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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q/A
(AMENDMENT NO. 1)
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
_________________________________________________
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________________ to___________________________
Commission file number 000-22327
PSW TECHNOLOGIES, INC.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 74-279604
____________________________________________________________________________
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
6300 Bridgepoint Parkway, Building 3, Suite 200, Austin Texas 78730
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 343-6666
______________________________
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check x whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x
__________
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 8,847,831 shares of the
Company's Common Stock, $.01 par value, were outstanding as of August 1, 1997.
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PSW TECHNOLOGIES, INC.
Index to June 30, 1997 Form 10-Q/A
Page
Part I -- Financial Information
Item 1. Financial Statements.................................................3
Condensed Balance Sheets -- June 30, 1997 and December 31, 1996......3
Condensed Statements of Operations -- Three Months and Six Months
Ended June 30, 1997 and 1996.........................................4
Condensed Statements of Cash Flows -- Six Months Ended June 30,
1997 and 1996........................................................5
Notes to Condensed Financial Statements..............................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................8
Part II -- Other Information
Item 1. Legal Proceedings...................................................17
Item 2. Changes in Securities...............................................17
Item 3. Defaults upon Senior Securities.....................................17
Item 4. Submission of Matters to a Vote of Security Holders.................17
Item 5. Other Information...................................................17
Item 6. Exhibits and Reports on Form 8-K....................................17
Signatures..........................................................19
2
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PART 1--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PSW TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 2,976 $ 3,182
Investments......................................................................... 18,045 --
Accounts receivable, net of allowance for doubtful accounts of $150................. 6,648 6,118
Unbilled revenue under client contracts............................................. 196 244
Prepaid expenses and other current assets........................................... 341 603
----------- ------------
Total current assets.................................................................. 28,206 10,147
Property and equipment, net........................................................... 3,541 1,796
----------- ------------
Total assets.......................................................................... $ 31,747 $ 11,943
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank................................................................ $ -- $ 5,125
Due to related party................................................................ -- 581
Accounts payable and accrued expenses............................................... 3,422 2,566
Deferred revenue.................................................................... 341 227
Dividend payable.................................................................... 1,400 --
Income taxes........................................................................ 1,275 --
----------- ------------
Total current liabilities............................................................. 6,438 8,499
Deferred income taxes................................................................. 25
Stockholders' equity:
Preferred stock, par value $.01 per share, 1,000,000 shares authorized and none
issued and outstanding at June 30, 1997 and December 31, 1996....................... -- --
Common stock, par value $.01 per share, 34,000,000 shares authorized and 8,413,530
shares issued and outstanding at June 30, 1997 and 5,538,463 shares issued and
outstanding at December 31, 1996.................................................... 84 55
Additional paid-in capital.......................................................... 25,485 4,187
Deferred compensation............................................................... (453) (641)
Retained earnings (accumulated deficit)............................................. 168 (157)
----------- ------------
Total stockholders' equity............................................................ 25,284 3,444
----------- ------------
Total liabilities and stockholders' equity............................................ $ 31,747 $ 11,943
----------- ------------
----------- ------------
</TABLE>
See accompanying notes.
3
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PSW TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
--------- --------- --------- ---------
Revenue................................................................ $ 10,702 $ 6,950 $ 21,009 $ 13,487
Operating expenses:
Technical staff...................................................... 5,450 3,741 10,734 7,297
Selling and administrative staff..................................... 2,088 1,257 3,974 2,428
Other expenses....................................................... 1,918 1,240 3,879 2,417
Special compensation expense......................................... 69 -- 188 --
--------- --------- --------- ---------
Total operating expenses............................................... 9,525 6,238 18,775 12,142
--------- --------- --------- ---------
Income from operations................................................. 1,177 712 2,234 1,345
Interest expense, net.................................................. (14) (17) (103) (44)
--------- --------- --------- ---------
Income before provision for income taxes............................... 1,163 695 2,131 1,301
--------- --------- --------- ---------
Provision for income taxes:
Nonrecurring charge for termination of Subchapter S election......... 1,200 -- 1,200 --
C Corporation........................................................ 100 -- 100 --
--------- --------- --------- ---------
Total provision for income taxes....................................... 1,300 -- 1,300 --
--------- --------- --------- ---------
Net income (loss)...................................................... $ (137) $ 695 $ 831 $ 1,301
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma information:
Historical income before provision for income taxes.................... $ 1,163 $ 695 $ 2,131 $ 1,301
Pro forma provision for income taxes................................... 442 264 810 494
--------- --------- --------- ---------
Pro forma net income................................................... $ 721 $ 431 $ 1,321 $ 807
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma earnings per share........................................... $ 0.10 $ 0.06 $ 0.19 $ 0.12
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares and equivalents outstanding............. 7,506 6,881 7,091 6,881
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes.
