enhancements.
3.3 Continuing Rights. RESELLER and RESELLER Licensors shall retain full
ownership of and full rights to continue to use and market the Deliverables and
RESELLER Enhancements and all rights, title and interest in and to all
copyrights, patent rights, and trade secret rights associated with the
Deliverables and RESELLER Enhancements.
3.4 Copyrights. CLIENT shall not remove any existing copyright or other
proprietary rights notices from the RESELLER Object Library, RESELLER
Enhancements or the Deliverables.
Section 4
TERM
4.1 Loss of Rights by RESELLER. In the event that RESELLER shall lose any
of its sublicenses or rights due to breach, bankruptcy, insolvency, or any other
event, the rights and obligations in this agreement shall continue.
Section 5
CONFIDENTIAL INFORMATION
5.1 RESELLER Information. In connection with this Agreement, RESELLER has
provided and shall provide CLIENT with certain information that is proprietary
and confidential to RESELLER or the RESELLER Licensors and necessary or useful
for CLIENT to exploit the licenses granted hereunder.
5.2 Confidentiality. The term "Confidential Information" as used herein
shall mean any information disclosed by RESELLER to CLIENT pursuant to Section
5.1 above in a written or other tangible form clearly identified as being
confidential. Oral or visual information shall not be considered as Confidential
Information unless it is designated confidential at the time of oral or visual
disclosure and
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reduced to a writing clearly marked as being confidential that is sent to CLIENT
by RESELLER within thirty (30) days after such oral or visual disclosure. For
the purpose of this Agreement, any Deliverable or RESELLER Enhancement shall be
deemed Confidential Information.
5.3 Treatment of Confidential Information. During this Agreement and
thereafter, CLIENT shall keep the Confidential Information in strict confidence
and shall not disclose it to any person, firm or corporation outside CLIENT, nor
use the same for any purpose other than performing the Agreement. In addition,
CLIENT agrees to guard the Confidential Information by restricting its internal
dissemination to only those employees within CLIENT having a need to know the
Confidential Information for purposes of this Agreement. CLIENT has full
responsibility to ensure that all employees who are given access to the
Confidential Information maintain the confidentiality of the Confidential
Information, whether or not such employees continue to be employees of CLIENT.
5.4 Exceptions to Treatment of Confidential Information.
Notwithstanding Section 5.3 above, CLIENT shall have no confidential
obligation and no use restriction hereunder with respect to any Confidential
Information that
(1) is already known to CLIENT at the time of disclosure thereof as
evidenced by written records;
(2) is or becomes publicly known through no wrongful act of CLIENT at
or subsequent to the time of disclosure thereof; or
(3) is permitted for release by prior written consent of RESELLER.
5.5 Tangible Embodiments. Any and all written or tangible embodiments of
information disclosed to CLIENT by RESELLER hereunder shall be and remain the
property of RESELLER, and CLIENT agrees promptly to return such tangible
embodiments, including any copy thereof, to RESELLER upon termination of this
Agreement.
5.6 Intellectual Property. Except to the extent necessary to perform
CLIENT's obligations hereunder or as otherwise provided herein, no license or
right, expressed or implied, is hereby conveyed or granted to CLIENT for any
invention, patent application, patent, copyright, know-how, trade secret or
other intellectual property of RESELLER or RESELLER Licensors.
5.7 Trademarks. No license or right, expressed or implied, is hereby
conveyed or granted to CLIENT to use any trademark of RESELLER without the prior
express written consent of RESELLER or any trademark of any RESELLER Licensor
without the prior express written consent of such RESELLER Licensor.
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5.8 Enforcement. CLIENT understands and agrees that the obligations and
restrictions provided herein are necessary and reasonable in order to protect
the business of RESELLER and the RESELLER Licensors, and RESELLER and the
RESELLER Licensors would be irreparably harmed by any breach or threatened
breach hereof. In addition to any other remedies available for breach thereof,
RESELLER and the RESELLER Licensors shall be entitled to obtain injunctive
relief against a threatened breach or continuation of any such breach, without
the necessity of providing actual damages.
5.9 Confidentiality of Other Parties. CLIENT acknowledges that portions of
the RESELLER object Library may be licensed by RESELLER from other parties. To
the degree that the identity of and terms of those license agreements are made
known to CLIENT for the execution of this Agreement, CLIENT shall keep this
Confidential Information in strict confidence and shall not disclose it to any
person, firm or corporation except as required to execute this Agreement;
provided, however, that either party may, on a confidential basis, disclose
those Agreements to its accountants, attorneys, and financing organizations.
Section 6
REPRESENTATIONS AND WARRANTIES
CLIENT acknowledges and agrees that any representations and warranties regarding
the Deliverables are provided by RESELLER and that its sole remedy for breach
hereunder shall be against RESELLER and not against the Reseller Licensors. THE
RESELLER LICENSORS EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, WITH
RESPECT TO THE DELIVERABLES OR THE RESULTS OBTAINED FROM USING THE SAME,
INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
Section 7
LIMITATION OF LIABILITY
UNDER NO CIRCUMSTANCES SHALL RESELLER OR THE RESELLER LICENSORS BE LIABLE FOR
SPECIAL, EXEMPLARY, INCIDENTAL AND/OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT
LIMITED TO LEGAL FEES, LOSS OF PROFITS, LOSS OR INACCURACY OF DATA, OR LOSS
RESULTING FROM BUSINESS DISRUPTION, EVEN IF RESELLER OR THE RESELLER LICENSORS
HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
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Section 8
THIRD-PARTY BENEFICIARY
CLIENT acknowledges that the Deliverables and Confidential Information include
that of the Reseller Licensors and that the Reseller Licensors are third-party
beneficiaries of this Agreement with all the rights of Reseller to enforce the
obligations of this Agreement against CLIENT.
Section 9
U.S. GOVERNMENT RESTRICTED RIGHTS
If this license is acquired under a U.S. Government contract, use, duplication
or disclosure by the U.S. Government is subject to restrictions as set forth in
DFARS 252.227-7013(c)(ii) for Department of Defense contracts and as set forth
in FAR 52.227-19(a)-(d) for civilian agency contracts. RESELLER and the RESELLER
Licensors reserve all unpublished rights under the United States copyright laws.
(remainder of the reseller's Customer license agreement intentionally omitted)
(Schedules 1 and 2 to this End User Agreement are the same as Schedules 1 and 2
to PSW's end user agreement, which is Schedule B to Software Licensing
Agreement)
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Exhibit 10.12
CREDIT AGREEMENT
(Borrowing Base)
THIS CREDIT AGREEMENT (as amended, restated and supplemented from time to time,
this "Agreement") by and between PSW TECHNOLOGIES, INC. ("Borrower") and TEXAS
COMMERCE BANK NATIONAL ASSOCIATION ("Bank") is dated as of November 8, 1996 (the
"Effective Date").
1. THE LOANS.
REVOLVING CREDIT NOTE 1.1 Subject to the terms and conditions hereof, Bank
agrees to make loans ("Loan" or "Loans") to Borrower from time to time before
the Termination Date, not to exceed at any one time outstanding the lesser of
the Borrowing Base or $6,500,000.00 (the "Commitment"). Borrower has the right
to borrow, repay and reborrow the Loans. Each Loan and each repayment must be at
least the minimum amount required in the Note. The Loans may only be used for
financing Borrower's working capital needs. Chapter 15 of the Texas Credit Code
will not apply to this Agreement, the Note or any Loan. The Loans will be
evidenced by, and will bear interest and be payable as provided in, the
promissory note of Borrower dated the Effective Date (together with any and all
renewals, extensions, modifications and replacements thereof and substitutions
therefor, the "Note"). "Termination Date" means the earlier of: (a) November 8,
1997; or (b) the date specified by Bank pursuant to Section 6.1 hereof.
BORROWING BASE 1.2 The Borrowing Base will be the amount shown as the BORROWING
BASE on the most recent Borrowing Base Report, subject to verification by Bank
and calculated using the eligibility criteria, borrowing base factors and dollar
ceilings for various components specified in the attached Exhibit A,
incorporated herein by reference.
REQUIRED PAYMENT 1.3 If the unpaid amount of the Loans at any time exceeds the
Borrowing Base then in effect, Borrower must make a payment on the Note in an
amount sufficient to reduce the unpaid principal balance of the Note to an
amount no greater than the Borrowing Base. Such payment shall be accompanied by
any prepayment charge required by the Note and shall be due concurrently with
the Borrowing Base Report.
COMMITMENT FEE; TERMINATION 1.4 Borrower will pay a commitment fee (computed on
the basis of a year comprised of 360 days of 3/16% per annum on the daily
average difference between the Commitment and the principal balance of the Note,
from the date hereof to the Termination Date. The Commitment fee shall be
computed, and be due and payable, quarterly in arrears. Borrower shall be
entitled, upon delivery of 30 days advance written notice to Bank, to terminate
its use of the unused portion of the Commitment as of the effective date of such
notice. Upon the effective date of such notice of termination, accrual of the
commitment shall cease; Borrower shall thereupon not have the right to borrow or
reborrow new Loans under the Commitment (notwithstanding anything in this
Agreement or the other Loan Documents to the contrary); and the amount of such
fee accrued through the effective date of such termination shall be immediately
due and payable.
CAPITAL ADEQUACY 1.5 With respect to any Loan bearing interest at the LIBOR
Rate, if Bank determines after the date of this Agreement that any change in
applicable laws, rules or regulations regarding capital adequacy, or any change
in the interpretation or administration thereof by any appropriate governmental
agency, or compliance with any request or directive to Bank regarding capital
adequacy (whether or not having the force of law) of any such agency, increases
the capital required to be maintained with respect to any Loan bearing interest
at the LIBOR Rate and therefore reduces the rate of return on Bank's capital
below the level Bank could have achieved but for such change or compliance
(taking into consideration Bank's policies with respect to capital adequacy),
then Borrower will pay to Bank from time to time, within 15 days of Bank's
request, any additional amount required to compensate Bank for such reduction.
Bank will request any additional amount by delivering to Borrower a certificate
of Bank setting forth the amount necessary to compensate Bank. The certificate
will be conclusive and binding, absent manifest error. Bank may make any
assumptions, and may use any allocations of costs and expenses and any averaging
and attribution methods, which Bank in good faith finds reasonable.
2. CONDITIONS PRECEDENT.
ALL LOANS 2.1 Bank is not obligated to make any Loan unless: (a) Bank has
received the following, duly executed and in Proper Form: (1) a Request for
Loan, substantially in the form of Exhibit B, within the time required in the
Note; provided, however, Bank may accept and act upon verbal advance requests
received from Borrower's representative reasonably believed by Bank to be
authorized to make such requests; (2) a Borrowing Base Report within the time
required by this Agreement; and (3) such other documents as Bank reasonably may
require; (b) no Event of Default exists; and (c) the making of the Loan is not
prohibited by, or subjects Bank to any penalty or onerous condition under any
Legal Requirement. If Bank fails to make Loans solely on the basis of clause (c)
of the preceding sentence, then during the period that such clause (c) applies,
the commitment fee provided for in section 1.4 shall not accrue.
FIRST LOAN 2.2 In addition to the matters described in the preceding section,
Bank will not be obligated to make the first Loan unless Bank has received all
of the Loan Documents specified in Annex I in Proper Form.
3. REPRESENTATIONS AND WARRANTIES. To induce Bank to enter into this Agreement
and to make the Loans, Borrower represents and warrants as of the Effective Date
that each of the following statements is true and correct:
ORGANIZATION AND STATUS 3.1 Borrower and each Subsidiary of Borrower is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization; has all power and authority to conduct its
business as presently conducted, and is duly qualified to do business and in
good standing in each jurisdiction in which the nature of the business conducted
by it makes such qualification desirable. Borrower has no Subsidiary other than
those listed on Annex II and each Subsidiary is owned by Borrower in the
percentage set forth on Annex II.
FINANCIAL STATEMENTS 3.2 All financial statements delivered to Bank are complete
and correct and fairly present, in accordance with generally accepted accounting
principles, consistently applied ("GAAP"), the financial condition and the
results of operations of Borrower and each Subsidiary of Borrower as at the
dates and for the periods indicated. No material adverse change has occurred in
the assets, liabilities, financial condition, business or affairs of Borrower or
any Subsidiary of Borrower since the dates of such financial statements. Neither
Borrower nor any Subsidiary of Borrower is subject to any instrument or
agreement materially and adversely affecting its financial condition, business
or affairs. Each of the foregoing representations and warranties is subject to
the following qualifications: (a) the unaudited interim Income Statement of
Pencom Software ("Pencom Software") (a Division of Pencom Systems Incorporated
("PSI")) for the month and eight months ended August 31, 1996 delivered
Page 1 of 7 Pages
<PAGE>
Credit Agreement (With Borrowing Base) November 8, 1996
PSW TECHNOLOGIES, INC.
to the Bank was prepared in a manner substantially similar with the preparation
of the audited financial statements of Pencom Software for the years ended
December 31, 1995 and December 31, 1994, except that the unaudited interim
income statement is subject to normal year-end audit adjustments including, but
not limited to, bonus accruals and non-cash charges related to stock option
transactions; and (b) no material adverse change has occurred in the assets,
liabilities financial condition, or business affairs of Pencom Software since
the date of the financial statements referred to in the preceding clause (a)
except that on October 1, 1996 certain but not all of the assets and
liabilities, and an assignment of an interest in Pencom Software accounts
receivable, were contributed to Borrower by PSI.
ENFORCEABILITY 3.3 The Loan Documents are legal, valid and binding obligations
of the Borrower enforceable in accordance with their respective terms, except as
may be limited by bankruptcy, insolvency and other similar laws affecting
creditors' rights generally. The execution, delivery and performance of the Loan
Documents have all been duly authorized by all necessary action; are within the
power and authority of the Borrower; do not and will not violate any Legal
Requirement, the Organizational Documents of the Borrower or any agreement or
instrument binding or affecting the Borrower or any of its Property.
COMPLIANCE 3.4 Borrower and each Subsidiary of Borrower has filed all applicable
tax returns and paid all taxes shown thereon to be due, except those for which
extensions have been obtained and those which are being contested in good faith
and for which adequate reserves have been established. Borrower and each
Subsidiary of Borrower is in compliance with all applicable Legal Requirements
and manages and operates (and will continue to manage and operate) its business
in accordance with good industry practices. Neither Borrower nor any Subsidiary
of Borrower is in default in the payment of any other indebtedness or under any
agreement to which it is a party. The Parties have obtained all consents of and
registered with all Governmental Authorities or other Persons required to
execute, deliver and perform the Loan Documents.
LITIGATION 3.5 Except as previously disclosed to Bank in writing, there is no
litigation or administrative proceeding pending or, to the knowledge of
Borrower, threatened against, nor any outstanding judgment, order or decree
affecting Borrower or any Subsidiary of Borrower before or by any Governmental
Authority which, if determined adversely to Borrower, would have a material
adverse effect on Borrower's business or financial condition.
TITLE AND RIGHTS 3.6 Borrower and each Subsidiary of Borrower has good and
marketable title to its Property, free and clear of any Lien except for Liens
permitted by this Agreement and other Loan Documents. Except as otherwise
expressly stated in the Loan Documents or permitted by this Agreement, the Liens
of the Loan Documents will constitute valid and perfected first and prior Liens
on the Property described therein, subject to no other Liens whatsoever.
Borrower and each Subsidiary of Borrower possess all permits, licenses, patents,
trademarks and copyrights required to conduct its business. All easements,
rights-of-way and other rights necessary to maintain and operate Borrower's
Property have been obtained and are in full force and effect.
REGULATION U; BUSINESS PURPOSES 3.7 None of the proceeds of any Loan will be
used to purchase or carry, directly or indirectly, any margin stock or for any
other purpose which would make this credit a "purpose credit" within the meaning
of Regulation U of the Board of Governors of the Federal Reserve System. All
Loans will be used for business, commercial, investment or other similar purpose
and not primarily for personal, family, or household use or primarily for
agriculture purposes as such terms are used in Chapter One of the Texas Credit
Code.
ENVIRONMENT 3.8 Borrower and each Subsidiary of Borrower have complied with
applicable Legal Requirements in each instance in which any of them have
generated, handled, used, stored or disposed of any hazardous or toxic waste or
substance, on or off its premises (whether or not owned by any of them). Neither
Borrower nor any Subsidiary of Borrower has any material contingent liability
for non-compliance with environmental or hazardous waste laws. Neither Borrower
nor any Subsidiary of Borrower has received any notice that it or any of its
Property or operations does not comply with, or that any Governmental Authority
is investigating its compliance with, any environmental or hazardous waste laws.
INVESTMENT COMPANY ACT/PUBLIC UTILITY HOLDING COMPANY ACT 3.9 Neither Borrower
nor any Subsidiary of Borrower is an "investment company" within the meaning of
the Investment Company Act of 1940 or a "holding company" or an "affiliate" of a
"holding company" or a "public utility" within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
STATEMENTS BY OTHERS 3.10 All material written statements and information
provided by or on behalf of Borrower, any Subsidiary of Borrower or any other of
the Parties in connection with any Loan Document constitute the representations
and warranties of Borrower hereunder.
4. AFFIRMATIVE COVENANTS. Borrower agrees to do, and if necessary causes to be
done, and cause its Subsidiaries to do, each of the following:
CORPORATE FUNDAMENTALS 4.1 (a) Pay when due all taxes and governmental charges
of every kind upon it or against its income, profits or Property, unless and
only to the extent that the same shall be contested in good faith and adequate
reserves have been established therefor; (b) Renew and keep in full force and
effect all of its licenses, permits and franchises as may be reasonably
necessary to conduct its business properly and efficiently; (c) Do all things
necessary to preserve its corporate existence and its qualifications and rights
in all jurisdictions where such qualification is necessary or desirable; (d)
Comply with all applicable Legal Requirements; and (e) Protect, maintain and
keep in good repair its property and make all replacements and additions to its
Property as may be reasonably necessary to conduct its business properly and
efficiently.
INSURANCE 4.2 Maintain insurance with such reputable financially sound insurers,
on such of its Property and personnel, in such amounts and against such risks as
is customary with similar Persons or as may be reasonably required by Bank, and
furnish Bank satisfactory evidence thereof promptly upon request. These
insurance provisions are cumulative of the insurance provisions of the other
Loan Documents. Bank must be named as a beneficiary, loss payee or additional
insured of such insurance as its interest may appear and Borrower must provide
Bank with copies of the policies of insurance and a certificate of the insurer
that the insurance required by this section may not be canceled, reduced or
affected in any manner without 30 days' prior written notice to Bank.
Page 2 of 7 Pages
<PAGE>
Credit Agreement (With Borrowing Base) November 8, 1996
PSW TECHNOLOGIES, INC.
FINANCIAL INFORMATION/BORROWING BASE REPORT 4.3 Furnish to Bank in Proper Form
(i) the financial statements prepared in conformity with GAAP on consolidated
and consolidating bases and the other information described in, and within the
times required by, Exhibit C, Reporting Requirements, Financial Covenants and
Compliance Certificate attached hereto and incorporated herein by reference;
(ii) the Borrowing Base Report substantially in the form of, and within the time
required by, Exhibit A along with the other information required by Exhibit A to
be submitted; (iii) within the time required by Exhibit C, Exhibit C signed and
certified by the chief financial officer or president of Borrower; (iv) promptly
after such request is submitted to the appropriate Governmental Authority, any
request for waiver of funding standards or extension of amortization periods
with respect to any employee benefit plan; (v) copies of special audits,
studies, reports and analyses prepared for the management of Borrower by outside
parties and (vi) such other information relating to the financial condition and
affairs of the Borrower and guarantors and their Subsidiaries as Bank may
request from time to time in its discretion.
MATTERS REQUIRING NOTICE 4.4 Notify Bank immediately, upon acquiring knowledge
of (a) the institution or threatened institution of any lawsuit of
administrative proceeding which, if adversely determined, might materially
adversely affect Borrower; (b) any material adverse change in the assets,
liabilities, financial condition, business or affairs of Borrower; (c) any Event
of Default; or (d) any reportable event or any prohibited transaction in
connection with any employee benefit plan.
INSPECTION 4.5 Permit Bank and its affiliates to inspect and photograph its
Property, to examine and copy its files, books and records, and to discuss its
affairs with its officers and accountants, at such times and intervals and to
such extent as Bank reasonably desires.
ASSURANCE 4.6 Promptly execute and deliver any and all further agreements,
documents, instruments, and other writings that Bank may request to cure any
defect in the execution and delivery of any Loan Document or more fully to
describe particular aspects of the agreements set forth or intended to be set
forth in the Loan Documents.
CERTAIN CHANGES 4.7 Notify Bank at least 30 days prior to the date that any of
the Parties changes its name or the location of its chief executive office or
principal place of business or the place where it keeps its books and records or
the location of any of the Collateral.
EXHIBIT C 4.8 Comply with each of the other affirmative covenants set forth in
Exhibit C.
5. NEGATIVE COVENANTS. The Borrower will not, and no Subsidiary of Borrower
will, without the prior written consent of the Bank, which Bank shall be
entitled to withhold in its sole and absolute discretion (Bank agreeing that it
will respond in writing to each written request for such consent with reasonable
promptness):
INDEBTEDNESS 5.1 Create, incur, or permit to exist, or assume or guarantee,
directly or indirectly, or become or remain liable with respect to, any
Indebtedness, contingent or otherwise, unless there is a permitted amount in
Exhibit C, except: (a) Indebtedness to Bank, or secured by Liens permitted by
this Agreement, or otherwise approved in writing by Bank, and renewals and
extensions (but not increases) thereof; and (b) current accounts payable and
unsecured current liabilities, not the result of borrowing, to vendors,
suppliers and Persons providing services, for expenditures for goods and
services normally required by it in the ordinary course of business and on
ordinary trade terms.
LIENS 5.2 Create or permit to exist any Lien upon any of its Property now owned
or hereafter acquired, or acquire any Property upon any conditional sale or
other title retention device or arrangement or any purchase money security
agreement; or in any manner directly or indirectly sell, assign, pledge or
otherwise transfer any of its accounts or other Property, unless as permitted in
Exhibit C, except: (a) Liens, not for borrowed money, arising in the ordinary
course of business; (b) Liens for taxes not delinquent or being contested in
good faith by appropriate proceedings; (c) Liens in effect on the date hereof
and disclosed to Bank in writing, so long as neither the principal indebtedness
secured thereby nor the Property covered thereby increases; and (d) Liens in
favor of Bank, or otherwise approved in writing by Bank. Notwithstanding
anything to the contrary herein, Borrower will not, and no Subsidiary of
Borrower will permit any Lien on any inventory that secures the Loans unless
Bank shall provide Borrower with Bank's prior written consent.
