<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 1997
REGISTRATION NO. 333-21565
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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 19, 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 6 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
$5.0 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 January 31, 1997 was $2.1 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 issuable 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 for 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 three 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, and (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.
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.
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.
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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.
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.
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.
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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.
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.
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.
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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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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
8,396,463 shares of Common Stock. Of these shares, the 2,850,000 shares offered
hereby (plus up to 427,500 additional shares if the Underwriters exercise their
over-allotment option) will be freely tradeable without restriction or further
registration (except by affiliates of the Company or persons acting as
underwriters) under the Securities Act. All of the remaining 5,546,463 shares of
Common Stock (the "Restricted Shares") may not be sold unless they are
registered under the Securities Act or are sold pursuant to an exemption from
registration, such as the exemption provided by Rule 144 promulgated under the
Securities Act.
In general, commencing 90 days after the completion of this offering, Rule
144, as currently in effect, allows a person who has beneficially owned
Restricted Shares for at least two years, including persons who may be deemed
affiliates of the Company, to sell, within any three-month period, up to the
number of Restricted Shares that does not exceed the greater of (i) one percent
of the then outstanding shares of Common Stock, and (ii) the average weekly
trading volume during the four calendar weeks preceding the date on which notice
of the sale is filed with the Securities and Exchange Commission. A person who
is not deemed to have been an affiliate of the Company at any time during the 90
days preceding a sale and who has beneficially owned his or her Restricted
Shares for at least three years would be entitled to sell such Restricted Shares
without regard to the volume limitations described above and the other
conditions of Rule 144. Upon the completion of this offering, none of the
Restricted Shares will be immediately eligible for sale in the public market
without restriction pursuant to Rule 144 of the Securities Act. The holders of
approximately 5,538,463 shares of the Company's Common Stock will have
beneficially owned such shares for 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
commitment to issue 8,000 shares 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
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>
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
F-13
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
8. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
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.
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
F-14
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
8. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
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 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
F-15
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
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>
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.
F-16
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 $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.
F-17
<PAGE>
PSW TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (CONTINUED)
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-) A set of PSW resources to enable improvements 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 Stockholders Agreement dated October 1, 1996 between the Registrant and certain stockholders of the
Registrant.
*10.18 Registration Rights Agreement dated October 1, 1996 between the Registrant and certain stockholders
and warrantholders of the Registrant.
**10.19 Promissory Note dated October 19, 1995 from Dr. William Frank King to Pencom Systems Incorporated.
**10.20 Employment Agreement dated October 19, 1992 between Dr. William Frank King and Pencom Systems
Incorporated.
*10.21 Employment Agreement dated October 1, 1996 between Dr. W. Frank King and the Registrant.
**10.22 Employment Agreement dated July 1, 1993 between the Registrant and Patrick Motola.
**10.23 Employment Agreement dated September 27, 1993 between the Registrant and William Cason.
**10.24 Employment Agreement dated October 19, 1993 between the Registrant and Brian Baisley.
**10.25 Employment Agreement dated July 18, 1994 between the Registrant and William Sutton Wimberley, Jr.
*10.26 1996 Stock Option/Stock Issuance Plan.
*10.27 Employee Stock Purchase Plan.
**10.28 PSW Profit Sharing Plan.
**10.29 Description of Executive Bonus Plan.
10.30 Stock Purchase Agreement dated as of January 1, 1997 between Michael J. Maples and the Registrant.
10.31 Stock Subscription dated October 1, 1996 between Pencom Systems Incorporated and the Registrant.
*10.32 Asset Contribution Agreement dated October 1, 1996 between Pencom Systems Incorporated and the
Registrant.
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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
**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 11 -- 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. 1 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 19TH 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 19, 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
II-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SIGNATURE TITLE
--------------------------------- ------------------------------------------
*By: /s/ DR. W. FRANK KING
------------------------------
Dr. W. Frank King
Attorney-in-Fact
</TABLE>
II-6
<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. 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>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
PSW TECHNOLOGIES, INC.
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COL.C
------------------------------------------------
COL.B
--------------- ADDITIONS
COL.A BALANCE AT ------------------------------------------------ COL.D
- ------------------------------------ BEGINNING OF CHARGED TO COSTS AND CHARGED TO OTHER ---------------------
DESCRIPTION PERIOD EXPENSES ACCOUNTS--DESCRIBE DEDUCTIONS--DESCRIBE
- ------------------------------------ --------------- ----------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1994 $ 14 $ 43 -- $ 43(1)
Deducted from asset account:
Allowance for doubtful
accounts......................
Year Ended December 31, 1995 $ 14 $ 52 -- $ 21(1)
Deducted from asset account:
Allowance for doubtful
accounts......................
Year Ended December 31, 1996 $ 45 $ 75 -- --
Deducted from asset account:
Allowance for doubtful
accounts......................
<CAPTION>
COL.E
COL.A -------------------
- ------------------------------------ BALANCE AT END OF
DESCRIPTION PERIOD
- ------------------------------------ -------------------
<S> <C>
Year Ended December 31, 1994 $ 14
Deducted from asset account:
Allowance for doubtful
accounts......................
Year Ended December 31, 1995 $ 45
Deducted from asset account:
Allowance for doubtful
accounts......................
Year Ended December 31, 1996 $ 120
Deducted from asset account:
Allowance for doubtful
accounts......................
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
S-3
<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.
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 1.1
__________________ Shares
PSW Technologies, Inc.
Common Stock
(Par Value $ .01 per share)
UNDERWRITING AGREEMENT
, 1997
ALEX. BROWN & SONS INCORPORATED
J. P. MORGAN SECURITIES INC.
As Representatives of the
Several Underwriters
c/o Alex Brown & Sons Incorporated
1 South Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
PSW Technologies, Inc., a Delaware corporation (the "Company"), proposes to
sell to the several underwriters (the "Underwriters") named in Schedule I hereto
for whom you are acting as representatives (the "Representatives") an aggregate
of __________ shares of the Company's Common Stock, par value $ .01 per share
(the "Firm Shares"). The respective amounts of the Firm Shares to be so
purchased by the several Underwriters are set forth opposite their names in
Schedule I hereto. The Company also proposes to sell at the Underwriters' option
an aggregate of up to __________ additional shares of the Company's Common Stock
(the "Option Shares") as set forth below.
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Option Shares
if
<PAGE>
you elect to exercise the over-allotment option in whole or in part for the
accounts of the several Underwriters. The Firm Shares and the Option Shares (to
the extent the aforementioned option is exercised) are herein collectively
called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company
The Company represents and warrants as follows:
(a) A registration statement on Form S-1 (File No. 333-_____) with
respect to the Shares has been carefully prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission under the Act. Copies of such registration statement, including any
amendments thereto, the preliminary prospectuses contained therein and the
exhibits, financial statements and schedules, as finally amended and revised,
have heretofore been delivered by the Company to you. Such registration
statement, together with any registration statement filed by the Company
pursuant to Rule 462(b) of the Act, herein referred to as the "Registration
Statement," which shall be deemed to include all information omitted therefrom
in reliance on Rule 430A and contained in the Prospectus referred to below, has
become effective under the Act and no post-effective amendment to the
Registration Statement has been filed as of the date of this Agreement.
"Prospectus" mean (a) the form of prospectus first filed by the Company with the
Commission pursuant to its Rule 424(b) or (b) the last preliminary prospectus
included in the Registration Statement filed prior to the time it becomes
effective or filed pursuant to Rule 424(a) under the Act that is delivered by
the Company to the Underwriters for delivery to purchasers of the Shares
together with any term sheet filed with the Commission pursuant to Rule
424(b)(7) under the Act. Each preliminary prospectus included in the
Registration Statement prior to the time it becomes effective is herein referred
to as a "Preliminary Prospectus."
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement The Company is duly
qualified to transact business in all jurisdictions in which the conduct of its
business requires such qualification. Except for investments in securities as
described in the Registration Statement, the Company has no equity or other
interest in, or right to acquire, an equity or other interest in, any
corporation, partnership, trust or other entity.
(c) The outstanding shares of Common Stock of the Company have been duly
authorized and validly issued and are fully paid and non-assessable; the Shares
to be issued and sold by the Company have been duly authorized and when issued
and paid for as contemplated
<PAGE>
herein will be validly issued, fully-paid and non-assessable; and no preemptive
rights of stockholders exist with respect to any of the Shares or the issue and
sale thereof. Neither the filing of the Registration Statement nor the offering
or sale of shares as contemplated by this Agreement gives rise to any rights
other than those which have been waived or satisfied, for a relating to the
registration of any shares of Common Stock.
(d) The information set forth under the caption "Capitalization" in the
Prospectus is true and correct. All of the Shares conform to the descriptions
thereof contained in the Registration Statement. The form of certificates for
the Shares conforms to the corporate law of the jurisdiction of the Company's
incorporation.
(e) The Commission has not issued an order preventing or suspending the use
of any Prospectus relating to the proposed offering of the Shares nor instituted
proceedings for that purpose. The Registration Statement contains and the
Prospectus and any amendments or supplements thereto will contain all statements
which are required to be stated therein by, and in all respects conform or will
conform, as the case may be, to the requirements of, the Act and the Rules and
Regulations. Neither the Registration Statement nor any amendment thereto, and
neither the Prospectus nor any supplement thereto contains or will contain, as
the case may be, any untrue statement of a material fact or omits or will omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted from the
Registration Statement or the Prospectus, or any such amendment or supplement in
reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of any Underwriter through the Representatives,
specifically for use in the preparation thereof.
(f) The financial statements of the Company, together with related notes
and schedules as set forth in the Registration Statement, present fairly the
financial position and the results of operations and cash flows of the Company
at the indicated dates and for the indicated periods. Such financial statements
and related schedules have been prepared in accordance with generally accepted
principles of accounting, consistently applied throughout the periods involved,
and all adjustments necessary for a fair presentation of results for such
periods have been made. The summary and selected financial and statistical data
included in the Registration Statement presents fairly the information shown
therein and such data have been compiled on a basis consistent with the
financial statements presented therein. The pro forma financial information
included in the Registration Statement and the Prospectus have been properly
complied on the pro forma bases described therein, and, in the opinion of the
Company, the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
referred to therein.
(g) Ernst & Young LLP, who have certified certain of the financial
statements filed with the Commission as part of the Registration Statement, are
independent public accountants as required by the Act and the Rules and
Regulations.
<PAGE>
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company before any court,
administrative agency, regulatory authority or otherwise which might result in
any material adverse change in the earnings, business, management, properties,
assets, rights, operation, condition (financial or otherwise) or prospects of
the Company, except as set forth in the Registration Statement.
(i) The Company has good and marketable title to all of the properties and
assets reflected in the financial statements (or as described in the
Registration Statement) hereinabove described, subject to no lien, mortgage,
pledge, charge or encumbrance of any kind except those reflected in such
financial statements (or as described in the Registration Statement) or which
are not material in amount. The Company occupies its their leased properties
under valid and binding leases conforming to the description thereof set forth
in the Registration Statement.
(j) The Company has filed all Federal, State, local and foreign income tax
returns which have been required to be filed and have paid all taxes indicated
by said returns and all assessments received by them or any of them to the
extent that such taxes have become due and are not being contested in good
faith. All tax liabilities have been adequately provided for to the financial
statements of the Company.
(k) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, there has not been
any material adverse change or any development involving a prospective material
adverse change in or affecting the earnings, business, management, properties,
assets, rights, operations, condition, financial or otherwise, or prospects of
the Company, whether or not occurring in the ordinary course of business, and
there has not been any material transaction entered into by the Company other
than transactions in the ordinary course of business and changes and
transactions contemplated by the Registration Statement, as it may be amended or
supplemented. The Company has no material contingent obligations which are not
disclosed in the Company's financial statements which are included in the
Registration Statement.
(l) The Company is not nor with the giving of notice, lapse of time or
both, will be in violation or default under its Certificate of Incorporation or
By-Laws or any agreement, lease, contract, indenture or other instrument or
obligation to which it is a party or by which it or any of its properties is
bound and which default is of material significance in respect of condition
(financial or otherwise) of the Company. The execution and delivery of this
Agreement and the consummation of the transactions herein contemplated and the
fulfillment of the terms hereof will not conflict with or result in a breach of
any of the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust or other agreement or instrument to which the Company is
a party, or of the Charter or By-Laws of the Company or any order, rule or
regulation applicable to the Company of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
<PAGE>
(m) Each approval, consent, order, authorization, designation, declaration
or filing by or with any regulatory, administrative or other governmental body
necessary in connection with the execution and delivery by the Company of this
Agreement and the consummation of the transactions herein contemplated (except
such additional steps as may be required by the National Association of
Securities Dealers, Inc. (the "NASD") or may be necessary to qualify the Shares
for public offering by the Underwriters under state securities or Blue Sky laws)
has been obtained or made and is in full force and effect.
(n) The Company holds all material licenses, certificates and permits from
governmental authorities which are necessary to the conduct of its business; and
the Company has not infringed any patents, patent rights, trade names,
trademarks or copyrights, which infringement is material to the business of the
Company. The Company knows of no material infringement by others of patents,
patent rights, trade names, trademarks or copyrights owned by or licensed to the
Company.
(o) Neither the Company, nor to the Company's best knowledge, any of its
affiliates, has taken or may take, directly or indirectly, any action designed
to cause or result in, or which has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of the
shares of Common Stock to facilitate the sale or resale of the Shares.
(p) The Company has never been, is not now, and immediately after the sale
of the Shares under this Agreement will not be, an "investment company" within
the meaning of the Investment Company Act of 1940, as amended and the rules and
regulations of the Commission thereunder.