4
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PSW TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
OPERATING ACTIVITIES
Net income.................................................................................... $ 831 $ 1,301
Adjustments to reconcile net income to net cash provided by operating activities:
Special compensation...................................................................... 188 --
Depreciation and amortization............................................................. 363 184
Bad debt expense.......................................................................... 30 --
Changes in operating assets and liabilities:
Accounts receivable..................................................................... (560) (1,414)
Due to/from related party............................................................... (258) --
Unbilled revenue under customer contracts............................................... 48 (2)
Prepaid expenses and other current assets............................................... (61) 39
Accounts payable and accrued expenses................................................... 199 100
Deferred revenue........................................................................ 114 --
Income taxes............................................................................ 1,300 --
--------- ---------
Net cash provided by operating activities..................................................... 2,194 208
--------- ---------
INVESTING ACTIVITIES
Purchase securities........................................................................... (18,045) --
Acquisition of property and equipment......................................................... (1,994) (591)
--------- ---------
Net cash used in investing activities......................................................... (20,039) (591)
--------- ---------
FINANCING ACTIVITIES
Repayments of line of credit.................................................................. (5,125) --
Capital contributions, net.................................................................... -- 353
Issuance of common stock...................................................................... 22,764 --
--------- ---------
Net cash provided by financing activities..................................................... 17,639 353
--------- ---------
Net decrease in cash.......................................................................... (206) (30)
Cash and cash equivalents, beginning of period................................................ 3,182 34
--------- ---------
Cash and cash equivalents, end of period...................................................... $ 2,976 $ 4
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid................................................................................. $ 161 $ 103
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
5
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PSW Technologies, Inc.
Notes to Condensed Financial Statements
June 30, 1997
1. Basis of Presentation
PSW Technologies, Inc. (the "Company") commenced operations as a separate,
stand-alone corporation effective October 1, 1996. In connection with the
Company's formation, Pencom Systems Incorporated ("Pencom") contributed its
software services business (the "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 stock and other consideration. 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.
The accompanying unaudited financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all the information and notes required by generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the financial statements and notes thereto for the year ended December 31,
1996 included in the Company's Registration Statement on Form S-1. The
accompanying financial statements 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 interim periods are not necessarily
indicative of full year results.
See Note 4 for discussion of the effect of the Company adjusting its analysis
of the tax effects of the termination of its Subchapter S status.
2. Significant Accounting Policies
Adoption of Accounting Pronouncements
As described below, the Company adopted Statement of Financial Accounting
Standards No. 115 (see Note 3) and No. 109 (see Note 4) during the quarter ended
June 30, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the financial statements and accompanying notes. Actual results
could differ from those estimates.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share, which is required to be adopted for financial
statements issued for periods ending after December 15, 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new requirements, the
presentation of primary earnings per share is replaced with basic earnings per
share, the calculation of which excludes the dilutive effect of common stock
equivalents. The impact is expected to result in a basic pro forma earnings per
share for the quarter ended June 30, 1997 and 1996 of $.12 and $.08,
respectively, or an increase of $.02 over the presently disclosed primary pro
forma earnings per share for each such quarter. Basic pro forma earnings per
share for the six months ended June 30, 1997 and 1996 is expected to be $.22 and
$.15, respectively, or an increase of $.03 over the presently disclosed primary
pro forma earnings per share for each such six month period.
