<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1997
REGISTRATION NO. 333-21565
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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
MARCH 24, 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 $9.00 and $11.00 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 $900,000.
(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 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.
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 12 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 1,121,540 shares of Common Stock issuable upon the exercise of
stock options outstanding as of February 28, 1997, at a weighted average
exercise price of $2.30 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>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
STATEMENTS OF INCOME DATA:
Revenue..................................................... $ 6,562 $ 8,725 $ 12,318 $ 21,147 $ 31,274
Total operating expenses.................................... 6,660 9,939 12,022 18,924 29,943
Income (loss) from operations............................... (98) (1,214) 296 2,223 1,331(2)
Pro forma net income (loss)(3).............................. (173) (957) 138 1,326 720(2)
Pro forma net income (loss) per share(4).................... $ (.03) $ (.14) $ .02 $ .19 $ .10(2)
Weighted average common shares and equivalents
outstanding(4)............................................ 6,909 6,909 6,909 6,909 7,006
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(5)
--------- --------------
BALANCE SHEET DATA:
Working capital........................................................................ $ 1,648 $ 25,945
Total assets........................................................................... 11,943 31,681
Total stockholders' equity............................................................. 3,444 27,865
</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 interest and pro forma provision for income taxes as
described in Note 12 of Notes to Financial Statements.
(4) Computed on the basis described in Note 2 of Notes to Financial Statements.
(5) Adjusted to reflect (i) the sale of 2,850,000 shares of Common Stock offered
hereby at an assumed initial offering price of $10.00 per share and the
application of the net proceeds thereof, (ii) the issuance of 8,000 shares
of Common Stock at $6.25 per share pursuant to a Stock Purchase Agreement
dated as of January 1, 1997, (iii) repayment of the note payable under the
Company's credit facility, together with accrued interest, of approximately
$5.1 million, (iv) the effect of a nonrecurring tax charge of $1,054,000
(see Note 12 of Notes to Financial Statements), and (v) payment of a
dividend of $900,000 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 $720,000 to the Company. See
"Capitalization," "Use of Proceeds" and Note 12 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 TO
BE EFFECTED PRIOR TO COMPLETION OF THIS OFFERING 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 and 1996 accounted for approximately
77%, 88% and 82% of its revenues in each of those years. The Company's largest
client, International Business Machines Corp., together with its subsidiaries
(collectively, "IBM"), accounted for approximately 52% of its revenue in 1996.
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, approximately
12% 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, financial condition and results of operations.
The Company has undertaken, and may in the future
7
<PAGE>
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 395 full-time
employees at March 1, 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 estimates of resources
required to complete ongoing projects and general economic conditions. A high
8
<PAGE>
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."
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
9
<PAGE>
Stock (56% if the Underwriters' over-allotment option is exercised in full). In
addition, as of February 28, 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.
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
10
<PAGE>
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 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
11
<PAGE>
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 1998 and January 1999, respectively. The Securities and
Exchange Commission has adopted certain amendments to Rule 144 that reduce by
one year the holding periods required for shares subject to Rule 144 to become
eligible for resale in the public market. These amendments, upon becoming
effective, will permit earlier resale of these shares of Common Stock in October
1997 and January 1998, respectively. Following completion of
12
<PAGE>
this offering, the Company intends to register under the Securities 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 $6.68 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 $25.6 million
($29.6 million if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $10.00 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 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"), together with the interest accrued thereon,
(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 equal
approximately $2.5 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 of approximately $900,000 in respect of their estimated 1997 income
tax obligations as described in Note 12 of Notes to Financial Statements. The
Credit Facility expires on November 8, 1997, and loans thereunder bore interest
at a rate of 8.25% at January 31, 1997. The outstanding principal amount of the
Credit Facility at February 28, 1997 was approximately $3.9 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 December 31, 1996, 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 $10.00 per share, and application of
the estimated net proceeds therefrom as described in footnote (3) to the table.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------
<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.................................................. $ 5,125 $ 1,943 $ --
Dividend payable to stockholders...................................... -- 900 --
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; 5,538,463 shares issued and outstanding, actual,
5,546,463 shares issued and outstanding, pro forma, and 8,396,463
shares issued and outstanding, pro forma as adjusted(4)........... 55 55 84
Additional paid-in capital............................................ 4,187 3,180 28,756
Deferred compensation................................................. (641) (641) (641)
Accumulated deficit................................................... (157) (334) (334)
--------- ------- -------
Total stockholders' equity.......................................... 3,444 2,260 27,865
--------- ------- -------
Total capitalization............................................ $ 8,569 $ 5,103 $ 27,865
--------- ------- -------
--------- ------- -------
</TABLE>
- ------------------------
(1) Adjusted to reflect (i) the issuance of 8,000 shares at $6.25 per share
pursuant to a Stock Purchase Agreement dated as of January 1, 1997, (ii) use
of cash at December 31, 1996 of $3,182,000 to repay a portion of the note
payable to bank, (iii) the elimination of the accumulated deficit against
additional paid-in capital, and (iv) the effect of a nonrecurring tax charge
of $1,054,000 (see Note 12 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 at $900,000. 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 12 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
$900,000, actual income tax payable by the Company due to the conversion
from an S corporation would be reduced by approximately $720,000.
(3) Adjusted to reflect the (i) issuance of 2,850,000 shares at an assumed
initial public offering price of $10.00 per share and the receipt of the
estimated net proceeds therefrom, (ii) repayment of the note payable to bank
of $1,943,000, and (iii) payment of the dividend to the stockholders of
$900,000.
(4) Excludes 1,121,540 shares of Common Stock issuable upon the exercise of
stock options outstanding as of February 28, 1997, at a weighted average
exercise price of $2.30 per share, and warrants to purchase 507,654 shares
of Common Stock at $.04 per share.
15
<PAGE>
DILUTION
As of December 31, 1996, after giving pro forma effect to (i) the proceeds
from 8,000 shares of Common Stock issuable pursuant to a Stock Purchase
Agreement dated as of January 1, 1997 at $6.25 per share, (ii) the effect of a
nonrecurring tax charge to the Company of $1,054,000 and (iii) the accrual of a
dividend, currently estimated to be $900,000, payable to the stockholders of
record prior to this offering for taxes payable on 1997 taxable income allocated
to them (see Note 12 of Notes to Financial Statements), the pro forma net
tangible book value of the Company was approximately $2.3 million, or $.41 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 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 $10.00 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 December 31, 1996 would have
been $27.9 million, or $3.32 per share, representing an immediate increase in
pro forma net tangible book value of $2.91 per share to existing stockholders
and immediate dilution of $6.68 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...................... $ 10.00
Pro forma net tangible book value per share prior to this
offering................................................. $ .41
Increase per share attributable to new investors........... 2.91
---------
Adjusted pro forma net tangible book value per share after
this offering.............................................. 3.32
---------
Dilution per share to new investors.......................... $ 6.68
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1996, 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 $10.00 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) 6.6% $ .36
New investors.................................... 2,850,000 33.9 28,500,000 93.4 $ 10.00
---------- ----- ------------- -----
Total...................................... 8,396,463 100.0% $ 30,506,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
The foregoing is based on the number of shares outstanding at December 31,
1996 plus 8,000 shares issued pursuant to a Stock Purchase Agreement dated as of
January 1, 1997, and excludes an aggregate of 1,121,540 shares issuable upon the
exercise of options outstanding as of February 28, 1997 with a weighted average
exercise price of $2.30 per share, of which options to purchase 363,540 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 December 31, 1996,
options to purchase an additional 643,484 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 to be 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 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. 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>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF INCOME DATA:
Revenue.................................................... $ 6,562 $ 8,725 $ 12,318 $ 21,147 $ 31,274
Operating expenses:
Technical staff.......................................... 4,003 6,167 7,385 11,193 16,444
Selling and administrative staff......................... 1,211 1,873 2,320 3,755 5,622
Other expenses........................................... 1,446 1,899 2,317 3,976 5,684
Special compensation expense(1).......................... -- -- -- -- 2,193
--------- --------- --------- --------- ---------
Total operating expenses............................... 6,660 9,939 12,022 18,924 29,943
--------- --------- --------- --------- ---------
Income (loss) from operations.............................. (98) (1,214) 296 2,223 1,331
Interest expense........................................... 181 329 74 84 170
--------- --------- --------- --------- ---------
Net income (loss).......................................... $ (279) $ (1,543) $ 222 $ 2,139 $ 1,161
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Unaudited pro forma information:
Historical income (loss) before provision for income
taxes.................................................. (279) (1,543) 222 2,139 1,161
Pro forma provision (benefit) for income taxes(2)........ (106) (586) 84 813 441
--------- --------- --------- --------- ---------
Pro forma net income (loss).............................. $ (173) $ (957) $ 138 $ 1,326 $ 720
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net income per share(3)........................ $ (.03) $ (.14) $ .02 $ .19 $ .10
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares and equivalents
outstanding(3)........................................... 6,909 6,909 6,909 6,909 7,006
BALANCE SHEET DATA (AT END OF PERIOD):
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
</TABLE>
- ------------------------
(1) See Note 13 of Notes to Financial Statements for an explanation of special
compensation expense.
(2) Computed on the basis described in Note 12 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% of the
Company's revenue in 1996. 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.
18
<PAGE>
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% of revenue in 1996. 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 1996 revenue.
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 12 of Notes to Financial Statements).
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 stock option plan (see Note 8 of Notes to Financial
Statements) and compensation related to the cancellation of a note issued by an
officer of the Company to Pencom (see Note 10 of Notes to Financial Statements),
which, in the aggregate, totaled $2.2 million for the year ended December 31,
1996.
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 12 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>
YEAR ENDED DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1994 1995 1996
----- ----- -----
Revenue...................................................................... 100% 100% 100%
Operating expenses:
Technical staff............................................................ 60 53 53
Selling and administrative staff........................................... 19 18 18
Other expenses............................................................. 19 19 18
Special compensation expense............................................... -- -- 7
--- --- ---
Total operating expenses............................................... 98 90 96
--- --- ---
Income from operations....................................................... 2 10 4
Pro forma provision for income taxes......................................... 1 4 1
--- --- ---
Pro forma net income......................................................... 1% 6% 2%
--- --- ---
--- --- ---
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE
Revenue consists primarily of fees for software services provided. 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
total revenue in 1996 and 1995, respectively. No other client accounted for more
than 10% of total revenue in 1996 or 1995.
TECHNICAL STAFF
Technical staff consists 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 costs were $16.4 million in 1996, an increase of 47% over 1995 technical
staff costs of $11.2 million. The increase in technical staff costs was
primarily due to the addition of personnel necessary to service growth in the
number and size of client projects. The cost of technical staff was 53% of
revenue in both 1996 and 1995.
SELLING AND ADMINISTRATIVE STAFF
Selling and administrative staff consists 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
personnel assigned to development projects or performing selling, recruiting or
training related tasks. Selling and administrative staff costs were $5.6 million
in 1996, up 50% from $3.8 million in 1995. The increase in selling and
administrative staff costs was primarily due to the addition of personnel
necessary to support the Company's growth, including increases in sales and
recruiting personnel, and increases in personnel working on the Company's GENOVA
initiative. Selling and administrative staff costs were 18% of revenue in both
1996 and 1995.
20
<PAGE>
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 $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 consists of stock-based compensation and
compensation related to the cancellation of a note payable (see Note 13 of Notes
to Financial Statements). Special compensation expense was $2.2 million, or 7%
of revenue in 1996.
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 were 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 were 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 total revenue in 1994.
TECHNICAL STAFF
Technical staff costs were $11.2 million in 1995, an increase of 52% over
1994 technical salaries of $7.4 million. The increase in technical staff cost
was primarily due to the addition of personnel necessary to service growth in
the number and size of client projects. The cost of the Company's technical
staff 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 costs were $3.8 million in 1995, up 62%
from $2.3 million in 1994. The increase in selling and administrative staff
salaries was primarily due to the addition of personnel necessary to support the
Company's growth. The cost of selling and administrative staff declined to 18%
of revenue in 1995 from 19% in 1994, primarily as a result of the significant
increase in revenue in 1995.
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.
21
<PAGE>
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 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>
DEC. 31,
1996
-----------
Revenue.................................. $ 10,050
Operating expenses:
Technical staff........................ 4,860
Selling and administrative staff....... 1,895
Other expenses......................... 1,850
Special compensation expense........... 1,538
-----------
Total operating expenses............. 10,143
-----------
Income (loss) from operations............ (93)
Interest expense (income)................ 66
Pro forma provision for income taxes..... (60)
-----------
Pro forma net income (loss).............. $ (99)
-----------
-----------
</TABLE>
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>
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
------------- ----------- ----------- ----------- ------------- -----------
Revenue.................................. 100% 100% 100% 100% 100% 100%
Operating expenses:
Technical staff........................ 54 54 51 53 54 54
Selling and administrative staff....... 17 18 18 18 18 18
Other expenses......................... 20 18 18 19 18 18
Special compensation expense........... -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Total operating expenses............. 91 90 87 90 90 90
----- ----- ----- ----- ----- -----
Income (loss) from operations............ 9 10 13 10 10 10
Interest expense (income)................ 1 -- 1 -- -- --
Pro forma provision for income taxes..... 3 4 5 4 4 4
----- ----- ----- ----- ----- -----
Pro forma net income (loss).............. 5% 6% 7% 6% 6% 6%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
<CAPTION>
<S> <C> <C>
SEPT. 30, DEC. 31,
1996 1996
----------- -----------
Revenue.................................. 100% 100%
Operating expenses:
Technical staff........................ 55 48
Selling and administrative staff....... 17 19
Other expenses......................... 18 18
Special compensation expense........... 9 16
----- -----------
Total operating expenses............. 99 101
----- -----------
Income (loss) from operations............ 1 (1)
Interest expense (income)................ 1 1
Pro forma provision for income taxes..... -- (1)
----- -----------
Pro forma net income (loss).............. -- (1)%
----- -----------
----- -----------
</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
22
<PAGE>
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. At
December 31, 1996, the Company had cash of $3.2 million as a result of
significant remittances from clients on that date, which was subsequently 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.
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 December 31, 1996, $5.1 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.
At December 31, 1996, the Company had commitments related to the relocation
of its Texas office for the purchase and/or construction of property and
equipment totaling approximately $700,000. The Company currently plans to make
investments in property and equipment of approximately $2.1 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.
23
<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,
24
<PAGE>
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,
25
<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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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 individually by the two business units and
primarily supports the sales process by producing qualified leads. Both business
units focus on implementing a "value chain" that seeks to align all the
resources of the unit to 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.
Each business unit conducts its own marketing programs to identify and
qualify potential clients. These programs emphasize relationships with
technology vendors to shorten the sales cycle and increase the productivity of
PSW's sales resources. The Software Technology Unit is pursuing Windows NT
porting opportunities 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. The Business Systems
Unit works closely with the sales forces of both NeXT and Transarc and is often
recommended by these companies to their clients. 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
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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 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, PSW's Business Systems Unit expects to leverage the
Company's expertise with the Tivoli Management Environment software and the
Software Technology Unit's 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 of the Business Systems Unit.
SALES
PSW's sales force consists of Business Development Managers and Senior
Managers under the direction of the individual business units. 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. Both business units utilize 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 Software Technology
Unit 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. The Business Systems Unit deploys its sales personnel geographically
under the direction of three regional managers, but currently centralizes
technical skills in Austin until an engagement is started. Once started, key
personnel travel or relocate to the project site and new personnel are added by
both local and national recruiting efforts. The Business Systems regional
offices are located in Seattle, Austin and Jersey City.
EMPLOYEES
PSW's workforce has grown significantly over the past two years, increasing
from 167 full-time employees at December 31, 1994 to 395 full-time employees at
March 1, 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
36
<PAGE>
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% of the Company's hires in 1996. 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
regional PSW recruiters to support its regional managers in identifying,
staffing and building pipelines for the skill types required to meet the unit's
selling 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. 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
37
<PAGE>
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."
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
38
<PAGE>
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. This facility houses Eastern Region sales,
recruiting, and senior consultants for the Business Systems Unit.
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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<PAGE>
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 January 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
Keith D. Thatcher.............................. 38 Vice President of Finance and Treasurer
William S. Wimberley, Jr....................... 43 Vice President, Business Systems -- Central Region
Julie M. Kirk.................................. 46 Vice President, Human Resources
Dennis P. Thompson............................. 41 Vice President, Software Technology Sales and Marketing
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 and Auspex Systems 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
40
<PAGE>
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 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. 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.
Mr. Wimberley has served as Vice President, Business Systems -- Central
Region of PSW since October 1, 1996. From July 1993 to October 1996, he served
as a Vice President of the Company. From July 1990 to July 1993, Mr. Wimberley
was Vice President of the Southwest Regional Operations of AGS Information
Service, a software consulting company. Prior thereto, Mr. Wimberley was with
Cap Gemini America Inc., a software consulting company, for seven years, holding
positions of Senior Sales Representative, Regional Sales Manager, Branch Manager
- -- Energy Industry Branch, and for the last four years of his tenure, Branch
Manager of the Dallas, Texas-based Commercial Branch. Mr. Wimberley earned a
bachelor's degree in marketing and advertising from the University of Texas at
Arlington.
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. Thompson has served as Vice President, Software Technology Sales and
Marketing of PSW since October 1, 1996. 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
41
<PAGE>
exploration and production of oil and gas. Mr. Thompson earned a bachelor's
degree in communications from Bethany College.
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.
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.
42
<PAGE>
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 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.
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<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 313,976 363,226 654,907 212,308
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. Vice President, Business 134,322 33,600 -- 21,539
Systems--Central Region...............................
</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.
44
<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.
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<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 593,460 are currently available for
grant. 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.
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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 will be submitted to the
stockholders for approval prior to the completion of this offering. 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.
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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, Cason and Wimberley
dated July 1, 1993, October 19, 1993, September 27, 1993 and July 18, 1994,
respectively (the "Executive Agreements"). Pursuant to the Executive Agreements,
the Company agreed to pay Messrs. Motola, Baisley, Cason and Wimberley annual
base salaries of $140,000, $60,000, $120,000 and $125,000, 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.
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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.
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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.
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 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.
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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 January 31, 1997, the Company granted executive
officers and directors options to purchase a total of 555,392 shares of Common
Stock with exercise prices ranging from $.04 per share to $7.96 per share and a
weighted average exercise price of $2.61 per share.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of January 31, 1996 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).............................................. 81,786 1.5 81,786 1.0
Brian E. Baisley(7)............................................... 24,616 * 24,616 *
William C. Cason(8)............................................... 24,616 * 24,616 *
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)...... 4,205,569 72.2% 4,205,569 48.5%
</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 January 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 January 31, 1997.
(6) Includes 81,786 shares issuable upon exercise of options held by Mr. Motola
that are exercisable within the 60-day period following January 31, 1997.
(7) Includes 24,616 shares issuable upon exercise of options held by Mr. Baisley
that are exercisable within the 60-day period following January 31, 1997.
(8) Includes 24,616 shares issuable upon exercise of options held by Mr. Cason
that are exercisable within the 60-day period following January 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 January
31, 1997.
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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 February 28, 1997, there were outstanding 5,538,463 shares of Common
Stock, held of record by five stockholders, options to purchase an aggregate of
1,121,540 shares of Common Stock at a weighted average exercise price of $2.30
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
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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.
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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 two years beginning in October 1998, and the
holder of an additional 8,000 shares will have beneficially owned such shares
for two years beginning in January 1999, at which time such stockholders may
sell such shares under Rule 144, subject to the volume and other limitations
contained in that Rule. The Securities and Exchange Commission has adopted
certain amendments to Rule 144 that, upon becoming effective, will reduce by one
year the holding periods required for shares subject to Rule 144 to become
eligible for resale in the public market. These amendments will permit earlier
resale of these shares of Common Stock in October 1997 and January 1998,
respectively.
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."
55
<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,
56
<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
57
<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.
58
<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............................................................ F-4
Statements of Income for the years ended December 31, 1994, 1995 and 1996.................................. F-5
Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996.................... F-6
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996.............................. 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 March , 1997
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion of
the restatement of capital accounts described in Note 3 to the financial
statements.
ERNST & YOUNG LLP
New York, New York
February 3, 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
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash....................................................................................... $ 34 $ 3,182
Accounts receivable, net of allowance for doubtful accounts of $45 and $120 in 1995 and
1996..................................................................................... 3,849 6,118
Due from related party (Note 10)........................................................... -- 323
Unbilled revenue under customer contracts.................................................. 100 244
Prepaid expenses and other current assets.................................................. 71 280
--------- ---------
Total current assets......................................................................... 4,054 10,147
Property and equipment, net.................................................................. 928 1,796
--------- ---------
Total assets................................................................................. $ 4,982 $ 11,943
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank....................................................................... $ -- $ 5,125
Due to related party (Note 10)............................................................. -- 581
Accounts payable and accrued expenses...................................................... 1,298 2,566
Deferred revenue........................................................................... -- 227
--------- ---------
Total current liabilities.................................................................... 1,298 8,499
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..................................... 55 55
Additional paid-in capital................................................................. 4,947 4,187
Deferred compensation...................................................................... -- (641)
Accumulated deficit........................................................................ (1,318) (157)
--------- ---------
Total stockholders' equity................................................................... 3,684 3,444
--------- ---------
Total liabilities and stockholders' equity................................................... $ 4,982 $ 11,943
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-4
<PAGE>
PSW TECHNOLOGIES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenue.................................................................... $ 12,318 $ 21,147 $ 31,274
Operating expenses:
Technical staff.......................................................... 7,385 11,193 16,444
Selling and administrative staff......................................... 2,320 3,755 5,622
Other expenses, including related party transactions of $532, $1,018 and
$910 (Note 10)......................................................... 2,317 3,976 5,684
Special compensation expense (Note 13)................................... -- -- 2,193
--------- --------- ---------
Total operating expenses................................................... 12,022 18,924 29,943
--------- --------- ---------
Income from operations..................................................... 296 2,223 1,331
Interest expense, including related party transactions of $74, $84 and $104
(Note 10)................................................................ 74 84 170
--------- --------- ---------
Net income................................................................. $ 222 $ 2,139 $ 1,161
--------- --------- ---------
--------- --------- ---------
Unaudited pro forma information (Note 12):
Historical income before provision for income taxes...................... $ 222 $ 2,139 $ 1,161
Pro forma provision for income taxes..................................... 84 813 441
--------- --------- ---------
Pro forma net income..................................................... $ 138 $ 1,326 $ 720
--------- --------- ---------
--------- --------- ---------
Pro forma net income per share........................................... $ .02 $ .19 $ .10
--------- --------- ---------
--------- --------- ---------
Weighted average common shares and equivalents outstanding................. 6,909 6,909 7,006
--------- --------- ---------
--------- --------- ---------
</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
$.01 PAR VALUE ADDITIONAL 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
---------- --- ----------- ------------- ------------ ------------
---------- --- ----------- ------------- ------------ ------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
PSW TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................................................ $ 222 $ 2,139 $ 1,161
Adjustments to reconcile net income to net cash provided by operating activities:
Special compensation.......................................................... -- -- 2,193
Depreciation and amortization................................................. 271 288 424
Bad debt expense.............................................................. 43 52 75
Changes in operating assets and liabilities:
Accounts receivable......................................................... (1,073) (1,181) (2,344)
Due from related party...................................................... -- -- (323)
Unbilled revenue under customer contracts................................... -- (100) (144)
Prepaid expenses and other current assets................................... -- (45) (864)
Other assets................................................................ 2 -- --
Due to related party........................................................ -- -- 581
Accounts payable and accrued expenses....................................... 404 648 1,154
Deferred revenue............................................................ 214 (214) 227
--------- --------- ---------
Net cash provided by operating activities......................................... 83 1,587 2,140
--------- --------- ---------
INVESTING ACTIVITIES
Acquisition of property and equipment............................................. (220) (444) (1,247)
--------- --------- ---------
Net cash used in investing activities............................................. (220) (444) (1,247)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from line of credit...................................................... -- -- 5,125
Capital contributions (distributions), net........................................ 151 (1,130) (2,870)
--------- --------- ---------
Net cash provided by (used in) financing activities............................... 151 (1,130) 2,255
--------- --------- ---------
Net increase in cash.............................................................. 14 13 3,148
Cash, beginning of year........................................................... 7 21 34
--------- --------- ---------
Cash, end of year................................................................. $ 21 $ 34 $ 3,182
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid..................................................................... $ 74 $ 84 $ 154
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-7
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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.
REVENUE RECOGNITION
Revenue from time and materials contracts is recognized during the period in
which the services are provided.
F-8
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 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.
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.
F-9
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 1,579,170 shares of common stock
at prices ranging from $.04 to $6.25 per share including 759,451 replacement
options (see Note 8) and, in January 1997, the Company issued options to
purchase 34,874 shares at $7.96 per share. Effective January 1, 1997, the
Company entered into a stock purchase agreement to issue 8,000 shares of common
stock at $6.25 per share. Accordingly, for purposes of calculating pro forma net
income per share amounts, such options, warrants and shares have been considered
outstanding for all periods presented. In addition, weighted average common
shares and equivalents outstanding for the year ended December 31, 1996 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 $10 per share.
The effect on pro forma net income per share for the year ended December 31,
1996 of the estimated number of shares assumed to be sold by the Company
(160,711) to repay the note payable to bank (net of the cash balance at December
31, 1996) of approximately $1,943,000 would result in such supplementary pro
forma net income per share increasing to $.11 per share.
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
F-10
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
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 and a change in the Company's authorized capital stock to
34,000,000 shares of common stock of $.01 par value and 1,000,000 shares of
preferred stock of $.01 par value. The foregoing changes 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.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Furniture and fixtures..................................................... $ 225 $ 521
Computer equipment......................................................... 1,356 2,251
Computer software.......................................................... 205 266
Leasehold improvements..................................................... 41 59
--------- ---------
1,827 3,097
Less accumulated depreciation and amortization............................. 899 1,301
--------- ---------
$ 928 $ 1,796
--------- ---------
--------- ---------
</TABLE>
F-11
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Trade payables............................................................. $ 352 $ 945
Accrued vacation........................................................... 195 307
Accrued bonuses............................................................ 453 600
Payroll and other taxes payable............................................ 199 161
Other accounts payable and accrued expenses................................ 99 553
--------- ---------
$ 1,298 $ 2,566
--------- ---------
--------- ---------
</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% at December 31, 1996). 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, $5.1 million was 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 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. Another customer accounted for approximately
9%, 17% and 14% of total revenue for the years ended December 31, 1994, 1995 and
1996, 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). No other customer accounted for more than 10% of
revenue in 1994, 1995 or 1996.
F-12
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
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, subject to stockholders' approval, 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 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 (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>
NON-
ASSUMPTION VESTED VESTED
- ------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Risk-free interest rate.................................................. 5.93% 6.23%
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>
F-13
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
8. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
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.
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
------------- -----------
<S> <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 1,078,563
Cancelled/replaced during the year............................. (759,451) (7,047)
------------- -----------
Balance at December 31, 1996................................... -- 1,071,516
------------- -----------
------------- -----------
Exercisable at December 31, 1996............................... -- 363,540
------------- -----------
------------- -----------
</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 $2.02 per share.
The weighted average exercise price of options exercisable at December 31, 1996
was $.12 per share. Exercise prices for options outstanding as of December 31,
1996 ranged from $.04 to $6.25 per share. 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 amounted to
$2.80.
EMPLOYEE STOCK PURCHASE PLAN
On February 3, 1997, the Board of Directors adopted, subject to
stockholders' approval, 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.
F-14
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
8. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
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 began on February 3, 1997 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 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 or 1996 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
Services performed by related party:
Recruiting services............................................. $ 60 $ 447 $ 316
Legal and accounting............................................ -- -- 21
Allocated Expenses:
Rent............................................................ 254 329 448
Corporate and officers' salaries................................ 218 242 125
--------- --------- ---------
Total expenses included in other expenses................... 532 1,018 910
Interest........................................................ 74 84 104
--------- --------- ---------
Total related party expenses...................................... $ 606 $ 1,102 $ 1,014
--------- --------- ---------
--------- --------- ---------
</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-15
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (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-16
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (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.
As of December 31, 1996, the Company had commitments related to the
relocation of its Texas office for the purchase and/or construction of property
and equipment totaling approximately $700,000.
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.
Had the Company changed its method of accounting and ceased to operate as an
S Corporation on December 31, 1996, approximately $4,300,000 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
would have been approximately $1,634,000. 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 $580,000.
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.
The Company's stockholders will be obligated to pay the 1997 income taxes
related to the period through the completion date of closing 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 $900,000 and may be paid in cash or
notes 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
F-17
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
12. INCOME TAXES (CONTINUED)
$900,000, the actual additional income tax payable by the Company due to the
conversion from an S Corporation, will be reduced by approximately $720,000.
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 as follows (in thousands, except per share data):
<TABLE>
<S> <C>
Operating income................................................... $ (2,193)
Pro forma net income............................................... (1,360)
Pro forma net income per share..................................... (.19)
</TABLE>
Deferred compensation as of December 31, 1996 of approximately $641,000 will
be amortized over the remaining vesting periods 1997, 1998, 1999 and 2000.
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.