FINANCIAL AND OTHER COVENANTS 5.3 Fail to comply with the required financial
covenants and other covenants described, and calculated as set forth, in Exhibit
C. Unless otherwise provided on Exhibit C, all such amounts and ratios will be
calculated: (a) on the basis of GAAP; and (b) on a consolidated basis.
Compliance with the requirements of Exhibit C will be determined as of the dates
of the financial statements to be provided to Bank.
CORPORATE CHANGES 5.4 RESTRICTED PAYMENTS 5.5 In any single transaction or
series of transactions, directly or indirectly: (a) liquidate or dissolve; (b)
be a party to any merger or consolidation; (c) sell or dispose of any interest
in any of its Subsidiaries, or permit any of its Subsidiaries to issue any
additional equity other than to Borrower; (d) sell, convey or lease all or any
substantial part of its assets, except for sale of inventory in the ordinary
course of business; or (e) permit any change in ownership of Borrower affecting
more than 49% of the stock ownership of Borrower (as of the Effective Date).
RESTRICTED PAYMENTS 5.5 Unless otherwise permitted on Exhibit C, at any time:
(a) redeem, retire, or otherwise acquire, directly or indirectly, any shares of
its capital stock or other equity interest; (b) declare or pay any dividend
(except stock dividends and dividends paid to Borrower); or (c) make any other
distribution or contribution of any Property or cash or obligation to owners of
an equity interest or to a Subsidiary in their capacity as such.
NATURE OF BUSINESS; MANAGEMENT 5.6 Substantially change the nature of its
business or enter into any business which is substantially different from the
business in which it is presently engaged, or permit any material change in its
management (which shall be understood to have occurred if more than one of the
persons who are President, Chief Financial Officer and the Controller of the
Borrower are changed).
AFFILIATE TRANSACTIONS 5.7 Enter into any transaction or agreement with any
Affiliate except upon terms substantially similar to those obtainable from
wholly unrelated sources.
SUBSIDIARIES 5.8 Form, create or acquire any Subsidiary; except that Borrower
shall be permitted to do any of the foregoing with the prior written consent of
the Bank, which consent shall not be unreasonably delayed or withheld, if in
advance of or
Page 3 of 7 Pages
<PAGE>
Credit Agreement (With Borrowing Base) November 8, 1996
PSW TECHNOLOGIES, INC.
substantially simultaneously with such action such Subsidiary shall execute a
continuing guaranty of the Obligations in Proper Form.
6. EVENTS OF DEFAULT AND REMEDIES.
EVENTS OF DEFAULT 6.1 Each of the following is an "Event of Default":
(a) Any Obligor fails to pay any principal of or interest on the Note or any
other obligation under any Loan Document as and when due; or
(b) Any Obligor or any Subsidiary of Borrower fails to pay at maturity, or
within any applicable period of grace, any principal of or interest on any other
borrowed money obligation (which shall not include any capital lease) in excess
of $25,000.00, or fails to observe or perform any term, covenant or agreement
contained in any agreement with respect to any such obligation; or
(c) Any representation or warranty made in connection with any Loan Document was
incorrect, false or misleading when made; or
(d) Any Obligor violates any covenant contained in any Loan Document; or
(e) An event of default occurs under any other Loan Document and any cure or
grace period with respect to such default has elapsed with such default
continuing; or
(f) Final judgment for the payment of money over $100,000.00 is rendered against
Obligor or any Subsidiary of Borrower and remains undischarged for a period of
30 days during which execution is not effectively stayed; or
(g) The sale, encumbrance or abandonment (except as otherwise expressly
permitted by this Agreement or another Loan Document) of any of the Collateral
or the making of any levy, seizure, garnishment, sequestration or attachment
thereof or thereon; or the uninsured loss, theft, substantial damage, or
destruction of any material portion of such Property; or
(h) Any order is entered in any proceeding against Borrower or any Subsidiary of
Borrower decreeing the dissolution, liquidation or split-up thereof, and such
order shall remain in effect for 30 days; or
(i) Any Obligor or any subsidiary of Borrower makes a general assignment for the
benefit of creditors or shall petition or apply to any tribunal for the
appointment of a trustee, custodian, receiver or liquidator of all or any
substantial part of its business, estate or assets or shall commence any
proceeding under any bankruptcy, insolvency, dissolution or liquidation law of
any jurisdiction, whether now or hereafter in effect; or any such petition or
application shall be filed or any such proceeding shall be commenced against any
Obligor or any Subsidiary of Borrower and the Obligor or such subsidiary by any
act or omission shall indicate approval thereof, consent thereto or acquiescence
therein, or an order shall be entered appointing a trustee, custodian, receiver
or liquidator of all or any substantial part of the assets of any Obligor or any
subsidiary of Borrower or granting relief to any Obligor or any subsidiary of
Borrower or approving the petition in any such proceeding, and such order shall
remain in effect for more than 30 days; or any Obligor or any subsidiary of
Borrower shall fail generally to pay its debts as they become due or suffer any
writ of attachment or execution or any similar process to be issued or levied
against it or any substantial part of its property which is not released,
stayed, bonded or vacated within 30 days after its issue or level; or
(j) Any Obligor or any Subsidiary of Borrower conceals or removes any part of
its Property, with intent to hinder, delay or defraud any of its creditors; (A)
makes or permits a transfer of any of its Property which may be fraudulent under
any bankruptcy, fraudulent conveyance or similar law; or (B) makes any
unscheduled transfer of its Property to or for the benefit of a creditor at a
time when other creditors similarly situated have not been paid; or
(k) A material adverse change occurs in the assets, liabilities or financial
condition of any Obligor, or any Subsidiary of Borrower, which is reasonably
related to such Obligor's ability to perform its obligations under the Loan
Documents and/or its ability to avoid any Event of Default; or
(l) Any change occurs in the ownership of Borrower other than as expressly
permitted by this Agreement; or
(m) Any Obligor that is not an individual dissolves.
RIGHTS AND REMEDIES 6.2 If any Event of Default defined in Section 6.1 occurs,
then Bank may do any or all of the following: (1) declare the Obligations to be
immediately due and payable without notice of acceleration or of intention to
accelerate, presentment and demand or protest, all of which are hereby expressly
waived; (2) without notice to any Obligor, terminate the Commitment and
accelerate the Termination Date; (3) set off, in any order, against the
indebtedness or Borrower under the Loan Documents any debt owing by Bank to
Borrower (whether such debt is owed individually or jointly), including, but not
limited to, any deposit account, which right is hereby granted by Borrower to
Bank; and (4) exercise any and all other rights pursuant to the Loan Documents,
at law, in equity or otherwise.
CURE PERIOD FOR CERTAIN EVENTS OF DEFAULT 6.3 Notwithstanding any other
provision of this Agreement or any other Loan Document to the contrary, the Bank
shall not take the actions described in section 6.2 during the Cure Period (as
defined hereinafter), with respect to: (i) any Event of Default described in
section 6.1(a) or (b) which consists of delay in making a payment of money; or
(ii) an Event of Default described in section 6.1(b) or (d) which consists of
delay in delivering reports or documents; or (iii) an Event of Default described
in section 6.1(d) which consists of a curable failure to maintain a financial
covenant set out in Exhibit C Part C. With respect to an Event of Default
described in clause (i) of the preceding sentence, the "Cure Period" shall be 5
business days beginning on the first day of the Event of Default. With respect
to an Event of Default described in clause (ii) or (iii) of the first sentence
of this section, the "Cure Period" shall be 15 calendar days beginning on the
first day of the Event of Default. This section 6.3 shall be void and of no
effect unless Borrower shall, to the extent Borrower has actual knowledge
thereof, provide prompt notices to Bank (in writing if requested by the Bank) of
(x) the occurrence or expected occurrence of such Event of Default, with a
certification to Bank of Borrower's good faith expectation that such Event of
Default shall be cured by Borrower before the end of the Cure Period; and (y)
the occurrence of Borrower's cure of the Event of Default before the end of the
Cure Period. During the Cure Period, an Event of Default shall be deemed to have
occurred and be continuing until actually cured by Borrower, for all purposes
including without limitation section 2.1(b) hereof. If the Event of Default is
not cured before the end of the Cure Period, Bank shall have all of the rights
described in Section 6.2 and each of the other Loan Documents without any
restriction imposed by this section whatsoever. This section shall not restrict
the Bank from taking any remedy with respect to any Event of Default not
specified in the first sentence of this section.
REMEDIES CUMULATIVE 6.4 No remedy, right or power of Bank is exclusive of any
other remedy, right or power now or hereafter existing by contract, at law, in
equity, or otherwise, and all remedies, rights and powers are cumulative.
7. MISCELLANEOUS.
NO WAIVER 7.1 No waiver of any default or Event of Default will be a waiver of
any other default or Event of Default. No failure to exercise or delay in
exercising any right or power under any Loan Document will be a waiver thereof,
nor shall any single or partial exercise of any such right or power preclude any
further or other exercise thereof or the exercise of any other right or power.
The making of any Loan during either the existence of any default or Event of
Default, or subsequent to the occurrence of an Event of Default will not be a
waiver of any such default or Event of Default. No amendment, modification or
waiver of any
Page 4 of 7 Pages
<PAGE>
Credit Agreement (With Borrowing Base) November 8, 1996
PSW TECHNOLOGIES, INC.
<PAGE>
Credit Agreement (With Borrowing Base) November 8, 1996
PSW TECHNOLOGIES, INC.
Loan Document will be effective unless the same is in writing and signed by the
Person against whom such amendment, modification or waiver is sought to be
enforced. No notice to or demand on any Person shall entitle any Person to any
other or further notice or demand in similar or other circumstances.
NOTICES 7.2 All notices required under the Loan Documents shall be in writing
and either delivered against receipt therefor, or mailed by registered or
certified mail, return receipt requested, in each case addressed to the address
shown on the signature page hereof or to such other address as a party may
designate. Except for the notices required by SECTION 2.1, which shall be given
only upon actual receipt by Bank, notices shall be deemed to have been given
(whether actually received or not) when delivered (or, if mailed, on the next
Business Day).
GOVERNING LAW/ARBITRATION 7.3 (a) UNLESS OTHERWISE SPECIFIED THEREIN, EACH LOAN
DOCUMENT IS GOVERNED BY TEXAS LAWS AND THE APPLICABLE LAWS OF THE UNITED STATES
OF AMERICA. To the maximum extent permitted by law, any controversy or claim
arising out of or relating to the Loans or any Loan Document, including but not
limited to any claim based on or arising from an alleged tort or an alleged
breach of any agreement contained in any of the Loan Documents, shall, at the
request of any party to the Loan or Loan Documents (either before or after the
commencement of judicial proceedings), be settled by mandatory and binding
arbitration in accordance with the Commercial Arbitration rules of the American
Arbitration Association (the "AAA RULES") and pursuant to Title 9 of the United
States Code, or if Title 9 does not apply, the Texas General Arbitration Act.
In any arbitration proceeding: (i) all statutes of limitations which would
otherwise be applicable shall apply; and (ii) the proceeding shall be conducted
in the city in which the office of Bank originating the Loans is located by a
single arbitrator if the amount in controversy is $1 million or less, or by a
panel of three arbitrators if the amount in controversy (including but not
limited to all charges, principal, interest fees and expenses) is over $1
million. Arbitrators are empowered to resolve any controversy by summary
rulings substantially similar to summary judgments and motions to dismiss.
Arbitrators may order discovery conducted in accordance with the Federal Rules
of Civil Procedures. All arbitrators will be selected by the process of
appointment from a panel, pursuant to the AAA Rules. Any award rendered in the
arbitration proceeding will be final and binding, and judgment upon any such
award may be entered in an court having jurisdiction.
(b) If any party to the Loan or Loan Documents files a proceeding in any court
to resolve any controversy or claim, such action will not constitute a waiver of
the right of such party or a bar to the right of any other party to seek
arbitration under the provisions of this Section or that of any other claim or
controversy, and the court shall, upon motion of any party to the proceeding,
direct that the controversy or claim be arbitrated in accordance with this
Section.
(c) No provision of, or the exercise of any rights under, this Section shall
limit or impair the right of any party to the Loan Documents before, during or
after any arbitration proceeding to: (i) exercise self-help remedies including
but not limited to setoff or repossession; (ii) foreclose any Lien on or
security interest in any Collateral; or (iii) obtain relief from a court of
competent jurisdiction or prevent the dissipation, damage, destruction,
transfer, hypothecation, pledging or concealment of assets or Collateral
including, but not limited to attachments, garnishments, sequestrations,
appointments of receivers, injunctions or other relief to preserve the status
quo.
(d) To the maximum extent permitted by applicable law and the AAA Rules,
neither Bank nor any Obligor or any Affiliate, officer, director, employee,
attorney, or agent of either shall have any liability with respect to, and Bank
and each Obligor waives, releases, and agrees not to sue any of them upon, any
claim for any special, indirect, incidental and consequential damages suffered
or incurred by such Person in connection with, arising out of, or in any way
related to, this Agreement or any of the other Loan Documents. Each of Bank and
each Obligor waives, releases, and agrees not to sue each other or any of their
Affiliates, officers, directors, employees, attorneys, or agents for
consequential or punitive damages in respect of any claim in connection with,
arising out of, or in any way related to, this Agreement or any of the other
Loan Documents, or any of the transactions contemplated by this Agreement or any
of the other Loan Documents. Nothing contained herein, however, shall be
construed as a waiver of any Obligor's or the Bank's right to compel arbitration
of disputes pursuant to subparagraphs (a) and (b), above.
(e) Nothing herein shall be considered a waiver of the right or protections
afforded Bank by 12 U.S.C. 91, Texas Banking Code Art. 342-609 or any similar
statute.
(f) Each party agrees that any other party may proceed against any other liable
Person, jointly or severally, or against one or more of them, less than all,
without impairing rights against any other liable Persons. A party shall not be
required to join the principal Obligor or any other liable Persons (e.g.
sureties or guarantors) in any proceeding against any Person. A party may
release or settle with one or more liable Persons as the party deems fit without
releasing or impairing right to proceed against any Persons not so released.
SURVIVAL; PARTIES BOUND; TERM OF AGREEMENT 7.4 All representations,
warranties, covenants and agreements made by or on behalf of Borrower in
connection with the Loan Documents will survive the execution and delivery of
the Loan Documents; will not be affected by any investigation made by any
Person, and will bind Borrower and the successors, trustees, receivers and
assigns of Borrower and will benefit the successors and assigns of the Bank;
PROVIDED that Bank's agreement to make Loans to Borrower will not insure to the
benefit of any successor or assign of Borrower. Except as otherwise provided
herein, the term of the Agreement will be until the later of the final maturity
of the Note and the full and final payment of all Obligations and all amounts
due under the Loan Documents.
DOCUMENTARY MATTERS 7.5 This Agreement may be executed in several identical
counterparts, on separate counterparts; each counterpart will constitute an
original instrument, and all separate counterparts will constitute but one and
the same instrument. The headings and captions in the Loan Documents have been
included solely for convenience and should not be considered in construing the
Loan Documents. If any provision of any Loan Document is invalid, illegal or
unenforceable in any respect under any applicable law, the remaining provisions
will remain effective. The Loans and all other obligations and indebtedness of
Borrower to Bank are entitled to the benefit of the Loan Documents.
EXPENSES 7.6 Upon the execution of this Agreement, Borrower agrees to pay Bank
a $5,000.00 fee for all pre-closing expenses including Bank's field audit and
Bank's legal fees for preparation, negotiation and handling of this Agreement.
Following the execution of this Agreement, Borrower agrees to pay on demand all
out-of-pocket expenses (including, without limitation the fees and expenses of
counsel for Bank) in connection with the negotiation, preparation, execution,
filing, recording, modification, supplementing and waiver of the Loan Documents
and the making, servicing and collection of the Loans. The obligations of the
Borrower under this and the following section will survive the termination of
this Agreement.
INDEMNIFICATION 7.7 Borrower agrees to indemnify, defend and hold bank harmless
from and against any and all loss, liability, obligations, damage, penalty,
judgment, claim, deficiency and expense (including interest, penalties,
attorneys'
Page 5 of 7 Pages
<PAGE>
Credit Agreement (With Borrowing Base) November 8, 1996
PSW TECHNOLOGIES, INC.
fees and amounts paid in settlement) (each, a "Claim") to which Bank may become
subject arising out of or based upon the Loan Documents, or any Loan, including
that resulting from Bank's own negligence, except and to the extent caused by
Bank's gross negligence or willful misconduct. To the extent any Claim is one to
which Borrower is not a party, Bank agrees that (a) it shall provide Borrower
written notice within 30 days of the date that the Bank has actual knowledge
that a Claim has been made; and (b) upon receipt by Bank of Borrower's
confirmation in Proper Form that the Claim is indemnified and that Borrower will
honor the indemnity, Bank shall (i) not compromise or settle such Claim without
Borrower's consent, which shall not be unreasonably withheld, and (ii) agree to
be represented by legal counsel mutually reasonably acceptable to Borrower and
Bank.
USURY NOT INTENDED 7.8 Borrower and Bank intend to conform strictly to
applicable usury laws. Therefore, the total amount of interest (as defined under
applicable law) contracted for, charged or collected under this Agreement or any
other Loan Document will never exceed the Highest Lawful Rate. If Bank contracts
for, charges or receives any excess interest, it will be deemed a mistake. Bank
will automatically reform the Loan Document or charge to conform to any
applicable law, and if excess interest has been received, Bank will either
refund the excess to Borrower or credit the excess on any unpaid principal
amount of the Note or any other Loan Document. All amounts constituting interest
will be spread throughout the full term of the Loan Document or applicable Note
in determining whether interest exceeds lawful amounts.
NO COURSE OF DEALING 7.9 NO COURSE OF DEALING BY BORROWER WITH BANK, NO COURSE
OF PERFORMANCE AND NO TRADE PRACTICES OR OTHER INTRINSIC EVIDENCE OF ANY NATURE
MAY BE USED TO CONTRADICT, VARY, SUPPLEMENT OR MODIFY ANY TERM OF THIS
AGREEMENT.
8. DEFINITIONS.
Unless the context otherwise requires, capitalized terms used in Loan Documents
and not defined elsewhere shall have the meanings provided by GAAP, except as
follows:
Account Debtor means any person in any way obligated on or in connection with
any Account.
Affiliate means, as to any Person, any other Person (a) that directly or
indirectly, through one or more intermediaries, controls or is controlled by, or
is under common control with, such Persons; (b) that directly or indirectly
beneficially owns or holds five percent (5%) or more of any class of voting
stock of such Person; or (c) five percent (5%) or more of the voting stock of
which is directly or indirectly beneficially owned or held by the Person in
question. The term "control" means to possess, directly or indirectly, the power
to direct the management and policies of a Person, whether through the ownership
of voting securities, by contract, or otherwise. Bank is not under any
circumstances to be deemed an Affiliate of Borrower or any of its Subsidiaries.
Authority Documents means certificates of authority to transact business,
certificates of good standing, borrowing resolutions (with secretary's
certificate), secretary's certificates of incumbency, and other documents which
empower and enable Borrower or its representatives to enter into agreements
evidenced by Loan Documents or evidence such authority.
Business Day means a day when the main office of Bank is open for the conduct of
commercial lending business.
Collateral means all Property, tangible or intangible, real, personal or mixed,
now or hereafter subject to Security Documents, or intended to be.
Corporation means corporations, partnerships, limited liability companies, joint
ventures, joint stock associations, associations, banks, business trusts and
other business entities.
Debt means all revolving, term and other interest and non-interest bearing debt
from banks and other financial institutions excluding accounts payable and other
accruals.
EBITDA means Borrower's earnings before interest, taxes, depreciation,
amortization and other Specified Non-Cash Charges.
Government Accounts means receivables owed by the U.S. government or by the
government of any state, county, municipality, or other political subdivision as
to which Bank's security interest or ability to obtain direct payment of the
proceeds is governed by any federal or state statutory requirements other than
those of the Uniform Commercial Code, including, without limitation, the Federal
Assignment of Claims Act of 1940, as amended.
Governmental Authority means any foreign governmental authority, the United
States of America, any state of the United States and any political subdivision
of any of the foregoing, and any agency, department, commission, board, bureau,
court or other tribunal having jurisdiction over Bank or any Obligor, or any
Subsidiary of Borrower or their respective Property.
Highest Lawful Rate means the maximum nonusurious rate of interest permitted to
be charged by applicable Federal or Texas law (whichever permits the highest
lawful rate) from time to time in effect. If Chapter One of the Texas Credit
Code establishes the Highest Lawful Rate, the Highest Lawful Rate is the
"indicated rate ceiling" as defined in that Chapter.
Indebtedness means and includes (a) all items which in accordance with GAAP
would be included on the liability side of a balance sheet on the date as of
which Indebtedness is to be determined (excluding capital stock, surplus,
surplus reserves and deferred credits); it being understood that operating lease
obligations and other such obligations which under GAAP do not appear as
liabilities on Borrower's balance sheet are not Indebtedness; (b) all
guaranties, endorsements and other contingent obligations in respect of, or any
obligations to purchase or otherwise acquire, Indebtedness of others, and (c)
all Indebtedness secured by any Lien existing on any interest of the Person with
respect to which indebtedness is being determined, in Property owned subject to
such Lien, whether or not the Indebtedness secured thereby has been assumed.
Legal Requirement means any law, ordinance, decree, requirement, order,
judgment, rule, regulation (or interpretation of any of the foregoing) of, and
the terms of any license or permit issued by, and Governmental Authority.
Lien shall mean any mortgage, pledge, charge, encumbrance, security interest,
collateral assignment or other lien or restriction of any kind, whether based on
common law, constitutional provision, statute or contract.
Loan Documents means this Agreement, the agreements, documents, instruments and
other writings contemplated by this Agreement or listed on Annex I, all other
assignments, deeds, guaranties, pledges, instruments, certificates and
agreements now or hereafter executed or delivered to the Bank pursuant to any of
the foregoing, and all amendments, modifications, renewals, extensions,
increases and rearrangements of, and substitutions for, any of the foregoing.