6
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PSW Technologies, Inc.
Notes to Condensed Financial Statements
June 30, 1997
3. Investments
Effective June 10, 1997, the Company adopted Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities. This statement requires that investments in debt and equity
securities be classified as trading, held-to-maturity, or available-for-sale.
The Company's investments, primarily tax-exempt investment grade securities, are
classified as available-for-sale and are recorded in the accompanying financial
statements at fair market value. Under SFAS No. 115, unrealized changes in fair
market value are recorded directly to stockholders' equity, net of applicable
income taxes. To date, neither unrealized changes in fair market value, nor
realized gains or losses from sales of securities have been material.
4. Income Taxes
Upon formation, the Company elected to operate as an S corporation under the
Internal Revenue Code of 1986, as amended. 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). With the closing of
the Company's initial public offering (see Note 5), the Company's Subchapter S
status was terminated and the Company became subject to corporate income taxes
and was required to change its method of tax accounting from the cash to the
accrual method.
Upon the termination of its Subchapter S status, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 109, ACCOUNTING FOR INCOME TAXES.
This statement prescribes the use of the liability method whereby deferred tax
asset and liability account balances are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
The estimated current and deferred tax effect of these changes, including the
effect of the change in the method of accounting based on the Company's
estimated 1997 taxable income, resulted in a nonrecurring charge of
approximately $1.2 million for termination of the Company's Subchapter S status
in the second quarter of 1997. The Company is also obligated to pay a dividend
to its S corporation stockholders, in an amount estimated to approximate the tax
that the S stockholders will be required to pay on the 1997 taxable income
allocated to them, which is currently estimated to be $1.4 million.
During the third quarter of 1997, the Company adjusted its analysis of the
current and deferred tax effects of the termination of its Subchapter S
status. As a result of this analysis, the Company has recorded a deferred tax
asset and corresponding deferred tax benefit of $600,000 by adjusting its
previously reported results as of and for the quarter ended June 30, 1997.
This revision has no impact on pro forma earnings per share or pro forma net
income or the pro forma income tax provision as reported. Historical net
loss is reduced and additional paid in capital is increased by $600,000, for
the quarter ended and as of June 30, 1997, to $137,000 and $25,485,000,
respectively.
5. Stockholders' Equity
On April 2, 1997, the Company effected an 8-for-13 reverse stock split of its
issued and outstanding shares of Common Stock. On June 3, 1997, the Company
effected a change in the Company's authorized capital stock to 34,000,000 shares
of Common Stock, $.01 par value, and 1,000,000 shares of Preferred Stock, $.01
par value. All references in the accompanying condensed financial statements to
the applicable share and per share data, for all periods presented, have been
retroactively restated to reflect the effect of the reverse stock split.
Upon termination of its Subchapter S status, the Company reclassified its
accumulated deficit of approximately $1.5 million to additional paid-in capital,
in accordance with Securities Exchange Commission Staff Advisory Bulletins.
7
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PSW Technologies, Inc.
Notes to Condensed Financial Statements
June 30, 1997
On June 10, 1997, the Company completed an initial public offering of 2,850,000
shares of its authorized but unissued Common Stock at a price to the public of
$9.00 per share. The net proceeds of the offering were approximately $22.2
million. In connection with the initial public offering, the Company granted the
underwriters of the offering an option to purchase up to 427,500 shares of
Common Stock to cover over-allotments. On July 2, 1997, the underwriters
exercised their option, purchasing 427,500 shares of the Company's Common Stock,
resulting in additional net proceeds to the Company of approximately $3.6
million.
6. Pro Forma Provision for Income Taxes
Pro forma provision for income taxes reflects the estimated corporate income tax
expense that the Company would have recognized had it accounted for income taxes
under SFAS No. 109 during all periods presented.