F-18
<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.................................................................. 24
Management................................................................ 40
Certain Transactions...................................................... 50
Principal Stockholders.................................................... 52
Description of Capital Stock.............................................. 53
Shares Eligible for Future Sale........................................... 55
Underwriting.............................................................. 56
Legal Matters............................................................. 57
Experts................................................................... 57
Additional Information.................................................... 57
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........................................................... 300,000
Accounting fees and expenses...................................................... 175,000
Directors and Officers insurance.................................................. 100,000
Blue sky fees and expenses........................................................ 5,000
Transfer agent fees............................................................... 10,000
Miscellaneous..................................................................... 77,515
----------
Total......................................................................... $ 900,000
----------
----------
</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 to be effected prior to completion of this offering):
(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 December 31, 1996, the Registrant granted options to
purchase a total of 1,121,540 shares of Common Stock at exercise prices ranging
from $.04 to $8.93 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 Form of Stockholders Agreement dated October 1, 1996 between the Registrant and certain stockholders
of the Registrant.
10.18 Form of 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.
</TABLE>
- ------------------------
* To be filed by amendment.
** 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. 2 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 24TH DAY OF MARCH, 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 MARCH 24, 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: 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 March , 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
------------------------
The foregoing report is in the form that will be signed upon the completion
of the restatement of capital accounts described in Note 3 to the financial
statements.
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.
</TABLE>
- ------------------------
* To be filed by amendment.
+ The Company has applied for confidential treatment with respect to certain
portions of these documents.
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PSW TECHNOLOGIES, INC.
(Pursuant to Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware)
PSW Technologies, Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "General Corporation
Law"),
DOES HEREBY CERTIFY:
FIRST: That the name of this corporation is PSW Technologies, Inc.,
and that this corporation was originally incorporated in Delaware under the name
PSW Technologies, Inc., on August 23, 1996, pursuant to the General Corporation
Law.
SECOND: That the Board of Directors duly adopted resolutions
proposing to amend and restate the Certificate of Incorporation of this
corporation, declaring said amendment and restatement to be advisable and in the
best interests of this corporation and its stockholders, and authorizing the
appropriate officers of this corporation to solicit the consent of the
stockholders therefore, which resolution setting forth the proposed amendment
and restatement is as follows:
"RESOLVED, that the Certificate of Incorporation of this corporation
be amended and restated in its entirety as follows:
ARTICLE I.
The name of this corporation is PSW Technologies, Inc.
ARTICLE II.
The address of the registered office of this corporation in the
State of Delaware is 1209 Orange Street, in The City of Wilmington, County of
New Castle. The name of its registered agent at such address is The Corporation
Trust Company.
<PAGE>
ARTICLE III.
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law.
ARTICLE IV.
A. This corporation is authorized to issue two classes of stock to
be designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which this corporation is authorized to issue is 35,000,000
shares. 34,000,000 shares, par value $0.01 per share, shall be Common Stock and
1,000,000 shares, par value $0.01 per share, shall be Preferred Stock.
B. The number of authorized shares of Common Stock may be increased
or decreased (but not below the number of shares thereof then outstanding) by
the affirmative vote of the holders of a majority of the stock of this
corporation entitled to vote, irrespective of the provisions of Section
242(b)(2) of the General Corporation Law of Delaware.
ARTICLE V.
A. Common Stock.
(a) General. All shares of Common Stock will be identical and
will entitle the holders thereof to the same rights, powers and privileges. The
rights, powers and privileges of the holders of the Common Stock are subject to
and qualified by the rights of holders of the Preferred Stock.
(b) Dividends. Dividends may be declared and paid on the
Common Stock from funds lawfully available therefor as and when determined by
the Board of Directors and subject to any preferential dividend rights of any
then outstanding Preferred Stock.
(c) Dissolution, Liquidation or Winding Up. In the event of
any dissolution, liquidation or winding up of the affairs of this corporation,
whether voluntary or involuntary, each issued and outstanding share of Common
Stock shall entitle the holder thereof to receive an equal portion of the net
assets of this corporation available for distribution to the holders of Common
Stock, subject to any preferential rights of any then outstanding Preferred
Stock.
(d) Voting Rights. Except as otherwise required by law or this
Amended and Restated Certificate of Incorporation, each holder of Common Stock
shall have one vote in respect of each share of stock held of record by such
holder on the books of this corporation for the election of directors and on all
matters submitted to a vote of stockholders of this corporation. Except as
otherwise required by law or provided herein,
-2-
<PAGE>
holders of Common Stock shall vote together with holders of Common Stock as a
single class, subject to any special or preferential voting rights of any then
outstanding Preferred Stock. There shall be no cumulative voting.
(e) Redemption. The Common Stock is not redeemable.
B. Preferred Stock. The Board of Directors is authorized, subject to
limitations prescribed by law and the provisions of ARTICLE IV, to provide for
the issuance of the shares of Preferred Stock in series, and by filing a
certificate pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each such
series, and to fix the designation, powers, preferences, and rights of the
shares of each such series and the qualifications, limitations or restrictions
thereof.
The authority of the Board with respect to each series shall
include, but not be limited to, determination of the following:
(a) The number of shares constituting that series and the
distinctive designation of that series;
(b) The dividend rate on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares of that
series;
(c) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion privileges, and, if
so, the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors shall
determine;
(e) Whether or not the shares of that series shall be redeemable,
and, if so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary under different conditions
and at different redemption dates;
(f) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and amount of such
sinking fund;
(g) The rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of this
corporation, and the relative rights or priority, if any, of payment of shares
of that series; and
(h) Any other relative rights, preferences and limitations of that
series.
-3-
<PAGE>
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be paid or
declared and set apart for payment on the Common Stock with respect to the same
dividend period.
If upon any voluntary or involuntary liquidation, dissolution or
winding up of this corporation, the assets available for distribution to holders
of shares of Preferred Stock of all series shall be insufficient to pay such
holders the full preferential amount to which they are entitled, then such
assets shall be distributed ratably among the shares of all series of Preferred
Stock in accordance with the respective preferential amounts (including unpaid
cumulative dividends, if any) payable with respect thereto.
ARTICLE VI.
In furtherance of and not in limitation of powers conferred by
statute, it is further provided:
1. Election of directors need not be by written ballot.
2. The Board of Directors is expressly authorized to adopt, amend or
repeal the Bylaws of this corporation.
ARTICLE VII.
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
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, of this corporation, as the case may be,
and also on this corporation.
-4-
<PAGE>
ARTICLE VIII.
A director of this corporation shall not be personally liable to
this corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to this corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the General Corporation Law is amended after approval by
the stockholders of this Article to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of this corporation shall be eliminated or limited to the fullest
extent permitted by the General Corporation Law of the State of Delaware, as so
amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of this corporation shall not adversely affect any right or
protection of a director of this corporation existing at the time of such repeal
or modification.
ARTICLE IX.
This corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of Delaware, as amended from time to time,
indemnify each person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was, or has agreed to become, a director or officer of this corporation,
or is or was serving, or has agreed to serve, at the request of this
corporation, as a director, officer or trustee of, or in a similar capacity
with, another corporation, partnership, joint venture, trust or other enterprise
(including any employee benefit plan), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom.
Indemnification may include payment by this corporation of expenses
in defending an action or proceeding in advance of the final disposition of such
action or proceeding upon receipt of an undertaking by the person indemnified to
repay such payment if it is ultimately determined that such person is not
entitled to indemnification under this Article, which undertaking may be
accepted without reference to the financial ability of such person to make such
repayment.
This corporation shall not indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person unless the initiation thereof was approved by the Board of Directors
of this corporation.
-5-
<PAGE>
The indemnification rights provided in this Article (i) shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under any law, agreement or vote of stockholders or disinterested directors or
otherwise, and (ii) shall inure to the benefit of the heirs, executors and
administrators of such persons. This corporation may, to the extent authorized
from time to time by its Board of Directors, grant indemnification rights to
other employees or agents of this corporation or other persons serving this
corporation and such rights may be equivalent to, or greater or less than, those
set forth in this Article.
ARTICLE X.
This corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute and this
Amended and Restated Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ARTICLE XI.
The number of directors of this corporation shall be fixed from time
to time by a bylaw or amendment thereof duly adopted by the Board of Directors
or by the stockholders.
ARTICLE XII.
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws of this corporation may provide. The books of this
corporation may be kept (subject to any provision contained in the statutes)
outside the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the Bylaws of this corporation.
The Stockholders of this corporation may not take any action by
written consent in lieu of a meeting."
* * *
THIRD: The foregoing amendment was approved by the holders of the
requisite number of shares of said corporation in accordance with Section 228 of
the General Corporation Law.
FOURTH: That said amendments were duly adopted in accordance with
the provisions of Section 242 and 245 of the General Corporation Law.
-6-
<PAGE>
IN WITNESS WHEREOF, this First Amended and Restated Certificate of
Incorporation has been signed by the President and the Secretary of this
corporation this ____ day of March, 1997.
_____________________________________
Dr. W. Frank King
_____________________________________
Patrick D. Motola
-7-
<PAGE>
Exhibit 3.4
AMENDED AND RESTATED BY-LAWS
OF
PSW TECHNOLOGIES, INC.
ARTICLE I
OFFICES
Section 1. The registered office shall be in the city of Wilmington,
County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
directors shall be held at such place as may be fixed from time to time by the
Board of Directors, or at such other place either within or without the State of
Delaware as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual meetings of stockholders shall be held at such
date and time as shall be designated from time to time by the Board of Directors
and stated in the notice of
<PAGE>
the meeting, at which they shall elect by a plurality vote a Board of Directors,
and transact such other business as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting stating the place,
date and hour of the meeting shall be given to each stockholder entitled to vote
at such meeting not fewer than ten (10) nor more than sixty (60) days before the
date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten (10) days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the President or the Chairman of the Board and
shall be called by the President or Secretary at the request in writing of a
majority of the Board of Directors.
Section 6. Written notice of a special meeting stating the place,
date and hour of the meeting and the purpose or purposes for which the meeting
is called, shall be given
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not fewer than ten (10) nor more than sixty (60) days before the date of the
meeting, to each stockholder entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 8. The holders of fifty percent (50%) of the stock issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is
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required, in which case such express provision shall govern and control the
decision of such question.
Section 10. Unless otherwise provided in the certificate of
incorporation each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three (3) years from its date, unless the proxy provides for a longer
period.
Section 11. A. Annual Meetings of Stockholders
1. Nominations of persons for election to the Board of
Directors and the proposal of business to be considered by the stockholders may
be made at an annual meeting of stockholders (a) pursuant to the corporation's
notice of meeting, (b) by or at the direction of the Board of Directors or (c)
by any stockholder of the corporation who was a stockholder of record at the
time of giving of notice provided for in this Section 11, who is entitled to
vote at the meeting and who complies with the notice procedures set forth in
this Section 11.
2. For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of paragraph
(A)(1) of this Section 11, the stockholder must have given timely notice thereof
in writing to the Secretary of the corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the corporation not later than the close of business on the
one hundred twentieth (120th) day nor earlier than the close of business on the
one hundred
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fiftieth (150th) day prior to the first anniversary of the date of the proxy
statement delivered to stockholders in connection with the preceding year's
annual meeting; provided, however, that if either (i) the date of the annual
meeting is more than thirty (30) days before or more than sixty (60) days after
such an anniversary date or (ii) no proxy statement was delivered to
stockholders in connection with the preceding year's annual meeting, notice by
the stockholder to be timely must be so delivered not earlier than the close of
business on the ninetieth (90th) day prior to such annual meeting and not later
than the close of business on the later of the sixtieth (60th) day prior to such
annual meeting or the close of business on the tenth (10th) day following the
day on which public announcement of the date of such meeting is first made by
the corporation. Such stockholder's notice shall set forth (a) as to each person
whom the stockholder proposes to nominate for election or reelection as a
director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director it elected); (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (c) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the corporation's books, and
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of such beneficial owner and (ii) the class and number of shares of capital
stock of the corporation that are owned beneficially and held of record by such
stockholder and such beneficial owner.
3. Notwithstanding anything in the second sentence of
paragraph (A)(2) of this Section 11 to the contrary, in the event that the
number of directors to be elected to the Board of Directors of the corporation
is increased and there is no public announcement by the corporation naming all
of the nominees for director or specifying the size of the increased Board of
Directors at least seventy (60) days prior to the first anniversary of the
preceding year's annual meeting (or, if the annual meeting is held more than
thirty (30) days before or sixty (60) days after such anniversary date, at least
seventy (60) days prior to such annual meeting), a stockholder's notice required
by this Section 11 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary at the principal executive office of the corporation
not later than the close of business on the tenth (10th) day following the day
on which such public announcement is first made by the corporation.
B. Special Meetings of Stockholders. Only such business shall
be conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the corporation's notice of meeting. Nominations
of persons for election to the Board of Directors may be made at a special
meeting of stockholders at which directors are to be elected pursuant to the
corporation's notice of meeting (a) by or at the direction of the Board of
Directors or (b) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
corporation who is a stockholder
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of record at the time of giving of notice of the special meeting, who shall be
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Section 11. If the corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any such stockholder may nominate a person or persons (as the case
may be), for election to such position(s) as specified in the corporation's
notice of meeting, if the stockholder's notice required by paragraph (A)(2) of
this Section 11 shall be delivered to the Secretary at the principal executive
offices of the corporation not earlier than the ninetieth (90th) day prior to
such special meeting not later than the later of (x) the close of business of
the sixtieth (60th) day prior to such special meeting or (y) the close of
business of the tenth (10th) day following the day on which public announcement
is first made of the date of such special meeting and of the nominees proposed
by the Board of Directors to be elected at such meeting.
C. General.
1. Only such persons who are nominated in accordance with the
procedures set forth in this Section 11 shall be eligible to serve as directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 11. Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Section 11 and, if any proposed
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nomination or business is not in compliance herewith, to declare that such
defective proposal or nomination shall be disregarded.
2. For purposes of this Section 11, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 and 15(d) of the Exchange Act.
3. Notwithstanding the foregoing provisions of this Section
11, a stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth herein. Nothing in this Section 11 shall be deemed to affect
any rights (i) of stockholders to request inclusion of proposals in the
corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(ii) of the holders of any series of Preferred Stock to elect directors under
specified circumstances.
Notwithstanding any other provision of law, the Certificate of
Incorporation or these By-Laws, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75) of the votes which all the stockholders would be
entitled to cast at any annual election of directors or class of directors shall
be required to amend or repeal, or to adopt any provision inconsistent with,
this Section 11.
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ARTICLE III
DIRECTORS
Section 1. The number of directors which shall constitute the whole
Board shall be determined by resolution of the Board of Directors or by the
stockholders at the annual meeting of the stockholders, except as provided in
Section 2 of this Article, and each director elected shall hold office until
said director's successor is elected and qualified. Directors need not be
stockholders.
Section 2. Vacancies and new created directorships resulting from
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, though less than a quorum, or by a sole
remaining director, and the directors so chosen shall hold office until the next
annual election and until their successors are duly elected and shall qualify,
unless sooner displaced. If there are no directors in office, then an election
of directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole Board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of the shares at the time outstanding having the right to vote
for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
Section 3. The business of the corporation shall be managed by or
under the direction of its Board of Directors which may exercise all such powers
of the corporation and
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do all such lawful acts and things as are not by statute or by the certificate
of incorporation or by these by-laws directed or required to be exercised or
done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 4. The Board of Directors of the corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
Section 5. The first meeting of each newly elected Board of
Directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 6. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the Board.
Section 7. Special meetings of the Board may be called by the
Chairman of the Board or the President on two (2) days' notice to each director
by mail or forty-eight (48) hours notice to each director either personally or
by telegram; special meetings shall be called by the Chairman of the Board, the
President or the Secretary in like manner and on like notice on the written
request of two directors unless the Board consists of only one
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director, in which case special meetings shall be called by the Chairman of the
Board, the President or the Secretary in like manner and on like notice on the
written request of the sole director.
Section 8. At all meetings of the Board a majority of the directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 9. Unless otherwise restricted by the certificate of
incorporation of these by-laws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these by-laws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
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COMMITTEES OF DIRECTORS
Section 11. The Board of Directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
In the absence of disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not the member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the
Board of Directors, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the by-laws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or
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committees shall have such name or names as may be determined from time to time
by resolution adopted by the Board of Directors.
Section 12. Each committee shall keep regular minutes of its
meetings and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. Unless otherwise restricted by the certificate of
incorporation or these by-laws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director or receive shares of stock or options to purchase shares of
stock in lieu of cash payments. No such payment shall preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
REMOVAL OF DIRECTORS
Section 14. Unless otherwise restricted by the certificate of
incorporation or bylaws, any director or the entire Board of Directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
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ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these by-laws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at such director's or stockholder's address as it
appears on the records of the corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Notice to directors may also be given by
telegram.
Section 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
by-laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the
Board of Directors and shall be a chief executive officer, chief financial
officer, president, treasurer and a secretary. The Board of Directors may elect
from among its members a chairman of the Board and a vice chairman of the Board.
The Board of Directors may also choose one or more senior vice-president,
vice-presidents, assistant secretaries and assistant treasurers.
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Any number of offices may be held by the same person, unless the certificate of
incorporation or these by-laws otherwise provide.
Section 2. The Board of Directors at its first meeting after each
annual meeting of stockholders shall choose a president, a treasurer, and a
secretary and may choose vice presidents.
Section 3. The Board of Directors may appoint such other officers
and agents as it shall deem necessary who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board.
Section 4. The salaries of all officers and agents of the
corporation shall be fixed by the Board of Directors.
Section 5. The officers of the corporation shall hold office until
their successors are chosen and qualify. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN OF THE BOARD
Section 6. The Chairman of the Board, if any, shall preside at all
meetings of the Board of Directors and of the stockholders at which the Chairman
shall be present. The Chairman shall have and may exercise such powers as are,
from time to time, assigned to the Chairman by the Board and as may be provided
by law.
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Section 7. In the absence of the Chairman of the Board, the Vice
Chairman of the Board, if any, shall preside at all meetings of the Board of
Directors and of the stockholders at which the Vice Chairman shall be present.
The Vice Chairman shall have and may exercise such powers as are, from time to
time, assigned to the Vice Chairman by the Board and as may be provided by law.
THE PRESIDENT AND VICE-PRESIDENTS
Section 8. The President shall be the Chief Operating Officer or
Chief Executive Officer of the corporation; and in the absence of the Chairman
and Vice Chairman of the Board the President shall preside at all meetings of
the stockholders and the Board of Directors; the President shall have general
and active management of the business of the corporation and shall see that all
orders and resolutions of the Board of Directors are carried into effect.
Section 9. The President shall execute bonds, mortgages and other
contracts, requiring a seal, under the seal of the corporation, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of the corporation.
Section 10. In the absence of the President or in the event of the
President's inability or refusal to act, a senior vice-president, if any, (or in
the event there be more than one senior vice-president, the senior
vice-presidents in the order designated by the directors, or in the absence of
any designation, then in the order of their election) shall perform the
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duties of the President, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the President. The Senior Vice-President
and the Vice-Presidents shall perform such other duties and have such other
powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 11. The Secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors,
the President or the Chairman of the Board, under whose supervision the
secretary shall be. The Secretary shall have custody of the corporate seal of
the corporation and the Secretary, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by the signature of the secretary or by the signature of such
assistant secretary. The Board of Directors may give general authority to any
other officer to affix the seal of the corporation and to attest the affixing by
said officer's signature.
Section 12. The Assistant Secretary, or if there be more than one,
the Assistant Secretaries in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election) shall,
in the absence of the Secretary
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or in the event of the Secretary's inability or refusal to act, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 13. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the Board of Directors.
Section 14. The Treasurer shall disburse the funds of the
corporation as may be ordered by the Board of Directors, taking proper vouchers
for such disbursements, and shall render to the president and the Board of
Directors, at its regular meetings, or when the Board of Directors so requires,
an account of all the Treasurer's transactions as treasurer and of the financial
condition of the corporation.
Section 15. If required by the Board of Directors, the Treasurer
shall give the corporation a bond (which shall be renewed every six years) in
such sum and with such surety or sureties as shall be satisfactory to the Board
of Directors for the faithful performance of the duties of the office of the
Treasurer and for the restoration to the corporation, in case of the Treasurer's
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in the Treasurer's
possession or under the Treasurer's control belonging to the corporation.
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Section 16. The Assistant Treasurer, or if there shall be more than
one, the Assistant Treasurers in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the Treasurer or in the event of the treasurer's
inability or refusal to act, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATE OF STOCK
Section 1. Every holder of stock in the corporation shall be
entitled to have a certificate, signed by, or in the name of the corporation by,
the Chairman or Vice-Chairman of the Board of Directors, or the President or a
vice-president and the Treasurer or an assistant treasurer, or the Secretary or
an assistant secretary of the corporation, certifying the number of shares owned
by such holder in the corporation.
Certificates may be issued for partly paid shares and in such case
upon the face or back of the certificate issued to represent any such partly
paid shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class
of stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions or such preferences and/or rights shall be set forth in
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full or summarized on the face or back of the certificate which the corporation
shall issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences 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.
Section 2. Any of or all the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if the
former officer, transfer agent or registrar were such officer, transfer agent or
registrar at the date of issue.
LOST CERTIFICATES
Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or
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destroyed certificate or certificates, or the legal representative of the owner
of such lost, stolen or destroyed certificate or certificates, to advertise the
same in such manner as it shall require and/or give the corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
TRANSFER OF STOCK
Section 4. Upon surrender to the corporation or the transfer agent
of the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 5. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholder or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply
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to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
Section 6. The corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the capital stock of the corporation,
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside
out of any funds of the corporation available for dividends such sum or sums as
the directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of
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the corporation, or for such other purposes as the directors shall think
conducive to the interest of the corporation, and the directors may modify or
abolish any such reserve in the manner in which it was created.
CHECKS
Section 3. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 4. The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.
SEAL
Section 5. The Board of Directors may adopt a corporate seal having
inscribed thereon the name of the corporation, the year of its organization and
the words "Corporate Seal, Delaware." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
INDEMNIFICATION
Section 6. The corporation shall, to the fullest extent permitted by
Section 145 of the General corporation Law of Delaware, as amended from time to
time, indemnify each person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he or she is or was, or has agreed to become, a director or officer of the
corporation, or is or was serving, or has agreed to serve, at the
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request of the corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person or on such person's
behalf in connection with such action, suit or proceeding and any appeal
therefrom.
Indemnification may include payment by the corporation of expenses
in defending an action or proceeding in advance of the final disposition of such
action or proceeding upon receipt of an undertaking by the person indemnified to
repay such payment if it is ultimately determined that such person is not
entitled to indemnification under this Section, which undertaking may be
accepted without reference to the financial ability of such person to make such
repayment.
The corporation shall not indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person unless the initiation thereof was approved by the Board of Directors
of the corporation.
The indemnification rights provided in this Section (i) shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under any law, agreement or vote of stockholders or disinterested directors or
otherwise, and (ii) shall inure to the benefit of the heirs, executors and
administrators of such persons. The corporation may, to the extent authorized
from time to time by its Board of Directors, grant indemnification rights to
other employees or agents of the corporation or other persons
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serving the corporation and such rights may be equivalent to, or greater or less
than, those set forth in this Section.
TRANSACTIONS WITH INTERESTED PARTIES
Section 7. No contract or transaction between the corporation and
one or more of the directors of officers, or between the corporation and any
other corporation, partnership, association, or other organization in which one
or more of the directors or officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because such director or officer is present at or participates in the meeting of
the Board of Directors or a committee of the Board of Directors which authorizes
the contract or transaction or solely because his, her or their votes are
counted for such purpose, if:
(1) The material facts as to his or her relationship or
interest and as to the contract or transaction are disclosed or are
known to the Board of Directors or the committee, and the Board or
committee in good faith authorizes the contract or transaction by
the affirmative vote of a majority of the disinterested directors,
even though the disinterested directors be less than a quorum;
(2) The material facts as to his or her relationship or
interest and as to the contract or transaction are disclosed or are
known to the stockholders entitled to vote thereon, and the contract
or transaction is specifically approved in good faith by vote of the
stockholders; or
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(3) The contract or transaction is fair as to the corporation
as of the time it is authorized, approved or ratified, by the Board
of Directors, a committee of the Board of Directors, or the
stockholders.
Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
ARTICLE VIII
AMENDMENTS
These by-laws may be altered, amended or repealed or new by-laws may
be adopted by the stockholders or by the Board of Directors, when such power is
conferred upon the Board of Directors by the certificate of incorporation at any
regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors if notice of
such alteration, amendment, repeal or adoption of new by-laws be contained in
the notice of such special meeting. If the power to adopt, amend or repeal
by-laws is conferred upon the Board of Directors by the certificate or
incorporation it shall not divest or limit the power of the stockholders to
adopt, amend or repeal by-laws.
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Exhibit 10.3
OFFICE LEASE
BY AND BETWEEN
G & W INVESTMENT PARTNERS,
A NINI KUMIA FORMED UNDER THE LAWS OF JAPAN,
LANDLORD,
AND
PENCOM SYSTEMS, INC.,
A NEW YORK CORPORATION
DBA PSW TECHNOLOGIES
TENANT
<PAGE>
TABLE OF CONTENTS
Section
Page
Number Title Number
- ---------------------------------------------------------------------
I. TERMS AND DEFINITIONS 1
II. PROPERTY LEASED 2
A. Premises 2
B. Common Areas 2
C. Minor Variations In Area 2
D. Substitution of Space 2
III. COMMENCEMENT OF TERM AND POSSESSION OF PREMISES 3
A. Lease Commencement Date 3
B. Completion of Tenant Improvements and
Possession of Premises 3
C. Extension of Lease Commencement Date 3
D. Acceptance and Suitability 3
IV. RENT 4
A. Monthly Rental 4
B. Consumer Price Index Increases 4
C. Additional Rent 5
V. REIMBURSEMENT OF COMMON EXPENSES 5
A. Definitions 5
B. Reimbursement 6
C. Rebate or Additional Charges 7
D. Control of Common Areas 7
VI. SECURITY DEPOSIT 7
VII. TENANT'S TAXES 8
VIII. USE OF PREMISES 8
A. Permitted Uses 8
B. Compliance with Laws 9
C. Hazardous Materials 9
D. Landlord's Rules and Regulations 10
IX. SERVICE AND UTILITIES 11
A. Standard Building Services
and Reimbursement by Tenant 11
B. Limitation on Landlord's Obligations 12
C. Excess Service 12
D. Security Services 12
X. MAINTENANCE AND REPAIRS 12
A. Landlord's Obligations 12
B. Tenant's Obligations 12
C. Landlord's Right to Make Repairs 13
D. Condition of Premises Upon Surrender 13
XI. ENTRY BY LANDLORD 13
XII. ALTERATIONS, ADDITIONS AND TRADE FIXTURES 14
XIII. MECHANIC'S LIENS 15
(I)
<PAGE>
XIV. INSURANCE 15
A. Tenant 15
B. Landlord 16
XV. INDEMNITY 16
A. Tenant 16
B. Landlord 17
C. Limitation on Recovery for Property Damage 17
D. Limitation of Landlord's Liability,
Release of Trustees, Officers and
Partners of Landlord 18
XVI. ASSIGNMENT AND SUBLETTING BY TENANT 18
XVII. TRANSFER OF LANDLORD'S INTEREST 21
XVIII. DAMAGE AND DESTRUCTION 21
A. Minor Insured Damage 21
B. Major or Uninsured Damage 21
C. Abatement of Rent 22
XIX. CONDEMNATION 22
A. Total or Partial Taking 22
B. Award 23
C. Abatement in Rent 23
D. Temporary Taking 23
E. Transfer of Landlord's Interest to Condemnor 24
XX. DEFAULT 24
A. Tenant's Default 24
B. Remedies 25
XXI. LATE PAYMENTS/INTEREST AND LATE CHARGES 26
A. Interest 27
B. Late Charges 27
C. Consecutive Late Payment of Rent 27
D. No Waiver 27
XXII. LIEN FOR RENT 28
XXIII. HOLDING OVER 28
XXIV. ATTORNEYS' FEES 28
XXV. MORTGAGEE PROTECTION 28
A. Subordination; Nondisturbance 29
B. Attornment 29
XXVI. ESTOPPEL CERTIFICATE/FINANCIAL STATEMENTS 29
A. Estoppel Certificate 29
B. Furnishing of Financial Statements 30
XXVII. PARKING 30
XXVIII. SIGNS; NAME OF BUILDING 31
XXIX. QUIET ENJOYMENT 32
XXX. BROKERS AND AGENTS 32
(II)
<PAGE>
XXXI. NOTICES 32
XXXII. NOTICE AND CURE TO LANDLORD AND MORTGAGEE 32
XXXIII. GENERAL 33
A. Paragraph Headings 33
B. Incorporation of Prior Agreements; Amendments 33
C. Waiver 33
D. Short Form or Memorandum of Lease 33
E. Time of Essence 33
F. Examination of Lease 33
G. Severability 33
H. Surrender of Lease Not Merger 34
I. Corporate Authority 34
J. Governing Law 34
K. Force Majeure 34
L. Use of Language 34
M. Successors 34
N. No Reduction of Rental 34
0. No Partnership 35
P. Exhibits 35
Q. Indemnities 35
XXXIV. EXECUTION 36
EXHIBIT A SITE PLAN FOR THE PROJECT 37
EXHIBIT B FLOOR PLAN OF THE PREMISES 38
EXHIBIT C CONSTRUCTION WORK LETTER 39
EXHIBIT D RENT SCHEDULE 40
EXHIBIT E RULES AND REGULATIONS 41
EXHIBIT F AMENDMENT OF LEASE COMMENCEMENT DATE 44
(III)
<PAGE>
OFFICE LEASE
THIS LEASE is entered into by and between Landlord and Tenant effective as of
this 25th day of April, l996 ("Effective Date").