Obligations means all principal, interest and other amounts which are or become
owing under this Agreement, the Note or any other Loan Document.
Obligor means each Borrower and any guarantor, surety, co-signer, general
partner or other person who may now or hereafter be obligated to pay all or any
part of the Obligations.
Organizational Documents means, with respect to a corporation, the certificate
of incorporation, articles of incorporation and bylaws of such corporation; with
respect to a limited liability company, the articles of organization,
regulations and other documents establishing such entity, with respect to a
partnership, joint venture, or trust, the agreement, certificate or instrument
establishing such entity; in each case including all modifications and
supplements thereof as of the date of the Loan Document referring to such
Organizational Document and any and all future modifications thereof which are
consented to by Bank.
Parties means all Persons other than Bank executing any Loan Documents.
Page 6 of 7 Pages
<PAGE>
Credit Agreement (With Borrowing Base) November 8, 1996
PSW TECHNOLOGIES, INC.
Person means any individual, Corporation, trust, unincorporated organization,
Governmental Authority or any other form of entity.
Proper Form means in form and substance satisfactory to the Bank.
Property means any interest in any kind of property or asset, whether real,
personal or mixed, tangible or intangible.
Security Documents means those Security Agreements listed on Annex I and all
supplements, modifications, amendment, extensions thereof and all other
agreements hereafter executed and delivered to Bank to secure the Loans.
Specified Non-Cash Charges means all non-cash charges to the Borrower's income
statement (not reflected as depreciation or amortization) (a) resulting from
stock option transactions; or (b) as agreed in writing by Bank in its sole
discretion, upon Borrower's request.
Subordinated Debt means any Indebtedness subordinated to Indebtedness due Bank
pursuant to a written subordination agreement in Proper Form by and among Bank,
subordinated creditor and Borrower which at a minimum must prohibit: (a) any
action by subordinated creditor which will result in an occurrence of an Event
of Default or default under this Agreement, the subordination agreement or the
subordinated Indebtedness; and (b) upon the happening of any Event of Default or
default under any Loan Document, the subordination agreement, or any instrument
evidencing the subordinated Indebtedness (i) any payment of principal and
interest on the subordinated Indebtedness; (ii) any act to compel payment of
principal or interest on subordinated Indebtedness; and (iii) any action to
realize upon any Property securing the subordinated Indebtedness.
Subsidiary means, as to a particular parent Corporation, any Corporation of
which 50% or more of the indicia of equity rights is at the time directly or
indirectly owned by such parent Corporation or by one or more Persons controlled
by, controlling or under common control with such parent Corporation.
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN BANK AND THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF BANK AND THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN BANK AND THE PARTIES.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective
Date.
BORROWER: PSW TECHNOLOGIES, INC.
By: /s/W. Frank King
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Name: W. Frank King
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Title: CEO & President
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Address: 9050 Capital of TX Hwy Austin TX
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BANK: TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By: /s/Ralph T. Beasley
----------------------------------------------------------------------------
Name: Ralph T. Beasley
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Title: Vice President
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EXHIBITS: ANNEXES:
A Borrowing Base Report I Loan Documents
B Request for Loan II Subsidiaries
C Reporting Requirements, Financial
Covenants, and Compliance Certificate
Page 7 of 7 Pages
<PAGE>
SECURITY AGREEMENT -- ACCOUNTS AND GENERAL INTANGIBLES
("Agreement")
PSW TECHNOLOGIES, INC.
9050 Capital of Texas Highway North, Austin, Travis County, Texas 78759
("Debtor")
TEXAS COMMERCE BANK NATIONAL ASSOCIATION
700 Lavaca, P.O. Box 550, Austin, Travis County, Texas 78701-0001
("Secured Party"), agree as follows:
1. DEFINITIONS. (a) "Collateral" means all Accounts and all Proceeds, together
with all books and records of Debtor, whether in paper or electronic form,
relating to the Collateral. "Accounts" means all accounts, instruments,
negotiable documents, and chattel paper. (b) "Obligations" means all debts,
obligations and liabilities of every kind and character, whether joint or
several, contingent or otherwise, of Debtor now or hereafter existing in favor
of Secured Party, including without limitation all liabilities arising under or
from any note, open account, overdraft, letter of credit, endorsement, surety
agreement, guaranty, interest rate swap, or other derivative produce,
acceptance, foreign exchange contract or depository service contract, whether
payable to Secured Party or to a third party and subsequently acquired by
Secured Party. Debtor and Secured Party specifically contemplate that Debtor may
hereafter become further indebted to Secured Party. (c) "Past Due Rate" means
the lesser of the Prime Rate plus three percent (3%) or the highest nonusurious
rate of interest that Secured Party may contract for, charge or receive under
applicable law. (d) "Proceeds" means the rights and interests of Debtor in
goods, the sale and delivery of which give rise to any Account, including all
returned or repossessed goods, and all products and proceeds, in cash or
otherwise, of all Collateral. (e) "Security Interest" means the security
interests created by this Agreement. (f) "UCC" means the Texas Uniform
Commercial Code, as amended from time to time. (g) "Prime Rate" means the rate
of interest per annum determined from time to time by the Secured Party as its
prime rate in effect at its principal office in Houston, Texas and thereafter
entered in the minutes of its Loan and Discount Committee; each change in the
Prime Rate shall be effective on the date such change is determined; without
special notice to the Debtor or any other person or entity. THE PRIME RATE IS A
REFERENCE RATE AND DOES NOT NECESSARILY REPRESENT THE LOWEST OR BEST RATE
ACTUALLY CHARGED TO ANY CUSTOMER AND ANY STATEMENT, REPRESENTATION OR WARRANTY
IN THAT REGARD OR TO THAT EFFECT IS EXPRESSLY DISCLAIMED BY SECURED PARTY.
2. CREATION OF SECURITY INTEREST. To secure the payment and performance of the
Obligations, Debtor grants to Secured Party a security interest in and assigns
to Secured Party all Collateral which Debtor owns or later acquires.
3. DEBTOR'S REPRESENTATIONS AND WARRANTIES. (a) Debtor is the sole lawful owner
of the Collateral, free and clear of all encumbrances, and has the right and
power to transfer the Collateral to Secured Party. No financing statement
covering the Collateral, other than in favor of Secured Party, is on file in any
public office. (b) This Agreement constitutes the legal, valid and binding
obligation of Debtor, enforceable in accordance with its terms. (c) The
Collateral and the Debtor's use thereof comply with all applicable laws, rules
and regulations, and Debtor has obtained any consents necessary to execute,
deliver and perform its obligations under this Agreement. (d) The address set
forth above is Debtor's place of business, if Debtor has only one place of
business, Debtor's chief executive office, if Debtor has more than one place of
business, or Debtor's residence, if Debtor has no place of business.
4. DEBTOR'S AGREEMENTS. (a) Debtor will warrant and defend its title to and
Secured Party's interest in the Collateral against any adverse claimant. Debtor
will promptly take all reasonable and appropriate steps to collect the
Collateral. Debtor will not agree to a material modification of the payment
terms of any Account without the written consent of Secured Party. (b)
Notwithstanding the security interest in Proceeds granted herein, Debtor will
not sell, transfer, assign or otherwise dispose of any interest in the
Collateral, except as authorized in this Agreement or in writing by Secured
Party, and Debtor will keep the Collateral (including Proceeds) free from unpaid
charges, including taxes and assessments, and from all encumbrances other than
those in favor of Secured Party. (c) After the occurrence and during the
continuation of an Even of Default (with respect to which, if subject to a Cure
Period, such Cure Period has ended with such default uncured), Secured Party may
require that Debtor (i) deposit all payments on the Accounts in a special bank
account over which Secured Party alone has the power of withdrawal, and (ii)
direct each account debtor to send remittances to an address designated by
Secured Party. Secured Party may hold the funds in the account as security, or
apply the funds to pay the Obligations. (d) Debtor will furnish Secured Party
all information Secured Party may request with respect to the Collateral. Debtor
will notify Secured Party promptly of any event that could have a material
adverse affect on the aggregate value of the Collateral or on the Security
Interest, or any change in Debtor's location, name, identity or organizational
structure. (e) Debtor will keep accurate books and records regarding the
Collateral and will allow Secured Party to inspect and make copies (including
electronic copies) of its books and records during regular business hours.
Secured Party may make text verifications of the Collateral.
5. FURTHER ASSURANCES. Secured Party may file this Agreement or any financing
statements wherever Secured Party believes necessary to perfect the Security
Interest. A photographic or other reproduction of this Agreement or any
financing statement relating to this Agreement will be sufficient as a financing
statement. Debtor authorizes Secured Party and irrevocably appoints Secured
Party as Debtor's attorney-in-fact to file any financing statement (including
any amendments) relating to this Agreement electronically, and Secured Party's
transmission of Debtor's name as part of any filing relating to this Agreement
will constitute Debtor's signature on the financing statement. Debtor will take
such action as Secured Party may at any time require to protect, assure or
enforce the Security Interest. Debtor will promptly deliver to Secured Party any
part of the Collateral that constitutes instruments, and will make a designation
on all of its chattel paper, instruments and negotiable documents to reflect the
Security Interest.
6. COSTS AND EXPENSES. Debtor will pay, or reimburse Secured Party for, all
out-of-pocket costs and expenses and all costs and expenses customarily charged
by Bank to similarly-situated Debtors, of every character incurred from time to
time in connection with this Agreement (including all modifications and
renewals) and the Obligations, including costs and expenses incurred (a) for
mortgage or recording taxes, (b) to satisfy any obligation of Debtor under this
Agreement or to protect the Collateral, (c) in connection with the evaluation,
monitoring or administration of the Obligations or the Collateral (whether or
not an Event of Default has occurred), and (d) in connection with the exercise
of Secured Party's rights and remedies. Costs and expenses include reasonable
fees and expense of outside counsel and other outside professionals and charges
imposed for the services of attorneys and other professionals employed by
Secured Party or its affiliates. Any amount owing under this Section will be due
and payable on demand and will bear interest from the date of expenditure by
Secured Party until paid at the Past Due Rate. If any part of the Obligations is
governed by Chapter 3, 4, 5 or 15 of the Texas Credit Code, this Section is
limited to the extent required by those chapters.
<PAGE>
7. DEFAULT. "Event of Default" shall have the same meaning as that set out in
the Credit Agreement between Debtor and Secured Party of even date herewith.
After an Event of Default occurs, Secured Party may, without notice to any
person, declare the Obligations to be immediately due and payable. Debtor WAIVES
demand, presentment and all notices, including without limitation notice of
dishonor and default, notice of intent to accelerate and notice of acceleration.
8. SECURED PARTY'S RIGHTS AND REMEDIES. After an Event of Default occurs,
Secured Party will have all rights and remedies of a secured party after default
under the UCC and other applicable law. Secured Party may, without waiving any
default, do anything Debtor is required to do by this Agreement and fails to do.
Secured Party may require Debtor to assemble the Collateral and make it
available at a reasonably convenient place Secured Party designates. Except for
the safe custody of any Collateral in its possession and accounting for moneys
actually received by it, Secured Party will have no duty as to any Collateral,
including any duty to preserve rights against prior parties. Debtor irrevocably
appoints Secured Party Debtor's attorney-in-fact to endorse any checks or other
instruments included in the Collateral, or to take any other action to enforce,
collect or compromise the Collateral. Secured Party is not required to take
possession of any Collateral prior to any sale, nor to have any Collateral
present at any sale. Secured Party may sell part of the Collateral without
waiving its right to proceed against the remaining Collateral. If any sale is
not completed or is defective in the opinion of Secured Party, Secured Party may
make a subsequent sale of the same Collateral. Any bill of sale or other
instrument evidencing any foreclosure sale will be prima facie evidence of
factual matters stated or recited therein. If a sale of Collateral is conducted
in conformity with customary practices of banks disposing of similar property,
the sale will be deemed commercially reasonably, but Secured Party will have no
obligation to advertise or to sell Collateral on credit. Written notice to
Debtor mailed 10 days prior to public or private sale is reasonable notice. By
exercising its rights, Secured Party will not become liable for, and Debtor will
not be released from, any of Debtor's duties or obligations under the contracts
and agreements included in the Collateral. Secured Party may purchase Collateral
at any public sale, and may credit the purchase price against the Obligations.
All remedies in this Agreement are cumulative of any and all other legal,
equitable or contractual remedies available to Secured Party. Debtor WAIVES any
rights to a marshaling of assets or sale in inverse order of alienation, and any
rights to notice except as provided in the UCC.
9. ADDITIONAL AGREEMENTS. (a) This Agreement will remain in effect until the
Secured Party executes and delivers to Debtor a written termination statement.
(b) No modification or waiver of the terms of this Agreement will be effective
unless in writing and signed by Secured Party. Secured Party may waive any
default without waiving any other prior or subsequent default. Secured Party's
failure to exercise or delay in exercising any right under this Agreement will
not operate as a waiver of such right. No single or partial exercise of any
right under this Agreement will preclude any other or further exercise of that
right or any other right. (c) Any notice required or permitted under this
Agreement will be given in writing by United States mail, by hand delivery or
delivery service, or by telegraphic, telex, telecopy or cable communication,
sent to the intended addressee at the address shown in this Agreement, or to
such different address as the addressee designates by 10 days notice. Notice by
United States mail will be effective when mailed. All other notices will be
effective when received. Written confirmation of receipt will be conclusive. (d)
If any provision of this Agreement is unenforceable or invalid, that provision
will not affect the enforceability or validity of any other provision. If the
application of any provision of this Agreement to any person or circumstance is
illegal or unenforceable, that application will not affect the legality or
enforceability of the provision as to any other person or circumstance. (e) If
more than one person executes this Agreement as Debtor, their obligations under
this Agreement are joint and several, and the term Collateral includes any
property described in Section 1 that is owned by any Debtor individually or
jointly with any other Debtor and the term "Obligations" includes both several
and joint obligations of each Debtor. (f) The section headings in this Agreement
are for convenience only and shall not be considered in construing this
Agreement. (g) This Agreement may be executed in any number of counterparts and
by different parties in separate counterparts, each of which will constitute one
and the same agreement. (h) This Agreement benefits the Secured Party and its
successors and assigns and is binding on Debtor and its heirs, legal
representatives, successors and assigns. (i) If any of the Obligations are
subject to Chapter 3, 4, 5 or 15 of the Texas Credit Code or Regulation AA of
the Board of Governors of the Federal Reserve System (collectively, the
"Consumer Restrictions"), (1) nothing in this Agreement waives any rights which
cannot be legally waived under the Consumer Restrictions, and (2) the Collateral
does not include any assignment of wages or any non-possessory, non-purchase
money security interest in household goods. (j) This Agreement is governed by
the laws of the State of Texas. (k) Secured Party is executing this Agreement
for the purpose of acknowledging the following notice, and Secured Party's
failure to execute this Agreement will not invalidate this Agreement.
This written loan agreement represents the final agreement between the parties
and may not be contradicted by evidence of prior, contemporaneous or subsequent
oral agreements of the parties. There are no unwritten oral agreements between
the parties.
Effective as of November 8, 1996.
DEBTOR PSW TECHNOLOGIES, INC.:
By: /s/W. Frank King Date: Nov. 8, 1996
---------------------------------- ------------
Name: W. Frank King
--------------------------------
Title: CEO & President
-------------------------------
SECURED PARTY: TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By: /s/Ralph T. Beasley
----------------------------------
Name: Ralph T. Beasley
--------------------------------
Title: Vice President
-------------------------------
2
<PAGE>
EXHIBIT A
BORROWING BASE REPORT
Borrowing Base Report for Period Beginning: __________ and Ending _________
("Current Period") required by the Credit Agreement dated the Effective Date (as
amended, restated, and supplemented from time to time, the "Agreement") by and
between PSW TECHNOLOGIES, INC. and Texas Commerce Bank National Association
- --------------------------------------------------------------------------------
THE BORROWING BASE REPORT MUST BE SUBMITTED TO BANK WITHIN 30 DAYS OF THE LAST
DAY OF EACH CALENDAR MONTH. BORROWER MUST PROVIDE THE FOLLOWING ALONG WITH THE
BORROWING BASE REPORT; ACCOUNTS RECEIVABLE AGINGS AND LISTING
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
1. Total Accounts as of the end of the Current Period $_________
Ineligible Accounts as of the end of the Current Period:
2. That portion (e.g., invoice) of all of the Accounts
of any Account Debtor where the Account is more than
110 days from invoice date $_________
3. All of the Accounts, not already included in Line 2,
of any Account Debtor if 20% of the dollar amount of all
of the Accounts of such Account Debtor are more than
110 days from invoice date $_________
4. Intercompany and Affiliate Accounts $_________
5. Governmental Accounts [Governmental Accounts means
receivables owed by the U.S. government or by the
government of any state, county, municipality, or
other political subdivision as to which Bank's
security interest or ability to obtain direct payment
of the proceeds is governed by any federal or state
statutory requirements other than those of the Uniform
Commercial Code, including, without limitation,
the Federal Assignment of Claims Act of 1940,
as amended.] $_________
6. Foreign Accounts (unless secured by a letter
of credit issued by a bank satisfactory to
the Bank or covered by Credit insurance
satisfactory to Bank) $_________
7. Accounts subject to any dispute or set-off or contra
account (including, but not limited to, accounts subject
to deferred revenue liability, royalty liability and
customer payable liability) $_________
8. Accounts associated with fixed price contracts in
excess of the lesser of: 20% of the Borrowing Base;
or (ii) $1,000,000.00 $_________
9. Other Ineligible Accounts $_________
10. Total Ineligible Accounts for the Current Period $_________
(Add Lines 2 through 9)
11. Total Eligible Accounts for the Current Period $_________
(Line 1 - Line 10)
12. Plus: Borrower's interest in "Receivables" as defined and
provided for in the Accounts Receivables Agreement dated
October 1, 1996 between Borrower and PSI, and collaterally
assigned to Bank in Proper Form (not to exceed $2,000,000.00);
provided, after 12/31/96, no credit shall be allowed on the
Borrowing Base for any such Accounts) $_________
13. Adjusted Total Eligible Accounts for the Current Period $_________
(Line 1 - Line 10)
14. Multiplied by: Borrowing Base Factor 85%
15. Equals: BORROWING BASE as of
the end of the Current Period $_________
16. Less: Aggregate principal amount outstanding under the Note
as of the end of the Current Period: $_________
17. Equals: amount available for borrowing subject to the terms
of the Agreement (including, but not limited to, the
maximum amount of the Commitment ($6,500,000.00), if
positive; or amount due, if negative: $_________
</TABLE>
The term "Accounts shall have the meaning as set forth in the Texas Business and
Commerce Code in effect as of the date of the Agreement. "Other Ineligible
Accounts" shall mean all such Accounts of Borrower that are not subject to a
first and prior Lien in favor of Bank, all Accounts that are subject to any Lien
not in favor of Bank and those Accounts of Borrower as shall be deemed from time
to time to be, in the sole judgment of the Bank, ineligible for purposes of
determining the Borrowing Base. All other terms not defined herein shall have
the respective meanings as in the Agreement.
For all invoices billed on or after December 1, 1996: (a) invoices in an amount
greater than $100,000.00 shall not be included in the Borrowing Base unless
Borrower has a letter of engagement in Proper Form relating thereto; and (b)
invoices of an amount greater than $100,000.00 associated with specific
milestone event(s) on fixed price contracts shall not be included in the
Borrowing Base for more than the sixty (60) day period immediately following the
invoice billing date unless Borrower has received a letter of acceptance
therefor in Proper Form within the above-described sixty (60) day period.
Borrowing Base Report EXHIBIT A Page 1 of 1
<PAGE>
Further, for all invoices of an amount greater than $100,000.00, if: (a)
Borrower's ratio of Total Funded Liabilities to EBITDA exceeds the maximum of
1.75:1.0 beginning September 30, 1996 and reverting back to 1.50:1.0 beginning
March 31, 1997; and/or (b) the Dilution Ratio (Cumulative Dilution
Amount/Cumulative Receivables Billed) over a three (3) month rolling average,
tested monthly, exceeds 2.00% (Dilution would include all negative adjustments
to Borrower's accounts receivable excluding negative adjustments associated
solely with any Account Debtor's inability to pay solely for financial reasons);
then these invoice(s) shall not be included in the Borrowing Base unless
Borrower has obtained written acceptance in Proper Form from the Account Debtor
that services have been rendered.
Borrower certifies that the above information and computations are true,
correct, complete and not misleading as of the date hereof.
Borrower: PSW TECHNOLOGIES, INC.
By: _______________________________________________________________________
Name: _____________________________________________________________________
Title: ____________________________________________________________________
Address: __________________________________________________________________
Date: _____________________________________________________________________
Borrowing Base Report EXHIBIT A Page 2 of 2
<PAGE>
EXHIBIT B
REQUEST FOR LOAN
Letterhead of Borrower
Texas Commerce Bank National Association
700 Lavaca
P.O. Box 550
Austin, Texas 78789-0001
Re: Request for Loan under Agreement
Attention: Ralph Beasley
Gentlemen:
This letter confirms our oral or telephonic request of __________, 19___,
for a Loan in accordance with that certain Credit Agreement (as amended,
restated and supplement from time to time, the "Agreement") dated as of the
Effective Date between you and us. Any term defined in the Agreement and used in
this letter has the same meaning as in the Agreement.
The proposed Loan is to be in the amount of $__________ and is to be made
on __________, 19___, which is a Business Day. The proceeds of the proposed Loan
should be (check one:) |_| deposited into account number __________ with the
Bank; or |_| ___________________________________________________________. The
proposed Loan should bear interest at the (check one:)
|_| Effective LIBOR Rate; or
|_| Effective Alternate Base Rate.
The undersigned hereby certifies that:
(1) The representations and warranties made by the Borrower or by any
other Person in the Agreement and the other Loan Documents are true
and correct on and as of this date as though made on this date.
(2) The proposed Loan complies with all applicable provisions of the
Agreement.
(3) No Event of Default has occurred and is continuing.
Sincerely,
PSW TECHNOLOGIES, INC.
