UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
-------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 000-22327
PSW TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2796054
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification No.)
6300 Bridgepoint Parkway, Building 3, Suite 200, Austin Texas 78730
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 343-6666
-------------------------
Indicate by check x whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _x No __________
As of October 30, 1998, the Registrant had outstanding XXXXXX shares of
Common Stock, $.01 par value.
1
<PAGE>
PSW TECHNOLOGIES, INC.
Index to September 30, 1998 Form 10-Q
Page
Part I -- Financial Information
Item 1. Financial Statements...............................................3
Condensed Balance Sheets - September 30, 1998 and
December 31, 1997..................................................3
Condensed Statements of Operations - Three Months
and Nine Months Ended September 30, 1998 and 1997..................4
Condensed Statements of Cash Flows - Nine Months
Ended September 30, 1998 and 1997..................................5
Notes to Condensed Financial Statements............................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................9
Part II -- Other Information
Item 2. Use of Proceeds from Registered Securities........................19
Item 6. Exhibits and Reports on Form 8-K..................................19
Signatures........................................................20
2
<PAGE>
Part 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
PSW Technologies, Inc.
Condensed Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
Assets
Current assets:
<S> <C> <C>
Cash $ 298 $ 835
Short-term investments 18,999 22,470
Accounts receivable, net of allowance for doubtful
accounts of $250 and $165 at September 30, 1998
and December 31, 1997, respectively 7,828 7,429
Unbilled revenue under customer contracts 843 418
Deferred tax asset 792 -
Prepaid expenses and other current assets 557 483
-------- ---------
Total current assets 29,317 31,635
Other non-current assets 4,573 3,785
-------- ---------
Total assets $ 33,890 $ 35,420
========== ==========
Liabilities and stockholders' equity
Current liabilities:
Trade payables 369 532
Deferred revenue 434 -
Accrued expenses and other current liabilities 2,062 3,029
--------- ---------
Total current liabilities 2,865 3,561
Stockholders' equity:
Preferred stock, par value $.01 per share, 1,000,000
shares authorized and none issued and outstanding - -
Common stock, par value $.01 per share, 34,000,000
shares authorized, 9,211,919 and 8,960,935 shares
issued and outstanding at September 30, 1998
and December 31, 1997, respectively 92 90
Additional paid-in capital 30,009 29,484
Deferred compensation (125) (243)
Accumulated other comprehensive income 46 (27)
Retained earnings 1,003 2,555
--------- ---------
Total stockholders' equity 31,025 31,859
--------- ---------
Total liabilities and stockholders' equity $ 33,890 $ 35,420
========== ==========
</TABLE>
See accompanying notes.
3
<PAGE>
PSW Technologies, Inc.
Condensed Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 9,255 $ 11,258 $ 28,880 $ 32,267
Operating expenses:
Technical staff 6,009 5,711 17,335 16,445
Selling and administrative staff 2,853 2,113 8,161 6,087
Other expenses 2,772 1,946 6,678 5,825
Special compensation expense 36 71 118 259
--------- ---------- ----------- ----------
Total operating expenses 11,670 9,841 32,292 28,616
--------- ---------- ----------- ----------
Income (loss) from operations (2,415) 1,417 (3,412) 3,651
Interest income (expense), net 215 264 690 161
--------- ---------- ----------- ----------
Income (loss) before provision (benefit) for
income taxes (2,200) 1,681 (2,722) 3,812
--------- ---------- ----------- ----------
Provision (benefit) for income taxes:
Nonrecurring charge for termination of
Subchapter S election - - - 1,200
C Corporation (1,070) 570 (1,170) 670
--------- ---------- ----------- ----------
Total provision (benefit) for income taxes (1,070) 570 (1,170) 1,870
--------- ---------- ----------- ----------
Net income (loss) $ (1,130) $ 1,111 $ (1,552) $ 1,942
========== ========== ============ =========
Basic earnings (loss) per share $ (0.12) $ 0.13 $ (0.17)
========== ========== ============
Diluted earnings (loss) per share $ (0.12) $ 0.11 $ (0.17)
========== ========== ============
Pro forma information:
Historical income before provision for
income taxes $ 3,812
Pro forma provision for income taxes 1,380
---------
Pro forma net income $ 2,432
=======
Pro forma basic earnings per share $ 0.35
========
Pro forma diluted earnings per share $ 0.30
========
Shares used in basic earnings (loss) per share
calculation 9,146 8,847 9,064 6,871
========= ========= ========= ========
Shares used in diluted earnings (loss) per share
calculation 9,146 9,973 9,064 8,001
========= ========= ========= ========
</TABLE>
See accompanying notes.
4
<PAGE>
PSW Technologies, Inc.