SECTION I. TERMS AND DEFINITIONS
The following terms as used herein shall have the meanings as set forth below:
A. "Landlord" means G&W INVESTMENT PARTNERS, a nini kumia formed under
the laws of Japan and its successors and assigns.
B. "Tenant" means Pencom Systems Inc., a New York Corporation DBA PSW
Technologies.
C. "Building" means the building in which the Premises are located,
which Building has approximately 41,941 net rentable square feet and
is located at 3055 - 112th Avenue NE in the City of Bellevue,
Washington.
D. "Project" means the Corporate Campus East - Buildings A, B & C
located in the City of Bellevue, Washington, in which Project the
Building is located as shown on the site plan attached hereto as
Exhibit A.
E. "Premises" means suite(s) 202 located on the second floor of the
Building and consisting of approximately four thousand six hundred
twenty three (4,623) net rentable square feet, as more particularly
shown on Exhibit B attached hereto and incorporated herein by this
reference.
F. "Term" means three (3) years.
G. "Lease Commencement Date" means May 1, 1996; provided, however, that
if the Lease Commencement Date stated in this subsection is extended
pursuant to Section III. C. below, Landlord and Tenant shall execute
and attach hereto as a new Exhibit F, an Amendment of Lease
Commencement Date, in form of that attached hereto as Exhibit F,
which shall specify such amended Lease Commencement Date and, if
applicable, an amended Expiration Date.
H. "Expiration Date" means April 30, 1999 unless amended as provided in
an Amendment of Lease Commencement Date executed as provided above.
I. "Monthly Rental" means the amounts specified in Section IV below and
in the Rent Schedule attached hereto as Exhibit D and incorporated
herein, subject to adjustments as set forth in Section IV. B. below.
J. "Base Operating Expense" means the actual amount for the calendar
year 1996 (as defined in Section V below) which shall be paid by
Landlord and not Tenant.
K. "Security Deposit" means seven thousand one hundred twenty seven
Dollars ($7,127.00)
L. "Permitted Use" means General Office Use
M. "Broker" means CB Commercial Real Estate Group, Inc.
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N. "Landlord's Address for Notice" means ARES Realty Capital Inc., 3055
112th Avenue NE, Suite 211, Bellevue, WA 98004, With a copy to:
Asset Management, ARES Realty Capital Inc., 7600 East Eastman
Avenue, Suite 300, Denver, Colorado 80231.
0. "Tenant's Address for Notice" means 3055 - 112th Avenue NE, Suite
202, Bellevue, Washington.
P. "Tenant's Proportionate Share" for Tenant's reimbursement of Common
Operating Costs and other expenses to be pro-rated hereunder means
11% which is the quotient obtained by dividing the total number of
square feet of net rentable floor area in the Building into the
total number of square feet of net rentable floor area within the
Premises.
Q. "Tenant's Parking Spaces" means seventeen (17) total parking spaces
located in such areas of the Project as landlord determines and
divided as follows: two (2) covered and fifteen (15) non-covered or
surface, all of which shall be non-exclusive, unassigned.
R. "Monthly Parking Rent" means fifteen dollars ($15) per month, per
stall payable by Tenant for Tenant's fifteen (15) covered parking
spaces. Such Monthly Parking Rent shall be considered Additional
Rent and shall be due and payable without notice or demand, on or
before the first day of each calendar month.
SECTION II. PROPERTY LEASED
A. Premises
Upon and subject to the terms, covenants and conditions hereinafter set
forth, Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, the Premises.
B. Common Areas
Subject to the terms, covenants and conditions of this Lease, Tenant shall
have the right, for the benefit of Tenant and its employees, suppliers,
shippers, customers and invitees, to the non-exclusive use of all of the
Common Areas as hereinafter defined.
C. Minor Variations In Area
The area of the Premises contained in Section I. is agreed to be the area
of the Premises regardless of minor variations resulting from construction
or remodeling of the Building and/or tenant improvements.
D. Substitution of Space (Intentionally Deleted)
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SECTION III. COMMENCEMENT OF TERM AND POSSESSION OF PREMISES
A. Lease Commencement Date
The Term of the Lease shall commence on the Lease Commencement Date (as
extended only pursuant to Section III. C. below, if applicable), and shall
continue, subject to earlier termination as provided herein, until the
Expiration Date (as extended only pursuant to subsection C. below).
B. Completion of Tenant Improvements and Possession of Premises
Upon execution of this Lease by the parties, Landlord shall proceed to
complete the tenant improvements in the Premises described as "Landlord's
Work" in the "Construction Work Letter" attached hereto and incorporated
herein as Exhibit C. At the time such work has been substantially
completed in accordance with the Construction Work Letter, except for
minor decorative or other "punch list" items as contemplated in subsection
D. below, and the Premises has been approved for occupancy under the
applicable building code (which together shall constitute "Substantial
Completion" hereunder), Landlord shall notify Tenant thereof and Tenant
shall take possession of the Premises on or after the Lease Commencement
Date. In the event permission is given to Tenant to enter or occupy all or
a portion of the Premises prior to the Lease Commencement Date, such
occupancy shall be subject to all of the terms and conditions of this
Lease. All tenant improvements constructed in the Premises, whether by
Landlord or by (or on behalf of) Tenant and whether at Landlord's or
Tenant's expense, shall become part of the Premises and shall be and
remain the property of Landlord unless Landlord specifically agrees
otherwise in writing.
C. Extension of Lease Commencement Date
If the Premises are not Substantially Completed on the original Lease
Commencement Date specified in Section I. due to one or more delays caused
by Landlord or caused by matters beyond the control of Landlord, this
Lease and the obligations of Landlord and Tenant hereunder shall
nevertheless continue in full force and effect. However, in such event
Landlord and Tenant shall agree on an amendment of the original Lease
Commencement Date to reflect such delay or delays and shall, in each
instance, execute and attach hereto an amendment in the form of that
attached as Exhibit F hereto stating such amended Lease Commencement Date
and, if applicable, an amended Expiration Date and no rental shall be
payable by Tenant hereunder until the amended Lease Commencement Date. The
delay in commencement of the Term and in Tenant's obligation to pay rent
described in the foregoing sentence shall constitute full settlement of
all claims that Tenant might otherwise have by reason of the Premises not
being Substantially Completed on the original Lease Commencement Date
specified in Section I. above.
If the Premises are not Substantially Completed on the Lease Commencement
Date due to one or more delays caused by Tenant, or anyone acting under or
for Tenant, Landlord shall have no liability for such delay and the Lease
Commencement Date shall nevertheless begin as of the Lease Commencement
Date stated in Section I. (as extended only because of Landlord's delay
pursuant to this subsection C., if applicable).
D. Acceptance and Suitability
Within fifteen (15) days following the date Tenant takes possession of the
Premises, Tenant may provide Landlord with a "punch list" which sets forth
an itemization of any reasonable corrective work
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to be performed by Landlord with respect to the Landlord's Work as set
forth in the Construction Work Letter; provided, however, that Tenant's
obligation to pay Monthly Rental as provided below shall not be affected
thereby. If Tenant fails to submit such "punch list" to Landlord within
such fifteen (15) day period, Tenant agrees that by taking possession of
the Premises it will conclusively be deemed to have inspected the Premises
and found the Premises in satisfactory condition. Tenant acknowledges that
neither Landlord, nor any agent, employee or servant of Landlord, has made
any representation with respect to the Premises or the Project, or with
respect to the suitability of them to the conduct of Tenant's business,
nor has Landlord agreed to undertake any modifications, alterations, or
improvements of the Premises or Project, except as specifically provided
in this Lease.
TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, LANDLORD HEREBY
DISCLAIMS, AND TENANT WAIVES THE BENEFIT OF, ANY AND ALL IMPLIED
WARRANTIES, INCLUDING IMPLIED WARRANTIES OF HABITABILITY, FITNESS OR
SUITABILITY FOR PURPOSE, OR THAT THE PROJECT (OTHER THAN THE IMPROVEMENTS
CONSTRUCTED BY LANDLORD IN THE PREMISES) HAVE BEEN CONSTRUCTED IN A GOOD
AND WORKMANLIKE MANNER. TENANT EXPRESSLY ACKNOWLEDGES THAT LANDLORD DID
NOT CONSTRUCT OR APPROVE THE QUALITY OF CONSTRUCTION OF THE BUILDING.
SECTION IV. RENT
A. Monthly Rental
Commencing on the Lease Commencement Date Tenant shall pay to Landlord
during the Term, rental for the entire Term in the total amount as set
forth in the "Rental Schedule" attached hereto as Exhibit D payable in
monthly installments (the "Monthly Rental") in the amount also set forth
in Exhibit D, (subject, however, to any modifications or adjustments
specified hereinbelow and/or in Exhibit D. The Monthly Rental shall be
payable by Tenant on or before the first day of each month, in advance,
without further notice, at the address specified for Landlord in Section
I., or such other place as Landlord shall designate, without any prior
demand therefor and without any abatement, deduction or set off
whatsoever. Notwithstanding the foregoing, Monthly Rental for the first
full month shall be paid upon the execution hereof. If the Lease
Commencement Date should occur on a day other than the first day of a
calendar month, or the Expiration Date should occur on a day other than
the last day of a calendar month, then the rental for such fractional
month shall be prorated on a daily basis upon a thirty (30) day calendar
month.
B. Consumer Price Index Increases (Intentionally Deleted)
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C. Additional Rent
As used in this Lease, the term "rent" shall mean the Monthly Rental plus
all "additional rent", which shall mean all other amounts payable by
Tenant to Landlord pursuant to this Lease other than Monthly Rental,
including without limitation, Tenant's Proportionate Share of Common
Operating Costs and Monthly Parking Rent. All Monthly Rental and
additional rent shall be paid in lawful money of the United States which
shall be legal tender at the time of payment. Where no other time is
stated herein for payment, payment of any amount due from Tenant to
Landlord hereunder shall be made within ten (10) days after Tenant's
receipt of Landlord's invoice or statement therefor.
SECTION V. REIMBURSEMENT OF COMMON EXPENSES
A. Definitions
(1) "Common Areas" means all areas, space, equipment and special
services provided by Landlord for the common or joint use and
benefit of the tenants, their employees, agents, servants,
suppliers, customers and other invitees, including, by way of
illustration, but not limitation, retaining walls, fences,
landscaped areas, parks, curbs, sidewalks, private roads, restrooms,
stairways, elevators, lobbies, hallways, patios, service quarters,
parking areas, all common areas and other areas within the exterior
of the Building and in the Project or as shown on the site plan
attached to this Lease as Exhibit A.
(2) "Taxes" shall mean all real property taxes, personal property taxes,
improvement bonds, and other charges and assessments which are
levied or assessed upon or with respect to the Building and Project
and the land on which the Building and Project are located and any
improvements, fixtures and equipment and all other property of
Landlord, real or personal, located in the Building and Project and
used in connection with the operation of the Building and Project
and the land on which the Building and Project are located,
including any increase in such taxes, whether resulting from a
reassessment of the value of the land, the Building or the Project,
personal property, or for any other reason, imposed by any
governmental authority, and any tax which shall be levied or
assessed in addition to or in lieu of such real or personal property
taxes and any license fees, commercial rental tax, or other tax upon
Landlord's business of leasing the Building and the Project, but
shall not include any federal or state income tax, or any franchise,
capital stock, estate, inheritance, succession, transfer and excess
profit taxes imposed upon Landlord, and shall also include any tax
consultant fee or other costs incurred by Landlord to review or
contest any tax assessed against the Premises, Building, or Project.
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(3) "Common Operating Costs" shall mean the aggregate of all costs and
expenses payable by Landlord in connection with the operation and
maintenance of the Premises, Building, Project, and Common Areas,
including, but not limited to, (a) the cost of landscaping,
repaving, resurfacing, repairing, replacing, painting, lighting,
cleaning, removing trash, janitorial services, security services and
other similar items;(c) all Taxes; (d) the cost of any insurance
obtained by Landlord in connection with the Building and Project,
including, but not limited to, the insurance required to be obtained
by Landlord pursuant to this Lease; (e) the cost of operating,
repairing and maintaining the mechanical, electrical, plumbing, life
safety, and access systems; (f) the cost of monitoring services, if
provided by Landlord, including, without limitation, any monitoring
or control devices used by Landlord in regulating the parking areas;
(g) the cost of water, electricity, gas and any other utilities; (h)
legal, accounting and consulting fees and expenses; (i) compensation
(including employment taxes and fringe benefits) of all persons who
perform duties connected with the operation, maintenance and repair
of the Premises, Project, Building or Common Areas but in no event
will this cost include executive personnel beyond the level of the
property manager, additionally, as long as the current management
agreement is in effect, neither will the cost of persons include
that of the Property Manager or any accounting personnel; (j) energy
allocation, energy use surcharges, or environmental charges; (k)
municipal inspection fees or charges; (l) the costs incurred by
Landlord to provide management services for the Building or Project;
(m) the amortized cost, including financing costs if applicable, of
any equipment, device or other capital improvement installed by
Landlord in the Premises, Building or Project which achieve
economies in the operation, maintenance and/or repair thereof; and
(n) any other costs or expenses incurred by Landlord under this
Lease which are not otherwise reimbursed directly by tenants. The
computation of Common Operating Costs shall be made in accordance
with generally accepted accounting principles.
(4) In the event during all or any portion of any calendar year the
Building is not at least ninety-five percent (95%) rented and
occupied, Landlord may elect to make an appropriate adjustment to
the Common Operating Costs for such year, employing sound accounting
and management principles, to determine the Common Operating Costs
that would have been paid or incurred by Landlord had the Building
been ninety-five percent (95%) rented and occupied and the amount so
determined shall be deemed to have been the Common Operating Costs
for such year.
B. Reimbursement
Within a reasonable time before the commencement of each calendar year
during the Term, Landlord shall deliver to Tenant a reasonable estimate of
the Common Operating Costs Landlord will incur for the forthcoming
calendar year. Commencing on the Lease Commencement Date, and continuing
on the first day of each calendar month thereafter, Tenant shall pay to
Landlord, as additional rental, an amount equal to one-twelfth (1/12th) of
the product obtained by multiplying (i) the remainder obtained by
deducting the Base Operating Expense, if any, from the then estimated
Common Operating Costs for the applicable calendar year of the Lease Term,
times (ii) Tenant's Proportionate Share; provided, however, that such
amount shall not be less than zero dollars ($0). The total of such
additional monthly payments to be paid by Tenant for such calendar year
shall be called "Tenant's Estimated Operating Cost". Upon
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Notice to Tenant, Tenant's Estimated Operating Cost may be adjusted
periodically by Landlord during the calendar year on the basis of
Landlord's reasonably revised estimate of Common Operating Costs for such
calendar year. Any major expenditure by Landlord (e.g. resurfacing of
parking areas, painting buildings, refurbishing landscaping or walkways
and similar items) during the year which was not included in determining
the estimated Common Operating Costs, may be billed separately to Tenant
according to Tenant's Proportionate Share.
C. Rebate of Excess Charges or Payment of Additional Charges
Within a reasonable time after the end of each calendar year, Landlord
shall furnish Tenant with a statement showing the Common Operating Costs
actually paid or incurred by Landlord for such year less the Base
Operating Expense, if any, and Tenant's Proportionate Share thereof
("Tenant's Actual Operating Cost"), which shall in no event be less than
zero dollars ($0). If the amount of Tenant's Estimated Operating Cost paid
by Tenant for such calendar year exceeds Tenant's Actual Operating Cost
for that year, Landlord shall refund such excess to Tenant within thirty
(30) days after such determination or Landlord may, at its sole option,
apply such excess to any outstanding amounts due Landlord. If Tenant's
Estimated Operating Cost actually paid by Tenant is less than Tenant's
Actual Operating Cost, Tenant shall pay such shortfall to Landlord, as
additional rent, within thirty (30) days after receipt of Landlord's
statement showing the amount due. If the Lease commences on a date other
than on the first day of a calendar year or expires or otherwise
terminates, on a date other than on the last day of a calendar year, the
foregoing payments shall be prorated accordingly.
D. Control of Common Areas
Tenant's use of the Common Areas shall be subject to the provisions of
this Lease and Landlord's rights, hereby reserved, to (a) restrain the use
of the Common Areas by unauthorized persons, (b) utilize from time to time
any portion of the Common Areas for promotional and related matters, (c)
temporarily close any portion of the Common Areas for repairs,
improvements or alterations, (d) change the shape and size of the Common
Areas or change the location of improvements within the Common Areas,
including, without limitation, parking areas, roadways and curb cuts, and,
(e) prohibit access to or use of Common Areas that are designated for the
storage of supplies or operation of equipment necessary to operate the
Project or Building. In addition, Landlord may determine the nature, size
and extent of the Common Areas as well as make changes to the Common Areas
and take such other actions in connection therewith from time to time
which, in its opinion, are deemed desirable.
SECTION VI. SECURITY DEPOSIT
Upon execution of this Lease, Tenant shall deposit with Landlord the Security
Deposit defined in Section I. above, which shall be held for Landlord as
security for the performance by Tenant of all terms, covenants and conditions of
this Lease. It is expressly understood and agreed that such deposit is not an
advance rental payment or a measure of Landlord's damages in case of Tenant's
default. If Tenant defaults with respect to any provision of this Lease,
including, but not limited to, the provisions relating to the payment of rent or
the obligation to repair and maintain the Premises or to perform any other term,
covenant or condition contained herein, Landlord may (but shall not be required
to), without prejudice to any other remedy provided herein or provided by law
and without notice to Tenant, use the Security Deposit, or any portion of it, to
cure the default or to compensate Landlord for all damages sustained by Landlord
resulting from Tenant's default. Tenant shall immediately on demand pay to
Landlord a sum equivalent to the portion of the Security Deposit so expended or
applied by Landlord as
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provided in this paragraph so as to maintain the Security Deposit in the sum
initially required to be deposited with Landlord. Although the Security Deposit
shall be deemed the property of Landlord, if Tenant is not in default at the
expiration or earlier termination of this Lease, Landlord shall return the
Security Deposit to Tenant within thirty (30) days of the termination of this
Lease. Landlord shall not be required to keep the Security Deposit separate from
its general funds and Landlord, not Tenant, shall be entitled to all interest,
if any, accruing on any such deposit. Upon any sale or transfer of its interest
in the Building, Landlord shall transfer the Security Deposit to its successor
in interest and thereupon, Landlord shall be released from any liability or
obligation with respect thereto.
SECTION VII. TENANT'S TAXES
To the extent not covered as a Common Operating Expense, Tenant shall be liable
for any tax (now or hereafter imposed by any governmental entity) applicable to
or measured by or levied on the rents or any other charges payable by Tenant
under this Lease, including (but not limited to) any gross income tax, gross
receipts tax or excise tax payable with respect to the receipt of such rent or
other charges or the possession, leasing or operation, use or occupancy of the
Premises, but not including any net income, franchise, capital stock, estate or
inheritance taxes payable by Landlord. If any such tax is required to be paid to
the governmental taxing entity directly by Landlord, then Landlord shall pay the
amount due and, upon demand, shall be fully reimbursed by Tenant for such
payment.
Tenant shall also be liable for all taxes levied against the leasehold held by
Tenant or against any personal property, leasehold improvements, additions,
alterations and fixtures placed by or for Tenant in, on or about the Premises,
Building and Project or constructed by Landlord for Tenant in the Premises,
Building or Project; and if any such taxes are levied against Landlord or
Landlord's property, or if the assessed value of such property is increased
(whether by special assessment or otherwise) by the inclusion therein of value
placed on such leasehold, personal property, leasehold improvements, additions,
alterations and fixtures, and Landlord pays any such taxes (which Landlord shall
have the right to do regardless of the validity thereof), Tenant, upon demand,
shall fully reimburse Landlord for the taxes so paid by Landlord or for the
proportion of such taxes resulting from such increase in any assessment.
SECTION VIII. USE OF PREMISES
A. Permitted Uses
Tenant shall use the Premises and Common Areas solely for the Permitted
Use specified in subsection I.L. above, and for no other use. Tenant
shall, at its own cost and expense, obtain any and all licenses and
permits necessary for any such use. Tenant shall not do or permit anything
to be done in or about the Premises, Common Areas, Building or Project
which will in any way obstruct or interfere with the rights of other
tenants or occupants of the Project or injure or annoy them. Tenant shall
not use or allow the Premises to be used for any unlawful purpose, nor
shall Tenant cause, maintain or permit any nuisance in, on or about the
Premises and Common Areas. Tenant shall not commit or suffer to be
committed any waste in or upon the Premises, Common Areas, Building or
Project. Tenant shall not do or permit anything to be done in or about the
Premises, Common Areas, Building or Project which may render the insurance
thereon void or increase the insurance risk or cost thereon. If an
increase in any fire and extended coverage insurance premiums paid by
Landlord for the Building and Project is caused by Tenant's use and
occupancy of the Premises, then Tenant shall pay, as additional rental,
the amount of such increase to Landlord.
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B. Compliance with Laws
Tenant shall not use the Premises, Building, Project or Common Areas in
any way (or permit or suffer anything to be done in or about the same)
which will conflict with any law, statute, ordinance or governmental rule
or regulation or any covenant, condition or restriction (whether or not of
public record) affecting the Premises, Project or Building, now in force
or which may hereafter be enacted or promulgated including, but not
limited to, the provisions of any city or county zoning codes regulating
the use thereof. Tenant shall, at its sole cost and expense, promptly
comply with (a) all laws, statutes, ordinances, and governmental rules and
regulations, now in force or which may hereafter be in force, (b) all
requirements, and other covenants, conditions and restrictions, now in
force or which may hereafter be in force, which affect the Premises, and
(c) all requirements, now in force or which may hereafter be in force, of
any board of fire underwriters or other similar body now or hereafter
constituted relating to or affecting the condition, use or occupancy of
the Premises, Building or Project. The judgment of any court of competent
jurisdiction or the admission by Tenant in any action against Tenant,
whether Landlord be a party thereto or not, that Tenant has violated any
such law, statute, ordinance, governmental rule or regulation or any
requirement, covenant, condition or restriction shall be conclusive of the
fact as between Landlord and Tenant. Tenant agrees to fully indemnify
Landlord against any liability, claims or damages arising as a result of a
breach of the provisions of this Subsection by Tenant, and against all
costs, expenses, fines or other charges arising therefrom, including,
without limitation, reasonable attorneys' fees and related costs incurred
by Landlord in connection therewith, which indemnity shall survive the
expiration or earlier termination of this Lease.
C. Hazardous Materials
Tenant shall not cause or permit any Hazardous Material (as defined below)
to be brought upon, kept, or used in or about the Premises, Building or
Project by Tenants, its agents, employees, contractors, or invitees,
without the prior written consent of Landlord (which Landlord shall not
unreasonably withhold as long as Tenant demonstrates to Landlord's
reasonable satisfaction that such Hazardous Material is necessary or
useful to Tenant's business and will be used, kept, stored and disposed of
in a manner that complies with all laws regulating any such Hazardous
Material so brought upon or used or kept in or about the Premises,
Building and Project, and such storage will not create an undue risk to
other tenants of the Building and Project, giving consideration to the
nature of the Project and Building). If Tenant breaches the obligations
stated in the preceding sentence, or if the presence of Hazardous Material
on the Premises, Building or Project caused or permitted by Tenant results
in contamination of the Premises, the Building or the Project, or if
contamination of the Premises, the Building or the Project, by Hazardous
Material otherwise occurs for which Tenant is legally liable to Landlord
for damage resulting therefrom, then Tenant shall indemnify, defend and
hold Landlord harmless from any and all claims, judgments, damages,
penalties, fines, costs, liabilities, or losses (other than consequential
damages) which arise during or after the Lease Term as a result of such
contamination. This indemnification of Landlord by Tenant includes,
without limitation, the obligation to reimburse Landlord for costs
incurred in connection with any investigation of site conditions or any
cleanup, remedial, removal or restoration work required by any federal,
state, or local governmental agency or political
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subdivision because of Hazardous Material present in, on, or about the
Premises, Building or Project or in the soil or ground water on or under
the Premises, the Building or the Project. Without limiting the foregoing,
if the presence of any Hazardous Material in, on or about the Premises,
Building or Project caused or permitted by Tenant results in any
contamination of the Premises, the Building or the Project, Tenant shall
promptly take all actions at its sole expense as are necessary to return
the Premises, the Building or the Project to the condition existing prior
to the introduction of any such Hazardous Material thereto; provided that
Landlord's approval of such actions shall first be obtained, which
approval shall not be unreasonably withheld so long as such actions would
not potentially have any material adverse long-term or short-term effect
on the Premises, Building or Project or exposes Landlord to any liability
therefor and such actions are undertaken in accordance with all applicable
laws, rules and regulations and accepted industry practices.
"Hazardous Material" is used in this Lease in its broadest sense and shall
mean any petroleum based products, pesticides, paints and solvents,
polychlorinated biphenyl, lead, cyanide, DDT, acids, ammonium compounds
and other chemical products and any substance or material defined or
designated as hazardous or toxic, or other similar term, by any federal,
state or local environmental statute, regulation, or ordinance affecting
the Premises, Building or Project presently in effect or that may be
promulgated in the future, as such statutes, regulations and ordinances
may be amended from time to time, including but not limited to the
statutes listed below:
Resource Conservation and Recovery Act of 1976, 42 U.S.C. ss. 6901 et seq.
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, 40 U.S.C. ss. 1801 et seq.
Clean Air Act, 42 U.S.C. ss.ss. 7401-7626.
Water Pollution Control Act (Clean Water Act of 1977), 33 U.S.C. ss. 1251
et seq.
Insecticide, Fungicide, and Rodenticide Act (Pesticide Act of 1987), 7
U.S.C. ss. 135 et seq.
Toxic Substances Control Act, 15 U.S.C. ss. 2601 et seq.
Safe Drinking Water Act, 42 U.S.C. ss. 300(f) et seq.
National Environmental Policy Act (NEPA) 42 U.S.C. ss. 4321 et seq.
Refuse Act of 1899, 33 U.S.C. ss. 407 et seq.
D. Landlord's Rules and Regulations
Tenant shall, and Tenant agrees to cause its agents, servants, employees,
invitees, and licensees to observe and comply fully and faithfully with
the rules and regulations attached hereto as Exhibit E or such reasonable
rules and regulations which may hereafter be adopted by Landlord (the
"Rules") for the care, protection, cleanliness, and operation of the
Premises, Building and Project, and any reasonable modifications or
additions to the Rules adopted by Landlord, provided that, Landlord shall
give written notice thereof to Tenant and, Tenant's Permitted Use of the
Project's not unreasonably affected. Landlord shall not be responsible to
Tenant for failure of any other tenant or occupant of the Building or
Project to observe or comply with any of the Rules. To the best of its
ability Landlord will apply the Rules equally to all tenants and will not
discriminate in the application of the Rules.
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SECTION IX. SERVICE AND UTILITIES
A. Standard Building Services and Reimbursement by Tenant
Landlord agrees to furnish to the Premises, between the hours of 7:00 a.m.
and 6:00 p.m. on Monday through Friday and between 8:00 a.m. and 12 noon
on Saturday (Sunday and legal holidays excepted) (hereinafter "Building
Hours"), heat and air conditioning (hereinafter "HVAC"), required in
Landlord's judgment for the comfortable use and occupation of the Premises
for general office purposes and at a level which is usual and customary in
similar office buildings in the area where the Project is located, all of
which shall be subject to the Rules of the Building as well as any
governmental requirements or standards relating to, among other things,
energy conservation. Standard water, electrical and elevator (if
applicable) service shall be supplied to the Premises at all times at
Landlord's cost, which cost is subject to the provisions of Section V
herein. Tenant agrees to pay, as a Common Operating Expense except as
provided below, the full cost of all utilities supplied to the Premises,
together with any taxes thereon, as part of Tenant's Proportionate Share
of Common Operating Costs except for separately metered and excess service
as provided below. If any such service or utilities are separately metered
to the Premises, Tenant shall pay the cost thereof in a timely manner
directly to the utility company providing such service. Tenant's
obligations in this Section regarding utilities include, but are not
limited to initial connection charges, all charges for gas, water and
electricity used on the Premises, and for all electric light lamps or
tubes. Tenant shall be required to pay any increased cost, as additional
rent, of any utilities and services, including, without limitation, water,
electricity and HVAC, resulting from any use of the Premises at any time
other than the above scheduled Building Hours or any use beyond what
Landlord agrees to furnish as described above, or resulting from special
electrical, cooling and ventilating needs created in certain areas by
telephone equipment, computers and other similar equipment or uses. Tenant
agrees to pay the cost of operating the HVAC at any time other than the
above scheduled Building Hours, which cost may include the operation of
the HVAC for space located outside the Premises when such space is
serviced concurrently with the operation of the HVAC for the benefit of
the Premises. Landlord estimates the cost of such HVAC service to be
$25.00 per hour.