By: _____________________________
Name: ___________________________
Title: __________________________
EXHIBIT B Page 1 of 1
<PAGE>
EXHIBIT C to Agreement between
PSW Technologies, Inc. ("Borrower") and
Texas Commerce Bank National Association ("Bank")
dated the Effective Date as same may be amended,
restated and supplemented in writing.
REPORTING REQUIREMENTS, FINANCIAL COVENANTS
AND COMPLIANCE CERTIFICATE
FOR CURRENT REPORTING PERIOD ENDING __________, 199__ ("END DATE")
<TABLE>
<S> <C> <C> <C>
===========================================================================================
A. Financial Reporting. Borrower will provide the following financial Compliance
information within the times indicated: Certificate
===========================================================================================
WHO WHEN DUE WHAT Compliance
--- -------- ---- (Circle)
Yes No
- -------------------------------------------------------------------------------------------
BORROWER (i) Within 120 days of Annual financial statements Yes No
fiscal year end (balance sheet, income
statement, cash flow
(Borrower's Fiscal Year Ends statement) Audited (with
on December 31) unqualified opinion) by
independent certified public
accountants satisfactory to
Bank, accompanied by
Compliance Certificate
(Exhibit C) executed by
Borrower
------------------------------------------------------------------------------
(ii)(a) prior to any Unaudited interim financial Yes No
successful IPO, within 30 statements accompanied by
days of each month end, Compliance Certificate
including final period of (Exhibit C) executed by
fiscal year Borrower
(b) Upon successful
completion of an IPO, within
45 days of each fiscal
quarter end including final
period of fiscal year
------------------------------------------------------------------------------
(iii) Within 30 days of each Borrowing Base Report Yes No
month end (Exhibit A), along with
accounts receivable aging
and listing
===========================================================================================
</TABLE>
EXHIBIT C Page 1 of 3 Pages
<PAGE>
<TABLE>
<S> <C> <C>
===========================================================================================
B. FINANCIAL COVENANTS. Borrower COMPLIANCE CERTIFICATE
will comply with the following
financial covenants, defined in
accordance with GAAP and the
definitions in Section 8, and
incorporating the calculation
adjustments indicated on the
Compliance Certificate:
- ------------------------------------------------------------------------------------------
REQUIRED ACTUAL REPORTED
-------- --------------- Compliance
Except as specified otherwise, For Current Reporting Period/ (Circle)
each covenant will be maintained as of the End of Date Yes No
at all times and reported for
each Reporting Period or as of
each fiscal quarter End Date
(March 31, June 30, September 30
and December 31), as appropriate:
- ------------------------------------------------------------------------------------------
1. Maintain a Tangible Net Worth Stockholders' Equity $____ Yes No
as adjusted of at least Minus: Goodwill $____
$2,200,000.00 beginning October Other Intangible
1, 1996 until December 31, 1996, Assets $____
and increasing thereafter each Loans/Advances to
quarter by 60% of Borrower's net Equity holders $____
income generated after October 1, Loans to Affiliates $____
1996, with the increased minimum
Tangible Net Worth requirement Plus: Subordinated Debt $____
beginning with the December 31, = Tangible Net Worth as
1996 calculation and continuing adjusted $____
thereafter on the last day of
each March, June, September and
December.
- ------------------------------------------------------------------------------------------
2. Beginning Most + YTD - YTD Yes No
October 1, Recent this last
1996 and FYE Year year Total
continuing
until March Net income $____ $____ $____ $____
31, 1997, Plus: Depreciation $____ $____ $____ $____
have a ratio Amortization $____ $____ $____ $____
of Total Interest
Funded Expense $____ $____ $____ $____
Liabilities Tax Expense $____ $____ $____ $____
to EBITDA for Specified
the 12 months Non-Cash
ending at Charges $____ $____ $____ $____
each fiscal Equals: EBITDA = $____ $____ $____ $____
quarter End
Date of not As of fiscal quarter End Date:
more than Loans from Bank $______________
2.00:1.00, Plus: Other Liabilities
and beginning for borrowed money $______________
March 31,
1997 and Equals: Total Funded Liabilities = $
continuing ==============
thereafter
until the $_______________ / $_______________ = _____________
termination Total Funded EBITDA Ratio
of the Liabilities
Agreement,
have a ratio
of Total
Funded
Liabilities
to EBITDA for
the 12 months
ending at
each month
End Date of
not more than
1.75:1.00
==========================================================================================
</TABLE>
EXHIBIT C Page 2 of 3 Pages
<PAGE>
<TABLE>
<S> <C> <C>
===========================================================================================
C. Other Required Covenants to be maintained and to be certified.
COMPLIANCE CERTIFICATE
===========================================================================================
REQUIRED ACTUAL REPORTED
-------- --------------- Compliance
(Circle)
- ------------------------------------------------------------------------------------------
(i) No change in ownership affecting Indicate change exceeding Yes No
more than 49% of the stock limit, if any
ownership of Borrower (as of the
Effective Date)
- ------------------------------------------------------------------------------------------
(ii) Borrower shall be permitted to
incur indebtedness, in the form
of capital leases and/or debt
secured by purchase money liens,
for capital leases and/or
purchases of equipment for use in
Borrower's regular business
operations not to exceed the
following amounts incurred in the
periods indicated:
$725,000.00 -- remainder of
FY 1996
$1,700,000.00 -- FY 1997
$2,500,000.00 -- FY 1998
- ------------------------------------------------------------------------------------------
(iii) Borrower shall be permitted to
incur indebtedness, other than
that expressly permitted in
Section 5.1 and this Exhibit, in
amounts not to exceed an
aggregate of $350,000.00 incurred
per fiscal year of Borrower (such
limitation shall be reduced by
proration for the partial fiscal
year remaining for the year in
which this Agreement is
executed).
===========================================================================================
</TABLE>
THE ABOVE SUMMARY REPRESENTS SOME OF THE COVENANTS AND AGREEMENTS CONTAINED IN
THE AGREEMENT AND DOES NOT IN ANY WAY RESTRICT OR MODIFY THE TERMS AND
CONDITIONS OF THE AGREEMENT. IN CASE OF CONFLICT BETWEEN THIS EXHIBIT C AND THE
AGREEMENT, THE AGREEMENT SHALL CONTROL.
The undersigned hereby certifies that the above information and computations are
true and correct and not misleading as of the date hereof, and that since the
date of the Borrower's most recent Compliance Certificate (if any):
|_| No default or Event of Default has occurred under the Agreement during
the current Reporting Period, or been discovered from a prior period,
and not reported.
|_| A default or Event of Default (as described below) has occurred during
the current Reporting Period or has been discovered from a prior
period and is being reported for the first time and:
|_| was cured on _______________.
|_| was waived by Bank in writing on _______________.
|_| is continuing.
Description of Event of Default: __________________________________________
___________________________________________________________________________
Executed this __________ day of __________, 19___.
BORROWER: PSW TECHNOLOGIES, INC.
SIGNATURE: _____________________________________________________________________
NAME: __________________________________________________________________________
TITLE: __________________________________ (Chief Financial Officer or President)
ADDRESS: 9050 Capital of Texas Highway North, Austin, Travis County, Texas 78759
EXHIBIT C Page 3 of 3 Pages
<PAGE>
ANNEX I
Loan Documents
"Loan Documents" includes, but is not limited to, the following:
1. Agreement
2. Note
3. Borrowing Base Report
4. Compliance Certificate
5. Security Agreement, in Proper Form, covering Accounts; additional
documentation of assignment to Bank of Receivables referred to in Line 12
of Borrowing Base, if Borrower elects to include them as provided in
Borrowing Base
6. Financing Statements
7. Guaranty by: any and all Subsidiaries (current and future) of Borrower (as
such Subsidiaries may exist from time to time)
8. Certificate of Account Status
9. Certified copies of Organizational and Authority Documents
10. Financial Statements of: Borrower; any Guarantor(s)
11. UCC search
Loan Documents - ANNEX I Page 1 of 1
<PAGE>
ANNEX II
Subsidiaries
IF NONE AS OF EFFECTIVE DATE, CHECK |X| NONE
Subsidiary Name State Where
and Address Incorporated % Owned
- --------------- ------------ -------
ANNEX II Page 1 of 1
<PAGE>
BORROWING RESOLUTION FOR
CORPORATIONS/PROFESSIONAL ASSOCIATIONS AND SECRETARY'S CERTIFICATE
I, the undersigned, Secretary of PSW Technologies, Inc. (Name of
Company)("this Company"), a Delaware (State of Incorporation)
corporation/professional association, do hereby certify that at a meeting of the
Board of Directors of this Company duly and regularly called on the _____ day of
________________, 19 ___, a quorum being present, or pursuant to a waiver of
notice and unanimous consent to action of all directors dated the 1st day of
October, 1996, the following resolutions were unanimously adopted and recorded
in the minute books of this Company kept by me, and are in accord with and
pursuant to the charter and by-laws of this Company and are now in full force
and effect, to wit:
RESOLVED, that (SPECIFY NUMBER OF SIGNATURES REQUIRED ON EACH INSTRUMENT)
one of the following officers or employees of this Company, herein called
"Authorized Persons," whether one or more:
PLEASE TYPE OR PRINT PLAINLY BELOW THE NAMES OF AUTHORIZED PERSONS.
NAME TITLE SIGNATURE
W. Frank King President and CEO /s/W. Frank King
- -------------------- -------------------- --------------------
Patrick Motola CFO & Secretary /s/Patrick Motola
- -------------------- -------------------- --------------------
Keith Thatcher Treasurer /s/Keith Thatcher
- -------------------- -------------------- --------------------
are hereby authorized for and on behalf of and as the act and deed of this
Company to borrow money or to obtain credit from
TEXAS COMMERCE BANK NATIONAL ASSOCIATION AUSTIN, TEXAS
("Bank") in such amounts, for such times, in such forms (including, but not
limited to, notes, facilities, acceptances, letters of credit and overdrafts)
and upon such terms as may be deemed by such Authorized Persons to be advisable;
to renew and extend from time to time any such loan or credit arrangement; to
execute and deliver to Bank, in such form as may be required by Bank, notes,
loan agreements, drafts, letters of credit applications and other instruments
and documents relating to any indebtedness owing by this Company to Bank or
relating to any other arrangement whereby Bank extends credit to this Company,
whether fixed or contingent; to mortgage, hypothecate, encumber, pledge, assign
or transfer to Bank, or otherwise subject to any lien or security interest in
favor of Bank, as security for any such indebtedness, any property of this
Company, real or personal, tangible or intangible; to sell to Bank with or
without recourse, any of this Company's notes, bills receivable, acceptances or
other paper, whether or not negotiable; and to take all such other actions as
such Authorized Persons may deem to be necessary or desirable, or as Bank may
require, to consummate any transaction contemplated in these resolutions.
FURTHER RESOLVED, that Bank be and it hereby is authorized to credit this
Company on Bank's books with the proceeds as directed by such Authorized
Persons, whether to the order of any of said persons in his individual capacity
or not, and whether such proceeds are deposited to the individual credit of any
such person or not.
FURTHER RESOLVED, that the foregoing authority shall be and continue in
full force and effect until revoked or modified by written notice actually
delivered to the President or a Vice President of Bank; provided that such
revocation shall not be effective with respect to any exercise of any said
authority prior to the receipt by Bank of such notice.
I FURTHER CERTIFY that each title indicated and each signature appearing
above next to a designated Authorized Person is the title and signature of that
designated Authorized Person.
I FURTHER CERTIFY, that Company
|X| does not conduct business under an assumed business or professional
name(s).
|_| does conduct business under an assumed business or professional name(s) and
it has properly filed an Assumed Name Certificate(s) in the office(s) required
by Chapter 36 of the Texas Business and Commerce Code for the following name(s):
ASSUMED BUSINESS/PROFESSIONAL NAMES USED:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
I FURTHER CERTIFY that this Company is duly organized, validly existing and
in good standing under the laws governing its creation and existence; that all
requisite licenses, permits and franchises for the operation of Company's
business are in full force and effect; and that all taxes, assessments and
governmental charges due upon Company's income, profits, or property have been
paid except for those that Company is contesting in good faith and for which it
has established adequate reserves.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal* of this Company by order of the Board of Directors this 8th day of
November, 1996.
(SEAL)* /s/Patrick Motola
(If Company has no seal, type "none.") ---------------------------------
Secretary
F-250-00350C (Rev. 1/91) 2990264 012-0317131-710001
<PAGE>
<TABLE>
<S> <C> <C>
THIS FINANCING STATEMENT IS PRESENTED
TO A FILING OFFICER FOR FILING PURSUANT
TO THE UNIFORM COMMERCIAL CODE.
------------------------------------------
11. |_| CHECK TO REQUEST SAME DEBTOR
SEARCH CERTIFICATE (INSTRUCTION B.11)
- ------------------------------------------------------------------------------------------------------------------------------------
1. DEBTOR (IF PERSONAL) LAST NAME FIRST NAME MI 1A. PREFIX 1B. SUFFIX
PSW Technologies, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
1C. MAILING ADDRESS 1D. CITY, STATE 1E. ZIP CODE
9050 Capital of Texas Hwy North Austin, Texas 78759
- ------------------------------------------------------------------------------------------------------------------------------------
2. ADDITIONAL DEBTOR (IF PERSONAL) LAST NAME FIRST NAME MI 2A. PREFIX 2B. SUFFIX
- ------------------------------------------------------------------------------------------------------------------------------------
2C. MAILING ADDRESS 2D. CITY, STATE 2E. ZIP CODE
- ------------------------------------------------------------------------------------------------------------------------------------
3. ADDITIONAL DEBTOR (IF PERSONAL) LAST NAME FIRST NAME MI 3A. PREFIX B. SUFFIX
- ------------------------------------------------------------------------------------------------------------------------------------
3C. MAILING ADDRESS 3D. CITY, STATE 3E. ZIP CODE
- ------------------------------------------------------------------------------------------------------------------------------------
4. SECURED PARTY (IF PERSONAL) LAST NAME FIRST NAME MI
Texas Commerce Bank National Association
- ------------------------------------------------------------------------------------------------------------------------------------
4A. MAILING ADDRESS 4B. CITY, STATE 4C. ZIP CODE
P.O. Box 2558 Houston, Texas 77252-2558
- ------------------------------------------------------------------------------------------------------------------------------------
5. ASSIGNEE OF SECURED PARTY (IF ANY) LAST NAME FIRST NAME MI
- ------------------------------------------------------------------------------------------------------------------------------------
5A. MAILING ADDRESS 5B. CITY, STATE 5C. ZIP CODE
- ------------------------------------------------------------------------------------------------------------------------------------
6. This FINANCING STATEMENT covers the following types or items of property. (If collateral is crops, fixtures, timber or
minerals, read instruction B.6-7.)
ALL ACCOUNTS, INSTRUMENTS, NEGOTIABLE DOCUMENTS AND CHATTEL PAPER OF DEBTOR
TOGETHER WITH ALL PROCEEDS THEREOF (INCLUDING THE RIGHTS AND INTERESTS OF
DEBTOR IN GOODS, THE SALE AND DELIVERY OF WHICH GIVE RISE TO ANY ACCOUNT,
INCLUDING ALL RETURNED OR REPOSSESSED GOODS, AND ALL PRODUCTS AND PROCEEDS,
IN CASH OR OTHERWISE, OF ANY OF THE FOREGOING.
- ------------------------------------------------------------------------------------------------------------------------------------
7. CHECK ONLY 7A. PRODUCTS OF 7B. THIS FINANCING STATEMENT IS NUMBER OF ADDITIONAL
IF COLLATERAL ARE TO BE FILED FOR RECORD IN SHEETS
APPLICABLE |_| ALSO COVERED |_| THE REAL ESTATE RECORDS PRESENTED __________
- ------------------------------------------------------------------------------------------------------------------------------------
8. CHECK 8A. THIS FINANCING STATEMENT IS SIGNED BY THE SECURED PARTY
APPROPRIATE INSTEAD OF THE DEBTOR TO PERFECT A SECURITY INTEREST IN
BOX COLLATERAL IN ACCORDANCE WITH INSTRUCTION B.8 ITEM: |_|(1) |_|(2) |_|(3) |_|(4) |_|(5)
- ------------------------------------------------------------------------------------------------------------------------------------
9. SIGNATURE(S) THIS SPACE FOR USE OF FILING OFFICER
OF (DATE, TIME, NUMBER, FILING OFFICER)
DEBTOR(S) BY: /s/Patrick Motola
- ------------------------------------------------------------------------------------------
PSW Technologies, Inc.
- ------------------------------------------------------------------------------------------
SIGNATURE(S)
OF
SECURED PARTY(IES) /s/Ralph T. Beasley
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
10. Return copy to:
NAME Texas Commerce Bank National Association
ADDRESS P.O. Box 2558
CITY Houston, Texas 77252-2558
STATE 08 1111 Fannin 301 (CPU)
ZIP
- ------------------------------------------------------------------------------------------------------------------------------------
STANDARD FORM - FORM UCC-1(REV. 9/1/92) (C)1992 OFFICE OF THE SECRETARY OF STATE OF TEXAS
(1) FILING OFFICER COPY - NUMERICAL TEXAS COMMERCE BANCSHARES, INC. F- 250-00220c (REV. 9/92)
</TABLE>
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT ("Amendment" or "First Amendment")
executed March _____, 1997 to be effective as of November 8, 1996 ("Effective
Date"), is between PSW TECHNOLOGIES, INC. ("Borrower") and TEXAS COMMERCE BANK
NATIONAL ASSOCIATION ("Bank").
PRELIMINARY STATEMENT. Borrower and Bank entered into a Credit Agreement dated
as of November 8, 1996 (as amended by this and prior amendments, "Credit
Agreement" or "Agreement"). In this Amendment, all capitalized terms defined in
the Credit Agreement and not otherwise defined herein have the same meanings as
in the Credit Agreement, and each Section, Exhibit and similar reference is to
the Credit Agreement as amended. Borrower and Bank have agreed to amend the
Credit Agreement to provide for certain adjustments and other agreements
relating to covenants related to Borrower's status as a former division of
another company, effective as of the original date of the Agreement.
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties, Borrower and Bank agree as follows:
1. Section 5.5 is amended to read as follows:
"RESTRICTED PAYMENTS 5.5 Unless otherwise provided on Exhibit C, at any
time: (a) redeem, retire or otherwise acquire, directly or indirectly, any
shares of its capital stock or other equity interest; (b) declare or pay
any dividend; or (c) make any other distribution or contribution of any
Property or cash or obligation to owners of an equity interest or to a
Subsidiary in their capacity as such; provided, however that Borrower shall
be permitted to declare and pay dividends and distributions notwithstanding
clauses (b) and (c) of this section (but otherwise in compliance with this
Agreement) in amounts not to exceed the lesser of (i) $1,000,000.00 per tax
year of Borrower and (ii) the estimated income tax liability of the
recipients of such dividends or distributions in respect of Borrower's net
income, under Borrower's Subchapter S election."
2. Section 5.7 is amended to add at the end of such section, "; provided,
however, that from the Effective Date of this Agreement until April 30, 1997,
the restriction in the first clause of this section shall not apply to
transactions associated with the Borrower ceasing to be a division of Pencom
Systems, Incorporated and setting up operations as a separate corporation."
3. The parties agree to classify Borrower's write-off of Borrower's $655,000
note payable by W. Frank King prior to the execution of this Amendment as a
Specified Non-Cash Charge.
4. Exhibit C is replaced with Exhibit C attached to this Amendment.
5. No security interest, lien, or other interest granted by Borrower, any
guarantor or other person to Bank is released or limited in connection with the
execution of this Amendment. Borrower confirms and ratifies each of the liens,
security interests and other interests granted in each and all security
agreements executed in connection with, related to, or securing the Credit
Agreement, each prior amendment and each note and loan heretofore governed by
the Credit Agreement, each in accordance with its stated terms. Borrower
represents and warrants that each guaranty executed in connection with, related
to, or securing the Credit Agreement, each prior amendment and each note and
loan heretofore governed by the Credit Agreement, remains in force as of the
Effective Date of this Amendment, in accordance with its stated terms.
6. Borrower represents and warrants to Bank that after giving effect to this
Amendment: (a) the representations and warranties set forth in the Credit
Agreement are true and correct of the date of execution of this Amendment as
though made on and as of such date of execution; and (b) no Event of Default, or
event which with passage of time, the giving of notice or both would become an
Event of Default, has occurred and is continuing as of the date of execution of
this Amendment. Borrower further acknowledges and agrees that each of the other
Loan Documents is in all other respects ratified and confirmed, and all of the
rights, powers and privileges created thereby or thereunder are ratified,
extended, carried forward and remain in full force and effect except as the
Credit Agreement is amended by this Amendment.
7. This Amendment shall become effective as of its Effective Date upon execution
and delivery by each of the parties named in the signature lines below, and
"Agreement" and "Credit Agreement" as used in the Credit Agreement and this
Amendment shall refer to the Credit Agreement as amended by this Amendment. This
Amendment shall be included within the definition of "Loan Documents" as used in
the Agreement. This Amendment may be executed in any number of counterparts and
by different parties hereto in separate counterparts, each of which when so
executed shall be deemed an original and all of which taken together shall
constitute but one and the same agreement.
8. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF TEXAS AND AS APPLICABLE, THE LAWS OF THE UNITED STATES OF
AMERICA.
THIS WRITTEN AMENDMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN
AGREEMENT" AS DEFINED IN SECTION 26.02(a) OF THE TEXAS BUSINESS & COMMERCE CODE,
AND REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
effective as of its Effective Date.
BORROWER: PSW TECHNOLOGIES, INC. BANK: TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By: /s/ William Frank King By: /s/ Ralph T. Beasley
---------------------------- --------------------------------
Name: William Frank King Name: Ralph T. Beasley
Title: President & CEO Title: Vice President
Address: Austin TX
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT C to Agreement between
PSW Technologies, Inc. ("Borrower") and Texas Commerce Bank National Association ("Bank")
dated the Effective Date as same may be amended, restated and supplemented in writing.