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(r) The Company carries, or is covered by, insurance in such amounts and
covering such risks as is adequate for the conduct of its business and the value
of its properties and as is customary for companies engaged in similar
industries.
(s) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for
<PAGE>
which the Company would have any liability; the Company has not incurred and
does not expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each "pension plan"
for which the Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects and
nothing has occurred, whether by action or by failure to act, which would cause
the loss of such qualification.
(t) The Company confirms as of the date hereof that it is in compliance
with all provisions of Section 1 of Laws of Florida, Chapter 92-198, An Act
Relating to Disclosure of doing Business with Cuba, and the Company further
agrees that if it commences engaging in business with the government of Cuba or
with any person or affiliate located in Cuba after the date the Registration
Statement becomes or has become effective with the Commission or with the
Florida Department of Banking and Finance (the "Department"), whichever date is
later, or if the information reported or incorporated by reference in the
Prospectus, if any, concerning the Company's business with Cuba or with any
person or affiliate located in Cuba changes in any material way, the Company
will provide the Department notice of such business or change, as appropriate,
in a form acceptable to the Department.
(u) The Shares of the Company to be sold under this Agreement have been
approved for listing on the Nasdaq Stock Market (National Market).
2. Purchase, Sale and Delivery of the Firm Shares.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Company
agrees to sell to the Underwriters and each Underwriter agrees, severally and
not jointly, to purchase, at a price of $________ per share, the number of Firm
Shares set forth opposite the name of each Underwriter in Schedule I hereof,
subject to adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made in
immediately available funds by wire transfer to the order of the Company against
delivery of certificates therefor to the Representatives for the several
accounts of the Underwriters. Such payment and delivery are to be made at the
offices of Alex. Brown & Sons Incorporated, 1 South Street, Baltimore, Maryland
21202, at 10:00 A.M., Baltimore time, on the third business day after the date
of this Agreement or at such other time and date not later than three business
days thereafter as you and the Company shall agree upon, such time and date
being herein referred to as the "Closing Date." (As used herein, "business day"
means a day on which the New York Stock Exchange is open for trading and on
which banks in New York are open for business and are not permitted by law or
executive order to be closed.) The certificates for the Firm Shares will be
delivered in such denominations and in such registrations as the Representatives
requests in writing not later than the second full business day prior to the
Closing Date, and will be made
<PAGE>
available for inspection by the Representatives at least one business day prior
to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase the
Option Shares at the price per share as set forth in the first paragraph of this
Section 2. The option granted hereby may be exercised in whole or in part but
only once and at any time upon written notice (i) at any time before the Closing
Date and (ii) only once thereafter within 30 days after the date of this
Agreement, by you, as Representatives of the several Underwriters, to the
Company setting forth the number of Option Shares as to which the several
Underwriters are exercising the option, the names and denominations in which the
Option Shares are to be registered and the time and date at which such
certificates are to be delivered. The time and date at which certificates for
Option Shares are to be delivered shall be determined by the Representatives but
shall not be earlier than three nor later than 10 full business days after the
exercise of such option, nor in any event prior to the Closing Date (such time
and date being herein referred to as the "Option Closing Date"). If the date of
exercise of the option is three or more days before the Closing Date, the notice
of exercise shall set the Closing Date as the Option Closing Date. The number of
Option Shares to be purchased by each Underwriter shall be in the same
proportion to the total number of Option Shares being purchased as the number of
Firm Shares being purchased by such Underwriter bears to the total number of
Firm Shares, adjusted by you in such manner as to avoid fractional shares. The
option with respect to the Option Shares granted hereunder may be exercised only
to cover over-allotments in the sale of the Firm Shares by the Underwriters.
You, as Representatives of the several Underwriters, may cancel such option at
any time prior to its expiration by giving written notice of such cancellation
to the Company and the Attorney-in-Fact. To the extent, if any, that the option
is exercised, payment for the Option Shares shall be made on the Option Closing
Date in immediately available funds by wire transfer to the order of the Company
against delivery of certificates therefor at the offices of Alex. Brown & Sons
Incorporated, 1 South Street, Baltimore, Maryland.
3. Offering by the Underwriters. It is understood that the several
Underwriters are to make a public offering of the Firm Shares as soon as the
Representatives deems it advisable to do so. The Firm Shares are to be initially
offered to the public at the initial public offering price set forth in the
Prospectus. The Representatives may from time to time thereafter change the
public offering price and other selling terms. To the extent, if at all, that
any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters
will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. Covenants of the Company
<PAGE>
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (A) use its best efforts to cause the Registration
Statement to become effective or, if the procedure in Rule 430A of the Rules and
Regulations is followed, to prepare and timely file with the Commission under
Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the
Representatives containing information previously omitted at the time of
effectiveness of the Registration Statement in reliance on Rule 430A of the
Rules and Regulations, (B) not file any amendment to the Registration Statement
or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations and (C) file on a timely basis all
reports and any definitive proxy or information statements required to be filed
by the Company with the Commission subsequent to the date of the Prospectus and
prior to the termination of the offering of the Shares by the Underwriters.
(b) The Company will advise the Representatives promptly (A) when the
Registration Statement or any past effective amendment thereto shall have become
effective, (B) of receipt of any comments from the Commission, (C) of any
request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, or (D) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to prevent
the issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representatives in endeavoring to
qualify the Shares for sale under the securities laws of such jurisdictions as
the Representatives may reasonably have designated in writing and will make such
applications, file such documents, and furnish such information as may be
reasonably required for that purpose, provided the Company shall not be required
to qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction where it is not now so qualified or required to file
such a consent. The Company will, from time to time, prepare and file such
statements, reports, and other documents, as are or may be required to continue
such qualifications in effect for so long a period as the Representatives may
reasonably request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the Representatives,
from time to time, as many copies of any Preliminary Prospectus as the
Representatives may reasonably request. The Company will deliver to, or upon the
order of, the Representatives during the period when delivery of a Prospectus is
required under the Act, as many copies of the Prospectus in final form, or as
thereafter amended or supplemented, as the Representatives may reasonably
request. The Company will deliver to the Representatives at or before the
Closing Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits
<PAGE>
filed therewith, and will deliver to the Representatives such number of copies
of the Registration Statement (including such number of copies of the exhibits
filed therewith that may reasonably be requested), and of all amendments
thereto, as the Representatives may reasonably request.
(e) If during the period in which a prospectus is required by law to be
delivered by an Underwriter or dealer any event shall occur as a result of
which, in the judgment of the Company or in the opinion of counsel for the
Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances existing
at the time the Prospectus is delivered to a purchaser, not misleading, or, if
it is necessary at any time to amend or supplement the Prospectus to comply with
any law, the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus so that the Prospectus as so amended or supplemented will not, in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with law.
(f) The Company will make generally available to its security holders, as
soon as it is practicable to do so, but in any event not later than 15 months
after the effective date of the Registration Statement, an earning statement
(which need not be audited) in reasonable detail, covering a period of at least
12 consecutive months beginning after the effective date of the Registration
Statement, which earning statement shall satisfy the requirements of Section
11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you
in writing when such statement has been so made available.
(g) The Company will, for a period of five years from the Closing Date,
deliver to the Representatives copies of annual reports and copies of all other
documents, reports and information furnished by the Company to its stockholders
or filed with any securities exchange pursuant to the requirements of such
exchange or with the Commission pursuant to the Act or the Securities Exchange
Act of 1934, as amended. The Company will deliver to the Representatives similar
reports with respect to significant subsidiaries, as that term is defined in the
Rules and Regulations, which are not consolidated in the Company's financial
statements.
(h) No offering, sale or other disposition of any Common Stock of the
Company will be made for a period of 180 days after the date of this Agreement,
directly or indirectly, by the Company otherwise than hereunder or with the
prior written consent of the Representatives except that the Company may,
without such consent, issue shares upon the exercise of options outstanding on
the date of this Agreement issued pursuant to the Company's incentive stock
option plan, issued as consideration for future acquisitions or issued pursuant
to the Company's dividend reinvestment plan.
(i) The Company will use its best efforts to list, subject to notice of
issuance, the Shares on the Nasdaq Stock Market (National Market).
<PAGE>
(j) The Company has caused each officer and director and specific
shareholders of the Company to furnish to you, on or prior to the date of this
agreement, a letter or letters, in form and substance satisfactory to the
Underwriters, pursuant to which each such person shall agree not to offer, sell,
sell short or otherwise dispose of any shares of Common Stock of the Company or
other capital stock of the Company, or any other securities convertible,
exchangeable or exercisable for Common Shares or derivative of Common Shares
owned by such person or request the registration for the offer or sale of any of
the foregoing (or as to which such person has the right to direct the
disposition of) for a period of 180 days after the date of this Agreement,
directly or indirectly, except with the prior written consent of Alex. Brown &
Sons Incorporated ("Lockup Agreements").
(k) The Company shall apply the net proceeds of its sale of the Shares as
set forth in the Prospectus and shall file such reports with the Commission with
respect to the sale of the Shares and the application of the proceeds therefrom
as may be required in accordance with Rule 463 under the Act.
(l) The Company shall not invest, or otherwise use the proceeds received by
the Company from its sale of the Shares in such a manner as would require the
Company or any of the Subsidiaries to register as an investment company under
the Investment Company Act of 1940, as amended (the "1940 Act").
(m) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar for the Common Stock.
(n) The Company will not take, directly or indirectly, any action designed
to cause or result in, or that has constituted or might reasonably be expected
to constitute, the stabilization or manipulation of the price of any securities
of the Company.
5. Costs and Expenses. The Company will pay all costs, expenses and fees
incident to the performance of the obligations of the Company under this
Agreement, including, without limiting the generality of the foregoing, the
following: accounting fees of the Company; the fees and disbursements of counsel
for the Company; the cost of printing and delivering to, or as requested by, the
Underwriters copies of the Registration Statement, Preliminary Prospectuses, the
Prospectus, this Agreement, the Underwriters' Invitation Letter, the Blue Sky
Survey and any supplements or amendments thereto; the filing fee of the
Commission; the filing fee of the NASD; the fees and expenses incurred with
respect to the listing of the Shares on the Nasdaq Stock Market (National
Market); and the expenses, including the fees and disbursements of counsel for
the Underwriters, incurred in connection with the qualification of the Shares
under State securities or Blue Sky laws. The Company agrees to pay all costs and
expenses of the Underwriters, including the fees and disbursements of counsel
for the Underwriters, incident to the offer and sale of directed shares of the
Common Stock by the Underwriters to employees and persons having business
relationships with the Company. The Company shall not, however, be required to
pay for any of the Underwriters' expenses (other than those related to
qualification
<PAGE>
under NASD regulation and State securities or Blue Sky laws) except that, if
this Agreement shall not be consummated because the conditions in Section 6
hereof are not satisfied, or because this Agreement is terminated by the
Representatives pursuant to Section 11 hereof, or by reason of any failure,
refusal or inability on the part of the Company to perform any undertaking or
satisfy any condition of this Agreement or to comply with any of the terms
hereof on its part to be performed, unless such failure to satisfy said
condition or to comply with said terms be due to the default or omission of any
Underwriter, then the Company shall reimburse the several Underwriters for
reasonable out-of-pocket expenses, including fees and disbursements of counsel,
reasonably incurred in connection with investigating, marketing and proposing to
market the Shares or in contemplation of performing their obligations hereunder;
but the Company shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from the sale
by them of the Shares.
6. Conditions of Obligations of the Underwriters. The several obligations
of the Underwriters to purchase the Firm Shares on the Closing Date and the
Option Shares, if any, on the Option Closing Date are subject to the accuracy,
as of the Closing Date or the Option Closing Date, as the case may be, of the
representations and warranties of the Company contained herein, and to the
performance by the Company of its covenants and obligations hereunder and to the
following additional conditions:
(a) The Registration Statement and all post-effective amendments thereto
shall have become effective and any and all filings required by Rule 424 and
Rule 430A of the Rules and Regulations shall have been made, and any request of
the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, shall be contemplated by the Commission.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Brobeck, Phleger &
Harrison LLP , counsel for the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters (and stating
that it may be relied on by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Prospectus; the Company is duly qualified to
transact business in all jurisdictions in which the conduct of its business
requires such qualification, or in which the failure to qualify would have a
materially adverse effect upon the business of the Company.
<PAGE>
(ii) The Company has authorized and outstanding capital stock as set
forth under the caption "Capitalization" in the Prospectus; the authorized
shares of its Common Stock have been duly authorized; the outstanding shares of
its Common Stock have been duly authorized and validly issued and are fully paid
and non-assessable; all of the Shares conform to the description thereof
contained in the Prospectus; and the certificates for the Shares, assuming they
are in the form filed with the Commission, are in due and proper form; the
shares of Common Stock, including the Option Shares, if any, to be sold by the
Company pursuant to this Agreement have been duly authorized and will be validly
issued, fully paid and non-assessable when issued and paid for as contemplated
by this Agreement; and no preemptive rights of stockholders exist with respect
to any of the Shares or the issue and sale thereof.
(iii) Except as described in or contemplated by the Prospectus, to
the knowledge of such counsel, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or rights of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Shares of the right to have any Common Shares or other securities of the Company
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the Act
and, to the best of the knowledge of such counsel, no order proceedings with
respect thereto have been instituted or are pending or threatened under the Act.