B. Limitation on Landlord's Obligations
Landlord shall not be liable for and Tenant entitled to any abatement or
reduction of rent by reason of, Landlord's failure to furnish any of the
foregoing when such failure is caused by accidents, breakage, repairs,
strikes, brownouts, blackouts, lockouts or other labor disturbances or
labor disputes of any character, or by any other cause, similar or
dissimilar, beyond the reasonable control of Landlord, nor shall such
failure under such circumstances be construed as a constructive or actual
eviction of Tenant. Notwithstanding any of the foregoing, Landlord shall
not be liable under any circumstances for loss or injury to the property
or business of Tenant, however occurring, through or in connection with or
incidental to Landlord's furnishing or failure to furnish any of said
service or utilities.
C. Excess Service
Tenant shall not, without the written consent of Landlord, use any
apparatus or device in the Premises, including, without limitation,
electronic data processing machines, punch card machines or machines using
in excess of one hundred twenty (120) volts or which consumes more
electricity than is usually furnished or supplied for the Permitted Use of
the Premises, as reasonably determined by Landlord. Tenant shall not
consume water or electric current in excess of that usually furnished or
supplied for the Permitted Use of the Premises
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(as reasonably determined by Landlord), without first procuring the
written consent of Landlord, which Landlord may refuse. The excess cost
for such water and electric current shall be established by an estimate
made by a utility company or independent engineer hired by Landlord at
Tenant's expense and Tenant shall pay such excess costs as additional rent
each month with the Monthly Rental.
D. Security Services
Certain security measures (both by electronic equipment and personnel) may
be provided by Landlord in connection with the Building and Common Areas.
However, Tenant hereby acknowledges that any such security is intended to
be solely for the benefit of the Landlord in protecting its property from
fire, theft, vandalism and similar perils and while certain incidental
benefits may accrue to the Tenant therefrom, any such security is not for
the purpose of protecting either the property of Tenant or the safety of
its officers, employees, servants or invitees. By providing such security,
Landlord assumes no obligation to Tenant and shall have no liability
arising therefrom. Landlord reserves the right to either commence, expand,
reduce or discontinue the providing of any such security at any time
without notice to Tenant.
SECTION X. MAINTENANCE AND REPAIRS
A. Landlord's Obligations
Except for special or non-standard systems and equipment installed for
Tenant's exclusive use, Landlord shall, at Landlord's initial cost and
expense subject to reimbursement by Tenant of Tenant's Proportionate Share
of such cost and expense, keep in good condition and repair the heating,
ventilating and air conditioning and other mechanical systems which
service the Premises as well as other premises within the Building; the
foundations, exterior walls, structural condition of interior bearing
walls, and roof of the Premises and Building; and the parking lots,
walkways, driveways, landscaping, fences, signs and utility installations
and other Common Areas of the Project. Landlord shall not be in breach of
its obligations under this Section unless Landlord fails to make any
repairs or perform maintenance which it is obligated to perform hereunder
and such failure persists for an unreasonable time after written notice of
a need for such repairs or maintenance is given to Landlord by Tenant.
Landlord shall not be required to make any repairs that are the obligation
of any tenant or occupant within the Building or Project or repairs for
damage caused by any negligent or intentional act or omission of Tenant or
any person claiming through or under Tenant or any of Tenant's employees,
suppliers, shippers, customers or invitees, in which event Tenant shall,
with the consent and under the direction of Landlord, repair such damage
at its sole cost and expense. Tenant hereby waives and releases any right
it may have to make repairs to the Premises, Building or Project at
Landlord's expense under any law, statute, ordinance, rules and
regulations now or hereafter in effect in any jurisdiction in which the
Project is located.
B. Tenant's Obligations
Tenant shall, at its sole cost and expense, make all maintenance, repairs
and replacements in the manner and when Landlord reasonably deems
necessary to preserve in good working order and condition the following
items, and every part thereof: plumbing that is both within and servicing
the Premises; special or supplementary heating, ventilating and air
conditioning systems installed for the exclusive use of the Premises;
non-standard electrical, lighting and other utility systems, facilities
and equipment located within the Premises and; all trade fixtures,
interior walls, interior surfaces of exterior walls, ceilings, windows,
doors, cabinets, draperies, window coverings, carpeting and other floor
coverings, plate glass
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and skylights located within the Premises. Tenant shall not commit or
permit any waste in or about the Premises, the Building or the Project.
Tenant shall, at its sole cost and expense, make all repairs to the
Premises, Building and Project which are required, in the reasonable
opinion of Landlord, as a result of any misuse, neglect, negligent or
intentional act or omission committed or permitted by Tenant or by any
subtenant, agent, employee, supplier, shipper, customer, invitee or
servant of Tenant.
C. Landlord's Right to Make Repairs
In the event that Tenant fails to maintain the Premises, Building and
Project in good and sanitary order, condition and repair as required by
this Lease, then, following written notification to Tenant (except in the
case of an emergency, in which case no prior notification shall be
required), Landlord shall have the right, but not the obligation, to enter
the Premises and to do such acts and expend such funds at the expense of
Tenant as are required to place the Premises, Building and Project in
good, safe and sanitary order, condition and repair. Any amount so
expended by Landlord shall be paid by Tenant promptly upon demand as
additional rent.
D. Condition of Premises Upon Surrender
Except for reasonable wear and tear and as otherwise provided in this
Lease, Tenant shall, upon the expiration or earlier termination of the
Term, surrender the Premises to Landlord broom clean and in the same
condition as on the date Tenant took possession. All appurtenances,
fixtures, improvements, additions and other property attached to or
installed in the Premises whether by Landlord or by or on behalf of
Tenant, and whether at Landlord's expense or Tenant's expense, shall be
and remain the property of Landlord unless Landlord specifically agrees
otherwise in writing. Any furnishings and personal property of Tenant
located in the Premises, whether the property of Tenant or leased by
Tenant, and any fixtures, improvements and other items agreed, in writing,
by Landlord to belong to the Tenant as provided in the preceding sentence,
shall be and remain the property of Tenant and shall be removed by Tenant
at Tenant's sole cost and expense at the expiration of the Term. Tenant
shall promptly repair any damage to the Premises or the Building resulting
from such removal. Any of Tenant's property not removed from the Premises
prior to or upon the Expiration Date shall, at Landlord's option, either
become the property of Landlord or may be removed by Landlord, in which
case Tenant shall pay to Landlord the cost of such removal within ten (10)
days after delivery of a bill therefor or Landlord, at its option, may
deduct such amount from the Security Deposit. Any damage to the Premises,
including any structural damage, resulting from Tenant's use or from the
removal of Tenant's fixtures, furnishings and equipment shall be repaired
by Tenant at Tenant's expense.
SECTION XI. ENTRY BY LANDLORD
Landlord reserves and shall at any and all times have the right to enter the
Premises at reasonable times to inspect the same to determine whether Tenant is
complying with its obligations hereunder; to supply any service to be provided
by Landlord hereunder; to supply janitorial service and any other service to be
provided by Landlord to Tenant hereunder; to exhibit, upon reasonable notice to
Tenant the Premises to prospective purchasers, mortgagees or prospective
tenants; to post notices of nonresponsibility; and to alter, improve or repair
the Premises and any portion of the Building and Project, without abatement of
rent, in which case Landlord may erect scaffolding and other necessary
structures that are reasonably required by the character of the work to be
performed by Landlord, provided that the business of Tenant shall not be
interfered with unreasonably. In order to enter the Premises for each of the
aforesaid purposes, Landlord shall at all times have and retain a key
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with which to unlock all of the doors in, upon and about the Premises, excluding
Tenant's vaults and safes. Further, Landlord shall have the right to use any and
all means which Landlord may deem proper to open such doors in the event of an
emergency. Any entry to the Premises or portions thereof obtained by Landlord by
any of said means, or otherwise, shall not under any circumstances be construed
or deemed to be a forcible or unlawful entry into, or a detainer of, the
Premises, or an eviction, actual or constructive, of Tenant from the Premises,
or any portion thereof.
SECTION XII. ALTERATIONS, ADDITIONS AND TRADE FIXTURES
Tenant shall not make any alterations, additions or improvements to the
Premises, or any part thereof, whether structural or nonstructural (hereafter
"Alterations"), without Landlord's prior, final written consent. In order to
obtain Landlord's preliminary consent, which preliminary consent may be given or
denied in Landlord's sole discretion, Tenant shall submit such information as
Landlord may require, including, without limitation plans and specifications for
the Alterations. If Landlord gives its preliminary consent for the Alterations,
in order to obtain Landlord's final consent (which final consent may not be
unreasonably withheld after preliminary consent is given), Tenant shall then
submit (i) all necessary permits, licenses, bonds, and the construction
contract, all in conformance with the plans and specifications preliminarily
approved by Landlord; (ii) evidence of insurance coverage in such types and
amounts and from such insurers as Landlord deems satisfactory; and (iii) such
other information and documentation as Landlord deems reasonably necessary
including, but not limited to, evidence of Tenant's financial ability to pay for
the Alterations. Notwithstanding the foregoing Landlord will make reasonable
efforts to render it's preliminary consent within five (5) working days after
receipt of request for consent from Tenant.
The construction contract for the Alterations shall, at the minimum, require the
general contractor and all subcontractors to obey the rules and regulations of
the Building and Project. All Alterations shall be done in a good workmanlike
manner by qualified and licensed contractors or mechanics, as approved by
Landlord. In no event shall any Alterations affect the structure of the Building
or its exterior appearance. All Alterations made by or for Tenant (other than
Tenant's moveable trade fixtures), shall, unless Landlord expressly requires or
agrees otherwise in writing, immediately become the property of Landlord,
without compensation to Tenant, but Landlord shall have no obligation to repair,
maintain or insure those Alterations. Carpeting, shelving and cabinetry shall be
considered improvements of the Premises and not movable trade fixtures,
regardless of how or where affixed. No Alterations shall be removed by Tenant
from the Premises either during or at the expiration or earlier termination of
the Term, and they shall be surrendered as a part of the Premises unless
Landlord has agreed or required otherwise in writing, in Landlord's discretion,
in which case the Alterations shall be removed by Tenant at Tenant's sole cost
and expense. Upon any such removal, Tenant shall repair any damage caused to the
Premises thereby, and shall return the Premises to the condition they were in
prior to installation of the Alterations so removed.
Tenant shall indemnify, defend and keep Landlord free and harmless from and
against all liability, loss, damage, cost, attorneys' fees and any other expense
incurred on account of claims by any person performing work or furnishing
materials or supplies for Tenant or any person claiming under Tenant. Landlord
may require Tenant to provide Landlord, at Tenant's sole cost and expense, a
lien and completion bond in an amount equal to one and one-half times the
estimated cost of such improvements, to insure Landlord against any liability
for mechanic's liens and to insure completion of the work. Landlord shall have
the right at all times to post on the Premises any notices permitted or required
by law, or that Landlord shall deem proper, for the protection of Landlord, the
Premises, the Building and the Project, and any other party having an interest
therein, from mechanics' and materialmen's liens. Tenant shall
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give to Landlord written notice of the commencement of any construction in or on
the Premises at least thirty (30) business days prior thereto. Prior to the
commencement of any such construction, Landlord shall be furnished certificates
of insurance, naming Landlord as an additional insured, evidencing that each
contractor performing work has insurance acceptable to Landlord including but
not limited to general liability insurance of not less that $1,000,000 and
worker's compensation insurance in the statutorily required amount.
SECTION XIII. MECHANIC'S LIENS
Tenant shall keep the Premises, the Building and the Project free from any liens
arising out of any work performed, material furnished or obligation incurred by
or for Tenant or any person or entity claiming through or under Tenant. In the
event that Tenant shall not, within ten (10) days following the imposition of
any such lien, cause the same to be released of record by payment or posting of
a proper bond, Landlord shall have, in addition to all other remedies provided
herein and by law, the right, but not the obligation, to cause such lien to be
released by such means as Landlord deems proper, including payment of the claim
giving rise to such lien. All such sums paid and all expenses incurred by
Landlord in connection therewith shall be due and payable to Landlord by Tenant
on demand.
SECTION XIV. INSURANCE
A. Tenant
During the Term hereof, Tenant shall keep in full force and effect the
following insurance and shall provide appropriate insurance certificates
evidencing such coverage to Landlord prior to the Lease Commencement Date
and annually thereafter before the expiration of each policy:
(1) Commercial general liability insurance for the benefit of Tenant and
Landlord as an additional insured, with a limit of not less than One
Million Dollars ($1,000,000.00) combined single limit per
occurrence, against claims for personal injury liability including,
without limitation, bodily injury, death or property damage
liability and covering (i) the business(es) operated by Tenant and
by any subtenant of Tenant on the Premises, (ii) operations of
independent contractors engaged by Tenant for services or
construction on or about the Premises, and (iii) contractual
liability;
(2) Fire, extended coverage, vandalism and malicious mischief insurance,
insuring the personal property, furniture, furnishings and fixtures
belonging to Tenant located on the Premises for not less than one
hundred percent (100%) of the actual replacement value thereof; and
(3) Business interruption or loss of income insurance in amounts
satisfactory to Landlord, with a rental interruption rider assuring
Landlord that the rent due hereunder will be paid for a period of
not less than twelve (12) months if the Premises are destroyed or
rendered inaccessible by a risk insured against by a policy of all
risk insurance.
Each insurance policy obtained by Tenant pursuant to this Lease shall
contain a clause that the insurer will provide Landlord with at least
thirty (30) days prior written notice of any material change, non-renewal
or cancellation of the policy, shall be in a form satisfactory to Landlord
and shall be taken out with an insurance company authorized to do business
in the State in which the Project is located and rated not less than
Best's Financial Class X and Best's Policy Holder Rating "A". In addition,
any insurance policy obtained by Tenant shall be written as a primary
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policy, and shall not be contributing with or in excess of any coverage
which Landlord may carry, and shall have loss payable clauses satisfactory
to Landlord and in favor of Landlord naming Landlord, and any other party
reasonably designated by Landlord as an additional insured. The liability
limits of the above described insurance policies shall in no matter limit
the liability of Tenant under the terms of Section XV. below.
Not more frequently than every two (2) years, Landlord may, by notice to
Tenant, require an increase in the above-described limits of coverage if,
in the reasonable opinion of Landlord, the amount of liability insurance
specified in this Section is not adequate to maintain the level of
insurance protection at least equal to the protection afforded on the date
the Term commences. If Tenant fails to maintain and secure the insurance
coverage required under this Section XIV., then Landlord shall have, in
addition to all other remedies provided herein and by law, the right, but
not the obligation, to procure and maintain such insurance, the cost of
which shall be due and payable to Landlord by Tenant within ten (10)
business days after written demand.
If, on account of the failure of Tenant to comply with the provisions of
this Section, Landlord is deemed a co-insurer by its insurance carrier,
then any loss or damage which Landlord shall sustain by reason thereof
shall be borne by Tenant and shall be paid by Tenant as additional rent
within ten (10) business days after receipt of a bill therefor and
evidence of such loss.
B. Landlord
During the Term hereof, Landlord shall keep in full force and effect the
following insurance:
(1) Fire, extended coverage and vandalism and malicious mischief
insurance insuring the Building and Project of which the Premises
are a part, in an amount not less than 80% (or such greater
percentage as may be required by law) of the full replacement cost
thereof; and
(2) Such other insurance as Landlord deems necessary in its sole and
absolute discretion.
All insurance policies shall be issued in the names of Landlord and
Landlord's lender, and any other party reasonably designated by Landlord
as an additional insured, as their interests appear. The insurance
policies shall provide that any proceeds shall be made payable to
Landlord, or to the holders of mortgages or deeds of trust encumbering
Landlord's interest in the Premises, Building, and Project, or to any
other party reasonably designated by Landlord as an additional insured, as
their interests shall appear. All insurance premiums for Landlord's
insurance shall be included in Common Operating Costs.
SECTION XV. INDEMNITY
A. Tenant
Subject to the provisions of subparagraph C below, Tenant agrees to
indemnify, defend and hold Landlord and its officers, directors, partners
and employees entirely harmless from and against all liabilities, losses,
demands, actions, expenses or claims, including reasonable attorneys' fees
and court costs, for injury to or death of any person or for damages to
any property or for violation of law to the extent such liabilities,
losses, demands, actions, expenses or claims, including reasonable
attorneys' fees and court costs are arising out of or in any manner
connected with (i) the use, occupancy or enjoyment of the Premises,
Building and Project by Tenant or Tenant's agents, employees, or
contractors (the "Tenant's
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Agents") or any work, activity or other things allowed or suffered by
Tenant or Tenant's Agents to be done in or about the Premises, Building
and Project (ii) any breach or default in the performance of any
obligation of Tenant under this Lease and (iii) any negligent or otherwise
tortious act or failure to act by Tenant or Tenant's Agents on or about
the Premises, Building or Project. Notwithstanding the foregoing, Tenant
shall be responsible for actual damages only and shall not be responsible
for consequential damages.
B. Landlord
Subject to the provisions of subparagraph C below, Landlord agrees to
indemnify, defend and hold Tenant and its officers, directors, partners
and employees entirely harmless from and against all liabilities, losses,
demands, actions, expenses or claims, including attorneys' fees and court
costs but excluding consequential damages, for injury to or death of any
person or for damage to any property to the extent such are
determined to be caused by the negligence or willful misconduct of
Landlord, its agents, employees, or contractors on or about the Premises,
Building, or Project. None of the events or conditions set forth in this
paragraph shall be deemed a constructive or actual eviction or entitle
Tenant to any abatement or reduction of rent.
C. Limitation on Recovery for Property Damage
Notwithstanding the provisions of subparagraphs A and B above, neither
Landlord nor Tenant shall be liable to the other for any damage to the
property of the other caused by fire, casualty or the actions of Landlord,
Tenant or their employees, agents and contractors except to the extent
such property damage is (a) not covered by the damaged party's insurance
required to be maintained under the terms of this Lease (or if such
insurance is not in effect as required, the amount of such damage which
would not have been covered had the such insurance been in effect as
required); (b) caused by the intentional actions of Landlord or Tenant;
or (c) are caused by Tenant's installation or removal of alterations or
trade fixtures as provided in the Lease. In connection with the foregoing
waiver of claims, Landlord and Tenant hereby waive any rights of
subrogation arising under their respective property insurance policies.
D. Limitation on Landlord's Liability; Release of Trustees, officers and
Partners of Landlord
Tenant agrees that in the event Tenant obtains a judgment or decree
against Landlord arising out of the subject matter of this Lease which
requires the payment of money by Landlord, Tenant's sole recourse for the
satisfaction thereof shall be to (a) proceed against Landlord's interest
in the Building or any proceeds therefrom or (b) offset the amount due
under such judgment or decree against the sums due to Landlord hereunder
and no other property or assets of Landlord, its successors or assigns,
shall be subject to the levy, execution or other enforcement procedure for
the satisfaction of any such judgment or decree. Tenant further hereby
waives any and all right to assert any claim against or obtain any damages
from, for any reason whatsoever, the trustees, directors, officers and
partners of Landlord including all injuries, damages or losses to Tenant's
property, real and personal, whether known, unknown, foreseen, unforeseen,
patent or latent, which Tenant may have against Landlord or its directors,
officers or partners. Tenant understands and acknowledges the significance
and consequence of such specific waiver.
Landlord shall not be liable or responsible to Tenant for any loss or
damage to any property or person occasioned by theft, fire, act of God,
public enemy, injunction, riot, strike, insurrection, war,
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court order, requisition, or order of governmental body or authority.
SECTION XVI. ASSIGNMENT AND SUBLETTING BY TENANT
A. Tenant shall not directly or indirectly, voluntarily or by operation of
law, sell, assign, encumber, pledge or otherwise transfer or hypothecate
all or any part of the Premises or Tenant's leasehold estate hereunder
(collectively an "Assignment"), or permit the Premises to be occupied by
anyone other than Tenant or sublet the Premises or any portion thereof
(collectively a "Sublease") without Landlord's prior written consent,
which shall not be unreasonably withheld, being obtained in each instance,
subject to the terms and conditions contained in this Section.
B. If Tenant desires at any time to enter into an Assignment or Sublease of
the Premises or any portion thereof, Tenant shall, at least fifteen (15)
days prior to the effective date of the Assignment or Sublease, request in
writing Landlord's consent to the Assignment or Sublease and provide the
following:
(1) The name of the proposed assignee, sub-tenant or occupant;
(2) The nature of the proposed assignee's, subtenant's or occupant's
business to be carried on in the Premises;
(3) A copy of the proposed Assignment or Sublease; and
(4) Such financial information concerning the proposed assignee,
subtenant or occupant and other reasonable information regarding the
transaction which Landlord shall have requested following its
receipt of Tenant's request for consent.
C. At any time within fifteen (15) days after Landlord's receipt of the
notice specified above, Landlord may by written notice to Tenant elect
either to (a) consent to the proposed Assignment or Sublease, (b) refuse
to consent to the proposed Assignment or Sublease or (c) terminate this
Lease in full with respect to an Assignment or terminate in whole or in
part with respect to a Sublease and enter into a lease directly with the
proposed assignee or sublessee. In this regard, Landlord and Tenant agree
(by way of example and without limitation) that it shall be reasonable for
Landlord to withhold its consent if any of the following situations exist
or may exist:
(1) The proposed transferee's use of the Premises conflicts with the
Permitted Use under this Lease or is a type of use that is not
desirable or compatible with other uses of the Building or Project;
(2) In Landlord's reasonable business judgment, the proposed assignee,
sublessee or occupant lacks sufficient business reputation or
experience to operate a successful business of the type and quality
permitted under this Lease;
(3) Tenant is in default pursuant to this Lease or an event has occurred
which, with the passage of time and/or the giving of notice, would
constitute an event of default hereunder;
(4) (Intentionally Deleted)
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D. If Landlord consents to the Sublease or Assignment within said fifteen
(15) day period, Tenant may enter into such Assignment or Sublease of the
Premises or portion thereof, but only upon the terms and conditions set
forth in the notice furnished by Tenant to Landlord pursuant to Subsection
B. above; provided, however, that in connection with such Assignment or
Sublease, as a condition to Landlord's consent, Tenant shall pay to
Landlord one hundred percent (100%) of the excess net of actual
transaction costs (e.g., commissions) and net of any amounts paid to
Tenant by subtenant or assignee for furniture or equipment sold to said
subtenant or assignee, if any, of (i) in the case of an Assignment, the
rental and other payment obligations of the proposed assignee under the
terms of the proposed Assignment over the rental and other payment
obligations of Tenant under the terms of this Lease, or (ii) in the case
of a Sublease, the amount proposed to be paid by the sublessee over the
proportionate amount of rental and other payment obligations required to
be paid by Tenant to Landlord under the terms of this Lease as applicable
to the portion of the Premises so subleased.
E. No consent by Landlord to any Assignment or Sublease by Tenant shall
relieve Tenant of any obligation to be performed by Tenant under this
Lease, whether arising before or after the Assignment or Sublease. The
consent by Landlord to any Assignment or Sublease shall not relieve Tenant
of the obligation to obtain Landlord's express written consent to any
other Assignment or Sublease. Any Assignment or Sublease that is not in
compliance with this Section shall be void and, at the option of Landlord,
shall constitute a material default by Tenant under this Lease. The
acceptance of rent or payment of any other monetary obligation by Landlord
from a proposed assignee or sublessee shall not constitute the consent by
Landlord to such Assignment or Sublease. Tenant shall promptly provide to
Landlord a copy of the fully executed Sublease or Assignment.
F.
(1) For the purposes of the Lease, the term Assignment" shall also
include any of the following transactions if such transaction is
entered into principally for the purpose of transferring the
leasehold estate created hereby: (i) if Tenant is a partnership, the
transfer of a majority of partnership interests to other than,
existing partners or to their immediate family members; (ii) if
Tenant is a limited liability company, the transfer of a majority of
the membership interests to other than existing members or to their
immediate family members; (iii) if Tenant is a closely held
corporation (i.e., whose stock is not publicly held and not traded
through an exchange or over the counter), the sale or transfer of
more than an aggregate of 50% of the voting shares of Tenant to
other than existing shareholders or to their immediate family
members.
(2) Notwithstanding anything to the contrary contained in this Section
XVI, Landlord's consent shall not be required for an Assignment or
Sublease to an Affiliate, as long as Tenant gives notice to Landlord
of the Assignment or Sublease and, if an Assignment (other than as
described in Section XVIF(l)
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hereof), such assignee assumes the obligations of Tenant under this
Lease. As used herein, "Affiliate" shall mean any natural person,
corporation, partnership or limited liability company which, either
directly or with others; (i) then controls the original Tenant under
this Lease, (ii) is then controlled by the original Tenant under
this Lease, or (iii) is then controlled by a person or an entity
described in (1). The term "control" as used in this Section XVIF2
means the power to directly or indirectly direct or cause the
direction of the management or policies of Tenant.
(3) Notwithstanding anything to the contrary contained in this Section
XVI, Landlord's consent shall not be required in connection with an
Assignment or Sublease made in connection with: (i) a reorganization
in which beneficial ownership of a controlling interest in Tenant
remains in the shareholders of Tenant at the execution of this
Lease, (ii) a reincorporation or recapitalization of Tenant, (iii) a
merger or consolidation of any entity with or into Tenant, or (iv) a
sale of all or substantially all of the assets of Tenant or of the
division of Tenant located at the Premises, provided that in the
case of any such Transfer pursuant to clauses (iii) or (iv) above,
(x) Tenant gives Landlord at least ten (10) days' prior notice of
such transfer and (y) the successor to Tenant pursuant to such
Transfer has a net worth immediately following such Transfer that is
not less than ten (10) times the then annual rent obligations under
this lease.
G. Each assignee or other transferee, other than Landlord, shall assume, as
provided in this Subsection, all obligations of Tenant under this Lease
and shall be and remain liable jointly and severally with Tenant for the
payment of Monthly Rental and all other monetary obligations hereunder,
and for the performance of all the terms, covenants, conditions and
agreements herein contained on Tenant's part to be performed for the
remainder of the Term. No Assignment or Sublease shall be binding on
Landlord unless the assignee, sublessee or Tenant shall deliver to
Landlord a counterpart of the Assignment or Sublease . In connection with
an Assignment, Tenant or the assignee shall deliver an instrument
(acceptable in form and substance to Landlord and in recordable form,
whereby the assignee assumes all of the terms, covenants, conditions and
agreements of the Lease. However the failure or refusal of the assignee to
execute such instrument of assumption shall not release or discharge the
assignee from its liability as set forth above. In connection with a
Sublease, Tenant or the sublessee shall deliver to Landlord an instrument
(acceptable in form and substance to Landlord and in recordable form)
agreeing that sublessee shall be bound by all of the terms and conditions
of the Lease, other than those pertaining to rent, applicable to the
subleased space and that sublessee shall, at Landlord's sole option,
attorn to Landlord as lessor under the Sublessee if this Lease is
terminated for any reason and Landlord chooses to keep the Sublease in
effect.
H. If this Lease is assigned to any person or entity pursuant to the
provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et. seq., (the
"Bankruptcy Code"), any and all monies or other consideration payable or
otherwise to be delivered in connection with such assignment shall be paid
or delivered to Landlord, shall be and remain the exclusive property of
Landlord and shall not constitute property of Tenant or of the estate of
Tenant within the meaning of the Bankruptcy Code. Any and all monies or
other considerations constituting Landlord's property under the preceding
sentence not paid or delivered to Landlord shall be held in trust for the
benefit of Landlord and be promptly paid or delivered to Landlord.
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I. any person or entity to which this Lease is assigned pursuant to the
provisions of the Bankruptcy Code, shall be deemed, without further act or
deed, to have assumed all of the obligations arising under this Lease on
and after the date of such assignment. Any such assignee shall upon demand
execute and deliver to Landlord an instrument confirming such assumption.
J. Tenant shall pay Landlord's reasonable expenses and attorneys' fees
incurred in processing an Assignment or Sublease, but in no event more
than Five Hundred Dollars ($500.00), for each such proposed transfer to
cover the legal review and administrative expenses of Landlord, whether or
not Landlord shall grant its consent to such proposed transfers.
SECTION XVII. TRANSFER OF LANDLORD'S INTEREST
In the event Landlord shall sell or otherwise convey its title to the Building,
then, after the effective date of such sale or conveyance Landlord shall have no
further liability under this Lease to Tenant except as to matters of liability
which have accrued and are unsatisfied as of the date of sale or conveyance, and
Tenant shall seek performance solely from Landlord's purchaser or successor in
title. In connection with such sale or transfer, Landlord may assign its
interest under this Lease without notice to or consent by Tenant. In such event,
Tenant agrees to be bound to any successor Landlord.