7. Pro Forma Earnings Per Share
Pro forma earnings per share is computed using the weighted average number of
shares of common stock outstanding and dilutive common equivalent shares from
stock options using the treasury stock method. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletin No. 83, such computations include
all common and common equivalent shares issued within twelve months of the
offering date as if they were outstanding for all periods presented using the
treasury stock method.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Except for historical information contained herein, some matters discussed in
this report constitute forward-looking statements relating to future events or
the future financial performance of the Company. Stockholders are cautioned
that such statements are only predictions and actual events or results may
differ materially. In evaluating such statements, prospective investors should
specifically consider the risks discussed below under the caption "Certain
Factors That May Affect Future Results, Financial Condition and Market Price of
Securities", as well as those discussed in the Company's filings and reports
with the Securities and Exchange Commission, including the Company's
Registration Statement on Form S-1 (File No. 333-21565).
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.
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. The cumulative impact of revisions in percentage of completion
estimates 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. 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.
Information presented herein reflects the financial position, results of
operations and cash flows of the Company and its predecessor, the software
division of Pencom Systems Incorporated, and such information does not
8
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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.
Nonrecurring Charge for Termination of Subchapter S Election
Upon formation, the Company elected to operate as an S corporation under the
Internal Revenue Code of 1986, as amended. 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). With the
closing of the initial public offering, the Company's Subchapter S status was
terminated and the Company became subject to corporate income taxes and was
required to change its method of tax accounting from the cash to the accrual
method.
The estimated current and deferred tax effect of these changes, including the
effect of the change in the method of accounting based on the Company's
estimated 1997 taxable income, resulted in a nonrecurring charge of
approximately $1.2 million for termination of the Company's Subchapter S status
in the second quarter of 1997. The Company is also obligated to pay a dividend
to its S corporation stockholders, in an amount estimated to approximate the tax
that the S stockholders will be required to pay on the 1997 taxable income
allocated to them, which is currently estimated to be $1.4 million.
Results of Operations
The following table sets forth the percentage of revenue of certain items
included in the Company's condensed statements of operations for the period
indicated:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
---------- -------- -------- -------
Revenue..................................................................... 100% 100% 100% 100%
Operating expenses:
Technical staff........................................................... 51 54 51 54
Selling and administrative staff.......................................... 19 18 19 18
Other expenses............................................................ 18 18 18 18
Special compensation expense................................................ 1 -- 1 --
Total operating expense.................................................. 89 90 89 90
Income from operations...................................................... 11 10 11 10
Interest expense, net....................................................... -- -- (1) --
Pro forma provision from income taxes....................................... 4 4 4 4
---------- -------- -------- -------
Pro forma net income........................................................ 7% 6% 6% 6%
---------- -------- -------- -------
---------- -------- -------- -------
</TABLE>
First Six Months of 1997 Compared to First Six Months of 1996
Revenue
The Company's revenue consists primarily of fees for software services provided.
Revenue was $21.0 million in the first six months of 1997, up 56% over $13.5
million for the first six months of 1996, principally due to increases in the
scope and number of client projects. Revenue attributable to software services
rendered to technology vendors was $12.7 million and $9.0 million in first six
months of 1997 and the first six months of 1996, respectively, an increase of
41% in the first six months of 1997 over the first six months of 1996. Revenue
attributable to software services rendered to business end-users was $8.3
million and $4.5 million for the first six months of 1997 and the first six
months of 1996, respectively, an increase of 84% in the first six months of 1997
over the first six months of 1996.
9
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One client, including its wholly-owned subsidiaries, accounted for 46% and 56%
of revenue in each of the first six months of 1997 and 1996, respectively.
Another client accounted for 16% of revenue for the first six months of 1996.
No other client accounted for more than 10% of revenue for either period.
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
subcontractors for work performed in connection with a client project. Technical
staff expenses were $10.7 million in the first six months of 1997, an increase
of 47% over $7.3 million for the first six months of 1996. The increase in
technical staff expenses was primarily due to the addition of personnel
necessary to service the increase in the scope and number of client projects.