(v) The Registration Statement, all Preliminary Prospectuses, the
Prospectus and each amendment or supplement thereto comply as to form in all
material respects with the requirements of the Act and the applicable rules and
regulations thereunder (except that such counsel need express no opinion as to
the financial statements, schedules and other financial information included).
(vi) The statements under the captions "________________,"
"_____________," "Description of Capital Stock," and "Shares Eligible for Future
Sale" in the Prospectus, insofar as such statements constitute a summary of
documents referred to therein or matters of law, are accurate summaries and
fairly and correctly present the information called for with respect to such
documents and matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described in
the Registration Statement or the
<PAGE>
Prospectus which are not so filed or described as required, and such contracts
and documents as are summarized in the Registration Statement or the Prospectus
are fairly summarized in all material respects.
(viii) Such counsel knows of no material legal proceedings or
regulatory or other claims pending or threatened against the Company except as
set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Charter or By-Laws of the Company, or any
agreement or instrument known to such counsel to which the Company is a party or
by which the Company may be bound.
(x) This Agreement has been duly authorized, executed and delivered
by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement and the consummation of the transactions herein contemplated
(other than as may be required by the National Association of Securities
Dealers, Inc. or as required by State securities and Blue Sky laws as to which
such counsel need express no opinion) except such as have been obtained or made,
specifying the same.
(xii) The Company is not, and will not become as a result of the
consummation of the transactions contemplated by this Agreement, and the
application of the net proceeds therefrom as described in the Prospectus, an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
In rendering such opinion, may rely as to matters governed by the laws of
states other than Delaware or Federal laws on local counsel in such
jurisdictions provided that in each case Brobeck, Phleger & Harrison LLP shall
state that they believe that they and the Underwriters are justified in relying
on such other counsel and such other counsel's opinion is also addressed to the
Underwriters. In addition to the matters set forth above, such opinion shall
also include a statement to the effect that nothing has come to the attention of
such counsel which leads them to believe that (i) the Registration Statement, at
the time it became effective under the Act, (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the Act) and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and (ii) the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel
<PAGE>
need express no view as to financial statements, schedules and other financial
information included therein). With respect to such statement, Brobeck, Phleger
& Harrison LLP may state that their belief is based upon the procedures set
forth therein, but is without independent check and verification.
(c) The Representatives shall have received from Piper & Marbury L.L.P.,
counsel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect specified in
subparagraphs (ii), (iii), (iv), (v) and (x) of Paragraph (b) of this Section 6,
and that the Company is a validly organized and existing corporation under the
laws of the State of Delaware. In rendering such opinion Piper & Marbury L.L.P.
may rely as to all matters governed other than by the laws of the State of
Maryland or Federal laws on the opinion of counsel referred to in paragraph (b)
of this Section 6. In addition to the matters set forth above, such opinion
shall also include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that the Registration
Statement, as of the time it became effective under the Act, and the Prospectus
or any amendment or supplement thereto, on the date it was filed pursuant to
Rule 424(b) as of the date of effectiveness of the Registration Statement and
the Registration Statement and the Prospectus, or any amendment or supplement
thereto, as of the Closing Date or the Option Closing Date, as the case may be,
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading (except that such counsel need express no view as to financial
statements, schedules and other financial information included therein). With
respect to such statement, Piper & Marbury L.L.P. may state that their belief is
based upon the procedures set forth therein, but is without independent check
and verification.
(d) The Representatives shall have received at or prior to the Closing Date
from Piper & Marbury L.L.P. a memorandum or summary, in form and substance
satisfactory to the Representatives, with respect to the qualification for
offering and sale by the Underwriters of the Shares under the State securities
or Blue Sky laws of such jurisdictions as the Representatives may reasonably
have designated to the Company.
(e) The Representatives shall have received, on each of the date hereof,
the Closing Date and the Option Closing Date, as the case may be, a signed
letter from Ernst & Young LLP, dated the Closing Date or the Option Closing
Date, as the case may be, in form and substance satisfactory to you confirming
that they are independent public accountants within the meaning of the Act and
the applicable published Rules and Regulations thereunder and stating that in
their opinion the financial statements and schedules examined by them and
included in the Registration Statement comply in form in all material respects
with the applicable accounting requirements of the Act and the related published
Rules and Regulations; and containing such other statements and information as
is ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.
<PAGE>
(f) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief Financial Officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case may
be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the Act and
no stop order suspending the effectiveness of the Registration Statement
has been issued, and no proceedings for such purpose have been taken or
are, to his knowledge, contemplated by the Commission.
(ii) The representations and warranties of the Company contained in
Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be.
(iii) All filings required to have been made pursuant to Rules 424 or
430A under the Act have been made;
(iv) He has carefully examined the Registration Statement and the
Prospectus and, in his opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration
Statement, were true and correct, and such Registration Statement and
Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading
and, in his opinion, since the effective date of the Registration
Statement, no event has occurred which should have been set forth in a
supplement to or an amendment of the Prospectus which has not been so set
forth in such supplement or amendment.
(v) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been any material
adverse change or any development involving a prospective material adverse
change in or affecting the condition, financial or otherwise, of the
Company or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company,
whether or not arising in the ordinary course of business.
(h) The Company shall have furnished to the Representatives such further
certificates and documents confirming the representations and warranties
contained herein and related matters as the Representatives may reasonably have
requested.
(i) The Firm Shares, and Option Shares, if any, have been approved for
listing upon official notice of issuance on the Nasdaq Stock Market (National
Market).
(j) The Representatives shall have received from each officer and director
of the Company a letter or letters, in form and substance satisfactory to the
Underwriters, pursuant to which such person shall agree not to offer, sell, sell
short or otherwise dispose of any shares of
<PAGE>
Common Stock of the Company or other capital stock of the Company, or any other
securities convertible, exchangeable or exercisable for Common Stock or
derivative of Common Stock owned by such person (or as to which such person has
the right to direct the disposition of) for a period of 180 days after the date
of this Agreement, except with the prior written consent of the Representatives.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Piper & Marbury L.L.P.,
counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. Conditions of the Obligations of the Company. The obligations of the
Company to sell and deliver the portion of the Shares required to be delivered
as and when specified in this Agreement are subject to the conditions that at
the Closing Date or the Option Closing Date, as the case may be, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and in effect or proceedings therefor initiated or threatened.
8. Indemnification
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages or liabilities to which such Underwriter or
such controlling person may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto, or (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; and will reimburse each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating or
defending any such loss, claim, damage, liability, action or proceeding;
provided, however, that the Company will not be liable in any such case to the
extent that (i) any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement, or omission or
alleged omission made in the Registration Statement, any Preliminary Prospectus,
the Prospectus, or such amendment or supplement, in reliance upon and in
conformity with written information
<PAGE>
furnished to the Company by or through the Representatives specifically for use
in the preparation thereof. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer, or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based (i) upon any untrue statement or alleged untrue
statement of any material fact contained or incorporated by reference in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made; and will reimburse any
legal or other expenses reasonably incurred by the Company or any such director,
officer or controlling person in connection with investigating or defending any
such loss, claim, damage, liability, action or proceeding; provided, however,
that each Underwriter will be liable in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or such amendment or supplement, in reliance upon and
in conformity with written information furnished to the Company by or through
the Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(c) In case any proceeding (including any governmental investigation) shall
be instituted involving any person in respect of which indemnity may be sought
pursuant to this Section 8, such person (the "indemnified party") shall promptly
notify the person against whom such indemnity may be sought (the "indemnifying
party") in writing. No indemnification provided for in Section 8(a) or (b) shall
be available to any party who shall fail to give notice as provided in this
Section 8(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was prejudiced by the
failure to give such notice, but the failure to give such notice shall not
relieve the indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of the provisions of Section 8(a) or (b). In case any such proceeding shall be
brought against any indemnified party and it shall notify the indemnifying party
of the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party and shall pay as incurred the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense.
<PAGE>
Notwithstanding the foregoing, the indemnifying party shall pay as incurred the
fees and expenses of the counsel retained by the indemnified party in the event
(i) the indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel, (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them, or
(iii) the indemnifying party shall have failed to assume the defense and employ
counsel acceptable to the indemnified party within a reasonable period of time
after notice of commencement of the action. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) and by the Company in the case of parties indemnified
pursuant to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if settled
with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under Section 8(a) or (b)
above in respect of any losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) referred to therein, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under Section 8(c) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by
<PAGE>
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8(d). The amount paid
or payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 8(d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this Section 8(d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
<PAGE>
9. Default by Underwriters. If on the Closing Date or the Option Closing
Date, as the case may be, any Underwriter shall fail to purchase and pay for the
portion of the Shares which such Underwriter has agreed to purchase and pay for
on such date (otherwise than by reason of any default on the part of the
Company, you, as Representatives of the Underwriters, shall use your best
efforts to procure within 36 hours thereafter one or more of the other
Underwriters, or any others, to purchase from the Company such amounts as may be
agreed upon and upon the terms set forth herein, the Firm Shares or Option
Shares, as the case may be, which the defaulting Underwriter or Underwriters
failed to purchase. If during such 36 hours you, as such Representatives, shall
not have procured such other Underwriters, or any others, to purchase the Firm
Shares or Option Shares, as the case may be, agreed to be purchased by the
defaulting Underwriter or Underwriters, then (a) if the aggregate number of
shares with respect to which such default shall occur does not exceed 10% of the
Firm Shares or Option Shares, as the case may be, covered hereby, the other
Underwriters shall be obligated, severally, in proportion to the respective
numbers of Firm Shares or Option Shares, as the case may be, which they are
obligated to purchase hereunder, to purchase the Firm Shares or Option Shares,
as the case may be, which such defaulting Underwriter or Underwriters failed to
purchase, or (b) if the aggregate number of shares of Firm Shares or Option
Shares, as the case may be, with respect to which such default shall occur
exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered
hereby, the Company or you as the Representatives of the Underwriters will have
the right, by written notice given within the next 36-hour period to the parties
to this Agreement, to terminate this Agreement without liability on the part of
the non-defaulting Underwriters or of the Company or of the Selling Shareholders
except to the extent provided in Section 8 hereof. In the event of a default by
any Underwriter or Underwriters, as set forth in this Section 9, the Closing
Date or Option Closing Date, as the case may be, may be postponed for such
period, not exceeding seven days, as you, as Representatives, may determine in
order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The term
"Underwriter" includes any person substituted for a defaulting Underwriter. Any
action taken under this Section 9 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
10. Notices. All communications hereunder shall be in writing and, except
as otherwise provided herein, will be mailed, delivered or telegraphed and
confirmed as follows: if to the Underwriters, to Alex. Brown & Sons
Incorporated, 1 South Street, Baltimore, Maryland 21202, Attention: David
Weaver, Principal; if to the Company, to PSW Technologies, Inc., 6300
Bridgepoint Parkway, Building Three, Austin, Texas 78730, Attention: W. Frank
King, Chief Executive Officer.
11. Termination. This Agreement may be terminated by you by notice to the
Company as follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 A.M. on
the first business day following the date of this Agreement;
<PAGE>
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition, financial or otherwise, of the Company or the earnings, business
affairs, management or business prospects of the Company, whether or not arising
in the ordinary course of business, (ii) any outbreak or escalation of
hostilities or declaration of war or national emergency after the date hereof or
other national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, escalation, declaration,
emergency, calamity, crisis or change on the financial markets of the United
States would, in your reasonable judgment, make the offering or delivery of the
Shares impracticable or inadvisable, (iii) suspension of trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or
limitation on prices (other than limitations on hours or numbers of days of
trading) for securities on either such Exchange, (iv) the enactment,
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental authority which in
your reasonable opinion materially and adversely affects or will materially or
adversely affect the business or operations of the Company (v) declaration of a
banking moratorium by either federal or New York State authorities, (vi) the
suspension of trading of the Company's Common Stock by the Commission or the
Nasdaq Stock Market (National Market); (vii) the taking of any action by any
governmental body or agency in respect of its monetary or fiscal affairs which
in your reasonable opinion has a material adverse effect on the securities
markets in the United States or elsewhere, or (viii) any litigation or
proceeding is pending or threatened against the Underwriters which seeks to
enjoin or otherwise restrain, or seeks damages in connection with, or questions
the legality or validity of this Agreement or the transactions contemplated
hereby; or
(c) as provided in Sections 6 and 9 of this Agreement.
13. Information Provided by Underwriters. The Company and the Underwriters
acknowledge and agree that the only information furnished or to be furnished by
any Underwriter to the Company for inclusion in any Prospectus or the
Registration Statement consists of the information set forth in the last
paragraph on the front cover page (insofar as such information relates to the
Underwriters), legends required by Item 502(d) of Regulation S-K under the Act
and the information under the caption "Underwriting" in the Prospectus.
14. Successors. This Agreement has been and is made solely for the benefit
of the Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. The term "successors" shall not include any purchaser of
the Shares merely because of such purchase.
13. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement
<PAGE>
shall remain in full force and effect regardless of (a) any termination of this
Agreement, (b) any investigation made by or on behalf of any Underwriter or
controlling person thereof, or by or on behalf of the Company or its directors
or officers and (c) delivery of and payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Maryland.
<PAGE>
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
PSW Technologies, Inc.
By ____________________________
W. Frank King
Chief Executive Officer
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
ALEX. BROWN & SONS INCORPORATED
J. P. MORGAN SECURITIES INC.
As Representatives of the
several Underwriters listed
on Schedule I
ALEX BROWN & SONS INCORPORATED
By ___________________________
Authorized Officer
<PAGE>
SCHEDULE I
Schedule of Underwriters
Number of Firm Shares
Underwriter to be Purchased
----------- ---------------------
Alex. Brown & Sons Incorporated
J. P. Morgan Securities, Inc.
Total .............................