Condensed Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
--------------------------------------
1998 1997
---- ----
Operating activities
<S> <C> <C>
Net income (loss) $ (1,552) $ 1,942
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Special compensation 118 259
Depreciation and amortization 765 597
Bad debt expense 114 45
Changes in operating assets and liabilities:
Accounts receivable (513) (1,893)
Due to/from related party - (258)
Unbilled revenue under customer contracts (425) 106
Prepaid expenses and other current assets (74) 40
Trade payables (173) (359)
Deferred revenue 434 (125)
Accrued expenses and other current liabilities (188) 1,362
Income taxes (1,519) 694
-------- ----------
Net cash provided by (used in) operating activities (3,013) 2,410
-------- ----------
Investing activities
Purchase securities - (21,277)
Proceeds from sale of short term investments 3,544 -
Acquisition of property and equipment (1,442) (2,410)
-------- ---------
Net cash provided by (used in) investing activities 2,102 (23,687)
-------- ---------
Financing activities
Repayments of line of credit - (5,125)
Dividend to S corporation stockholders - (1,400)
Issuance of common stock 374 25,970
-------- ---------
Net cash provided by financing activities 374 19,445
-------- ---------
Net decrease in cash (537) (1,832)
Cash, beginning of period 835 3,182
-------- ---------
Cash, end of period $ 298 $ 1,350
========== =========
Non-cash activities:
Unrealized gain on investments $ 73 $ 52
Reduction of income taxes payable associated with the
exercise of stock options $ 153 $ 115
</TABLE>
See accompanying notes.
5
<PAGE>
PSW Technologies, Inc.
Notes to Condensed Financial Statements
September 30, 1998
(unaudited)
1. Basis of Presentation
PSW Technologies, Inc. (the "Company") commenced operations as a separate,
stand-alone corporation effective October 1, 1996. The accompanying unaudited
financial statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") regarding
interim financial reporting. Accordingly, they do not include all the
information and notes required by generally accepted accounting principles for
complete financial statements and should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 1997
included in the Company's annual report on Form 10-K. The accompanying financial
statements reflect adjustments, all of which are of a normal recurring nature,
which are, in the opinion of management, necessary for a fair presentation.
The results for interim periods are not necessarily indicative of full year
results.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
could affect the financial statements and accompanying notes. Actual results
could differ from those estimates.
3. Pro Forma Provision for Income Taxes
From commencement through June 5, 1997 the Company had elected to be treated as
an S Corporation under Subchapter S of the Internal Revenue Code of 1986, as
amended. As such, federal income taxes attributable to income through June 5,
1997 were the responsibility of the individual stockholders. Pro forma provision
for income taxes reflect the estimated corporate income tax expense that the
Company would have recognized had it not elected to be treated as an S
corporation for the period presented. The Company also paid a dividend of $1.4
million to its S corporation stockholders during the third quarter of 1997. The
dividend was estimated to approximate the tax that the S stockholders were
required to pay on the 1997 taxable income allocated to them.
4. Pro Forma Earnings Per Share
The pro forma basic and diluted earnings per share amounts prior to the
Company's initial public offering, which occurred during the second quarter of
1997, have been restated as required to comply with Statement of Financial
Accounting Standards No. 128, Earnings Per Share, and the Securities and
Exchange Commission Staff Accounting Bulletin 98.
6
<PAGE>
PSW Technologies, Inc.
Notes to Condensed Financial Statements (Continued)
(unaudited)
5. Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this Statement
had no impact on the Company's net income or stockholders' equity. SFAS No. 130
requires unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
The components of comprehensive income for the three and nine months ended
September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997(a)
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $(1,130) $1,111 $(1,552) $2,432
Unrealized gain (loss) on short term
investments 63 (79) 128 (79)
Income tax (expense) benefit related to items
of other comprehensive income (27) 27 (55) 27
=========== =========== ========== ==========
Comprehensive income (loss) $(1,094) $1,059 $(1,479) $2,380
=========== =========== ========== ==========
</TABLE>
(a) Net income and comprehensive income amounts are presented on a
pro forma basis as if the Company had been subject to federal and
state income taxes.
The components of accumulated other comprehensive income at September 30, 1998
and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ --------------
<S> <C> <C>
Unrealized gain (loss) on short term investments $46 $(27)
============ ==============
</TABLE>
7
<PAGE>
PSW Technologies, Inc.
Notes to Condensed Financial Statements (Continued)
(unaudited)
6. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data) for the three months and nine months
ended September 30:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997(1)
-------------- --------------- -------------- --------------
Numerator:
<S> <C> <C> <C> <C>
Net income (loss) $ (1,130) $ 1,111 $ (1,552) $ 2,432
============== =============== ============== ==============
Denominator:
Shares used in basic earnings (loss) per
share calculation 9,146 8,847 9,064 6,871
Effect of dilutive securities:
Employee stock options - 620 - 624
Warrants - 506 - 506
-------------- --------------- -------------- --------------
Shares used in diluted earnings (loss) per
share calculation 9,146 9,973 9,064 8,001
============== =============== ============== ==============
Basic earnings (loss) per share $ (0.12) $ 0.13 $ (0.07) $ 0.35
============== =============== ============== ==============
Diluted earnings (loss) per share $ (0.12) $ 0.11 $ (0.17) $ 0.30
============== =============== ============== ==============
</TABLE>
(1) Net income and earnings per share amounts are presented on a pro forma basis
as if the Company had been subject to federal and state income taxes. The pro
forma basic and pro forma diluted earnings per share amounts prior to the
Company's initial public offering, which occurred during the second quarter of
1997, have been restated as required to comply with SFAS No. 128 and the
Securities and Exchange Commission Staff Accounting Bulletin 98 ("SAB 98"). The
adoption of the provisions of SFAS 128 and SAB 98 resulted in an increase to pro
forma diluted earnings per share for the nine months ended September 30, 1997 of
$0.01 per share.