Technical staff expenses declined to 51% of revenue in the first six months of
1997 from 54% in the first six months of 1996, primarily as a result of improved
pricing of client projects in 1997.
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 cost of technical
staff salaries for technical staff personnel assigned to business development
projects or performing selling or training related tasks. Selling and
administrative staff expenses were $4.0 million in the first six months of 1997,
an increase of 64% from $2.4 million in the first six months of 1996. The
increase in selling and administrative staff expenses in the first six months of
1997 was primarily due to the addition of sales and administrative personnel,
and technical staff training necessary to support the Company's growth. Selling
and administrative staff expenses were 19% of revenue in the first six months of
1997 compared to 18% of revenue in the first six months of 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 $3.9 million in the first six months of 1997,
an increase of 60% over other expenses of $2.4 million in the first six months
of 1996, principally due to increased costs associated with the increases in the
Company's technical and sales and administrative staff. Other expenses were 18%
of revenue in each of the first six month periods in 1997 and 1996,
respectively.
Special Compensation Expense
Special compensation expense consists of stock-based compensation in connection
with the grants of replacement options to the Company's employees who
participated in the Pencom Systems Incorporated stock option plan. Special
compensation expense was $188,000, or 1% of revenue, in the first six months of
1997.
Income from Operations
Income from operations increased to $2.2 million in the first six months of
1997, up 66% from $1.3 million in the first six months of 1996. Income from
operations was 11% of revenue in the first six months of 1997, up from 10% in
the first six months of 1996. If income from operations in the first six months
of 1997 was adjusted to exclude the special compensation expense referred to
above, such income from operations would have increased by 80% compared with the
first six months of 1996, and would have represented 12% of revenue.
Pro Forma Provision for Income Taxes
Pro forma provision for income taxes reflect the estimated corporate income tax
expense that the Company would have recognized had it not elected to be treated
as an S corporation prior to the completion of its initial public offering.
Pro Forma Net Income
10
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Pro forma net income was $1.3 million in the first six months of 1997, up 64%
from $807,000 of pro forma net income for the first six months of 1996. Pro
forma net income was 6% of revenue in the first six months of 1997 and the first
six months of 1996. If pro forma net income for the first six months of 1997 was
adjusted to exclude the special compensation expense referred to above, such pro
forma net income would have increased by 78% compared with the first six months
of 1996, and would have represented 7% of revenue.
Liquidity and Capital Resources
At June 30, 1997, the Company had cash and cash equivalents and investments
totaling $21.0 million, an increase from $3.2 million at December 31, 1996,
primarily as a result of the completion of an initial public offering of
2,850,000 shares of its Common Stock at a price to the public of $9.00 per share
on June 10, 1997. Of the approximately $22.2 million of net proceeds of the
offering to the Company, approximately $3.0 million were used to repay the
principal amount and accrued interest 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"). In
connection with the completion of the initial public offering, the Company also
recorded liabilities for the payment of an estimated $1.8 million income tax
obligation resultant from the termination of its Subchapter S election,
including the conversion from a cash basis to accrual basis method of tax
accounting, and the payment of an estimated $1.4 million dividend to its S
stockholders in respect of the tax that the S stockholders will be required to
pay on the estimated 1997 taxable income allocated to them.
The Company maintains a Credit Facility with TCB providing for borrowings of up
to $6.5 million. The Credit Facility is secured by accounts receivable and
expires on November 7, 1997. Available borrowings under the Credit Facility are
based upon a percentage of the Company's eligible accounts receivable. At June
30, 1997, no amount was outstanding under the Credit Facility.
The Company currently plans to make additional investments in property and
equipment of approximately $700,000 in 1997, principally for software and
personal computers and other technology equipment.
The Company anticipates that its existing capital resources described above,
together with cash provided by operating activities 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 the
Company's facilities. There can be no assurance that additional funding, if
necessary, will be available on favorable terms, if at all.