=========
<PAGE>
Exhibit 3.1
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 03:00 PM 08/23/1996
960247590 - 2656550
CERTIFICATE OF INCORPORATION
OF
PSW TECHNOLOGIES, INC.
(Under Section 102 of the General Corporation Law)
The undersigned, being a natural person and acting as incorporator of the
corporation hereby being formed under the General Corporation Law, certifies
that:
FIRST: The name of the corporation (hereinafter called the "Corporation")
is PSW TECHNOLOGIES, INC.
SECOND: The address, including street number, city and county, of the
registered office of the Corporation in the State of Delaware is Corporation
Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle
19801, and the name of the registered agent of the Corporation in the State of
Delaware at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful business,
to promote any lawful purpose, and to engage in any lawful act or activity for
which corporations may be organized under the Delaware General Corporation Law.
FOURTH: The aggregate number of shares which the Corporation shall have
the authority to issue is 1,500, all of which shall be without par value and
shall be designated "Common Shares."
FIFTH: No director shall be personally liable to the Corporation or any
stockholder for monetary damages for breach of fiduciary duty as a director,
except for any matter in respect of which such director shall be liable under
Section 174 of Title 8 of the Delaware Code (relating to the Delaware General
Corporation Law) or any amendment thereto or successor provision thereto or
shall be liable by reason that, in addition to any and all other requirements
for such liability, such director (i) shall have breached his or her duty of
loyalty to the Corporation or its stockholders, (ii) shall not have acted in
good faith or in failing to act, shall not have acted in good faith, (iii) shall
have acted in a manner involving intentional misconduct or a knowing violation
of law or (iv) shall have derived an improper personal benefit. Neither the
amendment nor repeal of this Article FIFTH, nor the adoption of any provision of
the Certificate of Incorporation inconsistent with this Article FIFTH, shall
eliminate or reduce the effect of this Article FIFTH in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article
FIFTH, would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
SIXTH: Election of directors need not be by written ballot.
SEVENTH: The Board of Directors is authorized to adopt, amend or repeal
by-laws of the Corporation.
EIGTH: (a) Each person who was or is made a party or is threatened to be
made a party to or is otherwise involved in any action, suit or proceeding,
<PAGE>
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director,
officer, employee or agent of the Corporation or any of its direct or indirect
subsidiaries or is or was serving at the request of the Corporation as a
director, officer, employee or agent of any other corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "indemnitee"), whether the
basis of such proceeding is alleged action in an official capacity as a
director, officer, employee or agent or in any other capacity while serving as a
director, officer, employee or agent shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than permitted prior
thereto), against all expense, liability and loss (including, without
limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties,
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith, and such indemnification shall continue as
to an indemnitee who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the indemnitee's heirs, executors and
administrators; provided, however, that, except as provided in paragraph (c) of
this Article EIGHTH with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such Indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
(b) The right to indemnification conferred in paragraph (a) of this
Article EIGHTH shall include the right to be paid by the Corporation the
expenses incurred in defending any proceeding for which such right to
indemnification is applicable in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the Delaware General
Corporation Law requires, an advancement of expenses incurred by an indemnitee
in his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such indemnitee, including, without
limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Article EIGHTH or otherwise.
(c) The rights to indemnification and to the advancement of expenses
conferred in paragraphs (a) and (b) of this Article EIGHTH shall be contract
rights. If a claim under paragraph (a) or (b) of this Article EIGHTH is not paid
in full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
-2-
<PAGE>
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by an indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the Corporation shall be entitled to recover such advancement of
expenses upon a final adjudication that, the indemnitee has not met any
applicable standard for indemnification set forth in the Delaware General
Corporation Law. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or stockholders) that the indemnitee has
not met such applicable standard of conduct, shall create a presumption that the
indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article EIGHTH or otherwise, shall be on the
Corporation.
(d) The rights to indemnification and to the advancement of expenses
conferred in this Article EIGHTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, this certificate of
incorporation, by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
(e) The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
(f) The Corporation's obligation, if any, to indemnify any person who was
or is serving as a director, officer, employee or agent of any direct or
Indirect subsidiary of the Corporation or, at the request of the Corporation, of
any other corporation or of a partnership; joint venture, trust or other
enterprise shall be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint venture, trust,
or other enterprise.
(g) Any repeal or modification of the foregoing provisions of this Article
EIGHTH shall not adversely affect any right or protection hereunder of any
person in respect of any act or omission occurring prior to the time of such
repeal or modification.
NINTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
-3-
<PAGE>
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, or this Corporation, as the case may be,
and also on this Corporation.
TENTH: The name and address of the incorporator are as follows:
NAME MAILING ADDRESS
Peter W. Smith c/o Squadron Ellenoff, Plesent &
Sheinfeld, LLP
551 Fifth Avenue
New York, New York 10176
/s/ Peter W. Smith
Signed on: August 23, 1996 ----------------------------------
Peter W. Smith, Incorporator
-4-
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 12/18/1996
960373512 - 2656550
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PSW TECHNOLOGIES, INC.
I, the undersigned, being the Secretary of PSW Technologies, Inc., a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "Corporation"),
DO HEREBY CERTIFY:
FIRST: That the Fourth Article of the Certificate of Incorporation
be, and it hereby is, amended to read in its entirety as follows:
"The aggregate number of shares which
the Corporation shall have the authority
to issue is 11,250,000, par value of
$.01 per share, all of which shall be
designated 'Common Shares.'"
SECOND: That this amendment was duly adopted in accordance with the
provisions of section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, I have signed this certificate this 6th day of
December, 1996.
/s/ Patrick Motola
---------------------------------
Patrick Motola, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
AMENDED CERTIFICATE OF INCORPORATION
OF
PSW TECHNOLOGIES, INC.
Pursuant to Section 242
of the General Corporation
Law of the State of Delaware
**************************
PSW Technologies, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation") DOES HEREBY CERTIFY:
FIRST: That ARTICLE FOURTH, of the Amended Certificate of
Incorporation of the Corporation is amended by deleting the first paragraph
thereof in its entirety and inserting in lieu thereof:
"The aggregate number of shares which the Corporation shall have
authority to issue is eleven million two hundred and fifty thousand
(11,250,000), par value $.01 per share, all of which shall be designated
Common Shares. Each thirteen (13) shares of the Corporation's Common
Stock, par value $.01 per share, issued and outstanding as of the date
this Certificate of Amendment is filed shall be converted and reclassified
into eight (8) shares of the Corporation's Common Stock, par value $.01
per share, so that each share of the Corporation's Common Stock issued and
outstanding is hereby converted and reclassified. No fractional interests
resulting from such conversion shall be issued, but in lieu thereof, the
Corporation will issue to the holder one share of the Corporation's Common
Stock for any fractional share of post-conversion Common Stock to which
such holder was otherwise entitled to receive."
SECOND: That the foregoing amendment has been duly adopted in
accordance with the provisions of Sections 228 and 242 of the General
Corporation Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, said Corporation has caused this certificate to
be signed by Dr. W. Frank King, its President, and Patrick D. Motola, its
Secretary, this 18th day of March 1996.
By:________________________________
President
ATTEST:
_________________________________
Secretary
<PAGE>
Exhibit 3.2
FORM OF 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 the 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 the 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 the
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 the 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 the 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
First 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 the corporation for the election of directors and on
all matters submitted to a vote of stockholders of the 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 the
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.
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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 the 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 By-Laws of the 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.
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ARTICLE VIII.
A director of the corporation shall [may] not be personally liable
to the 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 the 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 the 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 the corporation shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification.
ARTICLE IX.
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
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 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 him or on his 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 Article, 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.
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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. 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 serving the
corporation and such rights may be equivalent to, or greater or less than, those
set forth in this Article.
ARTICLE X.
The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate of Incorporation, in
the manner now or hereafter prescribed by statute and this Restated Certificate
of Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.
ARTICLE XI.
The number of directors of the 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 may provide. The books of the 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 the corporation.
The Stockholders of the 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.
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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
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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
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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 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 incompliance 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
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 president or secretary in like manner and on like notice
on the written request of two directors unless the Board consists of only one
director, in which case special meetings shall be called by the
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president or 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 Director and may be paid a
fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. 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 vice-presidents, assistant
secretaries and assistant treasurers. Any number of offices
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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, the vice-president, if any, (or in the
event there be more than one vice-president, the 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 duties of the
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president, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the president. 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
or president, 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 or in the event of the secretary's inability or
refusal to act, perform the duties and exercise the
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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 [may], 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
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serve, at the 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 [may] 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
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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 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
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entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or
(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 5.1
[Letterhead of Brobeck, Phleger & Harrison]
March 19, 1997
PSW Technologies, Inc.
6300 Bridgepoint Parkway
Building 3, Suite 200
Austin, TX 78730
Ladies and Gentlemen:
We have assisted in the preparation and filing by PSW Technologies,
Inc. (the "Company") of a Registration Statement on Form S-1, as amended through
March 19, 1997 (the "Registration Statement"), with the Securities and Exchange
Commission, relating to the sale of up to 2,850,000 shares (the "Shares") of
Common Stock, $0.01 par value (the "Common Stock"), of the Company. A form of
underwriting agreement (the "Underwriting Agreement") is filed as an exhibit to
the Registration Statement.
We have examined such records and documents and have made such
examination of laws as we considered necessary to form a basis for the opinion
set forth herein. In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, and
the conformity with the originals of all documents submitted to us as copies
thereof.
Based upon and subject to the foregoing, we are of the opinion that
the Shares have been duly authorized and, when sold and paid for in accordance
with the terms of the Underwriting Agreement, will be validly issued, fully paid
and nonassessable.
We hereby consent to the use of our name in the Registration
Statement under the caption "Legal Matters" in the related Prospectus and
consent to the filing of this opinion as an exhibit thereto.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
Exhibit 10.7
SERVICE AGREEMENT NO 200.504
This SERVICE AGREEMENT, made as of November 26, l990, by and between
International Business Machines Corporation, a corporation of the State of New
York, having an office at 11400 Burnet Road, Austin, Texas 78758 (hereinafter
referred to as IBM), and Pencom Software Inc., a corporation of New York, having
an office at 9050 Capital of Texas Hwy. North, Austin, TX 78759 (hereinafter
referred to as Contractor).
1.0 SCOPE OF WORK
1.1 Contractor will furnish skill requirements for technical support to IBM,
as more fully set forth in Appendix A (which is attached and made a part
of this Agreement) and in accordance with the terms and conditions on the
face and reverse of purchase orders issued from time to time by IBM and
accepted by Contractor. Such purchase orders shall constitute the
only authorization for Contractor to take any action or expend any money
for services hereunder. Contractor's services may include collaboration
with and assistance to IBM personnel and/or others retained by IBM. In the
event of any conflict between the terms and conditions of this Agreement
and those of purchase orders issued hereunder, the terms and conditions
of this Agreement shall prevail.
"Subsidiary" shall mean a corporation, company of other entity:
more than fifty percent (50%) of whose outstanding shares or securities
(representing the right to vote for the election of directors or other
managing authority) are; or
which does not have. outstanding shares or securities, as may be the case
in a partnership, joint venture or unincorporated association, but more
than fifty percent (50%) of whose ownership interest (representing the
right to make the decisions for such corporation, company or other entity)
is;
now or hereafter, owned or controlled, directly or indirectly by a party hereto,
but such corporation, company or other entity shall be deemed to be Subsidiary
only so long as such ownership or control exists.
1.2 IBM shall appoint a coordinator for each purchase order issued by IBM
under this Agreement. Such coordinator shall be responsible for
maintaining technical liaison with Contractor's supervisor and for
determining for IBM the adequacy, acceptability and fitness of the
<PAGE>
services performed by the Contractor under such purchase orders.
1.3 When work is done on IBM's premises, Contractor shall at all times provide
supervisory personnel acceptable to IBM to provide on-premises supervision
and control of Contractor's personnel who are working on such premises.
The Contractor will inform IBM of the name of the supervisor responsible
for the work. The supervisor shall have authority to act as agent for the
Contractor in his absence.
2.0 PAYMENT
2.1 IBM will pay Contractor for services under this Agreement in accordance
with rates specified in purchase orders issued hereunder by IBM or with
rates specified in the attached rate schedule.
3.0 RECORDS
3.1 Contractor shall maintain complete and accurate accounting records, in a
form in accordance with generally accepted accounting principles to
substantiate Contractor's charges hereunder. Such records shall include
payroll records, job cards, attendance cards and job summaries, and the
Contractor shall retain such records for a one year period from the date
of termination of this Agreement.
IBM shall have access to such records for purposes of audit during normal
business hours during the term of this Agreement and during the respective
periods in which Contractor is required to maintain such records as herein
provided.
4.0 CONFIDENTIAL INFORMATION
4.1 "Confidential Information" shall mean that information: 1) disclosed to or
obtained by Contractor in connection with, and during the term of, this
Agreement; and 2) which relates to past, present and future research,
development and business activities of IBM or its Subsidiaries. It shall
also mean all items prepared for and submitted to IBM in connection with
work performed under this Agreement, including drafts and associated
materials. The term "Confidential Information" shall not mean any
information which is previously known to Contractor without obligation of
confidence, is publicly disclosed by IBM either prior
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or subsequent to Contractor's receipt of such information, or is
rightfully received by Contractor from a third party without obligation of
confidence.