REPORTING REQUIREMENTS, FINANCIAL COVENANTS AND COMPLIANCE CERTIFICATE
FOR CURRENT REPORTING PERIOD ENDING____________, 199_ ("END DATE")
<S> <C> <C> <C> <C>
===================================================================================================================================
A. FINANCIAL REPORTING. Borrower will provide the following financial information within the times indicated: Compliance
============================================================================================================
WHO WHEN DUE WHAT (Circle)
- -----------------------------------------------------------------------------------------------------------------------------------
BORROWER (i) Within 120 days of fiscal year Annual financial statements (balance Yes No
end (Borrower's Fiscal Year Ends on sheet, income statement, cash flow
December 31) statement) Audited (with unqualified
opinion) by independent certified public
accountants satisfactory to Bank,
accompanied by Compliance Certificate
(Exhibit C) executed by Borrower
---------------------------------------------------------------------------------------------------
(ii)(a)prior to any successful IPO, Unaudited interim financial statements Yes No
within 30 days of each month end accompanied by Compliance Certificate
including final period of fiscal (Exhibit C) executed by Borrower
year (b) Upon successful completion
of an IPO, within 45 days of each
fiscal quarter end including final
period of fiscal year
---------------------------------------------------------------------------------------------------
(iii) Within 30 days of each month Borrowing Base Report (Exhibit A), Yes No
end along with accounts receivable aging and
listing
===================================================================================================================================
B. FINANCIAL COVENANTS. Borrower will comply with the following financial covenants, defined in accordance
with GAAP and the definitions in Section 8, and INCORPORATING THE CALCULATION ADJUSTMENTS INDICATED ON THE
COMPLIANCE CERTIFICATE:
- -----------------------------------------------------------------------------------------------------------------------------------
REQUIRED. Except as specified otherwise, each COMPLIANCE CERTIFICATE: Compliance
covenant will be maintained at all times and reported ACTUAL REPORTED (Circle)
for each Reporting Period or as of each fiscal quarter For Current Reporting Period/ Yes No
End Date (March 31, June 30, September 30, and December as of the End of Date
31), as appropriate:
===================================================================================================================================
1. Maintain a Tangible Net Worth as adjusted of at least Yes No
$3,194,000.00 beginning December 31, 1996 until March 31, Stockholders' Equity $_______
1997, INCREASED BY (a) as of the end of each quarter by Minus: Goodwill $_______
60% of Borrower's net income generated after December 31, Other Intangible Assets $_______
1996, with the increased minimum Tangible Net Worth Loans/Advances to
requirement beginning with the March 31, 1997 calculation Equity holders $_______
and continuing thereafter on the last day of each June, Loans to Affiliates $_______
September, December and March; and (b) 100% of all
equity increases resulting from issuance of stock and Plus: Subordinated Debt $_______
corporate aquisitions; and DECREASED BY (x) any dividend Tangible Net Worth Adjusted $_______
or distribution made in compliance with Section 5.5; and
(y) $750,000, upon Borrower's completion of an initial
public offering resulting in a net increase in equity
of at least $15 million.
Please indicate required Tangible Net Worth for current
reporting period, from the above formula:
$
------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
2. Beginning Most + YTD - YTD Total Yes No
October 1, 1996 and Recent this Year last Year
continuing until FYE
March 31, 1997, ----- ------ ----- -----
have a ratio of Total Net income $____ $____ $____ $____
Funded Liabilities to Plus: Depreciation $____ $____ $____ $____
EBITDA for the 12 Amortization $____ $____ $____ $____
months ending at Interest Expense $____ $____ $____ $____
each fiscal quarter Tax Expense $____ $____ $____ $____
End Date of not more Specified Non-
than 2.00: 1.00. and Cash Charges $____ $____ $____ $____
beginning March 31, Equals: EBITDA = $____ $____ $____ $____
1997 and continuing
thereafter until the
termination of the As of fiscal quarter End Date:
Agreement, have a Loans from Bank $______________
ratio of Total Funded Plus: Other Liabilities
Liabilities to for borrowed money $______________
EBITDA for the 12
months ending at Equals: Total Funded Liabilities = $
each month End Date ==============
of not more than
1.75:1.00 =$_______________ / $_______________ = _____________
Total Funded EBITDA Ratio
Liabilities
===================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
C. OTHER REQUIRED COVENANTS TO BE MAINTAINED AND TO BE CERTIFIED.
COMPLIANCE CERTIFICATE
===================================================================================================================================
<S> <C> <C> <C>
REQUIRED ACTUAL REPORTED Compliance
(Circle)
- -----------------------------------------------------------------------------------------------------------------------------------
(i) No change in ownership affecting more than 49% of the Please indicate change exceeding limit, if any Yes No
stock ownership of Borrower (as of the Efeective Date)
- -----------------------------------------------------------------------------------------------------------------------------------
(ii) Borrower shall be permitted to incur indebtedness, Please Indicate amount(s): Yes No
in the form of capital leases and/or debt secured by
purchase money liens, for capital leases and/or purchases
of equipment for use in Borrower's regular business
operations not to exceed the following amounts incurred
in the periods indicated:
$725,000.00--remainder of FY 1996
$1,700,000.00--FY 1997
$2,500,000.00--FY 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(iii) Borrower shall be permitted to guarantee the Yes No
liability of Pencom Sysytems, Incorporated with
respect to lease and sublease agreements for Borrower's
former location at 9050 Capital of Texas Highway
North Austin, Texas 78759.
- -----------------------------------------------------------------------------------------------------------------------------------
(iv) Borrower shall be permitted to incur Indebtedness, Please indicate amopunt covered by this item: Yes No
other than that otherwise expressly permitted in Section
5.1 and this Exhibit, in the amounts not to exceed an
aggregate of $350,000.00 incurred per fiscal year of
Borrower (such limitation shall be reduced by proration
for the partial fiscal year remaining for the year in
which this Agreement is executed).
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ABOVE SUMMARY REPRESENTS SOME OF THE COVENANTS AND AGREEMENTS CONTAINED
IN THE AGREEMENT AND DOES NOT IN ANY WAY RESTRICT OR MODIFY THE TERMS AND
CONDITIONS OF THE AGREEMENT. IN CASE OF CONFLICT BETWEEN THIS EXHIBIT C AND
THE AGREEMENT, THE AGREEMENT SHALL CONTROL.
The undersigned hereby certifies that the above information and computations
are true and correct and not misleading as of this date hereof, and that
since the date of the Borrower's most recent Compliance Certificate (if any):
/ / No default or Event of Default has occurred under the Agreement during
the current Reporting Period, or has been discovered from a prior period, and
not reported.
/ / A default or Event of Default (as described below) has occurred during
the current Reporting Period or has been discovered from a prior period and
is being reported for the first time and:
/ / was cured on _______________________.
/ / was waived by Bank in writing on __________________________.
/ / is continuing.
Description of Event of Default:
----------------------------------------
------------------------------------------------------------------------
Executed this ___________ day of ___________________, 19 ____.
BORROWER: PSW TECHNOLOGIES, INC.
SIGNATURE:______________________________________________________________________
NAME:___________________________________________________________________________
TITLE:____________________________________(Chief Financial Officer or President)
ADDRESS: 6300 Bridgeport Parkway, Austin, Travis County, Texas 78730
<PAGE>
<PAGE>
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT ("Amendment" or "First Amendment")
executed April 14, 1997, but to be effective as of November 8, 1996 ("Effective
Date"), is between PSW TECHNOLOGIES, INC. ("Borrower") and TEXAS COMMERCE BANK
NATIONAL ASSOCIATION ("Bank").
PRELIMINARY STATEMENT. Borrower and Bank entered into a Credit Agreement dated
as of November 8, 1996 (as amended by this and prior amendments, "Credit
Agreement" or "Agreement"). In this Amendment, all capitalized terms defined in
the Credit Agreement and not otherwise defined herein have the same meanings as
in the Credit Agreement, and each Section, Exhibit and similar reference is to
the Credit Agreement as amended. Borrower and Bank have agreed to amend the
Credit Agreement to provide for certain adjustments and other agreements
relating to covenants related to Borrower's Subchapter S status, effective as of
the original date of the Agreement.
NOW THEREFORE, in consideration of the promises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties, Borrower and Bank agree as follows:
SECTION 1. Section 5.5 is amended to read as follows:
"RESTRICTED PAYMENTS 5.5 Unless otherwise provided on Exhibit C, at
any time: (a) redeem, retire or otherwise acquire, directly or
indirectly, any shares of its capital stock or other equity interest;
(b) declare or pay any dividend; or (c) make any other distribution or
contribution of any Property or cash or obligation to owners of an
equity interest or to a Subsidiary in their capacity as such;
provided, however that Borrower shall be permitted to declare and pay
dividends and distributions notwithstanding clauses (b) and (c) of
this section (but otherwise in compliance with this Agreement) in
amounts not to exceed the lesser of (i) $1,300,000.00 per tax year of
Borrower and (ii) the estimated income tax liability of the recipients
of such dividends or distributions in respect of Borrower's net
income, under Borrower's Subchapter S election."
SECTION 2. No security interest, lien, or other interest granted by Borrower,
any grantor or other person to Bank is released or limited in connection with
the execution of this Amendment. Borrower confirms and ratifies each of the
liens, security interests and other interests granted in each and all security
agreements executed in connection with, related to, or securing the Credit
Agreement, each prior amendment and each note and loan heretofore governed by
the Credit Agreement, each in accordance with its stated terms. Borrower
represents and warrants that each guaranty executed in connection with, related
to, or securing the Credit Agreement, each prior amendment and each note and
loan heretofore governed by the Credit Agreement, remains in force as of the
Effective Date of this Amendment, in accordance with its stated terms.
SECTION 3. Borrower represents and warrants to Bank that after giving effect
to this Amendment: (a) the representations and warranties set forth in the
Credit Agreement are true and correct on the date of execution of this Amendment
as though made on and as of such date of execution; and (b) no Event of Default,
or event which with passage of time, the giving of notice or both would become
an Event of Default, has occurred and is continuing as of the date of execution
of this Amendment. Borrower further acknowledges and agrees that each of the
other Loan Documents is in all other respects ratified and confirmed, and all of
the rights, powers and privileges created thereby or thereunder are ratified,
extended, carried forward and remain in full force and effect except as the
Credit Agreement is amended by this Amendment.
SECTION 4. This Amendment shall become effective as of its Effective Date upon
execution and delivery by each of the parties named in the signature lines
below, and "Agreement" and "Credit Agreement" as used in the Credit Agreement
and this Amendment shall refer to the Credit Agreement as amended by this
Amendment. This Amendment shall be included within the definition of "Loan
Documents" as used in the Agreement. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed an original and all of which
taken together shall constitute but one and the same agreement.
SECTION 5. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS AND AS APPLICABLE, THE LAWS OF THE UNITED STATES
OF AMERICA.
THIS WRITTEN AMENDMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN
AGREEMENT" AS DEFINED IN SECTION 26.02(a) OF THE TEXAS BUSINESS & COMMERCE CODE,
AND REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
effective as of its Effective Date.
BORROWER: PSW TECHNOLOGIES, INC. BANK: TEXAS COMMERCE BANK NATIONAL
ASSOCIATION
By: /s/ W. Frank King By: /s/ Ralph T. Beasley
--------------------- ------------------------
Name: W. Frank King Name: Ralph T. Beasley
------------------- ----------------------
Title: President & CEO Title: Vice President
------------------ ---------------------
Address: 6300 Bridgepoint Pkway
-------------------------
Building 3, Suite 200
Austin, TX 78730
Page 1 of 1
<PAGE>
Exhibit 10.17
STOCKHOLDERS AGREEMENT
dated as of
October 1, 1996
by and among
PSW TECHNOLOGIES, INC.
and
the Stockholders named herein
<PAGE>
TABLE OF CONTENTS
1. Certain Definitions.............................................. - 2 -
1.2 "Exchange Act".............................................. - 3 -
1.3 "Management Stockholder".................................... - 3 -
1.4 "Permitted Transferee"...................................... - 3 -
1.5 "Person" or "person"........................................ - 3 -
1.6 "Rule 144 Sales"............................................ - 3 -
1.7 "Securities Act"............................................ - 3 -
1.8 "Stockholder"............................................... - 4 -
1.9 "Stock Repurchase Agreement"................................ - 4 -
1.10 "Third Party Transferee"................................... - 4 -
2. Restrictions on Transfer of Shares of the Company................ - 4 -
2.1 Transfer Restricted......................................... - 4 -
2.2 Certain Permitted Transfers................................. - 5 -
2.3 First Offer Rights.......................................... - 6 -
2.4 Legend...................................................... - 11 -
3 Right to Join in Sale............................................ - 11 -
4 Obligation to Join in Sale....................................... - 13 -
5 Voting Matters................................................... - 14 -
5.1 Meetings................................................... - 14 -
5.2 No Proxies................................................. - 14 -
6 Sale of the Company.............................................. - 15 -
7 Termination...................................................... - 15 -
8 Miscellaneous.................................................... - 15 -
8.1 Injunctive Relief.......................................... - 15 -
8.2 Further Assurances......................................... - 16 -
8.3 Governing Law.............................................. - 16 -
8.4 Entire Agreement; Amendment; Waiver........................ - 16 -
8.5 Binding Effect............................................. - 17 -
8.6 Severability............................................... - 17 -
8.7 Notice..................................................... - 17 -
8.8 Headings; Execution in Counterparts........................ - 18 -
<PAGE>
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT (this "Agreement") dated as of October 1, 1996 by
and among PSW TECHNOLOGIES, INC., a Delaware corporation (the "Company") and
those stockholders of the Company listed on Schedule 1 hereto.
W I T N E S S E T H:
WHEREAS, the Stockholders (as hereinafter defined) have subscribed for 800
shares of the common stock, par value $.01, of the Company (the "Common Stock"),
representing all of the issued and outstanding shares of Common Stock of the
Company; and
WHEREAS, the Stockholders have concluded that it is in the best interests
of the Company to provide for continuity in the control and management of the
Company and, in connection therewith, to enter into certain agreements regarding
the voting of their shares of Common Stock and providing for certain
restrictions on the transfer of their shares of Common Stock;
NOW, THEREFORE in consideration of the mutual covenants herein contained
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the parties hereto hereby agree as follows:
1. Certain Definitions. As used in this Agreement, the following capitalized
terms shall have the meanings set forth below.
1.1 "Affiliate", with respect to any Person, means any Person that
directly or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, such Person and, as to any
Person that is an individual, such
-2-
<PAGE>
individual's spouse, parents, siblings and lineal descendants. For purposes of
this definition, the term "control" (including with correlative meanings, the
terms "controlling", "controlled by" and "under common control with"), as used
with respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities or by contract
or otherwise.
1.2 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
1.3 "Management Stockholder" means any individual that acquires from the
company shares of Common Stock while an officer or employee of the Company and,
with respect to shares of Common Stock transferred by a Management Stockholder
to such Person, any Person that becomes a Permitted Transferee or Third party
Transferee of any Management Stockholder.
1.4 "Permitted Transferee" means any transferee of Common Stock pursuant
to a transaction permitted under Section 2.2.
1.5 "Person" or "person" means any individual, partnership, joint venture,
corporation, association, trust or any other entity or organization.
1.6 "Rule 144 Sales" means sales pursuant to Rule 144 under the Securities
Act (or any successor rule or regulation) and in compliance with the
requirements of paragraphs (c), (e) and (f) of such Rule, without giving effect
to paragraph (k) of such rule.
1.7 "Securities Act" means the Securities Act of 1933, as amended.
1.8 "Stockholder" means any stockholder listed on Schedule 1 hereto.
-3-
<PAGE>
1.9 "Stock Repurchase Agreement" means an agreement between a Stockholder
and the Company providing for the terms under which certain restricted stock
covered thereby will vest and the terms under which any restricted stock that
has not vested may be repurchased by the Company.
1.10 "Third Party Transferee" has the meaning set forth in Section 2.3.5
and shall not include any person to whom shares are transferred in Rule 144
Sales or in a registered public offering.
2. Restrictions on Transfer of Shares of the Company.
2.1 Transfer Restricted.
2.1.1 No shares of Common Stock or any interest therein shall be
sold, assigned, transferred, pledged or otherwise encumbered or disposed of by
any Stockholder except in accordance with or as otherwise specifically permitted
by the provisions of this Agreement. The Company shall not transfer upon its
books and records any shares of Common Stock purported to be transferred to any
Person in violation of this Agreement, and any such purported transfer shall
have no force or effect.
2.1.2 In addition to each other restriction on transfer contained in
this Agreement, except for Rule 144 Sales, a sale of shares in a public offering
pursuant to this Agreement or a transfer to the Company, no Stockholder shall
sell, assign, transfer, pledge, or otherwise encumber or dispose of any shares
of Common Stock or any interest therein to any Person (regardless of the manner
in which such Stockholder initially acquired such shares of Common Stock),
unless (i) the certificates representing the shares issued to the transferee
bear appropriate legends reflecting the restrictions on transfer contained in
this
-4-
<PAGE>
Agreement; and (ii) the transferee shall have executed and delivered to the
Company, as a condition to the acquisition of shares of Common Stock, an
appropriate document satisfactory to the Company confirming that such transferee
takes such shares subject to all the terms and conditions of this Agreement.
2.1.3 In addition to each other restriction on transfer contained in
this Agreement, no Stockholder shall sell, assign, transfer, pledge or otherwise
encumber or dispose of any shares of Common Stock or any interest therein to any
Person unless such sale, assignment, transfer, pledge or other encumbrance or
disposition is pursuant to an effective registration statement or otherwise
expressly permitted hereunder.
2.1.4 The restrictions on transfer contained in this Agreement are
in addition to, and not in limitation of, each other restriction on transfer
contained in an agreement between the Company and any Stockholder, including,
without limitation, those contained in any Stock Repurchase Agreement or
Registration Rights Agreement.
2.2 Certain Permitted Transfers. The restriction contained in Section 2.1
of this Agreement with respect to transfers of shares of Common Stock shall not
apply to the following:
(a) any transfer by a Stockholder to a Person that is a Stockholder
listed on Schedule 1 owning in excess of 29% of the issued and outstanding
shares of Common Stock as of the date hereof (each such Stockholder shall be
referred to hereinafter as "Founding Stockholder");
(b) any transfer by a Stockholder to the Company pursuant to a Stock
Repurchase Agreement; and
-5-
<PAGE>
2.3 First Offer Rights. Except as otherwise permitted under Section 2.2 of
this Agreement, and except for Rule 144 Sales and sales of shares in public
offerings pursuant to this Agreement, a Stockholder may sell or otherwise
transfer shares of Common Stock only in compliance with the provisions of this
Section 2.3.
2.3.1 A Stockholder desiring to sell or otherwise transfer shares of
Common Stock in compliance with this Section 2.3 (a "Selling Stockholder") shall
first deliver written notice to the Company (hereinafter referred to as the
"Notice of Offer") which Notice of Offer shall specify (i) the number of shares
of Common Stock owned by the Selling Stockholder which such Selling Stockholder
wishes to sell (the "offered Shares"); (ii) the proposed cash purchase price per
share for the Offered Shares (the "Offer Price"); and (iii) all other terms and
conditions of the offer, The Notice of Offer shall constitute an irrevocable
offer by the Selling Stockholder to sell to the Company and the other
Stockholders the Offered Shares at the Offer Price, subject to the other terms
and conditions set forth in the Notice of Offer. Within five business days of is
receipt of the Notice of Offer, the Company shall send a copy of the Notice of
Offer to each other Stockholder of record.
2.3.2 Within 30 days following its receipt of the Notice of Offer,
the Company shall notify the Selling Stockholder and the other Stockholders of
record as to the number of the Offered Shares that it is electing to purchase
(such notification shall be referred to hereinafter as the "Company
Acceptance"). The election to purchase Offered Shares shall be made on behalf of
the Company by a majority of the disinterested Directors of the Company. The
Company Acceptance shall be deemed to be an irrevocable
-6-
<PAGE>
commitment to purchase from the Selling Stockholder the number of the Offered
Shares which the Company has elected to purchase pursuant to the Company
Acceptance.
2.3.3 If the Company does not deliver a Company Acceptance within 30
days following its receipt of the Notice of Offer or if the Company Acceptance
does not provide for the purchase by the Company of all of the Offered Shares,
then, within 15 days following the expiration of such 30-day notice period, each
other Stockholder of record shall notify the Company and the Selling Stockholder
as to the number of Offered Shares, if any, such other Stockholder is electing
to purchase (such notification is hereinafter referred to as the "Stockholder's
Acceptance"). If the Company does not receive a Stockholder's Acceptance from
any of the other Stockholders within such period, such other Stockholders that
did not deliver a Stockholder's Acceptance shall be deemed to have declined to
purchase any of the Offered Shares. A Stockholder's Acceptance shall be deemed
to be an irrevocable commitment to purchase from the Selling Stockholder the
number of Offered Shares which such other Stockholder has elected to purchase
pursuant to its Stockholder's Acceptance, subject to allocation of offered
Shares among other Stockholders accepting the Notice of Offer as hereinafter
provided.
2.3.4 If the Company and the other Stockholders have elected to
purchase a number of Offered Shares that in the aggregate exceeds the total
number of Offered Shares, the Company shall be entitled to purchase the number
of Offered Shares contained in the Company Acceptance and the remainder of the
Offered Shares shall be allocated among the other Stockholders accepting the
Selling Stockholder's offer (the "Accepting Stockholders") as follows: (a)
first, among the Accepting Stockholders, as nearly as possible
-7-
<PAGE>
in proportion to the number of shares of Common Stock held by such Accepting
Stockholders; and (b) thereafter, to those Accepting Stockholders, if any, that
elected to purchase more shares than the number to which they are entitled under
clause (a), in such equitable manner as the Company shall determine. Clauses (a)
and (b) shall be construed and given effect in such manner that no other
Stockholder shall be required or entitled to purchase a number of Offered Shares
greater than the number set forth in the Stockholder's Acceptance. If any other
Stockholder shall elect to purchase any of the Offered Shares, the Company shall
promptly notify each such other Stockholder of the number of shares allocated to
him, and each such other Stockholder shall be obligated to purchase at the Offer
Price such shares at a closing as set forth in Section 2.3.6.