SECTION XVIII. DAMAGE AND DESTRUCTION
A. Minor Insured Damage
In the event the Premises or the Building, or any portion thereof, is
damaged or destroyed by any casualty that is covered by the insurance
maintained by Landlord pursuant to Section XIV. above, then Landlord shall
rebuild, repair and restore the damaged portion thereof, provided that (1)
the amount of insurance proceeds available to Landlord equals or exceeds
the cost of such rebuilding, restoration and repair, (2) such rebuilding,
restoration and repair can be completed within one hundred eighty (180)
days after the work commences in the opinion of a registered architect or
engineer appointed by Landlord, (3) the damage or destruction has occurred
more than twelve (12) months before the expiration of the Term and (4)
such rebuilding, restoration, or repair is then permitted, under
applicable governmental laws, rules and regulations, to be done in such a
manner as to return the damaged portion thereof to substantially its
condition immediately prior to the damage or destruction, including,
without limitation, the same net rentable floor area. To the extent that
insurance proceeds must be paid to a mortgagee or beneficiary under, or
must be applied to reduce any indebtedness secured by, a mortgage or deed
of trust encumbering the Premises, Building or Project, such proceeds, for
the purposes of this Subsection shall be deemed not available to Landlord
unless such mortgagee or beneficiary permits Landlord to use such proceeds
for the rebuilding, restoration, and repair of the damaged portion
thereof. Notwithstanding the foregoing, Landlord shall have no obligation
to repair any damage to, or to replace any of, Tenant's personal property,
furnishings, trade fixtures, equipment or other such property or effects
of Tenant.
B. Major or Uninsured Damage
In the event the Premises or the Building, or any portion thereof, is
damaged or destroyed by any casualty to the extent that Landlord is not
obligated, under Subsection A. above, to rebuild, repair or restore the
damaged portion thereof, then Landlord shall within sixty (60) days after
such damage or destruction, notify Tenant of its election, at its option,
to either (1) rebuild, restore and repair the damaged portions thereof, in
which case Landlord's notice
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shall specify the time period within which Landlord estimates such repairs
or restoration can be completed; or (2) terminate this Lease effective as
of the date the damage or destruction occurred. If Landlord does not give
Tenant written notice within ninety (90) days after the damage or
destruction occurs of its election to rebuild or restore and repair the
damaged portions thereof, Landlord shall be deemed to have elected to
terminate this Lease. Notwithstanding the foregoing, if Landlord does not
elect to terminate this Lease, Tenant may terminate this Lease if either
(i) Landlord notifies Tenant that such repair or restoration cannot be
completed within three hundred and sixty-five (365) days after the work is
commenced or (ii) the damage or destruction occurs within the last twelve
(12) months of the Term, unless Tenant's actions or omissions are the
cause of the damage. If Tenant has the right to terminate the Lease in
accordance with the above provisions, Tenant may so elect by written
notice to Landlord which must be given within fifteen (15) days after
Tenant's receipt of Landlord's notice of its election to rebuild. Upon
Landlord's receipt of such notice, the termination shall be effective as
of the date the destruction occurred.
C. Abatement of Rent
There shall be an abatement of rent by reason of damage to or destruction
of the Premises or the Building, or any portion thereof, to the extent
that either (i) Landlord received insurance proceeds for loss of rental
income attributable to the Premises or (ii) the floor area of the Premises
cannot be reasonably used by Tenant for conduct of its business, in which
event the Monthly Rental shall abate proportionately according to (i) or
(ii) above, as appropriate, commencing on the date that the damage to or
destruction of the Premises or Building has occurred, and except that, if
Landlord or Tenant elects to terminate this Lease as provided in
Subsection B. above, no obligation shall accrue under this Lease after
such termination. Notwithstanding the provisions of this Section, if any
such damage is due to the fault or neglect of Tenant, any person claiming
through or under Tenant, or any of their employees, suppliers, shippers,
servants, customers or invitees, then there shall be no abatement of rent
by reason of such damage, unless and until Landlord is reimbursed for such
abatement pursuant to any rental insurance policy that Landlord may, in
its sole discretion, elect to carry. Tenant's right to terminate this
Lease in the event of any damage or destruction to the Premises or
Building, is governed by the terms of this Section and therefore Tenant
hereby expressly waives the provisions of any and all laws, whether now or
hereafter in force, and whether created by ordinance, statute, judicial
decision, administrative rules or regulations, or otherwise, that would
cause this Lease to be terminated, or give Tenant a right to terminate
this Lease, upon any damage to or destruction of the Premises or Building
that occurs.
SECTION XIX. CONDEMNATION
A. Total or Partial Taking
If all or substantially all of the Premises is permanently condemned or
taken in any manner for public or quasi-public use, including but not
limited to, a conveyance or assignment in lieu of the condemnation or
taking, this Lease shall automatically terminate as of the earlier of the
date on which actual physical possession is taken by the condemnor or the
date of dispossession of Tenant as a result of such condemnation or other
taking. If less than all or substantially all of the Premises is so
condemned or taken, this Lease shall automatically terminate only as to
the portion of the Premises so taken as of the earlier of the date on
which actual physical possession is taken by the condemnor or the date of
dispossession of Tenant as a result of such condemnation or taking. If
such portion of the Building is condemned or otherwise taken so as to
require, in the opinion of Landlord, a substantial alteration
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or reconstruction of the remaining portions thereof, this Lease may be
terminated by Landlord, as of the date on which actual physical possession
is taken by the condemnor or dispossession of Tenant as a result of such
condemnation or taking, by written notice to Tenant within sixty (60) days
following notice to Landlord of the date on which such physical possession
is taken or dispossession will occur.
B. Award
Landlord shall be entitled to the entire award in any condemnation
proceeding or other proceeding for taking the Premises, Building or
Project for public or quasi-public use, including, without limitation, any
award made for the value of the leasehold estate created by this Lease. No
award for any partial or total taking shall be apportioned, and Tenant
hereby assigns to Landlord any award that may be made in such proceeding
for condemnation or other taking, together with any and all rights of
Tenant now or hereafter arising in or to the same or any part thereof.
Although all damages in the event of any condemnation shall belong to
Landlord whether such damages are awarded as compensation for diminution
in value of the leasehold or to the Landlord's fee , Tenant shall have the
right to claim and recover from the condemnor, but not from Landlord, such
compensation as may be separately awarded or recoverable by Tenant in
Tenant's own right on account of the interruption of or damage to Tenant's
business by reason of the condemnation and for or on account of any cost
or loss to which Tenant might incur in removing Tenant's merchandise,
furniture and other personal property, fixtures, and equipment from the
Premises.
C. Abatement in Rent
In the event of a partial condemnation or other taking that does not
result in a termination of this Lease as to the entire Premises pursuant
to this Section, the rent and all other charges under this Lease shall
abate in proportion to the portion of the Premises taken by such
condemnation or other taking. If this Lease is terminated, in whole or in
part, pursuant to any of the provisions of this Section, all rentals and
other charges payable by Tenant to Landlord hereunder and attributable to
the Premises taken shall be paid up to the date upon which actual physical
possession shall be taken by the condemnor. Landlord shall be entitled to
retain all of the Security Deposit until such time as this Lease is
terminated as to all of the Premises.
D. Temporary Taking
If all or any portion of the Premises is temporarily condemned or
otherwise taken for public or quasi-public use for a limited period of
time, this Lease shall remain in full force and effect and Tenant shall
continue to perform all terms, conditions and covenants of this Lease;
provided, however, the rent and all other charges payable by Tenant to
Landlord hereunder shall abate during such limited period in proportion to
the portion of the Premises that is rendered untenable and unusable as a
result of such condemnation or other taking. Landlord shall be entitled to
receive the entire award made in connection with any such temporary
condemnation or other taking. Tenant shall have the right to claim and
recover from the condemnor, but not from Landlord, such compensation as
may be separately awarded or recoverable by Tenant in Tenant's own right
on account of damages to Tenant's business by reason of the condemnation
and for or on account of any cost or loss to which Tenant might be put in
removing Tenant's merchandise, furniture and other personal property,
fixtures, and equipment or for the interruption of or damage to Tenant's
business.
E. Transfer of Landlord's Interest to Condemnor
Landlord may, without any obligation or liability to Tenant, agree to sell
and/or convey to the condemnor the Premises, the Building,
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the Project or any portion thereof, sought by the condemnor, free from
this Lease and the rights of Tenant hereunder, without first requiring
that any action or proceeding be instituted or, if instituted, pursued to
a judgment. In such event, this Lease shall be deemed terminated effective
on the date of such transfer.
SECTION XX. DEFAULT
A. Tenant's Default
The occurrence of any of the following events shall constitute a default
hereunder by Tenant:
(1) (Intentionally Deleted)
(2) If Tenant fails to pay any rent or other charges required to be paid
by Tenant under this Lease and such failure continues for five (5)
days after such payment is due and payable; provided, however, that
the obligation of Tenant to pay a late charge or interest pursuant
to this Lease shall commence as of the due date of the rent or such
other monetary obligation and not on the expiration of such five (5)
day grace period;
(3) If Tenant involuntarily transfers Tenant's interest in this Lease or
voluntarily attempts to or actually transfers its interest in this
Lease, without Landlord's prior written consent;
(4) If Tenant files a voluntary petition for relief, or if an
involuntary petition against Tenant, is filed in a proceeding under
the United States Bankruptcy Code or other federal or state
insolvency laws and is not withdrawn or dismissed within forty-five
(45) days thereafter; or if under the provisions of any law
providing for reorganization or winding up of corporations, any
court of competent jurisdiction assumes jurisdiction, custody or
control of Tenant or any substantial part of the Premises or any of
Tenant's personal property located at the Premises and such
jurisdiction, custody or control remains in force unrelinquished,
unstayed or unterminated for a period of forty-five (45) days;
(5) If in any proceeding or action in which Tenant is a party, a
trustee, a receiver, agent or custodian is appointed to take charge
of the Premises or any of Tenant's personal property located at the
Premises (or has the authority to do so) for the purpose of
enforcing a lien against the Premises or Tenant's personal property;
(6) If Tenant shall make any general assignment for the benefit of
creditors or convene a meeting of its creditors or any class thereof
for the purpose of effecting a moratorium upon or composition of its
debts, or any class thereof;
(7) If Tenant fails to discharge any lien placed as a result of Tenant's
action or inaction upon the Premises, the Building or the Project
within thirty (30) days after the imposition of such lien;
(8) If Tenant is a partnership or consists of more than one (1) person
or entity, if any partner of the partnership or other person or
entity is involved in any of the acts or events described in
subparagraphs (1) through (8) above;
(9) If Tenant fails to promptly and fully perform any other covenant,
condition or agreement contained in this Lease (other than as
provided in subparagraphs (1) through (8) above) and such failure
continues for thirty (30)
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days after written notice thereof from Landlord to Tenant, or if
such failure cannot be completely cured within such thirty (30) day
period, then if Tenant fails to commence such cure within such
thirty (30) day period and thereafter proceed to completely cure
such failure within thirty (30) days after such written notice.
B. Remedies
Upon the occurrence of a default by Tenant that is not cured by Tenant
within any applicable grace period specified above, Landlord shall have
the following rights and remedies in addition to all other rights and
remedies available to Landlord at law or in equity, which shall be
cumulative and non-exclusive:
(1) The right to declare this Lease and the term of this Lease
terminated; to re-enter the Premises and the improvements located
thereon, with or without process of law; to eject all parties in
possession thereof therefrom; to repossess and enjoy the Premises
together with all said improvements; and to recover from Tenant all
of the following:
(a) The worth at the time of award of the unpaid rent which had
been earned at the time of termination;
(b) The worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination
until the time of award exceeds the amount of such rental loss
that Tenant proves could have been reasonably avoided;
(c) The worth at the time of award of the amount by which the
unpaid rent for the balance of the Term after the time of
award exceeds the amount of rental loss that Tenant proves
could be reasonably avoided; and
(d) Any other amount necessary to compensate Landlord for all the
actual (not consequential) detriment proximately caused by
Tenant's failure to perform its obligations under this Lease
or which in the ordinary course of things would be likely to
result therefrom, including, but not limited to, any
attorneys' fees, broker's commissions or finder's fees (not
only in connection with the reletting of the Premises, but
also that portion of any leasing commission paid by Landlord
in connection with this Lease which is applicable to that
portion of the Lease Term which is unexpired as of the date on
which this Lease is terminated); any costs for repairs,
clean-up, refurbishing, removal (including the repair of any
damage caused by such removal) and storage (or disposal) of
Tenant's personal property, equipment, fixtures, and anything
else that Tenant is required (under this Lease) to remove but
does not remove; any costs for alterations, additions and
renovations; and any other costs and expenses, including
reasonable attorney's fees and costs incurred by Landlord in
regaining possession of and reletting (or attempting to relet)
the Premises.
(2) The right to continue this Lease in effect and to enforce all of
Landlord's rights and remedies under this Lease, including the right
to recover rent and any other additional monetary charges as they
become due, for as long as Landlord does not terminate Tenant's
right to possession. Acts of maintenance or preservation, efforts to
relet the Premises or the appointment of a receiver upon Landlord's
initiative to protect its interest under this Lease shall not
constitute a termination of Tenant's right to possession.
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(3) The right: to re-enter the Premises; to eject therefrom all parties
in possession thereof; at any time and from time to time, but
without obligation to do so, to relet the Premises and the
improvements located therein or any part or parts thereof for the
account of Tenant, or otherwise, and to receive and collect the
rents therefor, and apply the same (i) first to the payment of the
following costs and expenses which Landlord may have paid, assumed
or incurred: (a) costs in recovering possession of the Premises and
said improvements, including attorneys' fees, and costs; (b)
expenses for placing the Premises and said improvements in good
order and condition, for decorating and preparing the Premises for
reletting; (c) costs in making any alterations, repairs, changes or
additions to the Premises that may be necessary or convenient; (d)
all other costs and expenses, including leasing and subleasing
commissions, and charges paid, assumed or incurred by Landlord in or
upon reletting the Premises and said improvements, or in fulfillment
of the covenants of Tenant under this Lease; and (ii) then to the
payment of Monthly Rental, Tenant's Proportionate Share of Common
Operating Costs, and other monetary obligations due and unpaid
hereunder. Any such reletting may be for the remainder of the term
of this Lease or for a longer or shorter period in Landlord's sole
and absolute discretion. Landlord may execute any lease or sublease
made pursuant to the terms of this subparagraph either in its own
name or in the name of Tenant as its agent, as Landlord may see fit.
The tenant(s) or subtenant(s) thereunder shall be under no
obligation whatsoever with regard to the application by Landlord of
any rent collected by Landlord from such tenant or subtenant to any
and all sums due and owing or which may become due and owing under
the provisions of this Lease, nor shall Tenant have any right or
authority whatever to collect any rent whatever from such tenant(s)
or subtenant(s). If Tenant has been credited with any rent received
by such reletting and such rent shall not be promptly paid to
Landlord by the tenant(s) or subtenant(s), or if such rentals
received from reletting during any month are less than those to be
paid during that month by Tenant hereunder, Tenant shall pay any
such deficiency to Landlord. Such deficiency shall be calculated and
paid monthly. For all purposes set forth in this subsection,
Landlord is hereby irrevocably appointed as agent for Tenant. No
taking possession of the Premises by Landlord shall be construed as
Landlord's acceptance of a surrender of the Premises by Tenant or an
election of Landlord's part to terminate this Lease unless written
notice of such intention is given to Tenant. Notwithstanding any
such leasing or subletting without termination of this Lease,
Landlord may at any time thereafter elect to terminate this Lease
for Tenant's previous breach.
(4) The right to have a receiver appointed for Tenant, upon application
by Landlord, to take possession of the Premises and to apply any
rental collected from the Premises and exercise all other rights and
remedies granted to Landlord pursuant to this Section.
SECTION XXI. LATE PAYMENTS/INTEREST AND LATE CHARGES
A. Interest
Any amount due from Tenant to Landlord which is not paid when due shall
bear interest at twelve percent (12%) annually from the date such payment
is due until paid, except that amounts spent by Landlord on behalf of
Tenant as provided in this Lease shall bear interest at such rate from the
date of disbursement by Landlord which Tenant agrees is to compensate
Landlord for Tenant's use of Landlord's money after it is due. Payment of
such interest shall
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not excuse or cure any default by Tenant pursuant to this Lease. Such rate
shall remain in effect after the occurrence of any breach or default
hereunder by Tenant to and until payment of the entire amount due.
B. Late Charges
Tenant hereby acknowledges that in addition to lost interest, the late
payment by Tenant to Landlord of rent or any other sums due hereunder will
cause Landlord to incur other costs not contemplated in this Lease, the
exact amount of which will be extremely difficult and impracticable to
ascertain. Such other costs include, but are not limited to processing,
administrative and accounting costs. Accordingly, if any installment of
rent or any additional rent or other sum due from Tenant shall not be
received by Landlord when such amount shall be due (without regard to any
grace period prior to default granted in this Lease), Tenant shall pay to
Landlord as additional rent hereunder a late charge equal to ten percent
(10%) of such overdue amount. The parties hereby agree that (i) such late
charge represents a fair and reasonable estimate of the costs Landlord
will incur in processing such past-due payment by Tenant, (ii) such late
charge shall be paid to Landlord as liquidated damages for each delinquent
payment, and (iii) the payment of the late charge is to compensate
Landlord for the additional administrative expense incurred by Landlord in
handling and processing delinquent payments. Notwithstanding the above, no
late charge or interest on past due amounts will be charged if there have
been fewer than two (2) incidences of late payment within the last twelve
(12) months and not more than five (5) incidences of late payments since
the beginning of the lease.
C. Consecutive Late Payment of Rent (Intentionally Deleted)
D. No Waiver
Neither assessment nor acceptance of partial payments, interest or late
charges by Landlord shall constitute a waiver of Tenant's default with
respect to such overdue amount, nor prevent Landlord from exercising any
of its other rights and remedies under this Lease. Nothing contained in
this Section shall be deemed to condone, authorize, sanction or grant to
Tenant an option for the late payment of rent, additional rent or other
sums due hereunder, and Tenant shall be deemed in default with regard to
any such payments should the same not be made by the date on which they
are due.
SECTION XXII. LIEN FOR RENT (Intentionally Deleted)
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SECTION XXIII. HOLDING OVER
Any holding over by Tenant in the possession of the Premises, or any portion
thereof, after the expiration of the Term, with or without the consent of
Landlord, shall require Tenant to pay one hundred fifty percent (150%) of the
Monthly Rental herein specified for the last month in the Term (prorated on a
monthly basis), unless Landlord shall specify a lesser amount for rent in its
sole discretion, together with an amount estimated by Landlord for the monthly
Common Operating Costs payable under this Lease. If Tenant holds over with
Landlord's consent, such occupancy shall be deemed a month to month tenancy and
such tenancy shall otherwise be on the terms and conditions herein specified in
this Lease as far as applicable. Notwithstanding the foregoing provisions or the
acceptance by Landlord of any payment by Tenant, any holding over without
Landlord's consent shall constitute a default by Tenant and shall entitle
Landlord to pursue all remedies provided in this Lease and Tenant shall be
liable for any and all direct or consequential damages or losses of Landlord
resulting from Tenant's holding over without Landlord's consent.
SECTION XXIV. ATTORNEYS' FEES
The losing party shall pay to the prevailing party all reasonable costs and
expenses, including, but not limited to, reasonable attorneys' fees and amounts
paid to any collection agency, incurred by the prevailing party in connection
with any breach or default by the losing party under this Lease or incurred in
order to enforce or interpret the terms or provisions of this Lease. Such
amounts shall be payable immediately upon demand. In addition, if any action
shall be instituted by either Landlord or Tenant for the enforcement or
interpretation of any of its rights or remedies in or under this Lease, the
prevailing party shall be entitled to recover from the losing party all costs
incurred by the prevailing party in said action and any appeal therefrom,
including reasonable attorneys' fees and court costs to be fixed by the court
therein. In the event Landlord is made a party to any litigation between Tenant
and any third party, then Tenant shall reimburse Landlord for all costs and
attorneys' fees incurred by or imposed upon Landlord in connection with such
litigation unless Landlord is ultimately held to be liable.
SECTION XXV. MORTGAGEE PROTECTION
A. Subordination; Nondisturbance
The rights of Tenant under this Lease are and shall be, at the option of
Landlord or the mortgagee, beneficiary or master or ground lessor under
the following instruments, either subordinate or superior to any mortgage
or deed of trust (including a consolidated mortgage or deed of trust)
constituting a lien on the Premises,
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Building or Project, or on any part thereof or Landlord's interest therein
and to any ground or master lease if Landlord's title to the Premises or
any part thereof is or shall become a leasehold interest, whether such
mortgage, deed of trust, ground or master lease is placed on the Premises,
Building or Project before or after the date of this Lease; provided
however that notwithstanding any such subordination, Tenant's right to
occupy the Premises pursuant to this Lease shall remain in effect for the
full Term as long as Tenant is not in default hereunder. To further assure
the foregoing subordination or superiority, Tenant shall, upon Landlord's
request, together with the request of any mortgagee under a mortgage or
beneficiary under a deed of trust or ground or master lessor, execute any
instrument (including without limitation an amendment to this Lease that
does not materially and adversely affect Tenant's rights or duties under
this Lease), or instruments intended to subordinate this Lease (subject to
Tenant's non-disturbance rights, or at the option of Landlord, to make it
superior to any mortgage, deed of trust, or ground or master lease.
B. Attornment
Notwithstanding and in addition to the provisions of Subsection A. above,
Tenant agrees (1) to attorn to any mortgagee of a mortgage or beneficiary
of a deed of trust encumbering the Premises and to any party acquiring
title to the Premises by judicial foreclosure, trustee's sale, or deed in
lieu of foreclosure, and to any ground or master lessor, as the successor
to Landlord hereunder and (2) to execute any attornment agreement
evidencing such attornment requested by a mortgagee, beneficiary, ground
or master lessor, or party making a loan secured by the Premises, Building
or Project or so acquiring title to the Premises, and (3) that this Lease
shall remain in force notwithstanding any such judicial foreclosure,
trustee's sale, deed in lieu of foreclosure, or merger of titles.
Notwithstanding the foregoing, neither a mortgagee of a mortgage or
beneficiary of a deed of trust encumbering the Premises, any party
acquiring title to the Premises by judicial foreclosure, trustee sale, or
deed in lieu of foreclosure, or any ground lessor or master lessor, as the
successor to Landlord hereunder, shall be liable or responsible for any
breach of a covenant contained in this Lease that occurred before such
party acquired its interest in the Premises or for any continuing breach
thereof until after the successor Landlord has received the notice and
right to cure as provided herein, and no such party shall be liable or
responsible for any security deposits held by Landlord hereunder which
have not been transferred or actually received by such party, and such
party shall not be bound by any payment of rent or additional rent for
more than two (2) months in advance.
SECTION XXVI. ESTOPPEL CERTIFICATE/FINANCIAL STATEMENTS
A. Estoppel Certificate
Tenant, at any time and from time to time upon not less than ten (10) days
prior written notice from Landlord, agrees to execute and deliver to
Landlord a statement in the form provided by Landlord (a) certifying that
this Lease is unmodified and in full force and effect, or, if modified,
stating the nature of such modification and certifying that this Lease, as
so modified, is in full force and effect and the date to which the rent
and other charges are paid in advance, if any; (b) acknowledging that
there are not, to Tenant's knowledge, any uncured defaults on the part of
Landlord hereunder, or specifying such defaults if they are claimed
evidencing the status of this Lease; (c) acknowledging the amount of the
Security Deposit held by Landlord; and (d) containing such other
information regarding this Lease or Tenant as Landlord reasonably
requests. Tenant's failure to deliver an estoppel certificate within such
time shall be conclusive upon Tenant that (i) this Lease is in full force
and effect without modification except as may be represented by
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Landlord, (ii) to Tenant's knowledge there are no uncured defaults in
Landlord's performance, (iii) no rent has been paid in advance except as
set forth in this Lease, and (iv) such other information regarding this
Lease and Tenant set forth therein by Landlord is true and complete.
B. Furnishing of Financial Statements
Landlord has reviewed the financial statements, if any, requested and
received from the Tenant and has relied upon the truth and accuracy
thereof with Tenant's knowledge and representations of the truth and
accuracy of such statements and that said statements accurately and fairly
depict the financial condition of Tenant. Said financial statements are an
inducing factor and consideration for the entering into of this Lease by
Landlord with this particular Tenant. Tenant shall, at any time and from
time to time upon not less than ten (10) days prior written notice from
Landlord, furnish Landlord with (a) Tenant's most recent audited financial
statements, including a balance sheet and income statement, or a document
in which Tenant states that its books are not independently audited, and
(b) unaudited financial statements, including a balance sheet and income
statement, dated within ninety (90) days of the request from Landlord.
SECTION XXVII. PARKING
Landlord agrees to maintain or cause to be maintained an automobile parking area
and to maintain and operate, or cause to be maintained and operated, said
automobile parking area during the Term of this Lease for the benefit and use of
the customers, service suppliers, other invitees and employees of Tenant.
Whenever the words "automobile" or "parking area" are used in this Lease, it is
intended that the same shall include, whether in a surface parking area or a
parking structure, the automobile parking stalls, driveways, loading docks,
truck areas, service drives, entrances and exits and sidewalks, landscaped
areas, pedestrian passageways in conjunction therewith and other areas designed
for parking. Landlord shall keep said automobile parking area in a reasonably
neat, clean and orderly condition, lighted and landscaped, and shall repair any
damage to the facilities thereof, the cost of which shall be included in Common
Operating Costs as defined above. Landlord shall also have the right to
establish such reasonable rules and regulations as may be deemed desirable, at
Landlord's sole discretion, for the proper and efficient operation and
maintenance of said automobile parking area. Such rules and regulations may
include, without limitation, (i) restrictions in the hours during which the
automobile parking area shall be open for use, (ii) the establishment of charges
for parking therein (on either a reserved or unreserved basis, at Landlord's
sole discretion) by tenants of the Building and Project as well as by their
employees, customers and service suppliers, and (iii) the use of parking gates,
cards, permits and other control devices to regulate the use of the parking
areas.
The rights of Tenant and its employees, customers, service suppliers and
invitees to use the automobile parking area shall at all times be subject to (a)
Landlord's right to establish rules and regulations applicable to such use and
to exclude any person therefrom who is not authorized to use same or who
violates such rules and regulations; (b) the rights of Landlord and other
tenants in the Building and Project to use the same in common with Tenant and
its employees, customers, service suppliers and invitees, (c) the availability
of parking spaces in said automobile parking area, and (d) Landlord's right to
change the location and configuration of the parking areas and any assigned
reserved parking spaces as shall be determined at Landlord's sole discretion.
Tenant agrees to limit its use of the Automobile Parking Area to the number and
type of parking spaces specified in the subsection entitled "Tenant Parking
Spaces" in Section I.
Notwithstanding the foregoing, nothing contained herein shall be deemed
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to impose liability upon Landlord for personal injury or theft, for damage to
any motor vehicle, or for loss of property from within any motor vehicle, which
is suffered by Tenant or any of its employees, customers, service suppliers or
other invitees in connection with their use of said automobile parking area.
SECTION XXVIII. SIGNS; NAME OF BUILDING
Tenant shall not have the right to place, construct, or maintain on or about the
Premises, Building or Project, or in any interior portions of the Premises or
Building that may be visible from the exterior of the Building or Common Areas,
any signs, names, insignia, trademark, advertising placard, descriptive material
or any other similar item ("Sign") without Landlord's prior written consent,
which consent may be withheld in Landlord's sole discretion. In the event
Landlord consents to Tenant placing a Sign on or about the Premises, Building or
Project, any such Sign shall be subject to Landlord's approval of the color,
size, style and location of such Sign, and shall conform to any current or
future Sign criteria established by Landlord for the Building or Project. If
Landlord enacts a Sign criteria or revises an existing Sign criteria, after
Tenant has erected a Sign to which Landlord has granted its consent, if Landlord
so elects, Tenant agrees, at Landlord's expense but subject to Landlord's prior
approval of the cost thereof, to make the necessary changes to its Sign in order
to conform the Sign to Landlord's current Sign criteria, as enacted or revised,
provided that such changes shall be limited to the color, size, style and
location of Tenant's Sign and that Tenant shall not be required to change the
content of its Sign. In the event Landlord consents to Tenant's placement of a
Sign on the Building, Tenant shall, at its sole cost, (i) maintain such sign in
first class condition during the Term and (ii) and remove such Sign from the
Building at the end of the Term and restore the Building to the same condition
as before the installation of the Sign, ordinary wear and tear excepted,
including removing any discoloration of the Building caused by the presence of
such sign.
Landlord reserves the right at any time it deems necessary or appropriate to (a)
place Signs at any location on the Building and Project as it deems necessary
and (b) change the name, address or designation of the Building and Project.
SECTION XXIX. QUIET ENJOYMENT
Upon payment by Tenant of the charges herein provided, and upon the observance
and performance of all the covenants, terms and conditions on Tenant's part to
be observed and performed, Tenant shall peaceably and quietly hold and enjoy the
Premises for the Term without hindrance or interruption by Landlord or any other
person or persons lawfully or equitably claiming by, through or under Landlord,
subject, nevertheless, to the terms and conditions of this Lease and any
mortgage and/or deed of trust to which this Lease is subordinate.