4.2 For a period of three years from the date of disclosure or receipt,
Contractor agrees to hold all such Confidential Information in trust and
confidence for IBM; and not to use such Confidential Information other
than for the benefit of IBM, or make copies of such Confidential
Information without the permission of IBM. Except as may be authorized by
IBM in writing, Contractor agrees not to disclose any such Confidential
Information, for such period of time, by publication or otherwise, to any
person other than those persons whose services Contractor requires who
have a need to know such Confidential Information for purposes of carrying
out the terms of this Agreement, and who agree in writing to be bound by,
and comply with, the provisions of this Section 4.
4.3 Upon termination or expiration of this Agreement, Contractor will return
to IBM all written or descriptive matter, including, but not limited to,
drawings, blueprints, descriptions, or other papers, documents, tapes, or
any other media which contain any such Confidential Information. In the
event of a loss of any item containing such Confidential Information,
Contractor shall promptly notify IBM in writing.
5.0 RIGHTS IN DATA
5.1 All of the items prepared for and submitted to IBM by Contractor under
this Agreement shall belong exclusively to IBM and shall be deemed to be
works made for hire. To the extent that any such items may not, by
operation of law, be works made for hire, Contractor hereby assigns to IBM
the ownership of copyright in such items and IBM shall have the right to
obtain and hold in its own name copyrights, registrations and similar
protection which may be available in such items. Contractor agrees to give
IBM or its designees all assistance reasonably required to perfect such
rights.
5.2 To the extent that any preexisting materials of Contractor are contained
in such items, Contractor grants to IBM an irrevocable, nonexclusive,
worldwide, royalty-free license to: 1) use, execute, reproduce, display,
perform, distribute (internally or externally) copies of, and prepare
derivative works based upon, such preexisting materials and derivative
works thereof, and, 2) authorize others to do any, some or all of the
foregoing.
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5.3 No license or right is granted to Contractor either expressly or by
implication, estoppel or otherwise to publish, reproduce, prepare
derivative works based upon, distribute copies of, publicly display, or
perform, any of such items, except preexisting materials of Contractor,
either during or after the term of this Agreement.
6.0 WARRANTIES
6.1 Contractor represents and warrants that it is under no obligation or
restriction, nor will it assume any such obligation or restriction, which
would in any way interfere or be inconsistent with, or present a conflict
of interest concerning, the services to be furnished by Contractor under
this Agreement.
6.2 Contractor represents and warrants the originality of the items prepared
for and submitted to IBM under this Agreement and that no portion of such
items, or their use or distribution violates or is protected by any
copyright or similar right of any third party.
6.3 In providing services under this Agreement, Contractor understands that
IBM does not wish to receive from Contractor any information which may be
considered confidential and/or proprietary to Contractor and/or to any
third party. Contractor represents and warrants that any information
disclosed by Contractor to IBM is not confidential and/or proprietary to
Contractor and/or to any third party.
7.0 INVENTIONS
7.1 'Invention' shall mean any idea, design, concept, technique, invention,
discovery or improvement, whether or not patentable, made, solely or
jointly by Contractor, and/or Contractor's employees, or jointly by
Contractor and/or Contractor's employees with one or more employees of IBM
during the term of this Agreement and in the performance of services
hereunder, provided that either the conception or reduction to practice
occurs during the term of this Agreement and in the performance of
services hereunder.
8.0 INVENTION RIGHTS
8.1 Contractor shall promptly make a complete written disclosure to IBM of
each Invention, specifically pointing out the features or concepts which
Contractor believes to be new or different.
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8.2 Contractor hereby assigns to IBM, its successors and assigns, any said
Invention together with the right to seek protection by obtaining patent
rights therefor and to claim all rights of priority thereunder, and the
same shall become and remain IBM's property whether or not such protection
is sought.
8.3 Contractor shall, upon IBM's request and at IBM's expense, cause patent
applications to be filed thereon, through solicitors designated by IBM,
and forthwith assign all such applications to IBM, its successors and
assigns. Contractor shall give IBM and its solicitors all reasonable
assistance in connection with the preparation and prosecution of any such
patent applications and shall cause to be executed all such assignments
and other instruments and documents as IBM may consider necessary or
appropriate to carry out the intent of this Section.
8.4 To the extent that IBM has the right to do so, IBM hereby grants to
Contractor an irrevocable, nonexclusive, non-transferable and fully
paid-up license throughout the world under any said Inventions assigned to
IBM pursuant to this Section 8, and under any patents throughout the world
issuing thereon, including reissues, extensions, divisions and
continuations thereof; provided, however, that such license is not
applicable to any Inventions, patent applications or patents relating to
appearance designs.
8.5 Nothing contained in this Agreement shall be deemed to grant either
directly or by implication, estoppel, or otherwise, any license under any
patents or patent applications arising out of any other inventions of
either party.
9.0 CONTRACTOR'S AGREEMENT WITH EMPLOYEES
9.1 Contractor will have an appropriate agreement with each of its employees
and all others whose services Contractor may secure to perform hereunder,
sufficient to enable it to comply with all of the terms of this Agreement.
10.0 CONTRACTOR'S EMPLOYEES NOT DEEMED IBM'S
10.1 Contractor agrees to take appropriate preventive steps before the
assignment of any of its employees to perform work under this Agreement,
that it reasonably believes will ensure that its employees and its
subcontractors' employees at any level, will not engage in inappropriate
conduct while on IBM premises.
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Inappropriate conduct shall include, but is not limited to: being under
the influence of or affected by alcohol, illegal drugs, or controlled
substances; the manufacture use, distribution, sale or possession of
alcohol, illegal drugs or any controlled substance, except for approved
medical purposes; the possession of a weapon of any sort; and/or
harassment, threats or violent behavior. Violation of this provision may
result in termination of this Agreement and any other remedy available to
IBM at law or in equity.
10.2 Personnel supplied by Contractor are employees of Contractor and will not
for any purpose be considered employees or agents of IBM. Contractor
assumes full responsibility for the actions of such personnel while
performing services pursuant to purchase order(s) issued hereunder, and
shall be solely responsible for their supervision, daily direction and
control, payment of salary (including withholding of income taxes and
social security), worker's compensation, disability benefits and the like.
10.3 Contractor agrees to provide IBM any information about Contractor's
personnel that IBM is required by law to obtain, including information on
"leased employees" and "management services organizations," as these terms
are discussed in Sections 414 (m), (n) and (o) of the U.S. Internal
Revenue Code.
11.0 FORMER DEPARTMENT OF DEFENSE EMPLOYEES
Contractor warrants that no individual who is a former officer or employee
of Department of Defense (DoD), who:
1) left DoD service on or after April 16, 1987; and
2) served in a civilian position for which the rate of pay is equal to
or greater than the minimum rate of pay for grade GS-13; or served
in the Armed Forces in a pay grade of 4 or higher,
shall be employed or compensated for services rendered under this
Agreement within two years after they left service in DoD, without
specific written approval of IBM. If Contractor requests such approval,
Contractor agrees to provide IBM with any information needed to comply
with 10 USC 2397 b and c.
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12.0 TERM, TERMINATION AND CANCELLATION
12.1 This Agreement shall commence on December 3, 1990, and shall expire on
December 2, 1991.
12.2 Contractor or IBM may terminate this Agreement at any time upon 30 days'
prior written notice to the other party. Any outstanding purchase orders
shall terminate upon termination of this Agreement.
12.3 IBM may, at its sole discretion, request that Contractor remove any
specified employee(s) of Contractor from IBM's premises, and that they not
be reassigned to any IBM premises under this Agreement. No reason is
required for such request. Contractor hereby agrees to take action
immediately to remove such specified employee(s), and to see that such
reassignment does not occur.
12.4 Purchase orders issued pursuant to this Agreement, or portions thereof,
covering services of Contractor's personnel to be performed on or off IBM
premises, may be so cancelled on 30 days, written notice, without further
liability to Contractor by IBM.
12.5 In the event of cancellation, termination or expiration of any purchase
order issued hereunder, all work being performed thereunder in
Contractor's possession shall be forwarded to IBM, and IBM shall make
payment at the specified rates for satisfactory services performed to the
effective date of cancellation, termination or expiration of such purchase
order.
13.0 COMPLIANCE WITH LAWS
13.1 There are incorporated into this Agreement the provisions of Executive
Order 11246 (as amended) of the President of the United States on Equal
Employment Opportunity and the rules and regulations issued pursuant
thereto. Contractor represents that Contractor will comply with this order
and pertinent rules and regulations, unless exempted.
13.2 Contractor represents that in the performance of this Agreement,
Contractor shall comply with all of the applicable provisions of the Fair
Labor Standards Act of 1938 of the United States, as amended.
13.3 Contractor agrees to comply and do all things necessary to meet the
requirements of the Occupational Safety and Health Act of 1970. Contractor
agrees to promptly
-7-
<PAGE>
notify IBM in writing if a charge of noncompliance with the Act has been
filed against it in connection with the services being provided hereunder.
13.4 Contractor agrees to comply, and do all the things necessary for IBM to
comply, with all applicable Federal, State and local laws, regulations and
ordinances, including, but not limited to, the Foreign Corrupt Practices
Act; the Immigration Reform and Control Act of 1986, as amended; and the
Regulations of the United States Department of Commerce relating to the
Export of Technical Data; insofar as they relate to the services to be
performed under this Agreement. Contractor agrees to obtain all required
government documents and approvals prior to export of any technical data
disclosed to Contractor or the direct product related thereto.
13.5 Contractor represents that it is not subject, either directly or
indirectly (by affiliation or any other connection with another party), to
any order issued by any agency of the United States Government revoking or
denying, in whole or in part, the Contractor's United States export
privileges. Contractor agrees to notify IBM immediately in the event
Contractor becomes subject to any such order.
14.0 ILLEGAL ALIENS
14.1 The Contractor shall establish appropriate procedures and controls so that
services under this Agreement will not be performed by using any alien who
is not legally eligible for such employment under United States
immigration laws.
15.0 FORMER IBM EMPLOYEES
15.1 Contractor shall inform IBM when Contractor plans to assign a former IBM
employee to perform work under this Agreement, whether or not on IBM
premises. IBM reserves the right to approve or disapprove the assignment.
15.2 Nothing contained in this Agreement shall be construed as granting to
Contractor or any employee of Contractor any other or additional rights
under any IBM employee benefit plan or otherwise, than may now exist under
the IBM Retirement Plan by reason of Contractor's or such employees' prior
status as a retired employee of IBM.
-8-
<PAGE>
16.0 GENERAL PROVISIONS
16.1 The rights and obligations of Sections 3.0, 4.0, 5.0, 6.0, 8.0, 13.0 and
20.0 shall survive and continue after any expiration or termination of
this Agreement and shall bind the parties and their legal representatives,
successors, heirs and assigns.
16.2 Contractor agrees that neither Contractor nor any of its agents or
employees will export or re-export any information of IBM, nor any
process, product or service that is produced as a result of the use of
such information, to any country specified in such Export Regulations as a
prohibited destination, without first obtaining U.S. Government approval,
by application through IBM. Upon request, IBM will advise Contractor of
the countries then specified in such Regulations as prohibited
destinations.
16.3 Neither party shall assign any of its rights (except rights to the payment
of money) or delegate any of its obligations under this Agreement to any
third party without the express written consent of the other. Any act in
derogation of the foregoing shall be null and void.
16.4 This Agreement incorporates by reference the IBM Austin Contractor Safety
Guide dated October 4, 1989, the terms of which are set forth in Appendix
B (which is attached and made a part of this Agreement). In the event of
any conflict between or among the terms of the IBM Austin Contractor
Safety Guide and Paragraphs 1 through 21, the terms of Paragraph 1 through
21 of this Agreement shall control.
17.0 SOLE AGREEMENT
17.1 This Agreement together with its attachments shall supersede all prior
agreements and understandings between the parties respecting the subject
matter thereof. This Agreement may not be changed or terminated orally by
or on behalf of either party.
18.0 INDEMNIFICATION
18.01 Contractor agrees to indemnify and save IBM harmless from and against any
and all claims of any kind including, but not limited to, personal injury
or death to persons or damage to property, arising out of, in connection
with, or resulting from Contractor's performance under this Agreement, to
the extent caused
-9-
<PAGE>
in whole or in part by Contractor, or any subcontractors, or by anyone
directly or indirectly employed by Contractor.
19.0 LIMITATION OF LIABILITY
19.1 Neither party shall be liable for any lost revenue, lost profits, or other
consequential damages under any part of this Agreement, even if advised of
the possibility of such damages. Furthermore, IBM shall not be liable for
any delays, losses or any other damages which may result from the
furnishing of any equipment, documentation, programs or services under
this Agreement, even if advised of the possibility of such damages.
19.2 Contractor shall secure and maintain adequate worker's compensation
insurance in accordance with the law of the state or states wherein
Contractor shall perform services for IBM. Contractor further agrees to
maintain comprehensive general and vehicular liability insurance for
claims for damages because of bodily injury (including death) and property
damage, caused by or arising out of acts or omission of its employees. The
minimum limits of such insurance shall be $100,000.00 for each person and
$300,000.00 for each accident because of bodily injury, and $100,000.00
because of property damage for each accident. Certificates of such
insurance shall be furnished to IBM at the commencement of this Agreement
and at the renewal date or dates of all such insurance policies for as
long as this Agreement remains in effect. In no event shall any such
insurance be cancelled without prior written notice to IBM by Contractor's
insurance carrier.
20.0 IBM TRADEMARK
20.1 Notwithstanding any other provisions of this Agreement, Contractor shall
have no right to use IBM's trademark, or trade name, or to refer to this
Agreement or the services performed hereunder, directly or indirectly, in
connection with any product, service, promotion or publication without the
prior written approval of IBM.