2.3.5 If the Company and the other Stockholders do not elect to
purchase all of the Offered Shares available for purchase under this Section
2.3, the Selling Stockholder (a) shall be under no obligation to sell any of the
Offered Shares to the Company or any other Stockholder, unless the Selling
Stockholder so elects, and (b) subject to Section 3, may, within a period of six
months from the date of the Notice of Offer sell the Offered Shares to one or
more third parties (each a "Third Party Transferee"), for cash at a price per
share not less than the Offer Price and on such other terms and conditions as
are no more favorable to the proposed Third Party Transferee than those
specified in the Notice of Offer; provided, however, that if there is more than
one Third Party Transferee, the Selling Stockholder in good faith must obtain
binding and definitive commitments to purchase all the Offered Shares within
such six-month period before any sale to a Third Party Transferee of the Offered
Shares may take place. Upon any such sale, the Third Party Transferee of
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such shares of Common Stock shall execute an agreement in form and substance
satisfactory to the Company pursuant to which such Third Party Transferee agrees
that the shares of Common Stock it acquired from the selling Stockholder are
subject to the provisions of this Agreement. Any Third Party Transferee to whom
shares of Common Stock are transferred pursuant to and in compliance with this
Section 2.3.5 shall, upon consummation of such transfer, be deemed a Stockholder
for purposes of this Agreement. If the Selling Stockholder does not complete the
sale of the Offered Shares within such six-month period, the provisions of this
Section 2.3 shall again apply, and no sale of shares of Common Stock of the
Selling Stockholder shall be made otherwise than in accordance with the terms of
this Agreement.
2.3.6 The closing of purchases of Offered Shares by the Company
and/or other Stockholders pursuant to this Section 2.3 shall take place within
30 days after the delivery of the Company Acceptance or 60 days after the date
of the Notice of Offer, whichever is later, at 11:00 a.m. local time at the
principal offices of the Company, or at such other date, time or place as the
parties to the sale may agree. At least five (5) business days prior to such
closing, the Company shall notify the Selling Stockholder(s) in writing of the
name and number of purchasers and the portion of the Offered Shares to be
purchased by each. At such closing, the Selling Stockholder(s) shall sell,
transfer and deliver to each purchaser full right, title and interest in and to
the Offered Shares so purchased by such purchaser, free and clear of all liens,
security interests or adverse claims of any kind and nature (except as otherwise
set forth in this Agreement), and shall deliver to each purchaser a certificate
or certificates representing the Offered Shares sold to such purchaser, in each
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case duly endorsed for transfer or accompanied by appropriate stock transfer
powers duly endorsed. Simultaneously with delivery of such certificates, each
purchaser of the Offered Shares shall deliver to the Selling Stockholder(s), by
certified or bank check or by wire transfer of immediately available funds to
such bank and account as the Selling Stockholder(s) shall designate, a cash
amount equal to the product of the Offer Price and the number of Offered Shares
being acquired by such purchaser, in full payment of the purchase price of the
offered Shares purchased.
2.4 Legend. Each certificate representing shares of Common Stock now or
hereafter owned by a Stockholder shall bear a legend in substantially the
following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A STOCKHOLDERS
AGREEMENT DATED AS OF OCTOBER 1, 1996, A COPY OF WHICH IS ON FILE AT THE
OFFICE OF THE COMPANY AND WILL BE FURNISHED TO PROSPECTIVE PURCHASERS UPON
REQUEST. SUCH STOCKHOLDERS AGREEMENT PROVIDES, AMONG OTHER THINGS, FOR
RESTRICTIONS ON THE SALE, TRANSFER, PLEDGE, HYPOTHECATION OR OTHER
DISPOSITION OF THE SHARES REPRESENTED BY THIS CERTIFICATE."
3 Right to Join in Sale.
3.1 If any one or more Stockholders (the "Selling Stockholders") propose
in a single transaction or series of related transactions to transfer an
aggregate of 58% or more of the shares of Common Stock held by the Stockholders,
including, without limitation, pursuant to Section 2.3 (including a transfer to
the Company, to the other Stockholders or to a third party), then the Selling
Stockholders shall refrain from effecting such transaction or transactions
unless, prior to the consummation thereof, each Stockholder other than the
Selling Stockholders shall have been afforded the opportunity to join in such
sale on a pro
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rata basis, as hereinafter provided. Any purported transfer subject to this
Section 3 not made in compliance with this Section 3 shall be void and shall not
be consummated upon the books and records of the Company.
3.2 Prior to the consummation of any transaction (including any
transaction in a series of transactions) subject to this Section 3, the Selling
Stockholders shall cause each person or persons that propose to acquire shares
of Common Stock in the transaction or series of transactions (the "Proposed
Purchasers") to offer (the "Purchase Offer") in writing to each other
Stockholder to purchase that number of shares of Common Stock from each such
other Stockholder that constitutes the same percentage of the aggregate shares
of Common Stock held by such other Stockholder as the percentage determined by
dividing the number of shares of Common Stock to be purchased from the Selling
Stockholders by the aggregate number of shares of Common Stock held by the
Selling Stockholders, at the same price per Share (the "Joining Terms"), as the
Proposed Purchaser has offered to purchase shares of Common Stock to be sold by
the Selling Stockholders. Notwithstanding the foregoing, if the Proposed
Purchasers are acquiring shares of Common Stock in a series of related
transactions, or in a single transaction or series of related transactions from
multiple Selling Stockholders, (i) the Joining Price shall be the highest of the
prices offered by any Proposed Purchaser to any Selling Stockholder in any one
of such transactions, and (ii) the other Joining Terms shall be those terms
offered by any Proposed Purchaser to any Selling Stockholder in any one of such
transactions which are most favorable to the offeree. Each Stockholder shall
have at least 30 days from the receipt of the Purchase offer in which to accept
the Purchase Offer.
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3.3 The provisions of this Section 3 shall not apply to transfers to
Permitted Transferees in accordance with Section 2.2 or to transfers by the
Stockholders to the Company pursuant to a Stock Repurchase Agreement. In the
case of shares of Common Stock held by a Stockholder subject to a Stock
Repurchase Agreement, only those shares that have vested at the time of, or that
will vest upon the consummation of, the proposed sale or other transfer may be
sold or otherwise transferred pursuant to this Section 3. In the event that a
transfer subject to this Section 3 is proposed to be made to a person other than
a Stockholder, the Selling Stockholders shall notify such person that the
transfer is subject to this Agreement and shall insure that no transfer is
consummated without compliance with this Section 3.
4 Obligation to Join in Sale
4.1 If any one or more stockholders owning, in the aggregate, in excess of
58% of the issued and outstanding shares of Common Stock as of the date hereof
(together, the "Approving Stockholders") approve any sale of the Company by
merger, consolidation, sale of the Company's assets, sale of Common Stock or
otherwise, to any person other than a Founding Stockholder or an Affiliate of a
Founding Stockholder, each of the other Stockholders hereby agree to consent to
vote for and raise no objections against such sale. If such sale is structured
as a sale of all of the outstanding Common Stock, each other Stockholder hereby
agrees to sell all of its shares of Common Stock on the terms approved by such
Approving Stockholders and to take all reasonable actions requested by such
Approving Stockholders or the purchaser in connection with the consummation of
any such sale. As consideration for the sale of such Stockholders' shares of
Common Stock, each
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Stockholder will receive for each share of Common Stock cash and the fair market
value of any non-cash consideration in the same amount as the Approving
Stockholders receive for the sale of each share of Common Stock.
4.2 If the closing of any sale of Common Stock pursuant to Section 4.1 has
not been effected within 180 days after the Approving Stockholders first approve
of such sale, the obligation of any Stockholder to participate in such sale
shall terminate and the provisions of Section 4.1 shall be reinstated.
4.3 Nothing contained in Section 4 shall obligate the Approving
Stockholders to consummate any sale of the Company hereunder, and any such sale
may be abandoned by the Approving Stockholders at any time. If any such proposed
sale is abandoned, the Approving Stockholders shall promptly send written notice
thereof to each of the other Stockholders.
5 Voting Matters.
5.1 Meetings. Each Stockholder hereby agrees to take all actions necessary
to call, or cause the Company and the appropriate officers and directors of the
Company to call, a special or annual meeting of stockholders of the Company to
implement the intent of this Agreement.
5.2 No Proxies. Each Stockholder covenants and agrees that, except for
transfers expressly permitted by, and pursuant to and in accordance with, this
Agreement, such Stockholder will have sole voting power with respect to such
Stockholder's Common Stock and will not grant any proxy with respect to such
Common Stock, enter into any voting trust or other voting agreement or
arrangement with respect to such Common Stock or grant any
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other rights to vote such Common Stock other than the agreement to vote such
Common Stock set forth herein.
6 Sale of the Company.
In the event of a proposed sale of the Company prior to the completion of
an initial public offering of the Company, the "fair market value" of the
Company shall be such value as shall be agreed upon by a two-thirds majority of
the Stockholders or, in the absence of such agreement, such value as shall be
determined by an independent investment banking firm selected by agreement of a
two-thirds majority of the Stockholders. In the absence of an agreement as to an
investment banking firm, the investment banking firm shall be chosen by the
President of the American Arbitration Association upon the request of a
two-thirds majority of the Stockholder. Such investment banking firm shall value
the Company by determining the amount a willing buyer would pay in cash to a
winning seller under no compulsion to sell for all of the shares of Common Stock
of the Company as a whole, less the estimated transaction costs that would be
incurred by a seller in connection with such a sale (including estimated
investment banking, attorneys and accounting fees). Any fee charged by the
President of the American Arbitration Association or such investment banking
firm shall be borne by the Company.
7 Termination. This Agreement shall terminate upon the earlier of: (i) the
consummation of the first firm commitment underwritten public offering pursuant
to an effective registration statement on Form S-1 under the Securities act of
1933, as amended, pursuant to which the aggregate price paid by the public for
the purchase of Common Stock
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is at least $10,000,000; or (ii) September 30, 2001 unless earlier terminated
upon the written agreement of the Company and a two-thirds majority of the
Stockholders.
8 Miscellaneous.
8.1 Injunctive Relief. Each party hereto acknowledges that it will be
impossible to measure in money the damages that would be suffered if any party
fails to comply with any of the obligations herein imposed on such party and
that in the event of any such failure, an aggrieved person will be irreparably
damaged and will not have an adequate remedy at law. Any such Person shall,
therefore, be entitled to injunctive relief and/or specific performance to
enforce such obligations, and if any action should be brought in equity to
enforce any of the provisions of this Agreement, none of the parties hereto
shall raise the defense that there is an adequate remedy at law.
8.2 Further Assurances. Each party hereto shall do and perform or cause to
be done and performed all such further acts and things and shall execute and
deliver all such other agreements, certificates, instruments, and documents as
any other party hereto reasonably may request in order to carry out the intent
and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
8.3 Governing Law. This Agreement including all matters of construction,
validity and performance, shall be governed by, and construed and interpreted in
accordance with, the laws of the State of New York without giving effect to its
conflict of law rules to the contrary.
8.4 Entire Agreement; Amendment; Waiver. This Agreement: (a) contains the
entire agreement among the parties hereto with respect to the subject matter
hereof, (b)
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supersedes all prior written agreements and negotiations and oral
understandings, if any, with respect thereto, and (c) may not be amended or
supplemented except by an instrument or counterparts thereof in writing signed
by the Company and by two-thirds majority of the Stockholders. No waiver of any
term or provision of this Agreement shall be effective unless in writing signed
by the party to be charged. The waiver by any party of a breach of any term or
provision of this Agreement shall not be construed as a waiver of any subsequent
breach.
8.5 Binding Effect. This Agreement shall be binding on and inure to the
benefit of the parties hereto and their respective legal representatives,
successors and assigns. The rights and obligations arising from this Agreement
shall be transferred in connection with the transfer by a Stockholder to any
Person of any shares of Common Stock in compliance with this Agreement, other
than in a registered public offering or in Rule 144 Sales, and any such Person
shall conclusively be deemed to have agreed to be bound by this Agreement.
8.6 Severability. In case any one or more of the provisions contained in
this Agreement shall,for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement and such invalid, illegal
and unenforceable provision shall be reformed and construed so that it will be
valid, legal, and enforceable to the maximum extent permitted by law.
8.7 Notice. All notices and other communications hereunder shall be in
writing, shall be sent by certified or registered mail (return receipt
requested) or by facsimile or shall be delivered by hand or by a recognized
overnight courier service and, unless otherwise
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<PAGE>
provided herein, shall be deemed to have been given or made when delivered
against receipt or, int he case of facsimile notice, when sent, receipt
confirmed, to the party to whom such notice is to be given at its address set
forth below, or such other address for the party as shall be specified by notice
given pursuant hereto:
(a) If to the Company, to it at:
PSW Technologies, Inc.
6300 Bridgepoint Parkway,
Building Three, Suite 200
Austin, Texas 78730
Facsimile: (512) 343-6666
Attention: Dr. W. Frank King
with copies to:
Pencom Systems Incorporated
40 Fulton Street
New York, New York 10013
Attention: Jonathan D. Wallace, Esq.
and
Brobeck, Phleger & Harrison LLP
1633 Broadway
New York, New York 10019
Facsimile: (212) 585-7878
Attention: Richard Plumridge, Esq.
(b) If to any Stockholder, to it at:
its address in the records of the Company.
(c) If to any other Stockholder, to it at:
its address in the records of the Company.
8.8 Headings; Execution in Counterparts. The headings and captions
contained herein are for convenience of reference only and shall not control or
affect the meaning or
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construction of any provision hereof. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original and all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Stockholders Agreement has been executed by or on
behalf of each of the parties hereto as of the date first above written.
PSW TECHNOLOGIES, INC.
By: /s/ Pat Motola
------------------------------
Name: Pat Motola
---------------------------
Title: Senior Vice President, Operations
---------------------------------
STOCKHOLDERS
/s/ Wade E. Saadi
---------------------------------
Wade E. Saadi
/s/ Edward C. Ateyeh, Jr.
---------------------------------
Edward C. Ateyeh, Jr.
/s/ Edgar G. Saadi
---------------------------------
Edgar G. Saadi
/s/ William Frank King
---------------------------------
William Frank King
/s/ Jonathan D. Wallace
---------------------------------
Jonathan D. Wallace
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SCHEDULE 1
Shares of
Name Common Stock
- ---- ------------
Wade E. Saadi 233 1/3
Edward C. Ateyeh, Jr. 233 1/3
Edgar G. Saadi 233 1/3
William Frank King 80
Jonathan Wallace 20
TOTAL 800
<PAGE>
Exhibit 10.18
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Registration Rights
Agreement") is entered into and made effective as of March 18, 1997, by and
among PSW TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and the
undersigned stockholders and warrantholders of the Company (collectively, the
"Securityholders" and individually, a "Securityholder").
NOW, THEREFORE, in consideration of good and valuable consideration,
the receipt of which is hereby acknowledged, the undersigned hereby agree as
follows:
1. Registration Rights. The Company covenants and agrees as follows:
1.1 Definitions. For purposes of this Section 1:
a. The term "register," "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Act"), and the declaration or ordering of effectiveness of such registration or
document by the Securities and Exchange Commission (the "SEC");
b. The term "Registrable Securities" means (1) the outstanding
Common Stock of the Company held by the Securityholders on the date hereof, (2)
the Common Stock of the Company issuable or issued upon exercise of the
outstanding Warrants of the Company held by the Securityholders on the date
hereof and (3) any Common Stock of the Company issued as (or issuable upon the
conversion or exercise of any other warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of such Common Stock or Warrants, excluding in all cases,
however, any Registrable Securities sold by a person in a transaction in which
his, her or its rights under this Section 1 are not assigned;
c. The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities.
d. The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 1.13 hereof; and
e. The term "Form S-3" means such form under the Act as in
effect on the date hereof or any registration form under the Act subsequently
adopted by the
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SEC which permits inclusion or incorporation of substantial information by
reference to other documents filed by the Company with the SEC.
1.2 Request for Registration.
a. If the Company shall receive at any time after the day that
is 180 days after the effective date of the first registration statement for a
public offering of securities of the Company (other than a registration
statement relating either to the sale of securities to employees of the Company
pursuant to a stock option, stock purchase or similar plan or a SEC Rule 145
transaction) (the "IPO"), a written request from the Holders of a majority of
the Registrable Securities then outstanding that the Company file a registration
statement under the Act covering the registration of Registrable Securities that
are or will be converted into Common Stock then the Company shall, within ten
(10) days of the receipt thereof, give written notice of such request to all
Holders and shall, subject to the limitations of subsection 1.2(b), effect as
soon as practicable, and in any event shall use its best efforts to effect
within 120 days of the receipt of such request, the registration under the Act
of all Registrable Securities which the Holders request to be registered within
twenty (20) days of the mailing of such notice by the Company in accordance with
paragraph 2.7, provided that the Company shall only be obligated to register
such Registrable Securities that are or have been converted into Common Stock at
the time of the filing of such registration statement.
b. If the Holders initiating the registration request
hereunder (the "Initiating Holders") intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to this Section 1.2
and the Company shall include such information in the written notice referred to
in subsection 1.2(a). The underwriters shall be selected by a majority in
interest of the Initiating Holders and shall be reasonably acceptable to the
Company. In such event, the right of any Holder to include his, her or its
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall (together with the Company as provided in subsection
1.4(e) hereof) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by a majority in
interest of the Initiating Holders. Notwithstanding any other provision of this
Section 1.2, if the underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities of the Company owned by each Holder; provided, however,
that the number of shares of Registrable Securities to be
2
<PAGE>
included in such underwriting shall not be reduced unless all other securities
are first entirely excluded from the underwriting.
c. The Company is obligated to effect only two (2) such
registrations pursuant to this Section 1.2.
d. Notwithstanding the foregoing, if the Company shall furnish
to Holders requesting a registration statement pursuant to this Section 1.2, a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer taking action
with respect to such filing for a period of not more than 60 days after receipt
of the request of the Initiating Holders; provided, however, that the Company
may not utilize this right more than once in any twelve month period.
1.3 Company Registration. If (but without any obligation to do so)
the Company proposes to register (including for this purpose a registration
effected by the Company for stockholders other than the Holders) any of its
stock or other securities under the Act in connection with the public offering
of such securities solely for cash (other than a registration relating solely to
the sale of securities to participants in a Company stock plan, or a
registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), the Company shall, at such
time, promptly give each Holder written notice of such registration. Upon the
written request of each Holder given within twenty (20) days after mailing of
such notice by the Company in accordance with Section 2.7, the Company shall,
subject to the provisions of Section 1.8, cause to be registered under the Act
all of the Registrable Securities that each such Holder has requested to be
registered, provided that the Company shall only be obligated to register such
Registrable Securities that are or have been converted into Common Stock at the
time of the filing of such registration statement.
1.4 Obligations of the Company. Whenever required under this Section
1 to effect the registration of any Registrable Securities, the Company shall,
as expeditiously as reasonably possible:
a. Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for up to one hundred eighty (180) days.
b. Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such
3
<PAGE>
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
c. Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.
d. Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
e. In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
f. Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
g. Use its best efforts to furnish, at the request of any
Holder requesting registration of Registrable Securities pursuant to this
Section 1, on the date that such Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this Section
1, if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, (i) an
opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities and
(ii) a letter dated such date, from the independent certified public accountants
of the Company, in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities.
1.5 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended
4
<PAGE>
method of disposition of such securities as shall be required to effect the
registration of such Holder's Registrable Securities.
1.6 Expenses of Demand Registration. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company, and the
reasonable fees and disbursements of one counsel for the selling Holders shall
be borne by the Company; provided, however, that the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to Section 1.2 if the registration request is subsequently withdrawn at the
request of the Holders of a majority of the Registrable Securities to be
registered (in which case all participating Holders shall bear such expenses),
unless the Holders of a majority of the Registrable Securities agree to forfeit
their right to one demand registration pursuant to Section 1.2; provided,
further, however, that if at the time of such withdrawal, the Holders have
learned of a material adverse change in the condition, business, or prospects of
the Company from that known to the Holders at the time of their request and have
withdrawn the request with reasonable promptness following disclosure by the
Company of such material adverse change, then the Holders shall not be required
to pay any of such expenses and shall retain their rights pursuant to Section
1.2.
1.7 Expenses of Company Registration. The Company shall bear and pay
all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.3 for each Holder (which right may be assigned as provided
in Section 1.13), including (without limitation) all registration, filing, and
qualification fees, printers and accounting fees relating or apportionable
thereto, and the fees and disbursements of one counsel for the selling Holders
selected by them, but excluding underwriting discounts and commissions relating
to Registrable Securities.
1.8 Underwriting Requirements. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not,
jeopardize the success of the offering by the Company. If the total amount of
Registrable Securities requested by Holders to be included in such offering
together with the securities to be sold by the Company exceeds the amount that
the underwriters determine in their sole discretion is compatible with the
success of the offering, then the Company shall be required to include in the
offering only that number of Registrable Securities which the underwriters
determine in their sole discretion will not jeopardize the success of the
offering (the securities so included to be apportioned pro rata among the
selling Holders according to the total amount of securities entitled to be
included therein owned by each selling Holder or in such
5
<PAGE>
other proportions as shall mutually be agreed to by such selling Holders) but in
no event shall (i) the amount of securities of the selling Holders included in
the offering be reduced below thirty percent (30%) of the total amount of
securities included in such offering, unless no other stockholder's securities
are included in such offering. For purposes of the preceding parenthetical
concerning apportionment, for any Holder of Registrable Securities which is a
partnership or corporation, the partners, retired partners and stockholders of
such Holder, or the estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single "selling Holder," and any pro-rata reduction with respect
to such "selling Holder" shall be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals included in
such "selling Holder," as defined in this sentence.
1.9 Delay of Registration. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
1.10 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 1:
a. The Company will indemnify and hold harmless each Holder,
any underwriter (as defined in the Act) for such Holder and each person, if any,
who controls such Holder or underwriter within the meaning of the Act or the
Securities Exchange Act of 1934, as amended (the "1934 Act"), against any
losses, claims, damages, or liabilities (joint or several) to which they may
become subject under the Act, or the 1934 Act or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Act, or the 1934
Act or any state securities law; and the Company will pay to each such Holder,
underwriter or controlling person, as incurred, any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection 1.10(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability, or action to the extent that
it arises out of or is based upon a Violation which occurs in reliance upon and
in conformity with written information furnished
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<PAGE>
expressly for use in connection with such registration by any such Holder,
underwriter or controlling person.
b. Each selling Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who has signed the
registration statement, each person, if any, who controls the Company within the
meaning of the Act, any underwriter, any other Holder selling securities in such
registration statement and any controlling person of any such underwriter or
other Holder, against any losses, claims, damages, or liabilities (joint or
several) to which any of the foregoing persons may become subject, under the
Act, or the 1934 Act or other federal or state law, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereto) arise out of or
are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration; and each such Holder will pay, as incurred, any legal or
other expenses reasonably incurred by any person intended to be indemnified
pursuant to this subsection 1.10(b), in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this subsection 1.10(b) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the consent of the Holder,
which consent shall not be unreasonably withheld; provided, that, in no event
shall any indemnity under this subsection 1.10(b) exceed the net proceeds from
the offering received by such Holder.
c. Promptly after receipt by an indemnified party under this
Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.10, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.10, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.10.