SECTION XXX. BROKERS AND AGENTS
Tenant warrants and represents that it has not dealt with any real estate broker
or agent in connection with this Lease or its negotiation except the Broker
identified in Section I. Tenant shall indemnify and hold Landlord harmless from
any cost, expense or liability (including costs of suit and reasonable
attorneys' fees) for any compensation, commission or fees claimed by any other
real estate broker or agent in connection with this Lease or its negotiation by
reason of any act of Tenant. Further, Tenant agrees that Landlord shall not be
responsible for, and Tenant shall indemnify and hold Landlord harmless from and
such liability for compensation, commission or fees claimed by any real estate
broker or agent representing Tenant in connection with any renewal, extension
modification or other matter relating to this Lease.
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SECTION XXXI. NOTICES
Any notice, demand, approval, consent, bill, statement or other communication
("Notice") required or desired to be given under this Lease shall be in writing
addressed to Tenant at Tenant's Address for Notice or to Landlord at Landlord's
Address for Notice, above and shall be personally served or given by pre-paid
Certified U.S. Mail, return receipt requested, or "overnight" delivery service
with written receipt. In the case of personal delivery, any Notice shall be
deemed to have been given when delivered; in the case of service by certified
mail, any Notice shall be deemed delivered on the date of receipt or refusal or
non-delivery indicated on the return receipt; and in the case of overnight
delivery service, any Notice shall be deemed given when delivered as evidenced
by a receipt. If more than one Tenant is named under this Lease, service of any
Notice upon any one of said Tenants shall be deemed as service upon all of such
Tenants. The parties hereto and their respective heirs, successors, legal
representatives, and assigns may from time to time change their respective
addresses for Notice by giving at least fifteen (15) days' written notice to the
other party, delivered in compliance with this Section.
SECTION XXXII. NOTICE AND CURE TO LANDLORD AND MORTGAGEE
On any act or omission by Landlord which gives, or which Tenant claims or
intends to claim gives, Tenant the right to recover damages from Landlord or the
right to terminate this Lease by reason of a constructive or actual eviction
from all or part of the Premises, or otherwise, Tenant shall not sue for damages
or attempt to terminate this Lease until it has given written notice of the act
or omission to Landlord and to the holder(s) of the indebtedness or other
obligations secured by any mortgage or deed of trust affecting the Premises as
identified by Landlord, and a reasonable period of time for remedying the act or
omission has elapsed following the giving of the notice, during which time
Landlord and the lienholder(s), or either of them, their agents or employees,
may enter upon the Premises and do therein whatever is necessary to remedy the
act or omission. During the period after the giving of notice and during the
remedying of the act or omission, the Monthly Rental payable by Tenant shall not
be abated and apportioned except to the extent that the Premises are
untenantable as a direct result of Landlord's breach of its obligations
hereunder.
SECTION XXXIII. GENERAL
A. Paragraph Headings
The paragraph headings used in this Lease are for the purposes of
convenience only. They shall not be construed to limit or to extend the
meaning of any part of this Lease.
B. Incorporation of Prior Agreements; Amendments
This Lease contains all agreements of Landlord and Tenant with respect to
any matter mentioned, or dealt with, herein. No prior agreement or
understanding pertaining to any such matter shall be binding upon
Landlord. Any amendments to or modifications of this Lease shall be in
writing, signed by the parties hereto, and neither Landlord nor Tenant
shall be liable for any oral or implied agreements.
Tenant hereby agrees that Landlord has not made, and Tenant may not rely
on, any representations or warranties, expressed or implied, with regard
to the Project, the Building, the Premises or otherwise, except as stated
in this Lease. In particular, Landlord has not authorized any agent or
broker to make a representation or warranty inconsistent with the terms of
this Lease and Tenant may not rely on any such inconsistent representation
or warranty.
C. Waiver
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Any waiver by Landlord of any breach of any term, covenant, or condition
contained in this Lease shall not be deemed to be a waiver of such term,
covenant, or condition or of any subsequent breach of the same or of any
other term, covenant, or condition contained in this Lease. Landlord's
consent to, or approval of, any act shall not be deemed to render
unnecessary the obtaining of Landlord's consent to, or approval of, any
subsequent act by Tenant. The acceptance of rent or other sums payable
hereunder by Landlord shall not be a waiver of any preceding breach by
Tenant of any provision hereof, other than failure of Tenant to pay the
particular rent or other sum so accepted, regardless of Landlord's
knowledge of such preceding breach at the time of acceptance of such rent,
or sum equivalent to rent.
D. Short Form or Memorandum of Lease
Tenant agrees, at the request of Landlord, to execute, deliver, and
acknowledge a short form or memorandum of this Lease satisfactory to
counsel for Landlord, and Landlord may, in its sole discretion, record
such short form or memorandum in the county where the Premises are
located. Tenant shall not record this Lease, or a short form of this
Lease, without Landlord's prior written consent, and such recordation
shall, at the option of Landlord, constitute a default of Tenant
hereunder.
E. Time of Essence
Time is of the essence in the performance of each provision of this Lease.
F. Examination of Lease
Submission of this instrument for examination or signature by Tenant does
not constitute a reservation of or option for lease, and it is not
effective as a lease or otherwise until execution by and delivery to both
Landlord and Tenant.
G. Severability
If any term or provision of this Lease or the application thereof to any
person or circumstance shall, to any extent, be invalid or unenforceable,
the remainder of this Lease, or the application of such term or provision
to persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Lease shall be valid and be enforced to the fullest
extent permitted by law.
H. Surrender of Lease Not Merger
+ Neither the voluntary or other surrender of the Lease by Tenant nor the
mutual cancellation thereof shall cause a merger of the titles of Landlord
and Tenant, but such surrender or cancellation shall, at the option of
Landlord, either terminate all or any existing subleases or operate as an
assignment to Landlord of any such subleases.
I. Corporate Authority
If Tenant is a corporation, each individual executing this Lease on behalf
of Tenant represents and warrants (1) that he is duly authorized to
execute and deliver this Lease on behalf of Tenant in accordance with a
duly adopted resolution of the Board of Directors of Tenant in accordance
with the By-laws of Tenant and (2) that this Lease is binding upon and
enforceable by Landlord against Tenant in accordance with its terms. If
Tenant is a corporation, Tenant shall, within thirty (30) days after
execution of this Lease, deliver to Landlord a certified copy of a
resolution of its Board of Directors authorizing or ratifying the
execution of this Lease.
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J. Governing Law
This Lease and the rights and obligations of the parties hereto shall be
interpreted, construed and enforced in accordance with the local laws of
the State in which the Project is located.
K. Force Majeure
If the performance by Landlord of any provision of this Lease is delayed
or prevented by any act of God, strike, lockout, shortage of material or
labor, restriction by any governmental authority, civil riot, flood, and
any other cause not within the control of Landlord, then the period for
Landlord's performance of the provision shall be automatically extended
for the same time the Landlord is so delayed or hindered.
L. Use of Language
Words of gender used in this Lease include any other gender, and words in
the singular include the plural, unless the context otherwise requires.
M. Successors
The terms, conditions and covenants contained in the Lease inure to the
benefit of and are binding on, the parties hereto and their respective
successors in interest, assigns and legal representatives, except as
otherwise herein expressly provided. All rights, privileges, immunities
and duties of Landlord under this Lease, including without limitation,
notices required or permitted to be delivered by Landlord to Tenant
hereunder, may, at Landlord's option, be exercised or performed by
Landlord's agent or attorney.
N. No Reduction of Rental
Except as otherwise expressly and unequivocally provided in this Lease,
Tenant shall not for any reason withhold or reduce the amounts payable by
Tenant under this Lease, it being understood that the obligations of
Landlord hereunder are independent of Tenant's obligations. If Landlord is
required by governmental authority to reduce energy consumption or impose
a parking or similar charge with respect to the Premises, Building or
Project, to restrict the hours of operation of, limit access to, or reduce
parking spaces available at the Building, or take other limiting actions,
then Tenant is not entitled to abatement or reduction of rent or to
terminate this Lease.
0. No Partnership
Notwithstanding any provision of this Lease or otherwise, Landlord is not,
and under no circumstances shall it be considered to be, a partner of
Tenant, or engaged in a joint venture with Tenant.
P. Exhibits
All exhibits attached hereto are made a part hereof and are incorporated
herein by a reference. A complete list of said exhibits is set forth in
the Table of Contents.
Q. Survival of Indemnities
The obligations of the indemnifying party under each and every
indemnification and hold harmless provision contained in this Lease shall
survive the expiration or earlier termination of this Lease to and until
the last to occur of(a) the last date permitted by law for the bringing of
any claim or action with respect to which indemnification may be claimed
by the indemnified party against the indemnifying party under such
provision or (b) the date on which any claim or action for which
indemnification may be claimed under such
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provision is fully and finally resolved and, if applicable, any compromise
thereof or judgement or award thereon is paid in full by the indemnifying
party and the indemnified party is reimbursed by the indemnifying party
for any amounts paid by the indemnified party in compromise thereof or
upon a judgement or award thereon and in defense of such action or claim,
including reasonable attorneys' fees incurred. Payment shall not be a
condition precedent to recovery upon any indemnification provision
contained herein.
R. References to Default:
All references to default or Default herein shall be interpreted to mean
that all applicable notice or grace periods have expired.
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SECTION XXXIV. EXECUTION
This Lease may be executed in several duplicate counterparts, each of which
shall be deemed an original of this Lease for all purposes.
"TENANT" "LANDLORD"
Pencom Systems, Inc. G&W Investment Partners, a nini
a New York Corporation kumia formed under the laws of
DBA PSW Technologies Japan
By: /s/ Wade E. Saadi By: Mony Realty Partner, Inc.,
------------------------ -----------------------------
a Delaware Corporation
as its Agent
Name: Wade E. Saadi Name: /s/Mark E. Novack
---------------------- ---------------------------
Mark E. Novack
Title: President Title: Vice President
--------------------- --------------------------
/s/Maureen J. Farulla /s/Elisabeth Stone Davis
[Stamp]
MAUREEN J. FARULLA Elisabeth Stone Davis
Notary Public State of New York Notary Public
No. 43-4773292 State of Colorado
Qualified in Richmond County My Commission Expires 10-08-1996
Commission Expires March 30,1998
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EXHIBIT "A"
[SITE PLAN FOR THE PROJECT]
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EXHIBIT "B"
[FLOOR PLAN OF THE PREMISES]
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EXHIBIT "C"
CONSTRUCTION WORK LETTER
Landlord shall be responsible for the construction of all tenant improvements to
be installed in the Premises prior to the Lease Commencement Date ("Landlord's
Work") in accordance with the following provisions. Landlord's Work shall
include those items shown on the space plan attached to this exhibit as Exhibit
"B" ("Space Plan"). After execution of the Lease by both parties, Landlord shall
cause Landlord's architect to prepare and submit to Landlord and Tenant complete
construction plans and specifications ("Working Drawings") which shall be based
on the attached Space Plan. Landlord and Tenant shall approve or disapprove the
Working Drawings within five (5) business days after receipt. In the event any
changes are required or desired to the Working Drawings, Landlord and Tenant
shall work in good faith to finalize and approve the Working Drawings within ten
(10) business days after their original receipt thereof. Upon approval of the
Working Drawings by Landlord and Tenant, they shall constitute the "Construction
Documents".
Landlord shall cause the Landlord's Work to be completed in a good and
workmanlike manner in accordance with the Construction Documents and in
compliance with all applicable laws, rules and regulations, including local
building codes. Landlord shall endeavor to minimize any interruption to Tenant's
business and both parties shall cooperate to accomplish the construction herein
contemplated. Landlord's work shall be limited to the installation of one
demising wall, patching walls as necessary, providing touch up painting as
necessary and cleaning the carpet.
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EXHIBIT "D"
RENT SCHEDULE
The total Monthly Rent (subject to adjustment by CPI increases, if applicable)
for the entire Term is equal to $261,199.68 and shall be payable monthly in
accordance with the provisions of the Lease in installments as set forth below:
Annual Rental
Months RSF Monthly Rental Rate
------ --- -------------- -------------
May 1, 1996 - 4,623 $7,127.13 $18.50/RSF
April 30, 1998
May 1, 1998 - 4,623 $7,512.38 $19.50/RSF
April 30, 1999
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EXHIBIT "E"
RULES AND REGULATIONS
ATTACHED TO AND MADE A PART OF THE LEASE
The following Rules and Regulations shall be in effect at the Building. Landlord
reserves the right to adopt reasonable modifications and additions hereto. In
the case of any conflict between these regulations and the Lease, the Lease
shall be controlling.
1. Except with the prior written consent of Landlord, no tenant shall conduct
any retail sales in or from the Premises, or any business other than that
specifically provided for in the Lease.
2. Landlord reserves the right to prohibit personal goods and services
vendors from access to the Building except upon such reasonable terms and
conditions, including but not limited to a provision for insurance
coverage, as are related to the safety, care and cleanliness of the
Building, the preservation of good order thereon, and the relief of any
financial or other burden on Landlord occasioned by the presence of such
vendors or the sale by them of personal goods or services to a tenant or
its employees. If reasonably necessary for the accomplishment of these
purposes, Landlord may exclude a particular vendor entirely or limit the
number of vendors who may be present at any one time in the Building. The
term "personal goods or services vendors" means persons who periodically
enter the Building of which the Premises are a part for the purpose of
selling goods or services to a tenant, other than goods or services which
are used by a tenant only for the purpose of conducting its business on
the Premises. "Personal goods or services" include, but are not limited
to, drinking water and other beverages, food, barbering services, and shoe
shining services.
3. The sidewalks, halls, passages, elevators and stairways shall not be
obstructed by any tenant or used by it for any purpose other than for
ingress to and egress from their respective Premises. The halls, passages,
entrances, elevators, stairways, balconies, janitorial closets, and roof
are not for the use of the general public, and Landlord shall in all cases
retain the right to control and prevent access thereto of all persons
whose presence in the judgment of Landlord shall be prejudicial to the
safety, character, reputation and interests of the Building and its
tenants, provided that nothing herein contained shall be construed to
prevent such access to persons with whom Tenant normally deals only for
the purpose of conducting its business on the Premises (such as clients,
customers, office suppliers and equipment vendors, and the like) unless
such persons are engaged in illegal activities. No tenant and no employees
of any tenant shall go upon the roof of the Building without the written
consent of Landlord.
4. The sashes, sash doors, windows, glass lights, and any lights or skylights
that reflect or admit light into the halls or other places of the Building
shall not be covered or obstructed. The toilet rooms, water and wash
closets and other water apparatus shall not be used for any purpose other
than that for which they were constructed, and no foreign substance of any
kind whatsoever shall be thrown therein, and the expense of any breakage,
stoppage or damage, resulting from the violation of this rule shall be
borne by the tenant who, or whose clerks, agents, employees, or visitors,
shall have caused it.
5. No sign, advertisement or notice visible from the exterior of the Premises
or Building shall be inscribed, painted or affixed by Tenant on any part
of the Building or the Premises without the prior written consent of
Landlord. If Landlord shall have given
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such consent at any time, whether before or after the execution of this
Lease, such consent shall in no way operate as a waiver or release of any
of the provisions hereof or of this Lease, and shall be deemed to relate
only to the particular sign, advertisement or notice so consented to by
Landlord and shall not be construed as dispensing with the necessity of
obtaining the specific written consent of Landlord with respect to each
and every such sign, advertisement or notice other than the particular
sign, advertisement or notice, as the case may be, so consented to by
Landlord.
6. In order to maintain the outward professional appearance of the Building,
all window coverings to be installed at the Premises shall be subject to
Landlord's prior reasonable approval. If Landlord, by a notice in writing
to Tenant, shall object to any curtain, blind, shade or screen attached
to, or hung in, or used in connection with, any window or door of the
Premises, such use of such curtain, blind, shade or screen shall be
forthwith discontinued by Tenant. No awnings shall be permitted on any
part of the Premises.
7. Tenant shall not do or permit anything to be done in the Premises, or
bring or keep anything therein, which shall in any way increase the rate
of fire insurance on the Building, or on the property kept therein, or
obstruct or interfere with the rights of other tenants, or in any way
injure or annoy them; or conflict with the regulations of the Fire
Department or the fire laws, or with any insurance policy upon the
Building, or any part thereof, or with any rules and ordinances
established by the Board of Health or other governmental authority.
8. No safes or other objects larger or heavier than the freight elevators of
the Building are limited to carry shall be brought into or installed in
the Premises. Landlord shall have the power to prescribe the weight,
method of installation and position of such safes or other objects. The
moving of safes shall occur only between such hours as may be designated
by, and only upon previous notice to, the manager of the Building, and the
persons employed to move safes in or out of the Building must be
acceptable to Landlord. No freight, furniture or bulky matter of any
description shall be received into the Building or carried into the
elevators except during hours and in a manner approved by Landlord.
9. Landlord shall clean the Premises as provided in the Lease, and except
with the written consent of Landlord, no person or persons other than
those approved by Landlord will be permitted to enter the Building for
such purpose, but Tenant shall not cause unnecessary labor by reason of
Tenant's carelessness and indifference in the preservation of good order
and cleanliness.
10. No tenant shall sweep or throw or permit to be swept or thrown from the
Premises any dirt or other substance into any of the corridors or halls or
elevators, or out of the doors or windows or stairways of the Building,
and Tenant shall not use, keep or permit to be used or kept any foul or
noxious gas or substance in the Premises, or permit or suffer the Premises
to be occupied or used in a manner offensive or objectionable to Landlord
or other occupants of the Building by reason of noise, odors and/or
vibrations, or interfere in any way with other tenants or those having
business therein, nor shall any animals or birds be kept in or about the
Building. Smoking or carrying lighted cigars or cigarettes in the
elevators of the Building is prohibited.
11. Except for the use of microwave ovens and coffee makers for Tenant's
personal use, no cooking shall be done or permitted by Tenant on the
Premises, nor shall the Building be used for lodging.
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12. Tenant shall not use or keep in the Building any kerosene, gasoline, or
inflammable fluid or any other illuminating material, or use any method of
heating other than that supplied by Landlord.
13. If Tenant desires telephone or telegraph connections, Landlord will direct
electricians as to where and how the wires are to be introduced. No boring
or cutting for wires or other otherwise shall be made without directions
from Landlord.
14. Each tenant, upon the termination of its tenancy, shall deliver to
Landlord all the keys of offices, rooms and toilet rooms, and security
access card/keys which shall have been furnished such tenant or which such
tenant shall have had made, and in the event of loss of any keys so
furnished, shall pay Landlord therefor.
15. No Tenant shall lay linoleum or other similar floor covering so that the
same shall be affixed to the floor of the Premises in any manner except by
a paste, or other material which may easily be removed with water, the use
of cement or other similar adhesive materials being expressly prohibited.
The method of affixing any such linoleum or other similar floor covering
to the floor, as well as the method of affixing carpets or rugs to the
Premises shall be subject to reasonable approval by Landlord. The expense
of repairing any damage resulting from a violation of this rule shall be
borne by Tenant by whom, or by those agents, clerks, employees or
visitors, the damage shall have been caused.
16. No furniture, packages or merchandise will be received in the Building or
carried up or down in the elevators, except between such hours and in such
elevators as shall be designated by Landlord.
17. On Saturdays, Sundays and legal holidays, and on other days between the
hours of 6:00 p.m. and 7:00 a.m. access to the Building or to the halls,
corridors, elevators or stairways in the Building, or to the Premises may
be refused unless the person seeking access is known to the building
watchman, if any, in charge and has a pass or is properly identified.
Landlord shall in no case be liable for damages for the admission to or
exclusion from the Building of any person whom Landlord has the right to
exclude under Rule 3 above. In case of invasion, mob, riot, public
excitement, or other commotion, Landlord reserves the right but shall not
be obligated to prevent access to the Building during the continuance of
the same by closing the doors or otherwise, for the safety of the tenants
and protection of property in the Building.
18. Tenant shall see that the windows and doors of the Premises are closed and
securely locked before leaving the Building and Tenant shall exercise care
and caution that all water faucets or water apparatus are entirely shut
off before Tenant or Tenant's employees leave the Building, and that all
electricity, gas or air shall likewise be carefully shut off, so as to
prevent waste or damage, and for any default or carelessness Tenant shall
make good all injuries sustained by other tenants or occupants of the
Building or Landlord.
19. Tenant shall not alter any lock or install a new or additional lock or any
bolt on any door of the Premises without prior written consent of
Landlord. If Landlord shall give its consent, Tenant shall in each case
furnish Landlord with a key for any such lock.
20. Tenant shall not install equipment, such as but not limited to electronic
tabulating or computer equipment, requiring electrical or air conditioning
service in excess of those to be provided by Landlord under the Lease.
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<PAGE>
21. No bicycle, or shopping cart, or other vehicle or any animal shall be
brought into the Premises or the halls, corridors, elevators or any part
of the Building by Tenant.
22. Landlord shall have the right to prohibit the use of the name of the
Building or Project or any other publicity by Tenant which in Landlord's
opinion tends to impair the reputation of the Building or Project or their
desirability for other tenants, and upon written notice from Landlord,
Tenant will refrain from or discontinue such publicity.
23. Tenant shall not erect any aerial or antenna on the roof or exterior walls
of the Premises, Building, or Project without the prior written consent of
Landlord.
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EXHIBIT "F"
AMENDMENT OF LEASE COMMENCEMENT DATE
In connection with that certain Office Lease dated _________________ between The
Mutual Life Insurance Company of New York, as Landlord, and
____________________________, as Tenant concerning the Premises located at
_____________________________, Landlord and Tenant hereby agree as follows:
1. The Lease Commencement Date stated in Section I. of the Office Lease is
amended to be _____________________, 19__ and the Expiration Date stated
in Section I. is amended to be __________, 19__.
2. Landlord has satisfactorily complied with all requirements and conditions
precedent to the commencement of the Term as specified in the Office
Lease.
3. The Premises covered by the Office Lease and the tenant improvements
therein have been fully completed as required, are in good condition, are
ready for occupancy and have been accepted by Tenant.
4. Tenant has or shall commence paying Monthly Rental pursuant to the Office
Lease on __________________, 199__.
Dated effective this __________ day of _________, 199__.
"TENANT" "LANDLORD"
________________________________ _______________________________________
________________________________ _______________________________________
________________________________ _______________________________________
By:_____________________________ By:____________________________________
Name: ______________________ Name: ______________________________
Title: ______________________ Title: _____________________________
[SAMPLE]
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<PAGE>
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE is entered into by and between G & W Investment
Partners, A Nini Kumia Formed under the Laws of Japan, ("Landlord"), and
Pencom Systems, Inc. A New York Corporation, d.b.a. PSW Technologies,
("Tenant") effective as of this 1st day of JULY, 1996 ("Lease Amendment
Effective Date").
WHEREAS, Landlord and Tenant executed that certain Office Lease ("Lease")
effective April 25, 1996 for the premises described in Section I, Paragraph E
of the Lease.
NOW THEREFORE, in consideration of mutual covenants and conditions contained
herein and for such other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Section 1. Paragraph E. of the Lease is deleted in its entirety and the
following is added as a replacement:
"Premises" means suite 202 located on the second floor of the
Building and consisting of approximately six thousand six hundred
ninety eight (6,698) rentable square feet, as more particularly shown
on Exhibit B attached hereto and incorporated herein by this reference.
2. Section 1. Paragraph K. of the Lease is deleted in its entirety and the
following is added as a replacement:
"Security Deposit" means Eight Thousand Nine Hundred Twenty One
Dollars ($8,921.00)
3. Section 1. Paragraph P. of the Lease is deleted in its entirety and the
following is added as a replacement:
"Tenant's Proportionate Share" for Tenant's reimbursement of Common
Operating Costs and other expenses to be pro-rated hereunder means
15.97% which is the quotient obtained by dividing the total number of
square feet of net rentable floor area in the Building into the total
number of square feet of net rentable floor area within the Premises.
4. Section 1. Paragraph Q. of the Lease is deleted in its entirety and the
following is added as a replacement:
"Tenant's Parking Spaces" means TWENTY TWO (22) total parking spaces
located in such areas of the Project as landlord determines and
divided as follows: FIVE (5) covered and SEVENTEEN (17) non-covered or
surface, all of which shall be non-exclusive, unassigned.
5. Section 1. Paragraph R. of the Lease is deleted in its entirety and the
following is added as a replacement:
"Monthly Parking Rent" means FIFTEEN dollars ($15) per month, per
stall payable by Tenant for Tenant's FIVE (5) covered parking spaces.
Such Monthly Parking Rent shall be considered Additional Rent and shall
be due and payable without notice or demand, on or before the first day
of each calendar month.
6. Exhibit B. Of the Lease is deleted in its entirety and the attached
Exhibit B is added as a replacement.
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<PAGE>
7. Exhibit C. Of the Lease is deleted in its entirety and the attached
Exhibit C is added as a replacement.
8. Exhibit D. Of the Lease is deleted in its entirety and the attached
Exhibit D is added as a replacement.
9. CAPITALIZED TERMS AND DEFINITIONS
Unless defined herein, all terms with initial capitalization shall have the
mean assigned to it in the Lease.
10. ALL OTHER TERMS AND CONDITIONS UNCHANGED
All terms and conditions not specifically changed herein shall remain
unchanged.
11. EXECUTION
This First Amendment to Lease may be executed in several duplicate
counterparts, each of which shall be deemed an original of this Lease for all
purposes.
"TENANT" "LANDLORD"
Pencom Systems, Inc. A New York G&W Investment Partners, a nini
Corporation d.b.a. PSW Technologies kumia formed under the laws of
Japan
By: PENCOM SYSTEMS INCORPORATED By: MONY Realty Partners, Inc.
---------------------------- A Delaware Corporation as
its Agent
Name: /s/ Wade E. Saadi Name: /s/ Mark E. Novack
--------------------------- --------------------------
Wade E. Saadi Mark E. Novack
Title: President Vice President
------------------------
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<PAGE>
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
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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
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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>
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
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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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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:______________________________
Name:____________________________
Title:___________________________
STOCKHOLDERS
_________________________________
Wade E. Saadi
_________________________________
Edward C. Ateyeh, Jr.
_________________________________
Edgar G. Saadi
_________________________________
William Frank King
_________________________________
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 January __, 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
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<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
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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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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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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:________________________________
[ ]
Address:
Tel:
Fax:
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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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Exhibit 10.21
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of
October 1, 1996 by and between PSW TECHNOLOGIES, INC., a Delaware corporation
(the "Company"), and DR. WILLIAM F. KING (the "Executive").
W I T N E S S E T H
WHEREAS, the Company desires to employ Executive on the terms and
conditions herein contained; and
WHEREAS, Executive is willing to enter into this Agreement for
employment with the duties outlined herein on a full-time basis.
NOW, THEREFORE, in consideration of the employment of Executive by
the Company, the Company and Executive agree as follows:
1. Term of the Agreement. The Company shall employ Executive and
Executive shall accept employment with the Company for the two (2) year period
commencing on October 1, 1996 (the "Commencement Date") and ending September 30,
1998 (the "Employment Period"), subject, however, to prior termination as
hereinafter provided in Section 5. Thereafter, unless either party provides the
other party, no later than thirty (30) days prior to the end of the Employment
Period, with notice of its or his intention not to extend the Agreement and the
Employment Period as hereinafter set forth, this Agreement and the Employment
Period shall automatically be extended for subsequent one (1) year periods and
the provisions hereof shall remain applicable for each such subsequent period.
2. Executive's Title, Duties and Obligations.
a. Title and Duties. Executive shall serve as President and
Chief Executive Officer of the Company. Executive shall at all times report to
the Board of Directors of the Company (the "Board"), and shall be subject to the
policies established by the Board and shall discharge his responsibilities in a
competent and faithful manner, consistent with sound business practices.
b. Non-Disclosure Agreement. Prior to his commencement of
employment with the Company, Executive shall execute the Company's form of
Employee Non-Disclosure and Developments Agreement (the "Non-Disclosure
Agreement") attached hereto as Exhibit A.
<PAGE>
3. Devotion of Time to Company's Business
a. Full-Time Efforts. During his employment with the Company,
Executive shall devote all of his business time, attention and efforts to the
business of the Company.
b. No Other Employment. During his employment with the
Company, Executive shall not, whether directly or indirectly, render any
services of a commercial or professional nature to any other person or
organization, whether for compensation or otherwise, without the prior written
consent of the Company's Board of Directors.
c. Non-Competition. During his employment with the Company and
for a period of two (2) years thereafter, Executive shall not, directly or
indirectly, either as an employee, employer, consultant, agent, principal,
partner, joint venturer, stockholder, corporate officer, director, or in any
other individual or representative capacity, provide any software development,
porting support or contract programming services (the "Business") to any other
individual, corporation or entity for whom the Company has performed any
services within the twelve (12) month period prior thereto, or made a proposal
to provide any services within the six (6) month period prior thereto; or (ii)
solicit, divert or take away, or attempt to divert or to take away, the business
or patronage of any of the clients, customers or accounts which were contacted,
solicited or served by Executive while employed by the Company.
d. Non-Solicitation of Employees. Executive agrees that during
his employment with the Company and for two (2) years thereafter, he will not
encourage or solicit any employee of the Company to leave the Company for any
reason; provided, however, that this obligation shall not affect any
responsibility he may have as an employee of the Company with respect to the
bona fide hiring and firing of Company personnel.
e. Exceptions. Notwithstanding the provisions of this Section
3, nothing herein shall prohibit Executive from (i) holding less than one
percent (1%) of the outstanding capital stock of a publicly-held corporation
engaged in a business that competes with the Business or Proposed Business of
the Company; or (ii) serving on up to five (5) Boards of Directors of other
companies provided such role requires no more than twenty-five (25) days of
effort per annum total and involves no business conflict of interests within
Executive's services hereunder.
f. Interpretation. If any restriction set forth in Sections
3.c., 3.e. or 3.f. is found by any court of competent jurisdiction to be
unenforceable because it extends for too long a period of time or over too great
a range of activities or in too broad a geographic area, it shall be interpreted
to extend only over the maximum period of time, range of activities or
geographic area as to which it may be enforceable.