21.0 APPLICABLE LAW
21.1 This Agreement shall be construed, and the legal relations between the
parties hereto shall be determined in accordance with the law of the State
of New York.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective duly authorized representatives as of the day and year first
above written.
INTERNATIONAL BUSINESS PENCOM SOFTWARE, INC.
MACHINES CORPORATION
BY: /s/ A. Caricari BY: /s/ E. Taylor
TITLE: Procurement Manager TITLE: President
DATE: 11-30-90 DATE: 12/3/90
-11-
<PAGE>
APPENDIX "A"
SCOPE OF WORK
Provide skill requirements for technical support on IBM premises to IBM's
Advanced Workstations Division Customer Technical Support Center as follows:
1. Be responsible for answering questions from IBM customers and
vendors that the marketing level 1 and level 2 support centers
cannot answer.
2. Develop tips and techniques or course material for IBM marketing
technical support centers or porting center.
3. Assist IBM customers and vendors in difficult porting, performance
tuning or customer environment situations.
Skill requirements require excellent UNIX and C skills with the ability to read
code, specific knowledge of AIX, provide very good customer interaction skills
and a desire to work with problems/solutions rather than developing a new code.
Contractor shall provide a time based report on all projects being performed by
its employees under this agreement. These reports shall contain the time worked
on specific projects, coded to these projects. These reports shall be issued on
a weekly basis, followed by a monthly summary report. This reporting frequency
shall be in effect through the end of March, 1991. Thereafter, a reporting
procedure shall be negotiated and implemented for The period after March, 1991.
-12-
<PAGE>
Service Agreement # 200.504
Attachment 1
IBM Vendor Certificate of Originality
This questionnaire must be completed by the Vendor furnishing a software
material (program product or offering and related documentation, or other
software material) for IBM reproduction and marketing, and must be sent to the
IBM product manager. The acceptance of this questionnaire by IBM is a necessary
condition precedent for the IBM final payment for the furnished material.
One questionnaire can cover one complete product, even if that product includes
multiple modules. However, a separate questionnaire must be completed for code
and another for its related documentation (if any).
Please leave no question blank. Write "not applicable" or "N/A" if a question is
not relevant to the furnished software material.
----------
1. Name of the software material (provide complete identification, including
version, release, and modification numbers for programs and
documentation):
The only software provided will be software created in connection with
Pencom's technical support role.
2. Was the software material or any portion thereof written by any party than
you, _____ or your employees working within their job assignment?
YES _____ NO x
-1-
<PAGE>
If YES, provide the following information:
A) Indicate if the whole software material or only a portion thereof was
written by such party, and identify such portion:
n/a
B) Specify for each involved party:
i) Name: ______________________________________________________________
ii) Address: ___________________________________________________________
iii) If the party is a Company, how did it acquire title to the software
material (e.g. software material was written by company's employees
as part of their job assignment)?
n/a
iv) If the party is an individual, did he/she create the software
material while employed by or under contractual relationship with
another party?
YES _____ NO _____
If YES, provide name and address of the other party and explain the nature
of the obligations:
n/a
3. What copyright notice(s) do you wish to have included in the software
material when published by IBM?
n/a
4. Was the software material or any portion thereof derived from any of their
party's preexisting material(s)?
YES ______ NO X
-2-
<PAGE>
If YES, provide the following information for each of the preexisting
materials:
A) Name of the materials: n/a
B) Owner:
C) How did you get the right to use the preexisting material(s)? n/a
5. Identify below, or in an attachment, any other circumstances which might
affect IBM's ability to reproduce and market this software product,
including:
A) Confidentiality or trade secrecy of preexisting material(s) n/a
B) Known or possible royalty obligations to others: n/a
C) Preexisting materials developed for another party or customer
(including government) where you may not have retained full rights
to the material: n/a
D) Materials acquired from a person or company possibly having no title
to them: n/a
-3-
<PAGE>
E) Other Circumstances:
n/a
Vendor Name: Pencom Software Inc.
Address: 9050 Capital of Texas Hwy, N
Austin, Texas 78759
Signer Name and Title: Edward A. Taylor
-------------------------------------
President
Signature: /s/ E. Taylor
-------------------------------------
Date: December 3, 1990
-4-
<PAGE>
Attachment 2
November 30, 1990
Pencom Software, Inc.
9050 Capital of Texas Hwy N. # 300
Austin, TX 78759
SUBJECT: Service Agreement #200.504
Dear Edward Taylor:
In furnishing you with AT&T Information Systems' UNIX* or UNIX derivative source
code, International Business Machines Corporation (hereinafter referred to as
IBM) has been requested by AT&T Information Systems (hereinafter referred to as
AT&T) to obtain your Agreement to the following:
1. Any claim, demand, or right of action arising on behalf of Pencom
Software, Inc. (hereinafter referred to as Vendor) from access to or use
of the UNIX or UNIX derivative source code shall be solely against IBM.
2. Vendor agrees that it shall hold the UNIX or UNIX derivative source code
in confidence for AT&T and IBM. Vendor further agrees that it shall not
make any disclosure of any or all of the UNIX or UNIX derivative source
code to anyone, except to employees of Vendor or IBM to whom such
disclosure is necessary to the use for which rights are granted hereunder.
Vendor shall appropriately notify each employee to whom any such
disclosure is made that such disclosure is made in confidence and shall be
kept in confidence by such employee. If information relating to the UNIX
or UNIX derivative source code at any time becomes available without
restrictions to the general public by acts not attributable to Vendor or
its employees, Vendor's obligations under this Section shall not apply to
such information after such time.
3. All UNIX or UNIX derivative Source Code may be used only in conjunction
with a machine which has the appropriate source code license furnished by
AT&T. The only copies permitted to be made are those for back-up purposes
in conjunction with that machine. If Vendor wishes to transfer the source
code to another machine, IBM must be notified and have AT&T's approval to
transfer such source code, prior to the transfer of the source code. The
source code must be removed from the previously licensed machine upon
transfer of the license to the newly licensed machine.
*UNIX is a registered trademark of AT&T.
<PAGE>
4. Vendor, upon completion of work for IBM relating to the UNIX or UNIX
derivative source code shall return all copies of the UNIX or UNIX
derivative source code to IBM and shall erase any such software form any
storage elements or apparatus.
5. The obligations of Vendor and its respective employees under this
Agreement shall survive and continue after termination of any other
Agreements between Vendor and IBM.
This Agreement is effective December 3, 1990.
If the above terms and conditions are acceptable to Vendor, an authorized
representative is requested to indicate acceptance thereof by signing and
returning two (2) copies of this Agreement, as instructed herein, and retaining
one (1) copy for file.
Return one (1) copy to: IBM Corporation
Software Contracts Procurement
AOD/983/Zip 2202
11400 Burnet Road
Austin, TX 78758
Attention: May Cherry
Return one (1) copy to: IBM Corporation
Zip 1109
11400 Burnet Road
Austin, TX 78758
Attention: Lynn Turner
Very truly yours, Accepted and Agreed to:
INTERNATIONAL BUSINESS _________________________________
MACHINES CORPORATION
By: /s/ Caricari By: /s/ E. Taylor
--------------------------- -----------------------------
Title: Procurement Manager Title: President
Date: 11-30-90 Date: December 3, 1990
<PAGE>
Date: November 30, 1990
ATTACHMENT 3
Pencom Software, Inc
9050 Capital of TX, Hwy N. #300
Austin, TX 78759
SUBJECT: SERVICE AGREEMENT #200.504
Dear, Edward Taylor
International Business Machines Corporation (hereinafter called IBM) may wish to
obtain quotations from and to issue to Pencom Software, Inc. (hereinafter called
Developer) IBM Purchase Orders and to execute with Developer associated
agreements for various materials, services or software programs from time to
time. In connection therewith, it may be necessary for IBM to disclose to
Developer confidential information of IBM.
As a basis for such dealing, Developer is required to enter into this Agreement
having the following terms and conditions.
1. IBM may disclose IBM Confidential Information to Developer either orally
or in writing (including graphic material). When disclosed in writing, or
other tangible form, the information will be labeled "IBM Confidential".
When disclosed orally, such information will be identified as "IBM
Confidential" at the time of disclosure with subsequent confirmation in
writing referencing the date and type of information disclosed. Developer
agrees to clearly label as "IBM Confidential" all information reduced to
writing by Developer as a result of such oral disclosures.
IBM's disclosure of Confidential Information may include disclosure(s) of
third Party source code (hereinafter called Third Party Source Code).
Third Party and/or IBM Source Code shall be labeled as such in addition to
being labeled as and deemed to be IBM Confidential Information as set
forth above.
2. Developer shall hold in trust and confidence all IBM Confidential
Information including Third Party Source Code and shall not disclose such
information to any third party. Furthermore, Developer shall not use such
IBM Confidential Information for any purpose other than to prepare a
response to any IBM Request For Quotation or to perform work for IBM as
may subsequently be ordered. Developer shall not disclose or use such
information for any purpose other than those stated above until such time
as the information becomes publicly know through no fault of Developer.
-1-
<PAGE>
3. Except for the specific purposes contemplated by this Agreement, it is to
be understood that by disclosing IBM Confidential Information to
Developer, IBM and any Third Party do not grant any express or implied
license or other right to Developer under patents, copyrights or other
proprietary rights of IBM or the Third Party.
4. IBM Confidential Information shall also include all information identified
as confidential and disclosed by IBM to Developer which pertains to IBM's
past, present or future research, development or business activities.
5. Developer shall not disclose IBM Confidential Information to
subcontractors nor subcontract any part or the work covered by Purchase
Orders issued by IBM without first obtaining written consent from IBM.
6. Developer's obligations regarding IBM Confidential Information shall not
apply to information which was already know to Developer prior to
disclosure of it to Developer by IBM which is or becomes publicly
available through no fault of Developer's, which is rightfully received by
Developer from third parties without accompanying secrecy obligations,
which is independently developed by Developer or which is approved in
writing by IBM for Developer to release.
7. Developer shall disclose IBM'S Confidential Information only to
Developer's employees having a need-to-know and shall segregate such
information at all times from the materials of third parties so as to
prevent any commingling.
8. Developer shall maintain a written agreement with each of Developer's
employees sufficient to enable Developer to comply with the terms of this
Agreement.
9. Developer shall secure IBM documents, items of work in process, work
products, and any other items that embody IBM Confidential Information in
locked files or areas providing restricted access to prevent its
unauthorized disclosure.
10. Developer shall maintain adequate procedures to prevent loss of any
materials containing IBM Confidential Information. In the event of any
loss, Developer shall notify IBM immediately.
11. Developer agrees to maintain on hundred percent (100%) accountability of
material and equipment consigned to Developer by IBM and will promptly
notify IBM of loss or damage of any items consigned.
12. Developer shall return to IBM Confidential Information upon request.
-2-
<PAGE>
13. IBM does not wish to receive confidential information of Developer or
any third party and IBM will be free to reproduce, distribute to third
parties, and otherwise use any information furnished to IBM by Developer.
Any information provided to IBM shall not be deemed confidential.
14. This Agreement shall begin on December 3, 1990 and terminate on December
2, 1991 provided, however, that either party shall have the right to
terminate this Agreement upon ten (10) days prior written notice.
15. The provisions of this Agreement shall service and continue after
expiration or termination of the Agreement with respect to any IBM
Confidential Information disclosed to or obtained by Developer prior to
the date of such expiration or termination or disclosed to or obtained by
Developer subsequent thereto under any Purchase Orders in effect on such
date or expiration or termination.
16. This Agreement shall be construed and the legal relations between the
parties hereto shall be determined, in accordance with the substantive law
of the State of New York.
17. IBM shall have the right to visit periodically, using reasonable business
practices, Developer's premises and conduct a review of the compliance
with the terms of this Agreement -
18. Upon execution of this Agreement, Developer shall promptly notify IBM in
writing of Developer's authorized representative who will coordinate the
receipt and maintenance of all IBM Confidential Information sent to
Developer. Developer shall promptly notify IBM in writing of any change of
such authorized representatives.
-3-
<PAGE>
If the above terms and conditions are acceptable to Developer, an authorized
representative is requested to indicate acceptance thereof by signing and
returning two (2) copies of this Agreement, as instructed herein, and retaining
one (1) copy for file.
Return one (1) copy to: IBM Corporation
Software Contracts Procurement
AOD/983/Zip 2202
11400 Burnet Road
Austin, TX 78758
Attention: May Cherry
Return One (1) copy to: IBM Corporation
Zip 1109
11400 Burnet Road
Austin, TX 78758
Attention: Lynn Turner
Very truly yours, Accepted and Agreed to:
INTERNATIONAL BUSINESS --------------------------------
MACHINES CORPORATION
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
---------------------------- ----------------------------
Title: Procurement Manager Title: President
Date: 11-30-90 Date: December 3, 1990
-4-
<PAGE>
ATTACHMENT III
NON-CONFIDENTIAL GENERAL DESCRIPTION
OF IBM CONFIDENTIAL IMFORMATION
TO BE DISCLOSED TO TECHNICAL COORDINATOR
AIX Versons 3, 2, and 4 release plans.
<PAGE>
[LETTERHEAD OF IBM]
November 18, 1991
Mr. Edward A. Taylor
Pencom Software, Inc.
9050 Capital of Texas Hwy. North
Austin, Texas 78759
Dear Ed:
Service Agreement #200.504, dated November 26, 1990, is now being renewed.