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<PAGE>
d. If the indemnification provided for in subsection (a) or
(b) of this Section 1.10 is held by a court of competent jurisdiction to be
unavailable to an indemnified party, then each indemnifying party under any such
subsection, in lieu of indemnifying such indemnified party thereunder, hereby
agrees to contribute to the amount paid or payable by such indemnified party in
such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other.
Notwithstanding the foregoing, the amount any Holder of Registrable Securities
shall be obligated to contribute pursuant to this subsection (d) shall be
limited to an amount equal to the net proceeds from the offering received by
such holder.
e. The obligations of the Company and Holders under this
Section 1.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
1.11 Reports Under Securities Exchange Act of 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Act and any other rule or regulation of the SEC that may at any time permit a
Holder to sell securities of the Company to the public without registration or
pursuant to a registration on Form S-3, the Company agrees to:
a. make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
b. take such action, including the voluntary registration of
its Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities, such
action to be taken as soon as practicable after the end of the fiscal year in
which the first registration statement filed by the Company for the offering of
its securities to the general public is declared effective;
c. file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
d. furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act and the 1934 Act (at any
time after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or
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regulation of the SEC which permits the selling of any such securities without
registration or pursuant to such form.
1.12 Form S-3 Registration. In case the Company shall receive from
Holders of either at least thirty percent (30%) of the Registrable Securities
then outstanding a written request or requests that the Company effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder or
Holders, the Company will:
a. promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders; and
b. as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this section 1.12: (1) if
Form S-3 is not available for such offering by the Holders; (2) if the Holders,
together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Securities and such
other securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than $250,000; (3) if the
Company shall furnish to the Holders a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
stockholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than sixty (60) days after
receipt of the request of the Holder or Holders under this Section 1.12;
provided, however, that the Company shall not utilize this right more than once
in any twelve month period; (4) if the Company has, within the twelve (12) month
period preceding the date of such request, already effected two registrations on
Form S-3 for the Holders pursuant to this Section 1.12; or (5) in any particular
jurisdiction in which the Company would be required to qualify to do business or
to execute a general consent to service of process in effecting such
registration, qualification or compliance.
c. Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Holders, provided that the Company shall only be obligated to register such
Registrable Securities that are or have been converted into Common Stock at the
time of the filing of such registration statement. All expenses incurred in
connection with a registration requested pursuant to Section 1.12, including
(without limitation) all registration, filing, qualification, printer's and
accounting fees and the
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reasonable fees and disbursements of counsel for the selling Holder or Holders
and counsel for the Company, but excluding any underwriters' discounts or
commissions associated with Registrable Securities, shall be borne pro rata by
the Holder or Holders participating in the Form S-3 Registration; provided,
that, however, the Company shall pay all registration, filing, qualification,
printing and accounting fees and reasonable fees and disbursements of counsel
for the Selling Holder or Holders and counsel for the Company for two (2)
registrations filed pursuant to this Section 1.12, but excluding any
underwriters' discounts or commissions associated with Registrable Securities.
Registrations effected pursuant to this Section 1.12 shall not be counted as
demands for registration or registrations effected pursuant to Sections 1.2 or
1.3, respectively.
1.13 Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities, provided the Company is, within a reasonable time
after such transfer, furnished with written notice of the name and address of
such transferee or assignee and the securities with respect to which such
registration rights are being assigned; and provided, further, that such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the Act.
1.14 Limitations on Subsequent Registration Rights. From and after
the date of this Agreement, the Company shall not, without the prior written
consent of the Holders of a majority of the outstanding Registrable Securities,
enter into any agreement with any holder or prospective holder of any securities
of the Company which would allow such holder or prospective holder (a) to
include such securities in any registration filed under Section 1.2 hereof,
unless under the terms of such agreement, such holder or prospective holder may
include such securities in any such registration only to the extent that the
inclusion of his securities will not reduce the amount of the Registrable
Securities of the Holders which is included or (b) to make a demand registration
which could result in such registration statement being declared effective prior
to the earlier of either of the dates set forth in subsection 1.2(a) or within
one hundred twenty (120) days of the effective date of any registration effected
pursuant to Section 1.2.
1.15 Termination of Registration Rights. No Holder shall be entitled
to exercise any right provided for in this Section 1 after five (5) years
following the consummation of the sale of securities pursuant to a registration
statement filed by the Company under the Act in connection with the initial firm
commitment underwritten offering of its securities to the general public.
2. Miscellaneous.
2.1 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of New York as applied to agreements among New York
residents, made and to be performed entirely within the State of New York.
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2.2 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors, and administrators of the
parties hereto.
2.3 Entire Agreement. This Agreement constitutes the full and entire
understanding and agreement among the parties with regard to the subjects hereof
and no party shall be liable or bound to any other party in any manner by any
representations, warranties, covenants, or agreements except as specifically set
forth herein or therein. Nothing in this Agreement, express or implied, is
intended to confer upon any party, other than the parties hereto and their
respective successors and assigns, any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
herein.
2.4 Separability. Any invalidity, illegality, or limitation of the
enforceability with respect to any party hereto of any one or more of the
provisions of this Agreement, or any part thereof, whether arising by reason of
the law of any such party's domicile or otherwise, shall in no way affect or
impair the validity, legality, or enforceability of this Agreement with respect
to other parties. In case any provision of this Agreement, shall be invalid,
illegal, or unenforceable, it shall to the extent practicable, be modified so as
to make it valid, legal and enforceable and to retain as nearly as practicable
the intent of the parties, and the validity, legality, and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
2.5 Amendment and Waivers. Any provision of Section 1 may be amended
and the observance thereof may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the holders of at least two-thirds of the Registrable
Securities then outstanding. Any amendment or waiver regarding Section 1 of this
Agreement, effected in accordance with this paragraph, shall be binding upon
each holder of any Registrable Securities then outstanding, each future holder
of all such Registrable Securities, and the Company.
2.6 Delays or Omissions. No delay or omission to exercise any right,
power, or remedy accruing to any party hereto or any subsequent holder of any
Registrable Securities upon any breach, default or noncompliance of the Company
under this Agreement, shall impair any such right, power, or remedy, nor shall
it be construed to be a waiver of any such breach, default or noncompliance, or
any acquiescence therein, or of any similar breach, default or noncompliance
thereafter occurring. It is further agreed that any waiver, permit, consent, or
approval of any kind or character on the part of the parties hereto of any
breach, default or noncompliance under this Agreement or any waiver on the part
of the parties hereto of any provisions or conditions of this Agreement must be
in writing and shall be effective only to the extent specifically set forth in
such writing, and that all remedies, either under this Agreement, by law, or
otherwise afforded to the parties hereto, shall be cumulative and not
alternative.
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2.7 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery (by means of overnight mail, courier, messenger or other
reasonable methods of delivery) or upon deposit with the United States Post
Office, by first class mail, postage prepaid, addressed: (a) if to a party
hereto other than the Company, at such party's address as maintained in the
Company's records, or at such other address as such party shall have furnished
to the Company in writing, or (b) if to the Company, at its address as set forth
at the end of this Agreement, or at such other address as the Company shall have
furnished to the other parties hereto in writing.
2.8 Titles and Subtitles. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
2.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
REGISTRATION RIGHTS AGREEMENT as of the date first above written.
PSW TECHNOLOGIES INCORPORATED
By: /s/ W. Frank King
-------------------
W. Frank King, Ph.D.
Address: 6300 Bridgepoint Pkway,
Building 3, Suite 200
Austin, Texas 78730
Tel: (512) 343-6666
Fax: (512) 343-9650
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IN WITNESS WHEREOF, the parties hereto have duly executed this
REGISTRATION RIGHTS AGREEMENT as of the date first above written.
If individual investor
______________________________________
Print name of Securityholder
______________________________________
Signature
If corporate or
partnership investor
______________________________________
Print Name of Securityholder
By:__________________________________
Title:_______________________________
<PAGE>
SCHEDULE 1
SECURITYHOLDERS' STOCK AND WARRANTS
No. of shares of
Name and Address Common Stock
--------------------------------------------------------
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PSW TECHNOLOGIES, INC.
1996 STOCK OPTION/STOCK ISSUANCE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1996 Stock Option/Stock Issuance Plan is intended to promote the
interests of PSW Technologies, Inc., a Delaware corporation, by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into four separate equity programs:
(i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock,
(ii) the Stock Issuance Program under which eligible
persons may, at the discretion of the Plan Administrator, be issued
shares of Common Stock directly, either through the immediate purchase
of such shares or as a bonus for services rendered the Corporation (or
any Parent or Subsidiary),
(iii) the Automatic Option Grant Program under which
Eligible Directors shall automatically receive option grants at
periodic intervals to purchase shares of Common Stock, and
(iv) the Director Fee Option Grant Program under which
non-employee Board members may elect to have all or any portion of their annual
retainer fee otherwise payable in cash applied to a special option grant.
<PAGE>
B. The provisions of Articles One and Six shall apply to all equity
programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.
III. ADMINISTRATION OF THE PLAN
A. Prior to the Section 12(g) Registration Date, the Discretionary
Option Grant and Stock Issuance Programs shall be administered by the Board.
B. Beginning with the Section 12(g) Registration Date, the Primary
Committee shall have sole and exclusive authority to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders. Administration of the Discretionary Option Grant and Stock
Issuance Programs with respect to all other persons eligible to participate in
those programs may, at the Board's discretion, be vested in the Primary
Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons.
C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions
of any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
D. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority to
establish such rules and regulations as it may deem appropriate for proper
administration of the Discretionary Option Grant and Stock Issuance Programs and
to make such determinations under, and issue such interpretations of, the
provisions of such programs and any outstanding options or stock issuances
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator within the scope of its administrative functions under the Plan
shall be final and binding on all parties who have an interest in the
Discretionary Option Grant or Stock Issuance Program under its jurisdiction or
any option or stock issuance thereunder.
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
F. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the terms of
those programs, and no Plan Administrator shall exercise any discretionary
functions with respect to option grants made under those programs.
2.
<PAGE>
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority (subject to the
provisions of the Plan) to determine, (i) with respect to the option grants
under the Discretionary Option Grant Program, which eligible persons are to
receive option grants, the time or times when such option grants are to be made,
the number of shares to be covered by each such grant, the status of the granted
option as either an Incentive Option or a Non-Statutory Option, the time or
times at which each option is to become exercisable, the vesting schedule (if
any) applicable to the option shares and the maximum term for which the option
is to remain outstanding and (ii) with respect to stock issuances under the
Stock Issuance Program, which eligible persons are to receive stock issuances,
the time or times when such issuances are to be made, the number of shares to be
issued to each Participant, the vesting schedule (if any) applicable to the
issued shares and the consideration to be paid for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
D. The individuals eligible to participate in the Automatic Option
Grant Program shall be limited to (i) those individuals who are serving as
non-employee Board members on the Underwriting Date, (ii) those individuals who
first become non-employee Board members on or after the Underwriting Date,
whether through appointment by the Board or election by the Corporation's
stockholders, and (iii) those individuals who are to continue to serve as
non-employee Board members after one or more Annual Stockholders Meetings held
after the Underwriting Date. A non-employee Board member who has previously
been in the employ of the Corporation (or any Parent or Subsidiary) shall not be
eligible to receive an initial option grant under the Automatic Option Grant
Program on the Underwriting Date or (if later) at the time he or she first
becomes a non-employee Board member, but such individual shall be eligible to
receive periodic option grants under the Automatic Option Grant Program upon his
or her continued service as a non-employee Board member after one or more Annual
Stockholders Meetings.
3.
<PAGE>
E. All non-employee Board members shall be eligible to participate
in the Director Fee Option Grant Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed 1,715,000
shares. This maximum share reserve reflects the 8 for 13 stock split
expected to be effected by the Corporation prior to December 31, 1996.
B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 750,000 shares of Common Stock per calendar year beginning with the
1997 calendar year. This limit reflects the 8 for 13 stock split expected
to be effected by the Corporation prior to December 31, 1996.
C. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently repurchased by the
Corporation at the original issue price paid per share pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan. However, should the exercise
price of an option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an option or the vesting of a stock issuance under the Plan,
then the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is exercised
or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such option or stock issuance.
D. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the number and/or class of securities for which any one
person may be granted options, separately exercisable stock appreciation rights
and direct stock issuances per calendar year, (iii) the number and/or class of
4.
<PAGE>
securities for which automatic option grants are to be made subsequently per
Eligible Director under the Automatic Option Grant Program and (iv) the number
and/or class of securities and the exercise price per share in effect under each
outstanding option in order to prevent the dilution or enlargement of benefits
thereunder. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive.
5.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; PROVIDED, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall not be less than one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
option grant date unless otherwise determined by the Plan Administrator.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Six and the documents evidencing the option, be payable in cash or check
made payable to the Corporation. Should the Common Stock be registered under
Section 12(g) of the 1934 Act at the time the option is exercised, then the
exercise price may also be paid as follows:
(i) in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or
(ii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable written
instructions to (a) a Corporation-designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate exercise price payable
for the purchased shares plus all applicable Federal, state and local
income and employment taxes required to be withheld by the Corporation
by reason of such exercise and (b) the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm
in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
6.
<PAGE>
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
(i) Any option outstanding at the time of the
Optionee's cessation of Service for any reason shall remain
exercisable for such period of time thereafter as shall be determined
by the Plan Administrator and set forth in the documents evidencing
the option, but no such option shall be exercisable after the
expiration of the option term. If such period is not specified in the
documents evidencing the option, then the option shall remain
exercisable for a period of ninety (90) days following the Optionee's
cessation of Service.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be exercised subsequently by the
personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution.
(iii) During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than
the number of vested shares for which the option is exercisable on the
date of the Optionee's cessation of Service. Upon the expiration of
the applicable exercise period or (if earlier) upon the expiration of
the option term, the option shall terminate and cease to be
outstanding for any vested shares for which the option has not been
exercised. However, the option shall, immediately upon the Optionee's
cessation of Service, terminate and cease to be outstanding to the
extent the option is not otherwise at that time exercisable for vested
shares.
(iv) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
2. The Plan Administrator shall have the discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:
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(i) extend the period of time for which the option is
to remain exercisable following the Optionee's cessation of Service
from the period otherwise in effect for that option to such greater
period of time as the Plan Administrator shall deem appropriate, but
in no event beyond the expiration of the option term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but
also with respect to one or more additional installments in which the
Optionee would have vested under the option had the Optionee continued
in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares,
the Corporation shall have the right to repurchase, at the exercise price paid
per share, any or all of those unvested shares. The terms upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall be
established by the Plan Administrator and set forth in the document evidencing
such repurchase right.
F. FIRST REFUSAL RIGHTS. Until such time as the Common Stock is
first registered under Section 12(g) of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock issued
under the Plan. Such right of first refusal shall be exercisable in accordance
with the terms established by the Plan Administrator set forth in the document
evidencing such right.
G. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Statutory
Option may, in connection with the Optionee's estate plan, be assigned in whole
or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family or to a trust established exclusively for the
benefit of one or more such family members. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate.
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H. MARKET LOCK-UP. In connection with any underwritten public
offering by the Corporation of its equity securities pursuant to an effective
registration statement filed under the Securities Act of 1933, including the
Corporation's initial public offering, the Optionee may not sell, make any short
sale of, loan, hypothecate, pledge, grant any option for the purchase of, or
otherwise dispose or transfer for value or otherwise agree to engage in any of
the foregoing transactions with respect to, any shares of Common Stock acquired
upon exercise of an option granted under the Plan without the prior written
consent of the Corporation or its underwriters. Such restriction (the "Market
Stand-Off") shall be in effect for such period of time from and after the
effective date of the final prospectus for the offering as may be requested by
the Corporation or such underwriters. The Optionee shall be required to execute
such agreements as the Corporation or the underwriters request in connection
with the Market Stand-Off.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Five shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall NOT be subject to the terms of this Section II.
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
B. EXERCISE PRICE. The exercise price per share shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
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III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable for all of the shares of Common Stock at the time subject to
such option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall NOT so accelerate
if and to the extent: (i) such option is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation (or parent
thereof) or to be replaced with a comparable option to purchase shares of the
capital stock of the successor corporation (or parent thereof), (ii) such option
is to be replaced with a cash incentive program of the successor corporation
which preserves the spread existing on the unvested option shares at the time of
the Corporate Transaction and provides for subsequent payout in accordance with
the same vesting schedule applicable to such option or (iii) the acceleration of
such option is subject to other limitations imposed by the Plan Administrator at
the time of the option grant. The determination of option comparability under
clause (i) above shall be made by the Plan Administrator, and its determination
shall be final, binding and conclusive.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
C. Notwithstanding Section III.A. and Section III.B. of this Article
Two, the Plan Administrator shall have the discretion, exercisable either at the
time the option is granted or at any time while the option remains outstanding,
to provide for the automatic acceleration of one or more outstanding options
(and the automatic termination of one or more outstanding repurchase rights with
the immediate vesting of the shares of Common Stock subject to those rights)
upon the occurrence of a Corporate Transaction, whether or not those options are
to be assumed or replaced (or those repurchase rights are to be assigned) in the
Corporate Transaction. The Plan Administrator shall also have the discretion to
grant options which do not accelerate whether or not such options are assumed
(and to provide for repurchase rights that do not terminate whether or not such
rights are assigned) in connection with a Corporate Transaction.
D. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
E. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction,
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to apply to the number and class of securities which would have been issuable to
the Optionee in consummation of such Corporate Transaction had the option been
exercised immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to (i) the number and class of securities
available for issuance under the Plan following the consummation of such
Corporate Transaction, (ii) the exercise price payable per share under each
outstanding option, PROVIDED the aggregate exercise price payable for such
securities shall remain the same and (iii) the maximum number of securities
and/or class of securities for which any one person may be granted stock
options, separately exercisable stock appreciation rights and direct stock
issuances under the Plan.
F. The Plan Administrator shall have the discretion, exercisable at
the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of any options which are
assumed or replaced in a Corporate Transaction and do not otherwise accelerate
at that time (and the termination of any of the Corporation's outstanding
repurchase rights which do not otherwise terminate at the time of the Corporate
Transaction) in the event the Optionee's Service should subsequently terminate
by reason of an Involuntary Termination within eighteen (18) months following
the effective date of such Corporate Transaction. Any options so accelerated
shall remain exercisable for fully-vested shares until the EARLIER of (i) the
expiration of the option term or (ii) the expiration of the one (1)-year period
measured from the effective date of the Involuntary Termination.
G. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to (i) provide for the automatic acceleration of one or more
outstanding options (and the automatic termination of one or more outstanding
repurchase rights with the immediate vesting of the shares of Common Stock
subject to those rights) upon the occurrence of a Change in Control or (ii)
condition any such option acceleration (and the termination of any outstanding
repurchase rights) upon the subsequent Involuntary Termination of the Optionee's
Service within a specified period (not to exceed eighteen (18) months) following
the effective date of such Change in Control. Any options accelerated in
connection with a Change in Control shall remain fully exercisable until the
expiration or sooner termination of the option term.
H. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Non-Statutory Option under the Federal tax laws.
I. The grant of options under the Discretionary Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
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IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program and to grant in substitution new options covering the same or
different number of shares of Common Stock but with an exercise price per share
based on the Fair Market Value per share of Common Stock on the new grant date.
V. STOCK APPRECIATION RIGHTS
A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.
B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:
(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish,
to elect between the exercise of the underlying option for shares of
Common Stock and the surrender of that option in exchange for a
distribution from the Corporation in an amount equal to the excess of
(a) the Fair Market Value (on the option surrender date) of the number
of shares in which the Optionee is at the time vested under the
surrendered option (or surrendered portion thereof) over (b) the
aggregate exercise price payable for such shares.
(ii) No such option surrender shall be effective unless
it is approved by the Plan Administrator. If the surrender is so
approved, then the distribution to which the Optionee shall be
entitled may be made in shares of Common Stock valued at Fair Market
Value on the option surrender date, in cash, or partly in shares and
partly in cash, as the Plan Administrator shall in its sole discretion
deem appropriate.
(iii) If the surrender of an option is rejected by the
Plan Administrator, then the Optionee shall retain whatever rights the
Optionee had under the surrendered option (or surrendered portion
thereof) on the option surrender date and may exercise such rights at
any time prior to the LATER of (a) five (5) business days after the
receipt of the rejection notice or (b) the last day on which the
option is otherwise exercisable in accordance with the terms of the
documents evidencing such option, but in no event may such rights be
exercised more than ten (10) years after the option grant date.
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C. The following terms shall govern the grant and exercise of
limited stock appreciation rights:
(i) One or more Section 16 Insiders may be granted
limited stock appreciation rights with respect to their outstanding
options.
(ii) Upon the occurrence of a Hostile Take-Over, each
such individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for
a thirty (30)-day period following such Hostile Take-Over) to
surrender each such option to the Corporation, to the extent the
option is at the time exercisable for vested shares of Common Stock.
In return for the surrendered option, the Optionee shall receive a
cash distribution from the Corporation in an amount equal to the
excess of (a) the Take-Over Price of the shares of Common Stock which
are at the time vested under each surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for
such shares. Such cash distribution shall be paid within five (5)
days following the option surrender date.
(iii) Neither the approval of the Plan Administrator
nor the consent of the Board shall be required in connection with such
option surrender and cash distribution.
(iv) The balance of the option (if any) shall
continue in full force and effect in accordance with the documents
evidencing such option.
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ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.
A. PURCHASE PRICE.
1. The purchase price per share shall not be less than one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
issuance date unless otherwise determined by the Plan Administrator.