7. Income Taxes
During the third quarter, the Company revised its estimated annual effective tax
rate for 1998 from 19%, which was used during the second quarter of 1998, to 43%
due to changes in management's estimate of projected levels of operating income
relative to tax-exempt income. Using a 43% annual effective tax rate during the
first, second and third quarters of 1998, net loss would have been $178,000 for
the three months ended March 31, 1998, $120,000 for the three months ended June
30, 1998 and $1,254 for the three months ended September 30, 1998. The diluted
loss per share would have remained at $0.02 for the three months ended March 31,
1998, would have increased $0.01 to a diluted loss per share of $0.01 for the
three months ended June 30, 1998, and would have decreased $0.02 to a diluted
loss per share of $0.14 for the three months ended September 30, 1998.
8
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This report contains forward-looking statements, within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, that involve risks and uncertainties, such as statements concerning:
growth and future operating results; developments in the Company's markets and
strategic focus; and future economic and business conditions. Such forward
looking statements are generally accompanied by words such as "plan,"
"estimate," "expect," "believe," "could," "would," "anticipate," "may," or other
words that convey uncertainty of future events or outcomes. These
forward-looking statements and other statements made elsewhere in this report
are made in reliance on the Private Securities Litigation Reform Act of 1995.
The section below entitled "Certain Factors That May Affect Future Results,
Financial Condition and Market Price of Securities" sets forth and incorporates
by reference certain factors that could cause actual future results of the
Company to differ materially from these statements.
Overview
PSW Technologies, Inc. (the "Company"), is a software services firm, operating
in one industry segment, that provides high value solutions to information
technology ("IT") vendors and IT users by mastering and applying critical
emerging technologies, including Web based distributed computing, object
oriented development, advanced operating systems and systems management
technologies. IT vendors primarily consist of software companies who utilize the
Company's services to help bring their products to market faster. IT users
generally utilize the Company's services to help define, develop and complete
high value, mission critical enterprise software systems for internal use. PSW
provides joint project-based development, porting and testing services to
selected IT vendor clients and applies the technical expertise learned to the
design and development of high value, mission critical enterprise business
systems for its Fortune 1000 IT user clients.
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. 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.
9
<PAGE>
Results of Operations
The following table sets forth the percentage of revenue of certain items
included in the Company's condensed statement of operations for the period
indicated:
<TABLE>
<CAPTION>
Three Months Nine Months
ended September 30, ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue............................................ 100%.... 100% 100% 100%
Operating expenses:
Technical staff................................. 65 51 60 51
Selling and administrative staff................ 31 19 28 19
Other expenses.................................. 30 17 23 18
Special compensation expense.................... - 1 - 1
----- ----- ----- -----
Total operating expense............................ 126 88 111 89
----- ----- ----- -----
Income (loss) from operations...................... (26) 12 (11) 11
Interest income (expense), net..................... 2 2 2 -
Provision (benefit) from income taxes.............. (12) 5 (4) 4 (a)
----- ----- ----- -----
Net income (loss)................................. (12)% 9% (5)% 7%(a)
====== ===== ===== =====
</TABLE>
(a) Net income is presented on a pro forma basis as if the Company had been
fully subject to federal and state income taxes.
Third Quarter of 1998 Compared with Third Quarter of 1997
Revenue
The Company's revenue consists primarily of fees for software services provided.
Revenue was $9.3 million in the third quarter of 1998, down 18% from $11.3
million for the third quarter of 1997, principally due to the decline in the
scope and number of IT user projects. Revenue attributable to software services
rendered to IT vendors was $6.3 million and $6.6 million in the third quarter of
1998 and the third quarter of 1997, respectively. Revenue attributable to
software services rendered to IT users was $3.0 million and $4.6 million for the
third quarter of 1998 and the third quarter of 1997, respectively, a decrease of
35% in the third quarter of 1998 over the third quarter of 1997.
One client, including its wholly-owned subsidiaries, accounted for 36% and 35%
of revenue in each of the third quarters of 1998 and 1997, respectively. No
other client accounted for more than 10% of revenue for either period.
Technical Staff
Technical staff expenses consist of the cost of salaries, payroll taxes, health
insurance and workers' compensation, for technical staff personnel assigned to
client projects and unassigned technical staff personnel, and fees paid to
subcontractors for work performed in connection with a client project. Technical
staff expenses were $6.0 million in the third quarter of 1998, an increase of 5%
over $5.7 million for the third quarter of 1997. The increase in technical staff
expenses was primarily due to the addition of personnel during 1998 in
anticipation of new engagements. Technical staff expenses increased to 65% of
revenue in the third quarter of 1998 from 51% in the third quarter of 1997,
primarily as a result of lower utilization of technical staff and lower
revenues.