There are no changes to the previous agreement pertaining to any terms and
conditions except the dates stated on Page 7. The dates of November 26, 1991
through November 25, 1992 will now apply.
If you agree with this change, please sign both copies and return one copy to
me.
If you have any questions, please contact me at phone number (512) 823-6539.
INTERNATIONAL BUSINESS
MACHINES CORPORATION PENCOM SOFTWARE, INC.
NAME: Lynn D. Turner NAME: Ed Taylor
TITLE: Procurement Contracts TITLE: President
Administrator
DATE: 11/18/91 DATE: 11/20/91
SIGNATURE: /s/ Lynn D. Turner SIGNATURE: /s/ Ed Taylor
-------------------- ------------------------
<PAGE>
[LETTERHEAD OF IBM]
October 29, 1992
Pencom Software, Inc.
9050 Capital of Texas Hwy North
Austin, TX 78759
Dear Sir:
Service Agreement Number 200.504, dated November 26, 1990, is now being renewed.
There are no changes to the previous agreement pertaining to any terms and
conditions except the dates stated on Page 7. The dates of November 26, 1992
through November 25, 1993 will now apply.
If you agree with this change, please sign both copies and return one copy to
me.
If you have any questions, please contact me at phone number (512) 823-6539.
INTERNATIONAL BUSINESS
MACHINES CORPORATION PENCOM SOFTWARE, INC.
NAME: Lynn D. Turner NAME: Wade E. Saadi
TITLE: Procurement Contracts TITLE: President
Administrator
DATE: 10/29/92 DATE: November 17, 1992
SIGNATURE: /s/ Lynn D. Turner SIGNATURE: /s/ Wade E. Saadi
<PAGE>
November 2, 1992 Attachment 2
Pencom Software, Inc.
9050 Capital of Texas Hwy. N. #300
Austin, Texas 78759
SUBJECT: SERVICE AGREEMENT NUMBER 200.504
Dear Sir:
International Business Machines Corporation (hereinafter called IBM) may wish to
obtain quotations from and to issue to Pencom Software, Inc. (hereinafter called
Developer) IBM Purchase Orders and to execute with Developer associated
agreements for various materials, services or software programs from time to
time. In connection therewith, it may be necessary for IBM to disclose to
Developer confidential information of IBM.
As a basis for such dealings, Developer is required to enter into this Agreement
having the following terms and conditions.
1. IBM may disclose IBM Confidential Information to Developer either orally
or in writing (including graphic material). When disclosed in writing, or
other tangible form, the information will be labeled "IBM Confidential".
When disclosed orally, such information will be identified as "IBM
Confidential" at the time of disclosure with subsequent confirmation in
writing referencing the date and type of information disclosed. Developer
agrees to clearly label as "IBM Confidential" all information reduced to
writing by Developer as a result of such oral disclosures.
IBM's disclosure of Confidential Information may include disclosure(s) of
third Party source code (hereinafter called Third Party Source Code).
Third Party and/or IBM Source Code shall be labeled as such in addition to
being labeled as and deemed to be IBM Confidential Information as set
forth above.
2. Developer shall hold in trust and confidence all IBM Confidential
Information including Third Party Source Code and shall not disclose such
information to any third party. Furthermore, Developer shall not use such
IBM Confidential Information for any purpose other than to prepare a
response to any IBM Request For Quotation or to perform work for IBM as
may subsequently be ordered. Developer shall not disclose or use such
information for any purpose other than those stated above until such time
as the information becomes publicly known through no fault of Developer.
<PAGE>
3. Except for the specific purposes contemplated by this Agreement, it is to
be understood that by disclosing IBM Confidential Information to
Developer, IBM and any Third Party do not grant any express or implied
license or other right to Developer under patents, copyrights or other
proprietary rights of IBM or the Third Party.
4. IBM Confidential Information shall also include all information identified
as confidential and disclosed by IBM to Developer which pertains to IBM's
past, present or future research, development or business activities.
5. Developer shall not disclose IBM Confidential Information to
subcontractors nor subcontract any part of the work covered by Purchase
Orders issued by IBM without first obtaining written consent from IBM.
6. Developer's obligations regarding IBM Confidential Information shall not
apply to information which was already known to Developer prior to
disclosure of it to Developer by IBM which is or becomes publicly
available through no fault of Developer's, which is rightfully received by
Developer from third parties without accompanying secrecy obligations,
which is independently developed by Developer or which is approved in
writing by IBM for Developer to release.
7. Developer shall disclose IBM's Confidential Information only to
Developer's employees having a need-to-know and shall segregate such
information at all times from the materials of third parties so as to
prevent any commingling.
8. Developer shall maintain a written agreement with each of Developer's
employees sufficient to enable Developer to comply with the terms of this
Agreement.
9. Developer shall secure IBM documents, items of work in process, work
products, and any other items that embody IBM Confidential Information in
locked files or areas providing restricted access to prevent its
unauthorized disclosure.
10. Developer shall maintain adequate procedures to prevent loss of any
materials containing IBM Confidential Information. In the event of any
loss, Developer shall notify IBM immediately.
11. Developer agrees to maintain one hundred percent (100%) accountability of
material and equipment consigned to Developer by IBM and will promptly
notify IBM of loss or damage of any items consigned.
12. Developer shall return to IBM all IBM Confidential Information upon
request.
13. IBM does not wish to receive confidential information of Developer or any
third party and IBM will be free to
<PAGE>
reproduce, distribute to third parties, and otherwise use any information
furnished to IBM by Developer. Any information provided to IBM shall not
be deemed confidential.
14. This Agreement is effective upon execution.
15. The provisions of this Agreement shall survive and continue after
expiration or termination of the Agreement with respect to any IBM
Confidential Information disclosed to or obtained by Developer prior to
the date of such expiration or termination or disclosed to or obtained by
Developer subsequent thereto under any Purchase Orders in effect on such
date or expiration or termination.
16. This Agreement shall be construed and the legal relations between the
parties hereto shall be determined, in accordance with the substantive law
of the State of New York.
17. IBM shall have the right to visit periodically, using reasonable business
practices, Developer's premises and conduct a review of the compliance
with the terms of this Agreement.
18. Upon execution of this Agreement, Developer shall promptly notify IBM in
writing of Developer's authorized representative who will coordinate the
receipt and maintenance of all IBM Confidential Information sent to
Developer. Developer shall promptly notify IBM in writing of any change or
such authorized representatives.
If the above terms and conditions are acceptable to Developer, an authorized
representative is requested to indicate acceptance thereof by signing and
returning two (2) copies of this Agreement, as instructed herein, and retaining
one (1) copy for file.
Return one (1) copy to: IBM Corporation
Software Contracts Procurement
AOD/808/Zip 3001
11400 Burnet Road
Austin, Texas 78758
Attention: May Cherry
Return one (1) copy to: IBM Corporation
11400 Burnet Road
Internal Zip 1109
Austin, Texas 78758
Attention: Lynn Turner
<PAGE>
Very truly yours, Accepted and Agreed to:
INTERNATIONAL BUSINESS PENCOM SOFTWARE, INC.
MACHINES CORPORATION
By: /s/ Lynn D. Turner By: /s/ Wade E. Saadi
----------------------------- -------------------------------
Lynn D. Turner
Title: Procurement Administrator Title: President
-------------------------- ----------------------------
Date: 11/4/92 Date: 11/20/92
--------------------------- -----------------------------
<PAGE>
[LETTERHEAD OF IBM]
November 17, 1993
Pencom Systems Incorporated
150 Broadway, Suite 600
New York, NY 10038
Dear Sir:
Service Agreement Number 200.504, dated November 26, 1990, is now being renewed.
There are no changes to the previous agreement pertaining to any terms and
conditions except the dates stated on Page 7. The dates of November 26, 1993
through November 25, 1994 will now apply.
If you agree with this change, please sign both copies and return one copy to
me.
If you have any questions, please contact me at phone number (512) 823-6539.
INTERNATIONAL BUSINESS PENCOM SOFTWARE, INC.
MACHINES CORPORATION
NAME: Lynn Turner NAME: /s/ Wade E. Saadi
----------------------------- -------------------------------
TITLE: Sr. Procurement TITLE: President
Administrator
---------------------------- ------------------------------
DATE: 11/17/93 DATE: November 24, 1993
----------------------------- -------------------------------
SIGNATURE: /s/ Lynn D. Turner SIGNATURE: Wade E. Saadi
------------------------ --------------------------
<PAGE>
[LETTERHEAD OF IBM]
February 17, 1995
Pencom Systems
40 Fulton Street
New York, NY 10038
Dear Sir:
Service Agreement Number 200.504, dated November 26, 1990, is now being amended
as follows:
Amend Section 4.1 to include "All third party confidential information provided
by Contractor to IBM should be considered IBM Confidential if it contains either
an IBM Confidential legend or a proprietary legend of the third party.
Contractor shall be obligated to comply with additional usage restrictions and
confidentiality protection requirements IBM provides Contractor from time to
time".
If you agree with this change, please sign both copies and return one copy to
me.
If you have any questions, please contact me at phone number (512) 823-6539.
INTERNATIONAL BUSINESS PENCOM SYSTEMS, INC.
MACHINES CORPORATION
NAME: Lynn Turner NAME: /s/ Wade E. Saadi
------------------------------ -------------------------------
TITLE: Sr. Procurement Administrator TITLE: President
----------------------------- ------------------------------
DATE: 2/17/95 Date: 2/21/95
------------------------------ -------------------------------
SIGNATURE: /s/ Lynn D. Turner SIGNATURE: /s/ Wade E. Saadi
------------------------- --------------------------
<PAGE>
[LETTERHEAD OF IBM]
April 20, 1995
Pencom Systems
150 Broadway, Suite 600
New York, NY 10038
Dear Sir:
Service Agreement Number 200.504, dated November 26, 1990, is now being amended
as follows:
Amend Section 4.1 to include "All third Party confidential information provided
by IBM to Contractor should be considered IBM Confidential if it contains either
an IBM Confidential legend or a proprietary legend of the third party.
Contractor shall be obligated to comply with additional usage restrictions and
confidentially protection requirements IBM provides Contractor form time to
time."
If you agree with this change, please sign both copies and return one copy to
me.
If you have any questions, please contact me at phone number (512) 823-6539.
INTERNATIONAL BUSINESS PENCOM SOFTWARE, INC.
MACHINES CORPORATION
NAME: Lynn Turner NAME: /s/ Wade E. Saadi
------------------------------ -------------------------------
TITLE: Sr. Procurement Administrator TITLE: President
----------------------------- ------------------------------
DATE: 4/21/95 Date: 4/27/95
------------------------------ -------------------------------
SIGNATURE: /s/ Lynn D. Turner SIGNATURE: /s/ Wade E. Saadi
------------------------- --------------------------
<PAGE>
[LETTERHEAD OF IBM]
December 11, 1995
Pencom Systems, Inc.
40 Fulton Street
New York, NY 10038
Dear Sir,
Service Agreement # 200.504, dated November 26, 1990, is now being renewed.
There are no changes to the previous agreement pertaining to any terms and
conditions except the dates stated on Page 7. The dates of January 1, 1996
through December 31, 1996 will now apply.
If you agree with this change, please sign both copies and return one copy to
me.
If you have any questions, please contact me at phone number (512) 823-6539.
INTERNATIONAL BUSINESS PENCOM SYSTEMS, INC.
MACHINES CORPORATION
NAME: Lynn Turner NAME: /s/ Wade E. Saadi
------------------------------ -------------------------------
TITLE: Advisory Contracts TITLE: President
----------------------------- ------------------------------
Administrator
-----------------------------
DATE: 12/11/95 Date: 12/14/95
------------------------------ -------------------------------
SIGNATURE: /s/ Lynn D. Turner SIGNATURE: /s/ Wade E. Saadi
------------------------- --------------------------
<PAGE>
[Letterhead of IBM]
2/24/97
PSW TECHNOLOGIES, INC.
6300 Bridgepoint Pkwy.
Building 3, Suite 200
Austin, Texas 78730
Service Agreement: #2CO.504, dated November 26, 1990 is now being extended.
There are no changes to the previous agreement pertaining to any terms and
conditions except the dates stated on Page 7. The dates of November 26, 1990
through December 31, 1997 will now apply. The contract assignment was changed
per Consent To Assignment of Contract dated 2/22/97 as follows:
From: Pencom Systems, Inc.
40 Fulton Street
New York, NY 10038
To: PSW TECHNOLOGIES, INC.
6300 Bridgepoint Pkwy.
Building 3, Suite 200
Austin, Texas 78730
If you agree with this change, please sign both copies and return one copy to
me.
If you have any questions, please contact me at (919) 543-9811.
INTERNATIONAL BUSINESS PSW Technologies, INC.
MACHINES CORPORATION
NAME: Stanley M. Johnson NAME: Brian E. Baisley
---------------------------- ------------------------------
TITLE: Sr. Buyer TITLE: Sr. V.P. Software Technology
--------------------------- ------------------------------
DATE: 2/27/97 DATE: 2-25-97
---------------------------- ------------------------------
SIGNATURE: /s/ Stanley M. Johnson SIGNATURE: /s/ Brian E. Baisley
----------------------- --------------------------
<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
<PAGE>
Credit Agreement (With Borrowing Base) November 8, 1996
PSW TECHNOLOGIES, INC.