2. Subject to the provisions of Section I of Article Six,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
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requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock (or
other assets attributable thereto) which would otherwise occur upon the
cessation of the Participant's Service or the non-attainment of the performance
objectives applicable to those shares. Such waiver shall result in the
immediate vesting of the Participant's interest in the shares of Common Stock as
to which the waiver applies. Such waiver may be effected at any time, whether
before or after the Participant's cessation of Service or the attainment or
non-attainment of the applicable performance objectives.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are assigned to the successor corporation (or parent thereof)
in connection with such Corporate Transaction or (ii) such accelerated vesting
is precluded by other limitations imposed in the Stock Issuance Agreement.
B. Notwithstanding Section II.A. of this Article Three, the Plan
Administrator shall have the discretionary authority, exercisable either at the
time the unvested shares are issued or any time while the Corporation's
repurchase rights remain outstanding under the Stock Issuance Program, to
provide that those rights shall
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automatically terminate in whole or in part, and the shares of Common Stock
subject to those terminated rights shall immediately vest, in the event of a
Corporate Transaction, whether or not those repurchase rights are to be assigned
to the successor corporation (or its parent) in connection with such Corporate
Transaction. The Plan Administrator shall also have the discretion to provide
for repurchase rights with terms different from those in effect under this
Section II in connection with a Corporate Transaction.
C. The Plan Administrator shall have the discretion, exercisable
either at the time the unvested shares are issued or at any time while the
Corporation's repurchase rights remain outstanding, to provide that any
repurchase rights that are assigned in the Corporate Transaction shall
automatically terminate, and the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event the Participant's
Service should subsequently terminate by reason of an Involuntary Termination
within eighteen (18) months following the effective date of such Corporate
Transaction.
D. The Plan Administrator shall have the discretion, exercisable
either at the time the unvested shares are issued or at any time while the
Corporation's repurchase right remains outstanding, to (i) provide for the
automatic termination of one or more outstanding repurchase rights and the
immediate vesting of the shares of Common Stock subject to those rights upon the
occurrence of a Change in Control or (ii) condition any such accelerated vesting
upon the subsequent Involuntary Termination of the Participant's Service within
a specified period (not to exceed eighteen (18) months) following the effective
date of such Change in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
IV. MARKET LOCK-UP
In connection with any underwritten public offering by the Corporation
of its equity securities pursuant to an effective registration statement filed
under the Securities Act of 1933, including the Corporation's initial public
offering, the Optionee may not sell, make any short sale of, loan, hypothecate,
pledge, grant any option for the purchase of, or otherwise dispose or transfer
for value or otherwise agree to engage in any of the foregoing transactions with
respect to, any shares of Common Stock acquired under the Plan without the prior
written consent of the Corporation or its underwriters. Such restriction (the
"Market Stand-Off") shall be in effect for such period of time from and after
the effective date of the final prospectus for the offering as may be requested
by the Corporation or such underwriters. The Optionee shall be required to
execute such agreements as the Corporation or the underwriters request in
connection with the Market Stand-Off.
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ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made on the dates specified
below:
1. Each individual serving as a non-employee Board member on
the Underwriting Date shall automatically be granted at that time a
Non-Statutory Option to purchase 16,250*/ shares of Common Stock, provided that
individual has not previously been in the prior employ of the Corporation or any
Parent or Subsidiary.
2. Each individual who is first elected or appointed as a
non-employee Board member on or after the Underwriting Date shall automatically
be granted, on the date of such initial election or appointment, a Non-Statutory
Option to purchase 16,250*/ shares of Common Stock, provided such individual has
not previously been in the employ of the corporation (or any Parent or
Subsidiary).
3. On the date of each Annual Stockholders Meeting held after
the Underwriting Date, each individual who is to continue to serve as an
Eligible Director, shall automatically be granted a Non-Statutory Option to
purchase an additional 6,500*/ shares of Common Stock, provided such individual
has served as a non-employee Board member for at least six (6) months. There
shall be no limit on the number of such 6,500*/-share option grants any one
Eligible Director may receive over his or her period of Board service.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
________________________
*/ The share numbers have been adjusted to reflect the 11,250 for 1 stock split
expected to be effected by the Corporation prior to December 31, 1996.
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C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be
immediately exercisable for any or all of the option shares. However, any
shares purchased under the option shall be subject to repurchase by the
Corporation, at the exercise price paid per share, upon the Optionee's cessation
of Board service prior to vesting in those shares. Each initial grant shall
vest, and the Corporation's repurchase right shall lapse, in a series of four
(4) successive equal annual installments over the Optionee's period of continued
service as a Board member, with the first such installment to vest upon the
Optionee's completion of one (1) year of Board service measured from the option
grant date. Each annual grant shall vest, and the Corporation's repurchase
right shall lapse, upon the Optionee's completion of one (1) year of Board
service measured from the option grant date.
E. EFFECT OF TERMINATION OF BOARD SERVICE. The following provisions
shall govern the exercise of any options held by the Optionee at the time the
Optionee ceases to serve as a Board member:
(i) The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person or
persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution) shall
have a twelve (12)-month period following the date of such cessation
of Board service in which to exercise each such option.
(ii) During the twelve (12)-month exercise period, the
option may not be exercised in the aggregate for more than the number
of vested shares of Common Stock for which the option is exercisable
at the time of the Optionee's cessation of Board service.
(iii) Should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at
the time subject to the option shall immediately vest so that such
option may, during the twelve (12)-month exercise period following
such cessation of Board service, be exercised for all or any portion
of those shares as fully-vested shares of Common Stock.
(iv) In no event shall the option remain exercisable after
the expiration of the option term. Upon the expiration of the twelve
(12)-month exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding
for any vested shares for which the option has not been exercised.
However, the option shall, immediately upon the Optionee's cessation
of Board service for any reason
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other than death or Permanent Disability, terminate and cease to be
outstanding to the extent the option is not otherwise at that time
exercisable for vested shares.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Immediately following the consummation of
the Corporate Transaction, each automatic option grant shall terminate and cease
to be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and may
be exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or
consent of the Board or any Plan Administrator shall be required in connection
with such option surrender and cash distribution.
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.
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E. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.
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ARTICLE FIVE
DIRECTOR FEE OPTION GRANT PROGRAM
I. OPTION GRANTS
Each non-employee Board member may elect to apply all or any portion
of the annual retainer fee otherwise payable in cash for his or her service on
the Board to the acquisition of a special option grant under this Director Fee
Option Grant Program. Such election must be filed with the Corporation's Chief
Financial Officer prior to the first day of the calendar year for which the
annual retainer fee which is the subject of that election is otherwise payable.
Each non-employee Board member who files such a timely election shall
automatically be granted an option under this Director Fee Option Grant Program
on the first trading day in January in the calendar year for which the annual
retainer fee which is the subject of that election would otherwise be payable.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.
A. EXERCISE PRICE.
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
subject to the option shall be such that the value of the option (as determined
on the date of the option grant using the Black-Scholes valuation model) shall
be equal to the amount of the retainer fee subject to the election.
C. EXERCISE AND TERM OF OPTIONS. The option shall become
exercisable for fifty percent (50%) of the option shares upon the Optionee's
completion of six (6) months of Board service in the calendar year for which his
or her election under this Director Fee Option Grant Program is in effect, and
the balance of the option shares shall become exercisable in a series of six (6)
successive equal monthly installments upon the Optionee's completion of each
additional month of Board service during that calendar year.
21.
<PAGE>
Each option shall have a maximum term of ten (10) years measured from the option
grant date.
D. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
EARLIER of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.
E. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as
a Board member cease by reason of death or Permanent Disability, then each
option held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully-vested shares until the EARLIER of (i) the expiration of the ten
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service.
Should the Optionee die after cessation of Board service but while
holding one or more options under this Director Fee Option Grant Program, then
each such option may be exercised, for any or all of the shares for which the
option is exercisable at the time of the Optionee's cessation of Board service
(less any shares subsequently purchased by Optionee prior to death), by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution. Such right of exercise shall lapse,
and the option shall terminate, upon the EARLIER of (i) the expiration of the
ten (10)-year option term or (ii) the three (3)-year period measured from the
date of the Optionee's cessation of Board service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such option and may be exercised for any
or all of those shares as fully-vested shares of Common Stock. Each such
outstanding option shall be assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and shall remain exercisable for the
fully-vested shares until the EARLIER of (i) the expiration of the ten (10)-year
option
22.
<PAGE>
term or (ii) the expiration of the three (3)-year period measured from the date
of the Optionee's cessation of Board service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall immediately become fully exercisable with respect to the total number of
shares of Common Stock at the time subject to such option and may be exercised
for any or all of those shares as fully-vested shares of Common Stock. The
option shall remain so exercisable until the EARLIER or (i) the expiration of
the ten (10)-year option term or (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Service.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding option grants. The Optionee shall in return be entitled
to a cash distribution from the Corporation in an amount equal to the excess of
(i) the Take-Over Price of the shares of Common Stock at the time subject to
each surrendered option (whether or not the Optionee is otherwise at the time
vested in those shares) over (ii) the aggregate exercise price payable for such
shares. Such cash distribution shall be paid within five (5) days following the
surrender of the option to the Corporation. No approval or consent of the Board
or any Plan Administrator shall be required in connection with such option
surrender and cash distribution.
D. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
23.
<PAGE>
ARTICLE SIX
MISCELLANEOUS
I. FINANCING
A. The Plan Administrator may permit any Optionee or Participant to
pay the option exercise price under the Discretionary Option Grant Program or
the purchase price for shares issued under the Stock Issuance Program by
delivering a full-recourse, interest bearing promissory note payable in one or
more installments. The terms of any such promissory note (including the
interest rate and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion. In all events, the maximum credit
available to the Optionee or Participant may not exceed the sum of (i) the
aggregate option exercise price or purchase price payable for the purchased
shares plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.
B. The Plan Administrator may, in its discretion, determine that one
or more such promissory notes shall be subject to forgiveness by the Corporation
in whole or in part upon such terms as the Plan Administrator may deem
appropriate.
II. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or upon the issuance or vesting of such shares
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant or Director Fee Option Grant Program) with the right to use shares
of Common Stock in satisfaction of all or part of the Taxes incurred by such
holders in connection with the exercise of their options or the vesting of their
shares. Such right may be provided to any such holder in either or both of the
following formats:
(i) STOCK WITHHOLDING: The election to have the
Corporation withhold, from the shares of Common Stock otherwise
issuable upon the exercise of such Non-Statutory Option or the vesting
of such shares, a portion of those shares with an aggregate Fair
Market Value equal to the percentage of the Taxes (not to exceed one
hundred percent (100%)) designated by the holder.
24.
<PAGE>
(ii) STOCK DELIVERY: The election to deliver to the
Corporation, at the time the Non-Statutory Option is exercised or the
shares vest, one or more shares of Common Stock previously acquired by
such holder (other than in connection with the option exercise or
share vesting triggering the Taxes) with an aggregate Fair Market
Value equal to the percentage of the Taxes (not to exceed one hundred
percent (100%)) designated by the holder.
III. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective on the Plan Effective Date.
Options may be granted under the Discretionary Option Grant and Automatic Option
Grant Programs at any time on or after the Plan Effective Date. However, no
options granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation's stockholders.
If such stockholder approval is not obtained within twelve (12) months after the
Plan Effective Date, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.
B. The Plan shall terminate upon the EARLIEST of (i) October 1,
2006, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Upon such Plan
termination, all outstanding options and unvested stock issuances shall continue
to have force and effect in accordance with the provisions of the documents
evidencing such options or issuances.
IV. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect any rights and obligations with respect
to options, stock appreciation rights or unvested stock issuances at the time
outstanding under the Plan unless the Optionee or the Participant consents to
such amendment or modification. In addition, amendments to the Plan shall be
subject to approval of the Corporation's stockholders to the extent required by
applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant Program and shares of Common Stock may be issued
under the Stock Issuance Program that are in each instance in excess of the
number of shares then available for issuance under the Plan, provided any excess
shares actually issued under those programs are held in escrow until there is
obtained stockholder approval of an amendment sufficiently increasing the number
of shares of Common Stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve (12) months after the date
the first such excess grants or issuances are made, then (i) any unexercised
options
25.
<PAGE>
granted on the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the Optionees and
the Participants the exercise or purchase price paid for any excess shares
issued under the Plan and held in escrow, together with interest (at the
applicable Short Term Federal Rate) for the period the shares were held in
escrow, and such shares shall thereupon be automatically cancelled and cease to
be outstanding.
V. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.
VI. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any option or
stock appreciation right under the Plan and the issuance of any shares of Common
Stock (i) upon the exercise of any option or stock appreciation right or (ii)
under the Stock Issuance Program shall be subject to the Corporation's
procurement of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, the options and stock appreciation rights
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws and all
applicable listing requirements of any stock exchange (or the Nasdaq National
Market, if applicable) on which Common Stock is then listed for trading.
VII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
26.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
program in effect under the Plan.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by any person
or related group of persons (other than the Corporation or a person
that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation), of beneficial ownership (within
the meaning of Rule 13d-3 of the 1934 Act) of securities possessing
more than fifty percent (50%) of the total combined voting power of
the Corporation's outstanding securities pursuant to a tender or
exchange offer made directly to the Corporation's stockholders, which
the Board does not recommend such stockholders to accept, or
A-1.
<PAGE>
(ii) a change in the composition of the Board over a period
of thirty-six (36) consecutive months or less such that a majority of
the Board members ceases, by reason of one or more contested elections
for Board membership, to be comprised of individuals who either (A)
have been Board members continuously since the beginning of such
period or (B) have been elected or nominated for election as Board
members during such period by at least a majority of the Board members
described in clause (A) who were still in office at the time the Board
approved such election or nomination.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's common stock.
F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to a
person or persons different from the persons holding those securities
immediately prior to such transaction; or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.
G. CORPORATION shall mean PSW Technologies, Inc., a Delaware corporation,
and any corporate successor to all or substantially all of the assets or voting
stock of PSW Technologies, Inc. which shall by appropriate action adopt the
Plan.
H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option
grant program in effect under the Plan.
I. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option
grant in effect for non-employee Board members under Article Five of the Plan.
J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.
K. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. EXERCISE DATE shall mean the date on which the Corporation shall have
received written notice of the option exercise.
M. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market or any successor system. If
there is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no
closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be
A-1.
<PAGE>
the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal
to the price per share at which the Common Stock is sold in the
initial public offering pursuant to the Underwriting Agreement.
(iv) For purposes of any option grants made prior to the
Underwriting Date, the Fair Market Value shall be determined by the
Plan Administrator after taking into account such factors as the Plan
Administrator shall deem appropriate.
N. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly,
by any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.
O. INCENTIVE OPTION shall mean an option which satisfies the requirements
of Code Section 422.
P. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in his or
her level of compensation (including base salary, fringe benefits and
participation in corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) or (C) a relocation of
such individual's place of employment by more than fifty (50) miles,
provided and only if such change, reduction or relocation is effected
by the Corporation without the individual's consent.
Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or
A-3.
<PAGE>
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
any Optionee, Participant or other person in the Service of the Corporation (or
any Parent or Subsidiary).
R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.
T. OPTIONEE shall mean any person to whom an option is granted under the
Discretionary Option Grant, Automatic Option Grant or Director Fee Option Grant
Program.
U. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. PARTICIPANT shall mean any person who is issued shares of Common Stock
under the Stock Issuance Program.
W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for the purposes of the Automatic Option Grant and
Director Fee Option Grant Programs, Permanent Disability or Permanently Disabled
shall mean the inability of the non-employee Board member to perform his or her
usual duties as a Board member by reason of any medically determinable physical
or mental impairment expected to result in death or to be of continuous duration
of twelve (12) months or more.
X. PLAN shall mean the Corporation's 1996 Stock Option/Stock Issuance
Plan, as set forth in this document.
Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
A-4.
<PAGE>
Z. PLAN EFFECTIVE DATE shall mean October 2, 1996, the date on which the
Plan was adopted by the Board.
AA. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.
AB. SECONDARY COMMITTEE shall mean a committee of two (2) or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
AC. SECTION 12(G) REGISTRATION DATE shall mean the date on which the
Common Stock is first registered under Section 12(g) of the 1934 Act.
AD. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
AE. SERVICE shall mean the performance of services to the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
AF. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.
AG. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.
AH. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
under the Plan.
AI. SUBSIDIARY shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
AJ. TAKE-OVER PRICE shall mean the GREATER of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered
A-5.
<PAGE>
option is an Incentive Option, the Take-Over Price shall not exceed the clause
(i) price per share.
AK. TAXES shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.
AL. 10% STOCKHOLDER shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
AM. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
AN. UNDERWRITING DATE shall mean the date on which the Underwriting
Agreement is executed and the initial public offering price of the Common Stock
is established.
A-6.
<PAGE>
EXHIBIT 11.1
PSW TECHNOLOGIES, INC.
COMPUTATION OF PRO FORMA NET INCOME PER SHARE
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES SHARES
---------- ----------
<S> <C> <C>
Common stock issued................................................. 5,546,463 5,546,463
CHEAP STOCK OPTIONS AND WARRANTS
Stock Options and Warrants granted at $.04.......................... 924,684
Treasury shares..................................................... (4,110)
----------
920,574 920,574
Stock Options granted at $.43....................................... 132,761
Treasury shares..................................................... (6,343)
----------
126,418 126,418
Stock Options granted at $2.58...................................... 69,550
Treasury shares..................................................... (19,938)
----------
49,612 49,612
Stock Options granted at $3.90...................................... 371,452
Treasury shares..................................................... (160,963)
----------
210,489 210,489
Stock Options granted at $4.55...................................... 8,937
Treasury shares..................................................... (4,518)
----------
4,419 4,419
Stock Options granted at $6.25...................................... 59,915
Treasury shares..................................................... (41,608)
----------
18,307 18,307
Stock Options granted at $7.96...................................... 37,336
Treasury Shares..................................................... (33,022)
----------
4,314 4,314
Stock Options granted at $8.93, net................................. 14,996
Treasury shares..................................................... (14,879)
----------
117 117
----------
Weighted Average Shares--1992 through 1995 and three months ended
March 31, 1996....................................................
</TABLE>
<TABLE>
<S> <C> <C>
6,880,713
Additional shares required to be sold to pay dividend to
stockholders:
Assumed IPO price per share....................................... $ 9.00
Underwriters commission (7%)...................................... $ (0.63)
----------
Net proceeds per share............................................ $ 8.37
----------
Additional shares required to raise proceeds of $1,200,000 to pay
distribution to stockholders.................................... 143,369
----------
Weighted Average Shares--year ended December 31, 1996 and three
months ended March 31, 1997....................................... 7,024,082
----------
----------
</TABLE>
<PAGE>
PSW TECHNOLOGIES, INC.
COMPUTATION OF PRO FORMA NET INCOME PER SHARE
<TABLE>
<CAPTION>
PRO FORMA WEIGHTED PRO FORMA NET
NET INCOME AVERAGE INCOME (LOSS)
YEAR (LOSS) NUMBER OF SHARES PER SHARE
- ------------------------------------------------------------- ---------------- ----------------- ---------------
<S> <C> <C> <C>
1992......................................................... $ (173,000) 6,880,713 $ (0.03)
1993......................................................... $ (956,000) 6,880,713 $ (0.14)
1994......................................................... $ 138,000 6,880,713 $ 0.02
1995......................................................... $ 1,326,000 6,880,713 $ 0.19
1996......................................................... $ 720,000 7,024,082 $ 0.10
<CAPTION>
Three Months Ended March 31,
<S> <C> <C> <C>
1996......................................................... $ 376,000 6,880,713 $ 0.05
1997......................................................... $ 600,000 7,024,082 $ 0.09
</TABLE>
<PAGE>
EXHIBIT 11.1
PSW TECHNOLOGIES, INC.
COMPUTATION OF SUPPLEMENTAL PRO FORMA NET INCOME (LOSS) PER SHARE
<TABLE>
<S> <C> <C>
Weighted Average Shares--1996....................... 7,024,082
Note payable to bank as of December 31, 1996........ $5,125,000
Cash as of December 31, 1996 assumed to be used to
repay note payable to bank........................ (3,182,000)
----------
Note payable to bank repaid from proceeds
offering.......................................... $1,943,000
----------
Additional shares required to raise proceeds to pay
note payable (at a net price of $8.37 per
share)............................................ 232,139
---------
Weighted Average Shares for Supplemental net income
per share......................................... 7,256,221
---------
---------
Pro forma net income................................ $ 720,000
Interest on note payable to bank.................... 40,920
---------
$ 760,920
---------
---------
Supplemental pro forma net income per share for the
year ended December 31, 1996...................... $ 0.10
---------
---------
Weighted Average Shares--Three Months Ended March
31, 1997.......................................... 7,024,082
Note payable to bank as of March 31, 1997........... $4,650,000
Cash as of March 31, 1997 assumed to be used to
repay note payable to bank........................ (796,000)
----------
----------
$3,854,000
----------
Additional shares required to raise proceeds to pay
note payable (at a net price of $8.37 per
share)............................................ 460,454
---------
7,484,536
---------
---------
Pro forma net income................................ $ 600,000
Interest on note payable to bank.................... 89,000
---------
$ 689,000
---------
---------
Supplemental pro forma net income per share for the
three months ended March 31, 1997................. $ 0.09
---------
---------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated February 3, 1997
(except for paragraph 2 of Note 3, as to which the date is May 12, 1997), in
Amendment No. 4 to the Registration Statement (Form S-1 No. 333-21565) and
related Prospectus of PSW Technologies, Inc. for the registration of 2,850,000
shares of its common stock.
We also consent to the incorporation by reference therein to our report
dated February 3, 1997 with respect to the financial statement schedule of PSW
Technologies, Inc. for the years ended December 31, 1995 and 1996 included in
Amendment No. 4 to the Registration Statement (Form S-1 No. 333-21565) and
related Prospectus of PSW Technologies, Inc. for the registration of 2,850,000
shares of its Common Stock.
ERNST & YOUNG LLP
New York, New York
May 12, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 31, 1995, in Amendment No. 4 to the Registration
Statement (Form S-1) and related Prospectus of PSW Technologies, Inc. for the
registration of 2,850,000 shares of its common stock.
Margolin, Winer & Evens LLP
Garden City, New York
May 12, 1997
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