10
<PAGE>
Selling and Administrative Staff
Selling and administrative staff expenses consist of the cost of salaries,
payroll taxes, health insurance and workers' compensation for selling, marketing
and administrative personnel and all commissions and bonuses. Selling and
administrative staff expenses were $2.9 million in the third quarter of 1998, an
increase of 35% from $2.1 million in the third quarter of 1997. The increase in
selling and administrative staff expenses was primarily due to the increased
focus on sales and marketing initiatives which resulted in an increase to the
sales and marketing staff during 1998. Selling and administrative staff expenses
were 31% of revenue in the third quarter of 1998 compared to 19% of revenue in
the third quarter of 1997, primarily as a result of increases in the sales staff
and lower revenues.
Other Expenses
Other expenses consist of all non-staff related costs, such as occupancy costs,
travel, business insurance, business development, recruiting, training and
depreciation. Other expenses were $2.8 million in the third quarter of 1998 and
$1.9 million in the third quarter of 1997. The increase is principally due to
the addition of a facility in Mountainview, California, severance costs related
to an overall reduction in headcount, meeting costs, an increase in bad debt
reserves, along with higher travel and project related costs, offset slightly by
lower recruiting costs. Other expenses were 30% of revenue in the third quarter
of 1998 compared to 17% in the third quarter of 1997.
Special Compensation Expense
Special compensation expense consists of stock-based compensation in connection
with the grants of replacement options to the Company's employees who
participated in the Pencom Systems Incorporated stock option plan. Special
compensation expense was $36,000, or less than 1% of revenue, in the third
quarter of 1998 and $71,000, or 1% of revenue, in the third quarter of 1997.
Income (Loss) from Operations
The Company recorded a loss from operations of $2.4 million in the third quarter
of 1998, down from $1.4 million of income from operations in the third quarter
of 1997. Loss from operations was 26% of revenue in the third quarter of 1998,
down from income from operations of 12% of revenue in the third quarter of 1997.
First Nine Months of 1998 Compared with First Nine Months of 1997
Revenue
The Company's revenue consists primarily of fees for software services provided.
Revenue was $28.9 million in the first nine months of 1998, down 10% from $32.3
million for the first nine months of 1997, principally due to the decline in IBM
business. Revenue attributable to software services rendered to IT vendors was
$19.1 million and $19.3 million in the first nine months of 1998 and the first
nine months of 1997, respectively. Revenue attributable to software services
rendered to IT users was $9.8 million and $13.0 million for the first nine
months of 1998 and the first nine months of 1997, respectively, a decrease of
25% in the first nine months of 1998 over the first nine months of 1997.
One client, including its wholly owned subsidiaries, accounted for 36% and 42%
of revenue in each of the first nine months of 1998 and 1997, respectively. No
other client accounted for more than 10% of revenue for either period.
11
<PAGE>
Technical Staff
Technical staff expenses consist of the cost of salaries, payroll taxes, health
insurance and workers' compensation, for technical staff personnel assigned to
client projects and unassigned technical staff personnel, and fees paid to
subcontractors for work performed in connection with a client project. Technical
staff expenses were $17.3 million in the first nine months of 1998, an increase
of 5% over $16.4 million for the first nine months of 1997. The increase in
technical staff expenses was primarily due to the addition of personnel to
service the anticipated increase in scope and number of client projects during
1998. Technical staff expenses increased to 60% of revenue in the first nine
months of 1998 from 51% in the first nine months of 1997, primarily as a result
of lower utilization of technical staff and lower revenues.
Selling and Administrative Staff
Selling and administrative staff expenses consist of the cost of salaries,
payroll taxes, health insurance and workers' compensation for selling, marketing
and administrative personnel and all commissions and bonuses. Selling and
administrative staff expenses were $8.2 million in the first nine months of
1998, an increase of 34% from $6.1 million in the first nine months of 1997. The
increase in selling and administrative staff expenses was primarily due to the
addition of sales and administrative personnel, and increased training for
technical staff. Selling and administrative staff expenses were 28% of revenue
in the first nine months of 1998 compared to 19% of revenue in the first nine
months of 1997, primarily as a result of increases in the sales staff, greater
technical staff involvement in sales and lower revenues.
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 $6.7 million in the first nine months of 1998
and $5.8 million in the first nine months of 1997, principally due to the
addition of a facility, severance costs related to an overall reduction in head
count during the third quarter, third quarter meeting costs, an increase in bad
debt reserves, along with higher travel and project related costs, offset
slightly by lower recruiting costs. Other expenses were 23% of revenue in the
first nine months of 1998 compared to 18% in the first nine months of 1997 due
to the previously mentioned expenses and lower revenues.
Special Compensation Expense
Special compensation expense consists of stock-based compensation in connection
with the grants of replacement options to the Company's employees who
participated in the Pencom Systems Incorporated stock option plan. Special
compensation expense was $118,000, or less than 1% of revenue, in the first nine
months of 1998 and $259,000, or 1% of revenue, in the first nine months of 1997.
Income (Loss) from Operations
The Company recorded a loss from operations of $3.4 million in the first nine
months of 1998, down from $3.7 million of income from operations in the first
nine months of 1997. Due primarily from the decrease in revenue, loss from
operations was 11% of revenue in the first nine months of 1998, down from income
from operations of 11% of revenue in the first nine months of 1997.