PAGE MISSING (STAMPED SHEET NUMBERS ARE CONSECUTIVE WITHOUT THIS PAGE, THOUGH)
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
----------------------------------------------------------------------------
Name: W. Frank King
--------------------------------------------------------------------------
Title: CEO & President
-------------------------------------------------------------------------
Address: 9050 Capital of TX Hwy Austin TX
-----------------------------------------------------------------------
BANK: TEXAS COMMERCE BANK NATIONAL ASSOCIATION
By: /s/Ralph T. Beasley
----------------------------------------------------------------------------
Name: Ralph T. Beasley
--------------------------------------------------------------------------
Title: Vice President
-------------------------------------------------------------------------
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>
Exhibit 10.30
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT is made as of the 1st day of January,
1997, by and among PSW Technologies, Inc., a Delaware corporation (the
"Company"), and Michael J. Maples, a director of the Company (the "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
1.1 Sale and Issuance of Common Stock. Subject to the terms and conditions
of this Agreement, the Investor agrees to purchase at the Closing, and the
Company agrees to sell and issue to the Investor at the Closing, 13,000
shares of the Company's Common Stock for an aggregate purchase price of
$50,050.
1.2 Closing. The purchase and sale of the Common Stock shall take place at
the offices of the Company, 6300 Bridgepoint Parkway, Building Three,
Suite 200, Austin, Texas 78730, at 10:00 A.M. on January 1, 1997, or at
such other time and place as the Company and the Investor mutually agree
upon orally or in writing (which time and place are designated as the
"Closing"). At the Closing the Company shall deliver to the Investor a
certificate representing the Common Stock that such Investor is purchasing
against payment of the purchase price therefor by check or wire transfer,
or any combination thereof.
2. Representations and Warranties of the Investor. The Investor hereby
represents and warrants that;
2.1 Authorization. The Investor has full power and authority to enter into
this Agreement, and this Agreement constitutes his valid and legally
binding obligation, enforceable in accordance with its terms.
2.2 Purchase Entirely for Own Account. This Agreement is made with the
Investor in reliance upon the Investor's representation to the Company,
which by the Investor's execution of this Agreement the Investor hereby
confirms, that the Common Stock to be received by the Investor (the
"Securities") will be acquired for investment for the Investor's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that the Investor has no present
intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, the Investor further
represents
<PAGE>
that the Investor does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participations to
such person or to any third person, with respect to any of the Securities.
2.3 Disclosure of Information. The Investor believes he has received all
the information he considers necessary or appropriate for deciding whether
to purchase the Common Stock. The Investor further represents that he has
had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Common Stock and
the business, properties, prospects and financial condition of the
Company.
2.4 Investment Experience. The Investor is an investor in securities of
many companies, including companies in the development stage, and
acknowledges that he is able to fend for himself, can bear the economic
risk of his investment, and has such knowledge and experience in financial
or business matters that he is capable of evaluating the merits and risks
of the investment in the Common Stock.
2.5 Accredited Investor. The Investor is an "accredited investor" within
the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect.
2.6 Restricted Securities. The Investor understands that the Securities he
is purchasing are characterized as "restricted securities" under the
federal securities laws inasmuch as they are being acquired from the
Company in a transaction not involving a public offering, and that under
such laws and applicable regulations such securities may be resold without
registration under the Act only in certain limited circumstances. In this
connection, the Investor represents that he is familiar with SEC Rule 144,
as presently in effect, and understands the resale limitations, including
the minimum holding periods, imposed thereby and by the Act.
2.7 Further Limitations on Disposition. Without in any way limiting the
representations set forth above, the Investor further agrees not to make
any disposition of all or any portion of the Securities unless and until
the transferee has agreed in writing for the benefit of the Company to be
bound by this Section 2, and:
(a) There is then in effect a Registration Statement under the Act
covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
(b)(i) The Investor shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed
<PAGE>
statement of the circumstances surrounding the proposed disposition, and
(ii) if reasonably requested by the Company, the Investor shall have
furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company that such disposition will not require registration of such
shares under the Act. It is agreed that the Company will not require
opinions of counsel for transactions made pursuant to Rule 144 except in
unusual circumstances.
2.8 Legends. It is understood that the certificate evidencing the
Securities may bear one or all of the following legends:
(a) "These securities have not been registered under the Securities Act of
1933, as amended. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with
respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or
unless sold pursuant to Rule 144 of such Act."
(b) Any legend required by the laws of the States of Delaware or Texas.
3. Conditions of Company's Obligations at Closing. The obligations of the
Company to the Investor under this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions
by the Investor:
3.1 Representations and Warranties. The representations and warranties of
the Investor contained in Section 2 shall be true on and as of the Closing
with the same effect as though such representations and warranties had
been made on and as of the Closing.
3.2 Payment of Purchase Price. The Investor shall have delivered the
purchase price specified in Section 1.2.
3.3 Qualifications. All authorizations, approvals, or permits, if any, of
any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and
sale of the Securities pursuant to this Agreement shall be duly obtained
and effective as of the Closing.
4. Miscellaneous.
4.1 Survival of Warranties. The warranties, representations and covenants,
of the Investor contained in this Agreement shall survive the execution
and delivery of this Agreement and the Closing and shall in no
<PAGE>
way be affected by any investigation of the subject matter thereof made by
or on behalf of the Company.
4.2 Successors and Assigns. Except as otherwise provided herein, the terms
and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties
(including transferees of any Securities). Nothing in this Ageement,
express or implied, is intended to confer upon any party other than the
parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
4.3 Governing Law. This Agreement shall be governed by and construed under
the laws of the State of Texas as applied to agreements among Texas
residents entered into and to be performed entirely within Texas.
4.4 Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but both of which together shall
constitute one and the same instrument.
4.5 Titles and Subtitles The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing
or interpreting this Agreement.
4.6 Notices. Unless otherwise provided, any notice required or permitted
under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or
upon deposit with the United States Post Office, by registered or
certified mail, postage prepaid and addressed to the party to be notified
at 6300 Bridgepoint Parkway, Building Three, Suite 200, Austin, Texas
78730, or at such other address as such party may designate by ten (10)
days' advance written notice to the other parties.
4.7 Amendments and Waivers. Any term of this Agreement may be amended and
the observance of any term of this Agreement 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
Investor.
4.8 Severability. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, 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.
<PAGE>
4.9 Entire Agreement. This Agreement constitutes the entire agreement
among the parties with respect to the subject matter hereof and neither
party shall be liable or bound to the other party in any manner by any
warranties, representations, or covenants with respect to the subject
matter hereof except as specifically set forth herein or therein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
PSW TECHNOLOGIES, INC.
By: /s/ W. Frank King
------------------------------
W. Frank King, President & CEO
MICHAEL J. MAPLES
/s/ Michael J. Maples
----------------------------------
<PAGE>
Exhibit 10.31
Stock Subscription
PSW Technologies, Inc.
(a Delaware Corporation)
40 Fulton Street
28th Floor
New York, New York
October 1, 1996
Ladies/Gentlemen:
The undersigned hereby subscribes for 800 shares of common stock, without
par value of PSW Technologies, Inc., a Delaware corporation ("PSW"), all in
consideration of the contribution by the undersigned to PSW of certain of the
assets of the undersigned with respect to the business of the undersigned
relating to the development and management of software systems, as set forth on
Schedule A annexed hereto, and PSW agrees to assume and to discharge certain of
the liabilities of the undersigned with respect to the business of the
undersigned relating to the development and management of software systems, as
set forth on Schedule B annexed hereto.
<PAGE>
Very truly yours,
PENCOM SYSTEMS INCORPORATED
(a New York corporation)
By: /s/ Wade E. Saadi
---------------------------
Wade E. Saadi, President
Accepted:
PSW TECHNOLOGIES, INC.
(a Delaware corporation)
By:_________________________
<PAGE>
Very truly yours,
PENCOM SYSTEMS INCORPORATED
(a New York corporation)
By:___________________________
Wade E. Saadi, President
Accepted:
PSW TECHNOLOGIES, INC.
(a Delaware corporation)
By: /s/ W. Frank King
-------------------------
<PAGE>
SCHEDULE A
PENCOM SOFTWARE ASSETS
<PAGE>
SCHEDULE A
PENCOM SOFTWARE ASSETS
CASH 4,323.26
INTEREST IN ACCOUNTS RECEIVABLE - SEE NOTE 2,000,000.00
PREPAID EXPENSES AND OTHER RECEIVABLES 38,584.54
PROPERTY AND EQUIPMENT, net 1,725,679.88
------------
3,768,587.68
============
NOTE: TRANSFERRED ACCOUNTS RECEIVABLE REPRESENTS 26.67% OF ACTUAL BALANCE.
Page 1
<PAGE>
SCHEDULE B
PENCOM SOFTWARE LIABILITIES
<PAGE>
SCHEDULE B
PENCOM SOFTWARE LIABILITES
ACCOUNTS PAYABLE AND ACCRUED EXPENSE 1,020,739.46
PAYROLL AND OTHER TAXES PAYABLE 263,157.92
BILLINGS IN EXCESS OF COSTS 58,384.00
CURRENT PORTION OF LONG-TERM DEBT 11,300.47
LONG-TERM DEBT 5,878.96
------------
1,349,460.81
============
Page 2
<PAGE>
EXHIBIT 11.1
PSW TECHNOLOGIES, INC.
COMPUTATION OF PRO FORMA NET INCOME PER SHARE
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES SHARES
---------- ----------
<S> <C> <C>
Common stock issued at inception.................................... 5,538,463 5,538,463
CHEAP SHARES
Shares commited to be issued in January 1997 at $6.25............... 8,000
Treasury shares..................................................... (5,000)
----------
3,000 3,000
CHEAP STOCK OPTIONS AND WARRANTS
Stock Options and Warrants granted at $.04.......................... 921,389
Treasury shares..................................................... (3,686)
----------
917,703 917,703
Stock Options granted at $.43....................................... 136,271
Treasury shares..................................................... (5,860)
----------
130,411 130,411
Stock Options granted at $2.58...................................... 70,552
Treasury shares..................................................... (18,202)
----------
52,350 52,350
Stock Options granted at $3.90...................................... 381,921
Treasury shares..................................................... (148,949)
----------
232,972 232,972
Stock Options granted at $4.55...................................... 9,122
Treasury shares..................................................... (4,151)
----------
4,971 4,971
Stock Options granted at $6.25...................................... 59,915
Treasury shares..................................................... (37,447)
----------
22,468 22,468
Stock Options granted at $7.96...................................... 34,874
Treasury Shares..................................................... (27,760)
----------
7,114 7,114
----------
Weighted Average Shares--1992 through 1995..........................
</TABLE>
<TABLE>
<S> <C> <C>
6,909,453
Additional shares required to be sold to pay dividend to
stockholders:
Assumed IPO price per share....................................... $ 10.00
Underwriters commission (7%)...................................... $ (0.70)
----------
Net proceeds per share............................................ $ 9.30
----------
Additional shares required to raise proceeds of $900,000 to pay
distribution to stockholders.................................... 96,774
----------
Weighted Average Shares--1996....................................... 7,006,227
----------
----------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA WEIGHTED PRO FORMA NET
NET INCOME AVERAGE INCOME (LOSS)
YEAR (LOSS) NUMBER OF SHARES PER SHARE
- ------------------------------------------------------------- ---------------- ----------------- ---------------
<S> <C> <C> <C>
1992......................................................... $ (173,000) 6,909,453 $ (0.03)
1993......................................................... $ (957,000) 6,909,453 $ (0.14)
1994......................................................... $ 138,000 6,909,453 $ 0.02
1995......................................................... $ 1,326,000 6,909,453 $ 0.19
1996......................................................... $ 720,000 7,006,227 $ 0.10
</TABLE>
<PAGE>
EXHIBIT 11.1
PSW TECHNOLOGIES, INC.
COMPUTATION OF SUPPLEMENTAL PRO FORMA NET INCOME (LOSS) PER SHARE
<TABLE>
<S> <C> <C>
Weighted Average Shares--1996....................... 7,006,227
Note payable to bank as of December 31, 1996........ $5,125,000
Cash as of December 31, 1996 assumed to be used to
repay note payable to bank........................ (3,182,000)
----------
Note payable to bank repaid from proceeds
offering.......................................... $1,943,000
----------
Additional shares required to raise proceeds to pay
note payable (at a net price of $9.30 per
share)............................................ 208,925
---------
Weighted Average Shares for Supplemental net income
per share......................................... 7,215,152
---------
---------
Pro forma net income................................ $ 720,000
Interest paid on note payable to bank............... 40,920
---------
$ 760,920
---------
---------
Supplemental pro forma net income per share......... $ 0.11
---------
---------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated February 3, 1997
(except for paragraph 2 of Note 3, as to which the date is March , 1997), in
Amendment No. 1 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. 1 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 18, 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. 1 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 19, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1992
<PERIOD-END> DEC-31-1992
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 1,096
<ALLOWANCES> 8
<INVENTORY> 0
<CURRENT-ASSETS> 1,106
<PP&E> 744
<DEPRECIATION> 195
<TOTAL-ASSETS> 1,489
<CURRENT-LIABILITIES> 1,660
<BONDS> 0
0
0
<COMMON> 55
<OTHER-SE> 1,489
<TOTAL-LIABILITY-AND-EQUITY> 1,660
<SALES> 0
<TOTAL-REVENUES> 6,562
<CGS> 0
<TOTAL-COSTS> 4,003
<OTHER-EXPENSES> 2,650
<LOSS-PROVISION> 7
<INTEREST-EXPENSE> 181
<INCOME-PRETAX> (279)
<INCOME-TAX> (106)
<INCOME-CONTINUING> (173)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (173)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
</TABLE>