Certain Factors That May Affect Future Results, Financial Condition
and Market Price of Securities
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 six months of 1997,
accounted for approximately 77%, 88%, 82% and 74%, respectively, of its revenue
in each such period. The Company's largest client, International Business
Machines Corp., together with its subsidiaries (collectively, "IBM"), accounted
for approximately 52% and 46% of its revenue in 1996 and the first six months 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 the
Company's 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 information technology ("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.
11
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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 six
months of 1997, approximately 12% and 15%, 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.
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, 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, the
Company, 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, 1995 to 425 full-time
employees at June 30, 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 operations, 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 12
<PAGE>
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. The Company's management has only limited
experience operating the Company as a stand-alone Company, separate and apart
from Pencom. 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 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 period presented.
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 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 of
one quarter should not be relied upon as an indication of future performance.
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
mange 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 impact 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
13
<PAGE>
obsolete. The Company 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.
Control by Shareholders of Pencom; Potential Conflicts of Interest. The current
shareholders of Pencom own approximately 56% of the outstanding shares of the
Company's Common Stock. In addition, as of June 30, 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). As a result, the current shareholders of Pencom
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. 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 Pencom's shareholders could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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
Pencom's shareholder's ownership interest in the Company, the terms of such
agreements were not, and 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.
Four 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.
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 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 14
<PAGE>
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.
Dependence on Key Personnel. The Company's future success will depend in part
upon the continued services of a number of key management and 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 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 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
15
<PAGE>
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.
Potential Volatility of Stock 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
the Company'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.
16
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 2. Changes in Securities
On April 2, 1997, the Company effected an 8-for-13 reverse split of its
issued and outstanding shares of Common Stock. On June 3, 1997, the
Company effected a change in the Company's authorized Capital Stock to
34,000,000 shares of Common Stock, $.01 par value, and 1,000,000 shares
of Preferred Stock, $.01 par value.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On June 6, 1997, the stockholders of the Company by unanimous written
consent acknowledged and agreed to the declaration and distribution of
a cash dividend to the stockholders of the Company in an amount
estimated to approximate the tax that such stockholders will be
required to pay on the 1997 taxable income allocated to them in
connection with the termination of the Company's S corporation
status.
Item 5. Other Information
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ---------------- --------------------------------------------------------
<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.
(1)10.5 Software Development Agreement having an effective date
of March 9, 1994 between the Registrant and Canon
Computer Systems, Inc., as amended.
(1)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 November 26, 1990
between the Registrant and International Business
Machines Corporation, as amended to date.
**10.8 Software Task Order Agreement dated 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.
(1)10.10 Software & Methodology Licensing Agreement dated
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.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- -------------- --------------------------------------------------------
<S> <C>
**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 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 1996 Stock Option/Stock Issuance Plan.
**10.26 Employee Stock Purchase Plan.
**10.27 PSW Profit Sharing Plan.
**10.28 Description of Executive Bonus Plan.
**10.29 Stock Purchase Agreement dated as of January 1, 1997
between Michael J. Maples and the Registrant.
**10.30 Stock Subscription dated October 1, 1996 between Pencom
Systems Incorporated and the Registrant.
**10.31 Asset Contribution Agreement dated October 1, 1996
between Pencom Systems Incorporated and the Registrant.
**10.32 Assignment and Assumption Agreement dated October 1,
1996 between the Registrant and Pencom Systems
Incorporated.
**10.33 Warrant dated October 1, 1996 issued by the Registrant
to Pencom Systems Incorporated.
**10.34 Warrant dated October 1, 1996 issued by the Registrant
to Stephen Markman.
**10.35 Warrant dated October 1, 1996 issued by the Registrant
to Thomas Pallister.
**10.36 Warrant dated October 1, 1996 issued by the Registrant
to Joy Venegas.
11.1 Computation of Pro Forma Earnings Per Share.
27.1 Financial Data Schedule
</TABLE>
- ------------------------
** Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (File No. 333-21565).
(1) The Company has been granted confidential treatment with respect to certain
portions of these documents. The portions of these documents which have been
omitted are denoted by an asterisk[*]. The omitted portions of these
documents have been filed with the Securities and Exchange Commission
pursuant to Rule 406 under the Securities Act of 1933.