Income Taxes
From commencement through June 5, 1997 the Company had elected to be treated as
an S Corporation under Subchapter S of the Internal Revenue Code of 1986, as
amended. As such, federal income taxes attributable to income through June 5,
1997 were the responsibility of the individual stockholders. The pro forma
disclosures on the statements of operations reflect adjustments to record
provisions for income taxes as if the Company had not been an S Corporation.
12
<PAGE>
The pro forma provision for income taxes of $1.4 million for the nine months
ended September 30, 1997 is computed using an estimated annual effective tax
rate of 36%, which differs form the federal statutory rate of 34% primarily due
to state taxes.
The historical benefit for income taxes of $1.2 million for the nine months
ended September 30, 1998 is computed using an estimated annual effective tax
rate of 43%, which differs from the federal statutory rate of 34% as a result of
state taxes and the relationship of tax-exempt interest income to the pretax
loss.
During the third quarter, the Company revised its estimated annual effective tax
rate for 1998 from 19% to 43% due to changes in management's estimate of
tax-exempt income relative to projected levels of operating income.
Net Loss and Pro Forma Net Income
Net loss was $1.6 million in the first nine months of 1998 and pro forma net
income was $2.4 million in the first nine months of 1997. Net loss was 5% of
revenue in the first nine months of 1998 and pro forma net income was 7% of
revenue in the first nine months of 1997.
Liquidity and Capital Resources
At September 30, 1998, the Company had cash and short term investments totaling
$19.3 million, a decrease from $23.3 million at December 31, 1997 as a result of
funding operating and investing activities.
The Company maintains a Credit Facility with a bank providing for borrowings of
up to $10 million, subject to a borrowing base requirement. The Credit Facility
expires on May 1, 1999. Available borrowings under the Credit Facility are based
upon a percentage of the Company's eligible accounts receivable. At September
30, 1998, no amount was outstanding under the Credit Facility and the available
borrowing amount was $7.5 million.
The Company anticipates that its existing capital resources described above,
together with cash provided by operating activities will be adequate to fund the
Company's operations for at least the next 12 months. There can be no assurance
that changes will not occur that would consume available capital resources
before such time. The Company's capital requirements depend on numerous factors,
including potential acquisitions, the timing of the receipt of accounts
receivable, employee growth and the percentage of projects performed at the
Company's facilities. There can be no assurance that additional funding, if
necessary, will be available on favorable terms, if at all.
Year 2000 Compliance
Many older computer systems and software products currently in use are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than 15 months, computer systems and/or
software used by many companies will need to be upgraded to comply with such
"Year 2000" requirements.
All of the services currently offered by the Company are designed to be Year
2000 compliant. However, the Company's services are often integrated or used in
conjunction with third-party software; such software may not be compatible with
Company's services or Year 2000 compliant. The Company may in the future be
subject to claims based on Year 2000 problems in other's products, custom
scripts created by third parties to interface with the Company's services or
issues arising from the integration of multiple products and systems within an
overall system. The costs of defending and resolving Year 2000-related disputes,
and any liability of the Company for Year 2000-related damages, including
consequential damages, could have a material adverse effect on the Company's
business, operating results and financial condition.
13
<PAGE>
Over the past three years, the Company has made Year 2000 compliance a priority
in IT purchasing and installation decisions. The Company's internal information
technology group has adopted a Year 2000 compliance program to assess and
address any Year 2000 issues which remain related to the Company's IT systems.
The program consists of the following phases: identifying Year 2000 application
issues, updating applications, identifying Year 2000 systems and operating
systems issues (such phases are complete), collecting manufacturer's compliance
statements, verifying solutions to Year 2000 issues, updating and/or patching
operating systems, updating firmware and phasing out unsupported hardware (such
phases are in process and scheduled to be completed in the first quarter of
fiscal 1999). As of October 1, 1998, the Company has spent approximately $15,000
of the currently estimated $30,000 total cost of the program. Costs incurred and
expected to be incurred consist primarily of the cost of Company personnel
involved in updating applications and operating systems and the costs of
software updates and patches (many of which are provided free of charge from the
vendors). Funds for the Year 2000 compliance program are expected to be provided
from available working capital. The Company has utilized the Company's internal
technical personnel, and intends to continue to use such personnel, to address
Year 2000 issues, rather than contract with third-party consultants.
Although the Company has not completed its survey of third parties with which it
has a material relationship, the majority of the Company's customers are
sophisticated IT vendors and users who are addressing their own Year 2000 issues
and the Company relies primarily on its technical personnel and internal IT
systems, rather than third party suppliers. As the Company's Year 2000
compliance program is on schedule to be completed in the first quarter of fiscal
year 1999, the Company has not formulated a most reasonably likely worst case
scenario or formulated a contingency plan should the program fail to be
completed by such date.
Significant uncertainty still exists as to the global implications of the Year
2000 issue. The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of ways.
Many companies (including customers of the Company, and customers or potential
customers of the Company's customers) are expending significant resources to
correct or patch their current hardware and software systems for Year 2000
compliance. Such expenditures may result in reduced funds available for the
Company's customers to pursue product development programs or IT systems
enhancements for which the Company's services would otherwise be utilized. Any
of the foregoing, including costs of defending and resolving Year 2000-related
disputes, reductions in development programs or IT systems enhancements by
customers and their customers or the failure of the Company to adequately
resolve internal Year 2000 compliance issues could result in a material adverse
effect on the Company's business, operating results and financial condition.