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g. Equitable Remedies. The restrictions contained in Sections
3.c., 3.e. and 3.f. are necessary for the protection of the business and
goodwill of the Company and are considered by Executive to be reasonable for
such purpose. Executive agrees that any breach of Sections 3.c., 3.e. or 3.f. of
this Agreement is likely to cause the Company substantial and irrevocable damage
and therefore, in the event of any such breach, Executive agrees that the
Company, in addition to any other remedies which may be available, shall be
entitled to specific performance and other injunctive relief.
4. Compensation and Benefits.
a. Base Compensation. During the term of this Agreement, the
Company shall pay to Executive a base annual compensation of Three Hundred Forty
Eight Thousand Dollars ($348,000), less all required withholdings (the "Base
Salary") payable in accordance with the Company's payroll policies.
b. Performance Bonuses. Executive shall be entitled to receive
bonuses based upon the achievement of certain performance objectives, as more
fully set forth on Exhibit B attached hereto (the "Performance Bonus"). The
Executive hereby expressly waives all bonus payments, if any, he would otherwise
be entitled to receive for the years ended December 31, 1997 and 1998 pursuant
to the employment agreement dated October 19, 1992 between the Executive and
Pencom Systems Incorporated.
c. Benefits. During his employment with the Company, Executive
will be entitled to receive all such health and medical benefits as are provided
to other executive officers of the Company. The Company reserves the right to
modify, amend or terminate any benefits listed above at any time for any reason
(provided such modification, amendment or termination is applicable to all
executives receiving such benefits) but shall, in any case, provide reasonable
health and disability benefits to Executive while Executive is a full-time
employee of the Company. Further, Executive will have the rights to participate
in any vacation and savings plans implemented by the Company which are provided
to other executive officers of the Company.
d. Expense Reimbursement. Executive shall be entitled to
reimbursement from the Company for all customary, ordinary and necessary
business expenses incurred by him in the performance of his duties hereunder,
provided that Executive shall furnish the Company with vouchers, receipts and
other details of such expenses within thirty (30) days after they are incurred.
5. Termination of Employment.
a. Termination for Good Cause. The Company may terminate
Executive's employment at any time for Good Cause. For the purposes of this
Agreement, "Good Cause" includes, but is not limited to, gross misconduct, gross
neglect of duties, acts involving moral turpitude, material breach by Executive
of the Non-Disclosure Agreement or
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any act or omission involving fraud, embezzlement, or misappropriation of any
property or proprietary information of the Company by Executive.
b. Termination without Good Cause. If Executive's employment
is terminated by the Company without Good Cause, Executive shall be entitled to
receive (i) any unpaid compensation accrued through the last day of Executive's
employment and (ii) severance payments equal to his base compensation, payable
on normal Company payroll dates, for a period ending three months after the date
of such termination (the "Severance Payments"), which Severance Payments shall
cease to be owing by the Company to Executive upon Executive's commencement of
employment with another company during such period.
c. Termination by Executive. Executive may terminate this
Agreement at any time, upon ninety (90) days' written notice to the Company. If
Executive terminates this Agreement under this Section 5.c., Executive shall
only be entitled to any unpaid compensation accrued through the last day of
Executive's employment, but in no event shall Executive be entitled to any
severance benefit.
d. Death or Disability. This Agreement shall terminate if
Executive dies or is mentally or physically Disabled. For the purposes of this
Agreement, "Disabled" shall mean a mental or physical condition that renders
Executive incapable of performing his duties and obligations under this
Agreement for three (3) or more consecutive months or for a total of six (6)
months during any twelve (12) consecutive months. If this Agreement is
terminated under this Section 5.d., Executive or his estate shall be entitled to
any unpaid compensation accrued through the last day of Executive's employment
but shall not be entitled to any severance benefits.
6. Miscellaneous.
a. Representations and Agreements of Executive. Executive
represents and warrants that he is free to enter into this Agreement and to
perform the duties required hereunder, and that there are no employment
contracts or understandings, restrictive covenants or other restrictions,
whether written or oral, preventing the performance of his duties hereunder.
Executive further represents and warrants that he does not possess any
proprietary information with respect to any former employer which is subject to
an agreement or understanding, whether written or oral, between Executive and
such former employer which restricts Executive's use or disclosure of such
proprietary information.
b. Governing Law. This Agreement shall be interpreted,
construed, governed and enforced according to the laws of the State of New York.
c. Amendments. No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.
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<PAGE>
d. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
construed, if possible, so as to be enforceable under applicable law, else, such
provision shall be excluded from this Agreement and the balance of the Agreement
shall be interpreted as if such provision were so excluded and shall be
enforceable in accordance with its terms.
e. Successors and Assigns. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company. Executive shall not be entitled
to assign any of his rights or obligations under this Agreement.
f. Non-Waiver. The waiver of any term or condition of this
Agreement shall not be deemed to constitute a waiver of any other term or
condition.
g. Notices. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or two days after deposit in the United States Post Office, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown below such party's signature, or at such other address or
addresses as either party shall designate to the other in accordance with this
Section 5.h.
h. Entire Agreement. This Agreement, including the exhibits
attached hereto, constitutes the entire agreement between the parties with
respect to the employment of Executive.
i. Headings. The Section headings appearing in this Agreement
are for purposes of easy reference and shall not be considered a part of this
Agreement or in any way modify, amend, or affect its provisions.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Employment
Agreement as of the date set forth above.
PSW TECHNOLOGIES, INC.
_________________________________
By:
Title:
Address:
EXECUTIVE:
_________________________________
Dr. William F. King
Address:
-6-
<PAGE>
Exhibit 10.32
ASSET CONTRIBUTION AGREEMENT
This Asset Contribution Agreement (the "Agreement") is made and
entered into this 1st day of October, 1996 by and between Pencom Systems
Incorporated ("PSI"), a New York corporation, and PSW Technologies, Inc.
("PSW"), a Delaware corporation.
WHEREAS, PSI desires to transfer to PSW, and PSW desires to acquire
certain assets and assume certain liabilities of PSI as hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Definitions. As used in the Agreement, the following terms shall
have the following meaning:
a. "Assets" shall mean (i) all Intellectual Property; (ii) all
licenses, franchises, permits, approvals or other similar authorizations; (iii)
all books, records, files and papers, whether in hard copy or computer format,
including, without limitation, research and development information, all
materials and analyses prepared by consultants and other third parties,
engineering information, sales and promotional literature, manuals and data,
sales and purchase correspondence, lists of present and former suppliers, lists
of present and former customers, personnel and employment records, and any
tax-related information; (iv) all goodwill; (v) all claims and choses in action;
(vi) all accounts, prepaid expenses, notes and other receivables; (vii) all
security deposits; (viii) all raw materials, parts, work-in-process, finished
goods, supplies and other inventories; (ix) all rights under all contracts,
agreements, leases, licenses, commitments, sales and purchase orders and other
instruments ("Contracts"); (x) all rights, claims, credits, causes of action or
rights of set-off against third- parties and (xi) all equipment, machinery,
improvements, furniture and fixed assets.
b. "Assumed Liabilities" shall have the meaning ascribed to
such term in Section 3 below.
c. "Business of PSW" shall mean the business and operations of
the software division of PSI, as currently conducted and proposed to be
conducted, and all activities associated therewith.
d. "Closing" shall mean the closing of the transactions
contemplated hereunder on the Closing Date.
e. "Closing Date" shall mean October 1, 1996.
<PAGE>
f. "Intellectual Property" shall mean all (A) patents, patent
applications, patent disclosures and all related continuation,
continuation-in-part, divisional, reissue, re-examination, utility, model,
certificate of invention and design patents, patent applications, registrations
and applications for registration, (B) trademarks, service marks, trade dress,
logos, tradenames, service names and corporate names and registrations and
applications for registration thereof, (C) copyrights and registrations and
applications for registration thereof, (D) mask works and registrations and
applications for registration thereof, (E) computer software, data and
documentation, (f) trade secrets and confidential business information, whether
patentable or nonpatentable and whether or not reduced to practice, know-how,
manufacturing and product processes and techniques, research and development
information, copyrightable works, financial, marketing and business data,
pricing and cost information, business and marketing plans and customer and
supplier lists and information, (G) other proprietary rights relating to any of
the foregoing (including without limitation associated goodwill and remedies
against infringements thereof and rights of protection of an interest therein
under the laws of all jurisdictions) and (H) copies and tangible embodiments
thereof.
g. "Opening Balance Sheet" shall mean a balance sheet prepared
as of the Closing Date, in accordance with generally accepted accounting
principles from the books and records of PSI, setting forth the assets and
liabilities of PSW as at the Closing Date, attached hereto as Exhibit A.
h. "PSW Assets" shall mean all of the Assets used or useful in
and to the Business of PSW, including without limitation (i) the Assets set
forth on Exhibit B and (ii) all of the Intellectual Property related thereto.
i. "Shares" shall have the meaning ascribed to such term in
Section 2 below.
j. "Warrant" shall have the meaning ascribed to such term in
Section 2 below.
2. Transfer of Assets to PSW. In consideration for the issuance
to PSI of 800 fully paid, non-assessable shares of common stock of PSW (the
"Shares"), par value $.01 per share, (ii) issuance to PSI of a warrant to
purchase an aggregate of 28.8912 shares of common stock of PSW at a purchase
price of $276.9231 per share (the "Warrant"), in substantially the form
attached hereto as Exhibit C, and (iii) issuance to certain employees of PSI
listed on Exhibit D attached hereto of warrants to purchase such number of
shares of common stock of PSW as set forth opposite each such person's name
thereon (the "Employee Warrants"), each in substantially the form of Exhibit
D-1 attached hereto, PSI shall assign, transfer, convey and deliver to PSW,
in the form of a capital contribution, the PSW Assets, subject to the
liabilities of PSI related thereto as such liabilities appear on the Opening
Balance Sheet.
2
<PAGE>
3. Assumption of Liabilities by PSW. In further consideration for
the conveyance of the PSW Assets, PSW shall assume and agree to pay, perform and
discharge all debts, obligations, contracts and liabilities of PSI related to
the PSW Assets as set forth on the Opening Balance Sheet. All such liabilities
shall hereinafter collectively be referred to as the "Assumed Liabilities."
Notwithstanding any provision in this Agreement or any other writing to the
contrary, PSW is assuming only the Assumed Liabilities and is not assuming any
other liability or obligation of PSI.
4. Instruments of Conveyance and Transfer. At the Closing, the
parties hereto shall enter into an Assignment and Assumption Agreement in the
form of Exhibit E attached hereto, and PSI shall deliver to the PSW all
necessary bills of sale, endorsements, consents, assignments and other good and
sufficient instruments of conveyance and assignment as shall be reasonably
necessary to vest in PSW good and marketable title to the PSW Assets. PSI shall
take all such steps as may be necessary to put PSW in actual possession and
operating control of the PSW Assets. At the Closing, PSW shall deliver to PSI
(i) certificates representing the Shares and (ii) the Warrant and (iii) such
other documents (including the Employee Warrants) and undertakings as may be
necessary to reflect the obligations of PSW as herein set forth.
5. Representations of PSI. PSI hereby represents and warrants to PSW
that:
5.1 Corporate Existence and Power. PSI is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation.
5.2 Corporate Authorizations. The execution, delivery and
performance by PSI of this Agreement and the consummation by PSI of transactions
contemplated hereby are within PSI's corporate powers and have been duly
authorized by all necessary corporate action on the part of PSI. This Agreement
constitutes the valid and binding agreement of PSI.
6. Further Assurances. From time to time, at PSW's request and
without further consideration, PSI will execute and deliver such other
instruments of conveyance and transfer and take such other action as PSW may
reasonably require to more effectively convey, transfer to, and vest in PSW, and
to put PSW in possession of, any property to be conveyed, transferred and
delivered hereunder, and, in the case of contracts and rights, if any, which
cannot be effectively transferred without the consent of third parties which is
unattainable, PSI will use its best efforts to ensure that PSW receive the
benefits thereof.
7. Consent of Third Parties. If a consent of a third party that is
required in order to assign any of the PSW Assets to PSW is not obtained prior
to the Closing Date, or if an attempted assignment would be ineffective or would
adversely affect the ability of PSI to convey its interest to PSW, PSI will
cooperate with PSW in any lawful and reasonable
3
<PAGE>
arrangement to provide that PSW shall receive the interest of PSI in the
benefits under any such instrument, contract, lease, permit or other agreement
or arrangement, including performance by PSI as agent except where prohibited by
law; and any transfer or assignment to PSW or by PSI of any interest under any
such instrument, contract, lease, permit of other agreement or arrangement that
requires the consent of a third party shall be made subject to such consent or
approval being obtained.
WHEREFOR, the parties hereto have executed this Agreement as of the date
first above written.
PENCOM SYSTEMS INCORPORATED
By:______________________________
Title:___________________________
PSW TECHNOLOGIES, INC.
By:______________________________
Title:___________________________
4
<PAGE>
Exhibit 10.33
ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of October 1, 1996, by and
between PENCOM SYSTEMS INCORPORATION, a New York corporation ("PSI"), and PSW
TECHNOLOGIES, INC., a Delaware corporation ("PSI"). All capitalized terms used
and not otherwise defined herein shall have the meaning ascribed to such terms
in the Agreement (as defined below).
WHEREAS, PSW and PSI have concurrently herewith entered into an Asset
Contribution Agreement of even date herewith (the "Agreement");
WHEREAS, pursuant to the Agreement, PSI has agreed to assign to PSW the
PSW Assets, and PSW has agreed to assume certain liabilities and obligations of
PSI related to the PSW Assets;
NOW, THEREFORE, in consideration of the foregoing, PSI and PSW agree as
follows:
1. (a) PSI does hereby sell, transfer, assign and deliver to PSW all of
the right, title and interest of PSI in, to and under the PSW Assets.
(b) PSW does hereby accept all the right, title and interest of PSI
in, to and under all of the PSW Assets, and PSW agrees to perform and discharge
promptly and fully when due all of the Assumed Liabilities.
2. This Agreement shall be construed in accordance with and governed by
the law of the State of New York.
3. This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
PENCOM SYSTEMS INCORPORATED
By:___________________________
Name:
Title:
PSW TECHNOLOGIES, INC.
By:___________________________
Name:
Title:
<PAGE>
Exhibit 10.34
THIS WARRANT HAS NOT BEEN REGISTERED UNDER UNITED STATES FEDERAL OR STATE
SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED
OR ASSIGNED FOR VALUE, DIRECTLY OR INDIRECTLY, NOR MAY BE TRANSFERRED ON THE
BOOKS OF THE COMPANY, WITHOUT REGISTRATION UNDER ALL APPLICABLE UNITED STATES
FEDERAL OR STATE SECURITIES LAWS OR COMPLIANCE WITH AN APPLICABLE EXEMPTION
THEREFROM, SUCH COMPLIANCE AT THE OPTION OF THE COMPANY TO BE EVIDENCED BY AN
OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT NO VIOLATION OF SUCH
REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT.
COMMON STOCK PURCHASE WARRANT
Warrant No. W-1
PSW TECHNOLOGIES, INC.
Void after October 1, 2006
1. ISSUANCE. This Warrant is issued to Pencom Systems, Inc., a New York
Corporation ("PSI"), by PSW Technologies, Inc., a Delaware corporation
(hereinafter with its successors called the "Company").
2. PURCHASE PRICE; NUMBER OF SHARES. Subject to the terms and conditions
hereinafter set forth, the registered holder of this Warrant (the "Holder"),
commencing on October 2, 1996, is entitled upon surrender of this Warrant with
the subscription form annexed hereto duly executed, at the office of the
Company, currently located at 6300 Bridgepoint Parkway, Building 3, Suite 200,
Austin, Texas 78730, or such other office as the Company shall notify the Holder
of in writing, to purchase from the Company fully paid and nonassessable shares
of Common Stock, $.01 par value, of the Company (the "Common Stock") in the
amount designated and at a price per share (the "Purchase Price") as specified
on SCHEDULE A attached hereto.
3. PAYMENT OF PURCHASE PRICE. The Purchase Price may be paid (i) in cash
or by check, (ii) by the surrender by the Holder to the Company of any
promissory notes or other obligations issued by the Company, with all such notes
and obligations so surrendered being credited against the Purchase Price in an
amount equal to the principal amount thereof plus accrued interest to the date
of surrender, (iii) through delivery by the Holder to the Company of other
securities issued by the Company, with such securities being credited against
the
<PAGE>
Purchase Price in an amount equal to the fair market value thereof, as
determined in good faith by the Board of Directors of the Company (the "Board"),
or (iv) by any combination of the foregoing. The Board shall promptly respond
in writing to an inquiry by the Holder as to the fair market value of any
securities the Holder may wish to deliver to the Company pursuant to clause
(iii) above.
4. NET ISSUE ELECTION. The Holder may elect to receive, without the
payment by the Holder of any additional consideration, shares equal to the value
of this Warrant or any portion hereof by the surrender of this Warrant or such
portion to the Company, with the net issue election notice annexed hereto duly
executed, at the office of the Company. Thereupon, the Company shall issue to
the Holder such number of fully paid and nonassessable shares of Common Stock as
is computed using the following formula:
X = Y (A-B)
-------
A
where X = the number of shares to be issued to the Holder pursuant to this
Section 4.
Y = the number of shares covered by this Warrant in respect of which
the net issue election is made pursuant to this Section 4.
A = the fair market value of one share of Common Stock, as determined
in good faith by the Board, as at the time the net issue election
is made pursuant to this Section 4.
B = the Purchase Price in effect under this Warrant at the time the
net issue election is made pursuant to this Section 4.
The Board shall promptly respond in writing to an inquiry by the Holder as to
the fair market value of one share of Common Stock.
5. PARTIAL EXERCISE. This Warrant may be exercised in part, and the
Holder shall be entitled to receive a new warrant, which shall be dated as of
the date of this Warrant, covering the number of shares in respect of which this
Warrant shall not have been exercised.
6. ISSUANCE DATE. The person or persons in whose name or names any
certificate representing shares of Common Stock is issued hereunder shall be
deemed to have become the holder of record of the shares represented thereby as
at the close of business on the date this Warrant is exercised with respect to
such shares, whether or not the transfer books of the Company shall be closed.
7. EXPIRATION DATE. This Warrant shall expire upon occurrence of the
earliest to occur of (a) 5:00 p.m. Eastern Time on October 1, 2006.
2
<PAGE>
8. RESERVED SHARES; VALID ISSUANCE. The Company covenants that it will
at all times from and after the date hereof reserve and keep available such
number of its authorized shares of Common Stock, free from all preemptive or
similar rights therein, as will be sufficient to permit the exercise of this
Warrant in full. The Company further covenants that such shares as may be
issued pursuant to such exercise and conversion will, upon issuance, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof.
9. FRACTIONAL SHARES. In no event shall any fractional share of Common
Stock be issued upon any exercise of this Warrant. If, upon exercise of this
Warrant in its entirety, the Holder would, except as provided in this Section 9,
be entitled to receive a fractional share of Common Stock, then the Company
shall issue the next higher number of full shares of Common Stock, issuing a
full share with respect to such fractional share.
10. NOTICES OF RECORD DATE, ETC. In the event of:
10.1 any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of
stock of any class or any other securities or property, or to receive
any other right,
10.2 any reclassification of the capital stock of the Company,
capital reorganization of the Company, consolidation or merger
involving the Company, or sale or conveyance of all or substantially
all of its assets, or
10.3 any voluntary or involuntary dissolution, liquidation or
winding-up of the Company
then and in each such event the Company will mail or cause to be mailed to the
Holder a notice specifying (i) the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and stating the amount
and character of such dividend, distribution or right or (ii) the date on which
any such reclassification, reorganization, consolidation, merger, sale or
conveyance, dissolution, liquidation or winding-up is to take place, and the
time, if any is to be fixed, as of which the holders of record in respect of
such event are to be determined. Such notice shall be mailed at least 20 days
prior to the date specified in such notice on which any such action is to be
taken.
11. REPRESENTATIONS OF THE COMPANY. The Company has all necessary power
and authority, and has taken all action required to execute, deliver and perform
this Warrant, and to issue, sell and deliver the Common Stock issuable upon
surrender of this Warrant. This Warrant and all other documents and instruments
executed by the Company pursuant hereto, when delivered, are and will be duly
authorized, valid and binding obligations of the
3
<PAGE>
Company, enforceable against the Company, in accordance with their respective
terms, subject to laws of general application relating to bankruptcy, insolvency
and relief of debtors; equitable principles limiting rights to specific
performance.
12. AMENDMENT. The terms of this Warrant may be amended, modified or
waived only with the written consent of the Company and the holders of Warrants
representing at least two-thirds of the number of shares of Common Stock then
issuable upon the exercise of the Warrants. No such amendment, modification or
waiver shall be effective as to this Warrant unless the terms of such amendment,
modification or waiver shall apply with the same force and effect to all of the
other Warrants then outstanding.
13. WARRANT REGISTER; TRANSFER, ETC.
A. The Company will maintain a register containing the names and
addresses of the registered holders of the Warrants. The Holder may
change its address as shown on the warrant register by written notice
to the Company requesting such change. Any notice or written
communication required or permitted to be given to the Holder may be
given by certified mail or delivered to the Holder at its address as
shown on the warrant register.
B. Subject to compliance with applicable federal and state
securities laws, this Warrant may be transferred by the Holder,
PROVIDED that such transferee provide the Company with such
representations as the Company may reasonably require in order to
comply with applicable United States federal and state securities
laws. Upon surrender of this Warrant to the Company, together with
the assignment hereof properly endorsed, for transfer of this Warrant
as an entirety by the Holder, the Company shall issue a new warrant of
the same denomination to the assignee. Upon surrender of this Warrant
to the Company, together with the assignment hereof properly endorsed,
by the Holder for transfer with respect to a portion of the shares of
Common Stock purchasable hereunder, the Company shall issue a new
warrant to the assignee, in such denomination as shall be requested by
the Holder hereof, and shall issue to such Holder a new warrant
covering the number of shares in respect of which this Warrant shall
not have been transferred.
C. In case this Warrant shall be mutilated, lost, stolen or
destroyed, the Company shall issue a new warrant of like tenor and
denomination and deliver the same (i) in exchange and substitution for
and upon surrender and cancellation of any mutilated Warrant, or (ii)
in lieu of any reasonably satisfactory to the Company of the loss,
theft or destruction of such Warrant (including a reasonably detailed
affidavit with respect to the circumstances of any loss, theft or
destruction) and of
4
<PAGE>
indemnity reasonably satisfactory to the Company, provided, however, that
so long as PSI is the registered holder of this Warrant, no indemnity shall
be required other than its written agreement to indemnify the Company
against any loss arising from the issuance of such new warrant.
14. NO IMPAIRMENT. The Company will not, by amendment of its Certificate
of Incorporation or through any reclassification, capital reorganization,
consolidation, merger, sale or conveyance of assets, dissolution, liquidation,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holder.
15. GOVERNING LAW. The Provisions and terms of this Warrant shall be
governed by and construed in accordance with the internal laws of the State of
New York.
16. SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon the
Company's successors and assigns and shall inure to the benefit of the Holder's
successors, legal representatives and permitted assigns.
17. BUSINESS DAYS. If the last or appointed day for the taking of any
action required or the expiration of any right granted herein shall be a
Saturday or Sunday or a legal holiday, then such action may be taken or right
may be exercised on the next succeeding day which is not a Saturday or Sunday or
such a legal holiday.
Dated: October 2, 1996 PSW TECHNOLOGIES, INC.
________________________________________
(Corporate Seal) By: ____________________________________
Title: ________________________________
Attest:
_____________________________
5
<PAGE>
SUBSCRIPTION
To:____________________________ Date:_________________________
The undersigned hereby subscribes for __________ shares of Common Stock
covered by this Warrant. The certificate(s) for such shares shall be issued in
the name of the undersigned or as otherwise indicated below:
_____________________________
Signature
_____________________________
Name for Registration
_____________________________
Mailing Address
NET ISSUE ELECTION NOTICE
To:____________________________ Date:_________________________
The undersigned hereby elects under Section 4 to surrender the right to
purchase _____ shares of Common Stock pursuant to this Warrant. The
certificate(s) for the shares issuable upon such net issue election shall be
issued in the name of the undersigned or as otherwise indicated below.
_____________________________
Signature
_____________________________
Name for Registration
_____________________________
Mailing Address
6
<PAGE>
ASSIGNMENT
For value received __________________________________________ hereby sells,
assigns and transfers unto ___________________________________________
______________________________________________________________________________
Please print or typewrite name and address of Assignee
______________________________________________________________________________
the within Warrant, and does hereby irrevocably constitute and appoint
_____________________ its attorney to transfer the within Warrant on the books
of the within named Company with full power of substitution on the premises.
Dated:_________________________
_________________________________
In the Presence of:
_______________________________
7
<PAGE>
SCHEDULE A
NUMBER OF SHARES 28.8912
EXERCISE PRICE $276.9231
8
<PAGE>
Exhibit 10.35
THIS WARRANT HAS NOT BEEN REGISTERED UNDER UNITED STATES FEDERAL OR STATE
SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED
OR ASSIGNED FOR VALUE, DIRECTLY OR INDIRECTLY, NOR MAY BE TRANSFERRED ON THE
BOOKS OF THE COMPANY, WITHOUT REGISTRATION UNDER ALL APPLICABLE UNITED STATES
FEDERAL OR STATE SECURITIES LAWS OR COMPLIANCE WITH AN APPLICABLE EXEMPTION
THEREFROM, SUCH COMPLIANCE AT THE OPTION OF THE COMPANY TO BE EVIDENCED BY AN
OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT NO VIOLATION OF SUCH
REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT.
COMMON STOCK PURCHASE WARRANT
Warrant No. W-2
PSW TECHNOLOGIES, INC.
Void after October 1, 2006
1. ISSUANCE. This Warrant is issued to Stephen Markman ("Markman"), by
PSW Technologies, Inc., a Delaware corporation (hereinafter with its successors
called the "Company").
2. PURCHASE PRICE; NUMBER OF SHARES. Subject to the terms and conditions
hereinafter set forth, the registered holder of this Warrant (the "Holder"),
commencing on October 2, 1996, is entitled upon surrender of this Warrant with
the subscription form annexed hereto duly executed, at the office of the
Company, currently located at 6300 Bridgepoint Parkway, Building 3, Suite 200,
Austin, Texas 78730, or such other office as the Company shall notify the Holder
of in writing, to purchase from the Company fully paid and nonassessable shares
of Common Stock, $.01 par value, of the Company (the "Common Stock") in the
amount designated and at a price per share (the "Purchase Price") as specified
on SCHEDULE A attached hereto.
3. PAYMENT OF PURCHASE PRICE. The Purchase Price may be paid (i) in cash
or by check, (ii) by the surrender by the Holder to the Company of any
promissory notes or other obligations issued by the Company, with all such notes
and obligations so surrendered being credited against the Purchase Price in an
amount equal to the principal amount thereof plus accrued interest to the date
of surrender, (iii) through delivery by the Holder to the Company of other
securities issued by the Company, with such securities being credited against
the
<PAGE>
Purchase Price in an amount equal to the fair market value thereof, as
determined in good faith by the Board of Directors of the Company (the "Board"),
or (iv) by any combination of the foregoing. The Board shall promptly respond
in writing to an inquiry by the Holder as to the fair market value of any
securities the Holder may wish to deliver to the Company pursuant to clause
(iii) above.
4. NET ISSUE ELECTION. The Holder may elect to receive, without the
payment by the Holder of any additional consideration, shares equal to the value
of this Warrant or any portion hereof by the surrender of this Warrant or such
portion to the Company, with the net issue election notice annexed hereto duly
executed, at the office of the Company. Thereupon, the Company shall issue to
the Holder such number of fully paid and nonassessable shares of Common Stock as
is computed using the following formula:
X = Y (A-B)
-------
A
where X = the number of shares to be issued to the Holder pursuant to this
Section 4.
Y = the number of shares covered by this Warrant in respect of which
the net issue election is made pursuant to this Section 4.
A = the fair market value of one share of Common Stock, as determined
in good faith by the Board, as at the time the net issue election
is made pursuant to this Section 4.
B = the Purchase Price in effect under this Warrant at the time the
net issue election is made pursuant to this Section 4.
The Board shall promptly respond in writing to an inquiry by the Holder as to
the fair market value of one share of Common Stock.