18
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSW TECHNOLOGIES, INC.
(Registrant)
Date: October 8, 1997 /s/
_______________________________
Dr. W. Frank King
President and Chief Executive Officer
(Principal Executive Officer)
Date: October 8, 1997 /s/
_______________________________
Patrick D. Motola
Senior Vice President of Operations,
Chief Financial Officer
and Secretary (Principal Financial Officer)
Date: October 8, 1997 /s/
_______________________________
Keith D. Thatcher
Vice President of Finance and
Treasurer (Principal Accounting Officer)
19
<PAGE>
EXHIBIT 11.1
PSW TECHNOLOGIES, INC.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- --------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
----------- ---------- ------------ ------------
Net income (loss)........................................... $ (137,000) $ 695,000 $ 831,000 $ 1,301,000
----------- ---------- ------------ ------------
----------- ---------- ------------ ------------
Pro forma net income........................................ $ 721,000 $ 431,000 $ 1,321,000 $ 807,000
----------- ---------- ------------ ------------
----------- ---------- ------------ ------------
Primary:
Weighted average number of common shares outstanding........ 6,221,222 5,538,463 5,890,215 5,538,463
Net effect of stock options and warrants-based on treasury
stock method using average market price................... 1,284,389 1,342,350 1,201,028 1,342,350
----------- ---------- ------------ ------------
Weighted average number of common shares and equivalents
outstanding............................................... 7,505,611 6,880,813 7,091,243 6,880,813
----------- ---------- ------------ ------------
----------- ---------- ------------ ------------
Pro forma earnings per share................................ $ 0.10 $ 0.06 $ 0.19 $ 0.12
----------- ---------- ------------ ------------
----------- ---------- ------------ ------------
Fully diluted:
Weighted average number of common shares outstanding........ 6,221,222 5,538,463 5,890,215 5,538,463
Net effect of dilutive stock options and warrants-- based on
treasury stock method using quarter-end market price...... 1,386,109 1,342,350 1,301,054 1,342,350
----------- ---------- ------------ ------------
Weighted average number of common shares and equivalents
outstanding............................................... 7,607,331 6,880,813 7,191,269 6,880,813
----------- ---------- ------------ ------------
----------- ---------- ------------ ------------
Pro forma earnings per share (1)............................ $ 0.09 $ 0.06 $ 0.18 $ 0.12
----------- ---------- ------------ ------------
----------- ---------- ------------ ------------
</TABLE>
- ------------------------
(1) Fully diluted pro forma earnings per share is not disclosed in the financial
statements as the resulting dilution is less than 3% of primary pro forma
earnings per share.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,976
<SECURITIES> 18,045
<RECEIVABLES> 6,798
<ALLOWANCES> 150
<INVENTORY> 0
<CURRENT-ASSETS> 28,206
<PP&E> 5,205
<DEPRECIATION> 1,664
<TOTAL-ASSETS> 31,747
<CURRENT-LIABILITIES> 6,438
<BONDS> 0
0
0
<COMMON> 84
<OTHER-SE> 25,200
<TOTAL-LIABILITY-AND-EQUITY> 31,747
<SALES> 0
<TOTAL-REVENUES> 21,009
<CGS> 0
<TOTAL-COSTS> 10,734
<OTHER-EXPENSES> 8,041
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 103
<INCOME-PRETAX> 2,131
<INCOME-TAX> 1,300
<INCOME-CONTINUING> 831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 831
<EPS-PRIMARY> .19<F1>
<EPS-DILUTED> .19<F1>
<FN>
<F1>PRESENTED ON A PRO FORMA BASIS AS IF THE COMPANY HAD BEEN FULLY SUBJECT TO FEDERAL
AND STATE INCOME TAXES FOR ALL PERIODS PRESENTED.
</FN>
</TABLE>