Certain Factors That May Affect Future Results, Financial Condition
and Market Price of Securities
Numerous factors may affect the Company's business and results of operations.
These factors include, but are not limited to, industry concentration and
dependence on large projects, fixed price contracts and other project risks,
ability to manage growth, variability of quarterly operating results, need to
attract and retain professional staff, rapid technological advances and risk of
targeting emerging technologies, dependence on key personnel, risks of system
interruption and security risks, and uncertainty related to the Year 2000
Compliance issues. The discussion below addresses some of these factors. For a
more thorough discussion of these and other factors that may affect the
Company's future results, see the "Item 1 - Business" of the Company's Annual
Report of Form 10-K for the year ended December 31, 1997 and the Company's
Registration Statement of From S-1 (File No. 333-21565).
Industry Concentration; Dependence on Large Projects. 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 IT 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.
14
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Fixed-Price Contracts and Other Project Risks. During 1997 and the
first nine months of 1998, approximately 20% and 13%, respectively, of the
Company's revenue was generated on a fixed price, fixed-delivery-schedule
("fixed price") basis, rather than on a time-and-materials basis. The Company's
failure to accurately estimate the resources required for a fixed price project
or its failure to complete its contractual obligations in a timely manner
consistent with the project plan upon which its fixed price contract is based
could have a material adverse effect on the Company's business, financial
condition and results of operations. In the past, the Company has found it
necessary to revise project plans after commencement of the project and commit
unanticipated additional resources to complete certain projects, which have
negatively affected the profitability of such projects. The Company may
experience similar situations in the future, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company may establish contract prices before the project design
specifications are finalized, which could result in a fixed price that proves to
be too low and therefore adversely affects the Company's business, financial
condition and results of operations.
Many of the Company's engagements involve projects which are critical
to the operations of its clients' businesses and which provide benefits that may
be difficult to quantify. The Company's failure to meet a client's expectations
in the performance of its services could damage the Company's reputation and
adversely affect its ability to attract new business, and may have a material
adverse effect upon its business, financial condition and results of operations.
The Company has undertaken, and may in the future undertake, projects in which
the Company guarantees performance based upon defined operating specifications
or guaranteed delivery dates. The Company has also undertaken projects in which
a material portion of total revenue is earned based upon meeting specified
delivery dates. Unsatisfactory performance or unanticipated difficulties or
delays in completing such projects may result in client dissatisfaction and a
reduction in payment to, or payment of damages by, the Company, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will be able to limit its liability to clients, including liability arising from
the Company's failure to meet clients' expectations in the performance of
services, through contractual provisions, insurance or otherwise.
Management of Growth. The Company's growth has placed significant
demands on its management and other resources. For example, the Company's staff
increased from 167 full-time employees at December 31, 1994 to 442 full-time
employees at September 30, 1998. In order to manage its growth effectively, the
Company will need 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.
15
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Recent Organization; Limited 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 Systems Incorporated ("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 1996 year-end audit. There
can be no assurance that the Company will be successful in taking control of
these functions from Pencom. The Company has also relied upon, and will continue
to rely upon, Pencom for certain legal services and recruiting functions. The
Company's management has only limited experience operating the Company as a
stand-alone company, separate and apart from Pencom. Pencom has no obligation to
provide financial or management assistance to the Company and has no plans to do
so. The inability of the Company to operate successfully as an entity
independent from Pencom would have a material adverse effect on the Company's
business, financial condition and results of operations.
Variability of Quarterly Operating Results. The Company's quarterly
revenue, expenses and operating results have varied significantly in the past
and are likely to vary significantly from quarter to quarter in the future. Such
quarterly fluctuations are 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. Other factors which
may effect operating results include customer budget cycles and customer
spending priorities such as the Year 2000 compliance issue. A high percentage of
the Company's operating expenses, particularly personnel and rent, are fixed in
advance of any particular quarter. For example, while the number of professional
staff the Company employs may be adjusted to reflect active projects, such
adjustments take time and the Company must maintain a sufficient number of
senior professionals to oversee existing client engagements and to focus on
securing new client engagements. As a result, unanticipated variations in the
number or progress toward completion of the Company's projects or in employee
utilization rates may cause significant variations in operating results in any
particular quarter and could result in adverse changes to the Company's
business, financial condition and results of operations. In the last quarter of
1998, revenues may be adversely impacted by the Company's lengthy sales cycle,
among other matters, which may cause the Company's revenues and earnings to be
below the expectations of securities analysts. 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.
Need to Attract and Retain Professional Staff. The Company's success
depends 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.
16
<PAGE>
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.