5. PARTIAL EXERCISE. This Warrant may be exercised in part, and the
Holder shall be entitled to receive a new warrant, which shall be dated as of
the date of this Warrant, covering the number of shares in respect of which this
Warrant shall not have been exercised.
6. ISSUANCE DATE. The person or persons in whose name or names any
certificate representing shares of Common Stock is issued hereunder shall be
deemed to have become the holder of record of the shares represented thereby as
at the close of business on the date this Warrant is exercised with respect to
such shares, whether or not the transfer books of the Company shall be closed.
7. EXPIRATION DATE. This Warrant shall expire upon occurrence of the
earliest to occur of (a) 5:00 p.m. Eastern Time on October 1, 2006.
2
<PAGE>
8. RESERVED SHARES; VALID ISSUANCE. The Company covenants that it will
at all times from and after the date hereof reserve and keep available such
number of its authorized shares of Common Stock, free from all preemptive or
similar rights therein, as will be sufficient to permit the exercise of this
Warrant in full. The Company further covenants that such shares as may be
issued pursuant to such exercise and conversion will, upon issuance, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof.
9. FRACTIONAL SHARES. In no event shall any fractional share of Common
Stock be issued upon any exercise of this Warrant. If, upon exercise of this
Warrant in its entirety, the Holder would, except as provided in this Section 9,
be entitled to receive a fractional share of Common Stock, then the Company
shall issue the next higher number of full shares of Common Stock, issuing a
full share with respect to such fractional share.
10. NOTICES OF RECORD DATE, ETC. In the event of:
10.1 any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of
stock of any class or any other securities or property, or to receive
any other right,
10.2 any reclassification of the capital stock of the Company,
capital reorganization of the Company, consolidation or merger
involving the Company, or sale or conveyance of all or substantially
all of its assets, or
10.3 any voluntary or involuntary dissolution, liquidation or
winding-up of the Company
then and in each such event the Company will mail or cause to be mailed to the
Holder a notice specifying (i) the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and stating the amount
and character of such dividend, distribution or right or (ii) the date on which
any such reclassification, reorganization, consolidation, merger, sale or
conveyance, dissolution, liquidation or winding-up is to take place, and the
time, if any is to be fixed, as of which the holders of record in respect of
such event are to be determined. Such notice shall be mailed at least 20 days
prior to the date specified in such notice on which any such action is to be
taken.
11. REPRESENTATIONS OF THE COMPANY. The Company has all necessary power
and authority, and has taken all action required to execute, deliver and perform
this Warrant, and to issue, sell and deliver the Common Stock issuable upon
surrender of this Warrant. This Warrant and all other documents and instruments
executed by the Company pursuant hereto, when delivered, are and will be duly
authorized, valid and binding obligations of the
3
<PAGE>
Company, enforceable against the Company, in accordance with their respective
terms, subject to laws of general application relating to bankruptcy, insolvency
and relief of debtors; equitable principles limiting rights to specific
performance.
12. AMENDMENT. The terms of this Warrant may be amended, modified or
waived only with the written consent of the Company and the holders of Warrants
representing at least two-thirds of the number of shares of Common Stock then
issuable upon the exercise of the Warrants. No such amendment, modification or
waiver shall be effective as to this Warrant unless the terms of such amendment,
modification or waiver shall apply with the same force and effect to all of the
other Warrants then outstanding.
13. WARRANT REGISTER; TRANSFER, ETC.
A. The Company will maintain a register containing the names and
addresses of the registered holders of the Warrants. The Holder may
change its address as shown on the warrant register by written notice
to the Company requesting such change. Any notice or written
communication required or permitted to be given to the Holder may be
given by certified mail or delivered to the Holder at its address as
shown on the warrant register.
B. Subject to compliance with applicable federal and state
securities laws, this Warrant may be transferred by the Holder,
PROVIDED that such transferee provide the Company with such
representations as the Company may reasonably require in order to
comply with applicable United States federal and state securities
laws. Upon surrender of this Warrant to the Company, together with
the assignment hereof properly endorsed, for transfer of this Warrant
as an entirety by the Holder, the Company shall issue a new warrant of
the same denomination to the assignee. Upon surrender of this Warrant
to the Company, together with the assignment hereof properly endorsed,
by the Holder for transfer with respect to a portion of the shares of
Common Stock purchasable hereunder, the Company shall issue a new
warrant to the assignee, in such denomination as shall be requested by
the Holder hereof, and shall issue to such Holder a new warrant
covering the number of shares in respect of which this Warrant shall
not have been transferred.
C. In case this Warrant shall be mutilated, lost, stolen or
destroyed, the Company shall issue a new warrant of like tenor and
denomination and deliver the same (i) in exchange and substitution for
and upon surrender and cancellation of any mutilated Warrant, or (ii)
in lieu of any reasonably satisfactory to the Company of the loss,
theft or destruction of such Warrant (including a reasonably detailed
affidavit with respect to the circumstances of any loss, theft or
destruction) and of
4
<PAGE>
indemnity reasonably satisfactory to the Company, provided, however, that
so long as Markman is the registered holder of this Warrant, no indemnity
shall be required other than its written agreement to indemnify the Company
against any loss arising from the issuance of such new warrant.
14. NO IMPAIRMENT. The Company will not, by amendment of its Certificate
of Incorporation or through any reclassification, capital reorganization,
consolidation, merger, sale or conveyance of assets, dissolution, liquidation,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holder.
15. GOVERNING LAW. The Provisions and terms of this Warrant shall be
governed by and construed in accordance with the internal laws of the State of
New York.
16. SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon the
Company's successors and assigns and shall inure to the benefit of the Holder's
successors, legal representatives and permitted assigns.
17. BUSINESS DAYS. If the last or appointed day for the taking of any
action required or the expiration of any right granted herein shall be a
Saturday or Sunday or a legal holiday, then such action may be taken or right
may be exercised on the next succeeding day which is not a Saturday or Sunday or
such a legal holiday.
Dated: October 2, 1996 PSW TECHNOLOGIES, INC.
________________________________________
(Corporate Seal) By: ____________________________________
Title: _________________________________
Attest:
_______________________
5
<PAGE>
SUBSCRIPTION
To:____________________________ Date:_________________________
The undersigned hereby subscribes for __________ shares of Common Stock
covered by this Warrant. The certificate(s) for such shares shall be issued in
the name of the undersigned or as otherwise indicated below:
_____________________________
Signature
_____________________________
Name for Registration
_____________________________
Mailing Address
NET ISSUE ELECTION NOTICE
To:____________________________ Date:_________________________
The undersigned hereby elects under Section 4 to surrender the right to
purchase _____ shares of Common Stock pursuant to this Warrant. The
certificate(s) for the shares issuable upon such net issue election shall be
issued in the name of the undersigned or as otherwise indicated below.
_____________________________
Signature
_____________________________
Name for Registration
_____________________________
Mailing Address
6
<PAGE>
ASSIGNMENT
For value received __________________________________________ hereby sells,
assigns and transfers unto ___________________________________________
______________________________________________________________________________
Please print or typewrite name and address of Assignee
______________________________________________________________________________
the within Warrant, and does hereby irrevocably constitute and appoint
_____________________ its attorney to transfer the within Warrant on the books
of the within named Company with full power of substitution on the premises.
Dated:_________________________
_________________________________
In the Presence of:
_______________________________
7
<PAGE>
SCHEDULE A
NUMBER OF SHARES 31.50
EXERCISE PRICE $276.9231
8
<PAGE>
Exhibit 10.36
THIS WARRANT HAS NOT BEEN REGISTERED UNDER UNITED STATES FEDERAL OR STATE
SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED
OR ASSIGNED FOR VALUE, DIRECTLY OR INDIRECTLY, NOR MAY BE TRANSFERRED ON THE
BOOKS OF THE COMPANY, WITHOUT REGISTRATION UNDER ALL APPLICABLE UNITED STATES
FEDERAL OR STATE SECURITIES LAWS OR COMPLIANCE WITH AN APPLICABLE EXEMPTION
THEREFROM, SUCH COMPLIANCE AT THE OPTION OF THE COMPANY TO BE EVIDENCED BY AN
OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT NO VIOLATION OF SUCH
REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT.
COMMON STOCK PURCHASE WARRANT
Warrant No. W-3
PSW TECHNOLOGIES, INC.
Void after October 1, 2006
1. ISSUANCE. This Warrant is issued to Thomas Pallister ("Pallister"),
by PSW Technologies, Inc., a Delaware corporation (hereinafter with its
successors called the "Company").
2. PURCHASE PRICE; NUMBER OF SHARES. Subject to the terms and conditions
hereinafter set forth, the registered holder of this Warrant (the "Holder"),
commencing on October 2, 1996, is entitled upon surrender of this Warrant with
the subscription form annexed hereto duly executed, at the office of the
Company, currently located at 6300 Bridgepoint Parkway, Building 3, Suite 200,
Austin, Texas 78730, or such other office as the Company shall notify the Holder
of in writing, to purchase from the Company fully paid and nonassessable shares
of Common Stock, $.01 par value, of the Company (the "Common Stock") in the
amount designated and at a price per share (the "Purchase Price") as specified
on SCHEDULE A attached hereto.
3. PAYMENT OF PURCHASE PRICE. The Purchase Price may be paid (i) in cash
or by check, (ii) by the surrender by the Holder to the Company of any
promissory notes or other obligations issued by the Company, with all such notes
and obligations so surrendered being credited against the Purchase Price in an
amount equal to the principal amount thereof plus accrued interest to the date
of surrender, (iii) through delivery by the Holder to the Company of other
securities issued by the Company, with such securities being credited against
the
<PAGE>
Purchase Price in an amount equal to the fair market value thereof, as
determined in good faith by the Board of Directors of the Company (the "Board"),
or (iv) by any combination of the foregoing. The Board shall promptly respond
in writing to an inquiry by the Holder as to the fair market value of any
securities the Holder may wish to deliver to the Company pursuant to clause
(iii) above.
4. NET ISSUE ELECTION. The Holder may elect to receive, without the
payment by the Holder of any additional consideration, shares equal to the value
of this Warrant or any portion hereof by the surrender of this Warrant or such
portion to the Company, with the net issue election notice annexed hereto duly
executed, at the office of the Company. Thereupon, the Company shall issue to
the Holder such number of fully paid and nonassessable shares of Common Stock as
is computed using the following formula:
X = Y (A-B)
-------
A
where X = the number of shares to be issued to the Holder pursuant to this
Section 4.
Y = the number of shares covered by this Warrant in respect of which
the net issue election is made pursuant to this Section 4.
A = the fair market value of one share of Common Stock, as determined
in good faith by the Board, as at the time the net issue election
is made pursuant to this Section 4.
B = the Purchase Price in effect under this Warrant at the time the
net issue election is made pursuant to this Section 4.
The Board shall promptly respond in writing to an inquiry by the Holder as to
the fair market value of one share of Common Stock.
5. PARTIAL EXERCISE. This Warrant may be exercised in part, and the
Holder shall be entitled to receive a new warrant, which shall be dated as of
the date of this Warrant, covering the number of shares in respect of which this
Warrant shall not have been exercised.
6. ISSUANCE DATE. The person or persons in whose name or names any
certificate representing shares of Common Stock is issued hereunder shall be
deemed to have become the holder of record of the shares represented thereby as
at the close of business on the date this Warrant is exercised with respect to
such shares, whether or not the transfer books of the Company shall be closed.
7. EXPIRATION DATE. This Warrant shall expire upon occurrence of the
earliest to occur of (a) 5:00 p.m. Eastern Time on October 1, 2006.
2
<PAGE>
8. RESERVED SHARES; VALID ISSUANCE. The Company covenants that it will
at all times from and after the date hereof reserve and keep available such
number of its authorized shares of Common Stock, free from all preemptive or
similar rights therein, as will be sufficient to permit the exercise of this
Warrant in full. The Company further covenants that such shares as may be
issued pursuant to such exercise and conversion will, upon issuance, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof.
9. FRACTIONAL SHARES. In no event shall any fractional share of Common
Stock be issued upon any exercise of this Warrant. If, upon exercise of this
Warrant in its entirety, the Holder would, except as provided in this Section 9,
be entitled to receive a fractional share of Common Stock, then the Company
shall issue the next higher number of full shares of Common Stock, issuing a
full share with respect to such fractional share.
10. NOTICES OF RECORD DATE, ETC. In the event of:
10.1 any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of
stock of any class or any other securities or property, or to receive
any other right,
10.2 any reclassification of the capital stock of the Company,
capital reorganization of the Company, consolidation or merger
involving the Company, or sale or conveyance of all or substantially
all of its assets, or
10.3 any voluntary or involuntary dissolution, liquidation or
winding-up of the Company
then and in each such event the Company will mail or cause to be mailed to the
Holder a notice specifying (i) the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and stating the amount
and character of such dividend, distribution or right or (ii) the date on which
any such reclassification, reorganization, consolidation, merger, sale or
conveyance, dissolution, liquidation or winding-up is to take place, and the
time, if any is to be fixed, as of which the holders of record in respect of
such event are to be determined. Such notice shall be mailed at least 20 days
prior to the date specified in such notice on which any such action is to be
taken.
11. REPRESENTATIONS OF THE COMPANY. The Company has all necessary power
and authority, and has taken all action required to execute, deliver and perform
this Warrant, and to issue, sell and deliver the Common Stock issuable upon
surrender of this Warrant. This Warrant and all other documents and instruments
executed by the Company pursuant hereto, when delivered, are and will be duly
authorized, valid and binding obligations of the
3
<PAGE>
Company, enforceable against the Company, in accordance with their respective
terms, subject to laws of general application relating to bankruptcy, insolvency
and relief of debtors; equitable principles limiting rights to specific
performance.
12. AMENDMENT. The terms of this Warrant may be amended, modified or
waived only with the written consent of the Company and the holders of Warrants
representing at least two-thirds of the number of shares of Common Stock then
issuable upon the exercise of the Warrants. No such amendment, modification or
waiver shall be effective as to this Warrant unless the terms of such amendment,
modification or waiver shall apply with the same force and effect to all of the
other Warrants then outstanding.
13. WARRANT REGISTER; TRANSFER, ETC.
A. The Company will maintain a register containing the names and
addresses of the registered holders of the Warrants. The Holder may
change its address as shown on the warrant register by written notice
to the Company requesting such change. Any notice or written
communication required or permitted to be given to the Holder may be
given by certified mail or delivered to the Holder at its address as
shown on the warrant register.
B. Subject to compliance with applicable federal and state
securities laws, this Warrant may be transferred by the Holder,
PROVIDED that such transferee provide the Company with such
representations as the Company may reasonably require in order to
comply with applicable United States federal and state securities
laws. Upon surrender of this Warrant to the Company, together with
the assignment hereof properly endorsed, for transfer of this Warrant
as an entirety by the Holder, the Company shall issue a new warrant of
the same denomination to the assignee. Upon surrender of this Warrant
to the Company, together with the assignment hereof properly endorsed,
by the Holder for transfer with respect to a portion of the shares of
Common Stock purchasable hereunder, the Company shall issue a new
warrant to the assignee, in such denomination as shall be requested by
the Holder hereof, and shall issue to such Holder a new warrant
covering the number of shares in respect of which this Warrant shall
not have been transferred.
C. In case this Warrant shall be mutilated, lost, stolen or
destroyed, the Company shall issue a new warrant of like tenor and
denomination and deliver the same (i) in exchange and substitution for
and upon surrender and cancellation of any mutilated Warrant, or (ii)
in lieu of any reasonably satisfactory to the Company of the loss,
theft or destruction of such Warrant (including a reasonably detailed
affidavit with respect to the circumstances of any loss, theft or
destruction) and of
4
<PAGE>
indemnity reasonably satisfactory to the Company, provided, however, that
so long as Pallister is the registered holder of this Warrant, no indemnity
shall be required other than its written agreement to indemnify the Company
against any loss arising from the issuance of such new warrant.
14. NO IMPAIRMENT. The Company will not, by amendment of its Certificate
of Incorporation or through any reclassification, capital reorganization,
consolidation, merger, sale or conveyance of assets, dissolution, liquidation,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holder.
15. GOVERNING LAW. The Provisions and terms of this Warrant shall be
governed by and construed in accordance with the internal laws of the State of
New York.
16. SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon the
Company's successors and assigns and shall inure to the benefit of the Holder's
successors, legal representatives and permitted assigns.
17. BUSINESS DAYS. If the last or appointed day for the taking of any
action required or the expiration of any right granted herein shall be a
Saturday or Sunday or a legal holiday, then such action may be taken or right
may be exercised on the next succeeding day which is not a Saturday or Sunday or
such a legal holiday.
Dated: October 2, 1996 PSW TECHNOLOGIES, INC.
________________________________________
(Corporate Seal) By:_____________________________________
Title: _________________________________
Attest:
__________________________
5
<PAGE>
SUBSCRIPTION
To:____________________________ Date:_________________________
The undersigned hereby subscribes for __________ shares of Common Stock
covered by this Warrant. The certificate(s) for such shares shall be issued in
the name of the undersigned or as otherwise indicated below:
_____________________________
Signature
_____________________________
Name for Registration
_____________________________
Mailing Address
NET ISSUE ELECTION NOTICE
To:____________________________ Date:_________________________
The undersigned hereby elects under Section 4 to surrender the right to
purchase _____ shares of Common Stock pursuant to this Warrant. The
certificate(s) for the shares issuable upon such net issue election shall be
issued in the name of the undersigned or as otherwise indicated below.
_____________________________
Signature
_____________________________
Name for Registration
_____________________________
Mailing Address
6
<PAGE>
ASSIGNMENT
For value received __________________________________________ hereby sells,
assigns and transfers unto ___________________________________________
______________________________________________________________________________
Please print or typewrite name and address of Assignee
______________________________________________________________________________
the within Warrant, and does hereby irrevocably constitute and appoint
_____________________ its attorney to transfer the within Warrant on the books
of the within named Company with full power of substitution on the premises.
Dated:_________________________
_________________________________
In the Presence of:
_______________________________
7
<PAGE>
SCHEDULE A
NUMBER OF SHARES 7.8889
EXERCISE PRICE $276.9231
8
<PAGE>
Exhibit 10.37
THIS WARRANT HAS NOT BEEN REGISTERED UNDER UNITED STATES FEDERAL OR STATE
SECURITIES LAWS AND MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED
OR ASSIGNED FOR VALUE, DIRECTLY OR INDIRECTLY, NOR MAY BE TRANSFERRED ON THE
BOOKS OF THE COMPANY, WITHOUT REGISTRATION UNDER ALL APPLICABLE UNITED STATES
FEDERAL OR STATE SECURITIES LAWS OR COMPLIANCE WITH AN APPLICABLE EXEMPTION
THEREFROM, SUCH COMPLIANCE AT THE OPTION OF THE COMPANY TO BE EVIDENCED BY AN
OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT NO VIOLATION OF SUCH
REGISTRATION PROVISIONS WOULD RESULT FROM ANY PROPOSED TRANSFER OR ASSIGNMENT.
COMMON STOCK PURCHASE WARRANT
Warrant No. W-4
PSW TECHNOLOGIES, INC.
Void after October 1, 2006
1. ISSUANCE. This Warrant is issued to Joy Venegas ("Venegas"), by PSW
Technologies, Inc., a Delaware corporation (hereinafter with its successors
called the "Company").
2. PURCHASE PRICE; NUMBER OF SHARES. Subject to the terms and conditions
hereinafter set forth, the registered holder of this Warrant (the "Holder"),
commencing on October 2, 1996, is entitled upon surrender of this Warrant with
the subscription form annexed hereto duly executed, at the office of the
Company, currently located at 6300 Bridgepoint Parkway, Building 3, Suite 200,
Austin, Texas 78730, or such other office as the Company shall notify the Holder
of in writing, to purchase from the Company fully paid and nonassessable shares
of Common Stock, $.01 par value, of the Company (the "Common Stock") in the
amount designated and at a price per share (the "Purchase Price") as specified
on SCHEDULE A attached hereto.
3. PAYMENT OF PURCHASE PRICE. The Purchase Price may be paid (i) in cash
or by check, (ii) by the surrender by the Holder to the Company of any
promissory notes or other obligations issued by the Company, with all such notes
and obligations so surrendered being credited against the Purchase Price in an
amount equal to the principal amount thereof plus accrued interest to the date
of surrender, (iii) through delivery by the Holder to the Company of other
securities issued by the Company, with such securities being credited against
the
<PAGE>
Purchase Price in an amount equal to the fair market value thereof, as
determined in good faith by the Board of Directors of the Company (the "Board"),
or (iv) by any combination of the foregoing. The Board shall promptly respond
in writing to an inquiry by the Holder as to the fair market value of any
securities the Holder may wish to deliver to the Company pursuant to clause
(iii) above.
4. NET ISSUE ELECTION. The Holder may elect to receive, without the
payment by the Holder of any additional consideration, shares equal to the value
of this Warrant or any portion hereof by the surrender of this Warrant or such
portion to the Company, with the net issue election notice annexed hereto duly
executed, at the office of the Company. Thereupon, the Company shall issue to
the Holder such number of fully paid and nonassessable shares of Common Stock as
is computed using the following formula:
X = Y (A-B)
-------
A
where X = the number of shares to be issued to the Holder pursuant to this
Section 4.
Y = the number of shares covered by this Warrant in respect of which
the net issue election is made pursuant to this Section 4.
A = the fair market value of one share of Common Stock, as determined
in good faith by the Board, as at the time the net issue election
is made pursuant to this Section 4.
B = the Purchase Price in effect under this Warrant at the time the
net issue election is made pursuant to this Section 4.
The Board shall promptly respond in writing to an inquiry by the Holder as to
the fair market value of one share of Common Stock.
5. PARTIAL EXERCISE. This Warrant may be exercised in part, and the
Holder shall be entitled to receive a new warrant, which shall be dated as of
the date of this Warrant, covering the number of shares in respect of which this
Warrant shall not have been exercised.
6. ISSUANCE DATE. The person or persons in whose name or names any
certificate representing shares of Common Stock is issued hereunder shall be
deemed to have become the holder of record of the shares represented thereby as
at the close of business on the date this Warrant is exercised with respect to
such shares, whether or not the transfer books of the Company shall be closed.
7. EXPIRATION DATE. This Warrant shall expire upon occurrence of the
earliest to occur of (a) 5:00 p.m. Eastern Time on October 1, 2006.
2
<PAGE>
8. RESERVED SHARES; VALID ISSUANCE. The Company covenants that it will
at all times from and after the date hereof reserve and keep available such
number of its authorized shares of Common Stock, free from all preemptive or
similar rights therein, as will be sufficient to permit the exercise of this
Warrant in full. The Company further covenants that such shares as may be
issued pursuant to such exercise and conversion will, upon issuance, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issuance thereof.
9. FRACTIONAL SHARES. In no event shall any fractional share of Common
Stock be issued upon any exercise of this Warrant. If, upon exercise of this
Warrant in its entirety, the Holder would, except as provided in this Section 9,
be entitled to receive a fractional share of Common Stock, then the Company
shall issue the next higher number of full shares of Common Stock, issuing a
full share with respect to such fractional share.
10. NOTICES OF RECORD DATE, ETC. In the event of:
10.1 any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of
stock of any class or any other securities or property, or to receive
any other right,
10.2 any reclassification of the capital stock of the Company,
capital reorganization of the Company, consolidation or merger
involving the Company, or sale or conveyance of all or substantially
all of its assets, or
10.3 any voluntary or involuntary dissolution, liquidation or
winding-up of the Company
then and in each such event the Company will mail or cause to be mailed to the
Holder a notice specifying (i) the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and stating the amount
and character of such dividend, distribution or right or (ii) the date on which
any such reclassification, reorganization, consolidation, merger, sale or
conveyance, dissolution, liquidation or winding-up is to take place, and the
time, if any is to be fixed, as of which the holders of record in respect of
such event are to be determined. Such notice shall be mailed at least 20 days
prior to the date specified in such notice on which any such action is to be
taken.
11. REPRESENTATIONS OF THE COMPANY. The Company has all necessary power
and authority, and has taken all action required to execute, deliver and perform
this Warrant, and to issue, sell and deliver the Common Stock issuable upon
surrender of this Warrant. This Warrant and all other documents and instruments
executed by the Company pursuant hereto, when delivered, are and will be duly
authorized, valid and binding obligations of the
3
<PAGE>
Company, enforceable against the Company, in accordance with their respective
terms, subject to laws of general application relating to bankruptcy, insolvency
and relief of debtors; equitable principles limiting rights to specific
performance.
12. AMENDMENT. The terms of this Warrant may be amended, modified or
waived only with the written consent of the Company and the holders of Warrants
representing at least two-thirds of the number of shares of Common Stock then
issuable upon the exercise of the Warrants. No such amendment, modification or
waiver shall be effective as to this Warrant unless the terms of such amendment,
modification or waiver shall apply with the same force and effect to all of the
other Warrants then outstanding.
13. WARRANT REGISTER; TRANSFER, ETC.
A. The Company will maintain a register containing the names and
addresses of the registered holders of the Warrants. The Holder may
change its address as shown on the warrant register by written notice
to the Company requesting such change. Any notice or written
communication required or permitted to be given to the Holder may be
given by certified mail or delivered to the Holder at its address as
shown on the warrant register.
B. Subject to compliance with applicable federal and state
securities laws, this Warrant may be transferred by the Holder,
PROVIDED that such transferee provide the Company with such
representations as the Company may reasonably require in order to
comply with applicable United States federal and state securities
laws. Upon surrender of this Warrant to the Company, together with
the assignment hereof properly endorsed, for transfer of this Warrant
as an entirety by the Holder, the Company shall issue a new warrant of
the same denomination to the assignee. Upon surrender of this Warrant
to the Company, together with the assignment hereof properly endorsed,
by the Holder for transfer with respect to a portion of the shares of
Common Stock purchasable hereunder, the Company shall issue a new
warrant to the assignee, in such denomination as shall be requested by
the Holder hereof, and shall issue to such Holder a new warrant
covering the number of shares in respect of which this Warrant shall
not have been transferred.
C. In case this Warrant shall be mutilated, lost, stolen or
destroyed, the Company shall issue a new warrant of like tenor and
denomination and deliver the same (i) in exchange and substitution for
and upon surrender and cancellation of any mutilated Warrant, or (ii)
in lieu of any reasonably satisfactory to the Company of the loss,
theft or destruction of such Warrant (including a reasonably detailed
affidavit with respect to the circumstances of any loss, theft or
destruction) and of
4
<PAGE>
indemnity reasonably satisfactory to the Company, provided, however, that
so long as Venegas is the registered holder of this Warrant, no indemnity
shall be required other than its written agreement to indemnify the Company
against any loss arising from the issuance of such new warrant.
14. NO IMPAIRMENT. The Company will not, by amendment of its Certificate
of Incorporation or through any reclassification, capital reorganization,
consolidation, merger, sale or conveyance of assets, dissolution, liquidation,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holder.
15. GOVERNING LAW. The Provisions and terms of this Warrant shall be
governed by and construed in accordance with the internal laws of the State of
New York.
16. SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon the
Company's successors and assigns and shall inure to the benefit of the Holder's
successors, legal representatives and permitted assigns.
17. BUSINESS DAYS. If the last or appointed day for the taking of any
action required or the expiration of any right granted herein shall be a
Saturday or Sunday or a legal holiday, then such action may be taken or right
may be exercised on the next succeeding day which is not a Saturday or Sunday or
such a legal holiday.
Dated: October 2, 1996 PSW TECHNOLOGIES, INC.
________________________________________
(Corporate Seal) By: ____________________________________
Title: _________________________________
Attest:
_________________________
5
<PAGE>
SUBSCRIPTION
To:____________________________ Date:_________________________
The undersigned hereby subscribes for __________ shares of Common Stock
covered by this Warrant. The certificate(s) for such shares shall be issued in
the name of the undersigned or as otherwise indicated below:
_____________________________
Signature
_____________________________
Name for Registration
_____________________________
Mailing Address
NET ISSUE ELECTION NOTICE
To:____________________________ Date:_________________________
The undersigned hereby elects under Section 4 to surrender the right to
purchase _____ shares of Common Stock pursuant to this Warrant. The
certificate(s) for the shares issuable upon such net issue election shall be
issued in the name of the undersigned or as otherwise indicated below.
_____________________________
Signature
_____________________________
Name for Registration
_____________________________
Mailing Address
6
<PAGE>
ASSIGNMENT
For value received __________________________________________ hereby sells,
assigns and transfers unto ___________________________________________
______________________________________________________________________________
Please print or typewrite name and address of Assignee
______________________________________________________________________________
the within Warrant, and does hereby irrevocably constitute and appoint
_____________________ its attorney to transfer the within Warrant on the books
of the within named Company with full power of substitution on the premises.
Dated:_________________________
_________________________________
In the Presence of:
_______________________________
7
<PAGE>
SCHEDULE A
NUMBER OF SHARES 5.0477
EXERCISE PRICE $276.9231
8
<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 March , 1997), in
Amendment No. 2 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. 2 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
March , 1997
------------------------
The foregoing consent is in the form that will be signed upon the completion
of the restatement of capital accounts described in Note 3 to the financial
statements.
ERNST & YOUNG LLP
New York, New York
March 24, 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. 2 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
March 24, 1997