Changes in Senior Management. On August 31, 1998, the Company's Board
of Directors named Timothy D. Webb as president and Chief Executive Officer of
the Company. Webb succeeds Dr. W. Frank King who will continue to serve on PSW
Technologies, Inc. Board of Directors and as an advisor to the Company. In May,
1998, Patrick D. Motola resigned as Chief Financial Officer and was replaced by
Keith D. Thatcher (who had been serving as Vice President of Finance and
Treasurer of the Company). In addition, Brian E. Baisley, who had held the
position of Senior Vice President of Client Services, resigned in September,
1998. Baisley's position was not replaced and as a result, the business unit
vice presidents will report directly to the Chief Exectutive Officer. There can
be no assurances that such changes in the senior management of the Company will
not adversely affect the Company's results of operations or financial condition,
that the new members of the management team will succeed in their roles in a
timely or efficient manner or that they will be satisfactorily assimilated, or
that new and additional management responsibilities can be allocated effectively
among such executives. Failure by the Company to assimilate new executives, or
the failure of any such executive to perform effectively, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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 Timothy D. Webb, Keith D. Thatcher, James T. Kelsey, Michael V.
Jaggers, Brent R. Terry 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. 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 and results of operations.
17
<PAGE>
Potential Volatility of Stock Price. The market for securities of
early-stage and small capital stock companies has been highly volatile in recent
years as a result of factors often unrelated to a company's operations. In
addition, the Company believes factors such as quarterly variations in operating
results, announcements of technological innovations or new products or services
by the Company or its competitors, general conditions in the IT industry or the
industries in which the Company's clients compete and changes in earnings
estimates by securities analysts, could contribute to the volatility of the
price of the Company's Common Stock. These factors, as well as general economic
conditions such as recessions or changes in interest rates, could adversely
affect the market price of the Company's 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.
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 is 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.
Uncertainty Related to the Year 2000 Compliance Issues. Many older
computer systems and software products currently in use are coded to accept only
two digit entries in the date code field. These date code fields will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, in less than 15 months, computer systems and/or software
used by many companies will need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty still exists as to the global implications
of the Year 2000 issue. The Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues in a
variety of ways. Many companies (including customers of the Company, and
customers or potential customers of the Company's customers) are expending
significant resources to correct or patch their current hardware and software
systems for Year 2000 compliance. Such expenditures may result in reduced funds
available for the Company's customers to pursue product development programs or
IT systems enhancements for which the Company's services would otherwise be
utilized. Any of the foregoing, including costs of defending and resolving Year
2000-related disputes, reductions in development programs or IT systems
enhancements by customers and their customers or the failure of the Company to
adequately resolve internal Year 2000 compliance issues could result in a
material adverse effect on the Company's business, operating results and
financial condition.
18
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PART II -- OTHER INFORMATION
Item 2. Use of Proceeds
On June 5, 1997 (the "Effective Date"), the Company's Registration Statement on
Form S-1 (Registration No. 333-21565) relating to its initial public offering
(the "IPO") was declared effective by the Securities and Exchange Commission and
the offering of up to 3,277,500 shares of the Company's Common Stock covered by
such Registration Statement commenced. The IPO, which has been completed, was
managed by Alex, Brown & Sons Incorporated and J.P. Morgan & Co., as the
representatives of the several underwriters (the "Underwriters") of the IPO. All
of the securities registered were sold for the account of the Company at an
aggregate offering price of $29.5 million. Of the shares of Common Stock sold by
the Company, 2,850,000 shares were sold on June 5, 1997, and 427,500 shares
(which were subject to an overallotment option granted by the Company to the
Underwriters) were sold on July 2, 1997.
In connection with the IPO, total expenses of approximately $3.8 million were
incurred by the Company, which expenses consisted of: (i) $2.1 million
representing underwriting discounts and commissions paid to the Underwriters;
and (ii) other offering expenses, including without limitation, attorney's fees,
accountants' fees, printing costs and filing fees of approximately $1.7 million.
Of the other offering expenses, $101,000 were direct or indirect payments to
directors or officers of the Company or their associates or to persons owning
ten percent (10%) or more of any class of equity securities of the Company or to
affiliates of the Company. The net offering proceeds of such shares, after
deducting such total expenses, was approximately $25.7 million, of which $3.0
million was used to repay indebtedness of the Company, $654,000 was used to
satisfy certain federal income tax obligations of the Company, $1.4 million was
used to pay a dividend to the Company's stockholders of record just prior to the
IPO in respect of the estimated tax that such stockholders are required to pay
on the estimated 1997 taxable income allocated to them. During the nine months
ended September 30, 1998, the Company used $1.4 million of the proceeds to
acquire property and equipment and $2.2 million to fund working capital
requirements. The remaining $17.1 million is invested in short-term, interest
bearing municipal obligations, corporate securities, and money market funds
pending application of such proceeds by the Company. Other than the amounts paid
as a dividend to the stockholders of record just prior to the IPO, no other net
proceeds were paid directly or indirectly to any directors or officers of the
Company or their associates or to persons owning ten percent (10%) or more of
any class of equity securities of the Company or to affiliates of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
Number Description
10.1 Employment Agreement dated August 28, 1998 between the Registrant and
Timothy D. Webb.
27.1 Financial Data Schedule
- ---------
(b) Reports on Form 8-K
None.
19
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSW TECHNOLOGIES, INC.
(Registrant)
Date: November 13, 1998 /s/ Timothy Webb
-----------------------
Timothy Webb
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1998 /s/ Keith Thatcher
-------------------------
Keith D. Thatcher
Vice President of Finance, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
Date: November 13, 1998 /s/ Kasaundra Smith
-------------------------
Kasaundra L. Smith
Financial Reporting and Budgeting Manager
(Principal Accounting Officer)
20
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EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (this"Agreement") is made and entered into as of
August 28, l998, by and between PSW Technologies, Inc., a Delaware corporation
(the"Company"), and Timothy Webb, an individual (the"Executive").
RECITALS
WHEREAS, the Company desires to hire the Executive and the Executive
desires to become employed by the Company; and
WHEREAS, the Company and the Executive have determined that it is in their
respective best interest to enter into this Agreement on the terms and
conditions as set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and promises contained herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. EMPLOYMENT TERMS AND DUTIES
1.1 Employment. The Company hereby employs the Executive, and the Executive
hereby accepts employment by the Company, upon the terms and conditions set
forth in this Agreement.
1.2 Duties. The Executive shall serve as President and Chief Executive Officer.
The Executive shall perform all reasonable duties assigned by the Company's
Board of Directors (the"Board"). The Company agrees to nominate for election or
to appoint Executive to the Board at the earliest possible date and at each
annual meeting of the stockholders during his employment. Executive agrees to
serve on the Board.
During the term of his employment hereunder, the Executive shall devote his
full working time and efforts to the performance of his duties and the
furtherance of the interests of the Company and shall not be otherwise employed.
Notwithstanding the above, Executive may serve as a director or trustee of other
organizations, or engage in charitable, civic, and/or governmental activities
provided that such service and activities do not prevent Executive from
performing his duties under this Agreement and further provided that Executive
obtains written consent for all such activities from the Board, which consent
will not be unreasonably withheld. Executive may engage in personal activities,
including, without limitation, personal investments (subject to Section 3.1.1),
provided that such activities do not interfere with his performance of duties
hereunder.
1.3 Term. Subject to the provisions of Section 1.5 below, the initial term of
employment of the Executive under this Agreement shall commence on August 28,
1998, (the"Hire Date") and shall continue for a period of six (6) years (the
"Initial Term"). This Agreement may be renewed by mutual agreement of the
parties for additional consecutive one (1) year periods (the"Renewal Term," and
together with the Initial Term, the"Employment Term").
1.4 Compensation and Benefits.
1.4.1 Base Salary. In consideration of the services rendered to the Company
hereunder by the Executive and the Executive's covenants hereunder, the Company
shall, during the Employment Term, pay the Executive a salary at the annual rate
of Three Hundred Twenty Five Thousand Dollars and 00/100 ($325,000.00) (the
"Base Salary"), less statutory deductions and withholdings, payable in
accordance with the Company's regular payroll practices. The Base Salary shall
be increased annually by four percent (4%). At least annually, the Board or a
committee thereof, will review the Base Salary and the options granted hereunder
for competitiveness and appropriateness in the industry, and may further
increase Base Salary and/or award a bonus to Executive.
1.4.2 Benefits Package. In addition to the Base Salary, during the Employment
Term, the Executive shall be entitled to receive such employee benefits and
holidays as may be in effect from time to time as are afforded to other
executives of the Company. The Company also agrees to indemnify Executive and to
provide Executive with liability insurance in accordance with Company policy and
to the same extent that it provides indemnification and liability insurance to
comparable directors and/or officers.
1.4.3 Vacation. The Executive shall be entitled to four (4) weeks' vacation each
fiscal year.
1.4.4 Expenses. The Company shall, upon receipt from the Executive of supporting
receipts to the extent required by applicable income tax regulations and the
Company's reimbursement policies, reimburse the Executive for all out-of-pocket
business expenses reasonably incurred by the Executive in connection with his
employment hereunder.
1.5 Stock Option.
1.5.1 On the Hire Date the Company shall grant to Executive, in accordance with
the terms of the PSW Technologies, Inc. 1996 Stock Issuance Plan (the"Plan"),
an option to purchase a total of Five Hundred Thousand (500,000) shares of the
Company's common stock (the"Option"). The Option shall vest over six (6) years
in accordance with the following vesting schedule: (i) One Hundred Thousand
(100,000) shares upon Executive's completion of six (6) months' employment with
the Company; (ii) an additional One Hundred Thousand (100,000) shares upon
Executive's completion of two (2) years' employment with the Company; (iii) an
additional One Hundred Thousand (100,000) shares upon Executive's completion of
three (3) years' employment with the Company; (iv) an additional Twenty Five
Thousand (25,000) shares upon Executive's completion of four (4) years'
employment with the Company; (v) an additional Seventy Five Thousand (75,000)
shares upon Executive's completion of five (5) years' employment with the
Company; and (vi) an additional One Hundred Thousand (100,000) shares upon
Executive's completion of six (6) years' employment with the Company. The Option
granted to Executive under this Section shall be an Incentive Stock Option as
defined under Section-422 of the Internal Revenue Code of 1986, as amended, up
to the permitted limitation as of the Hire Date and any balance shall be
reflected in a non-qualified option.
1.5.2 All or a portion of the Option may be immediately exercisable at the
discretion of Executive upon the delivery of cash equal to the exercise price of
those shares being exercised, subject to the limitations on exercising incentive
stock options, which will be exercisable to the maximum extent allowable as of
the Hire Date over the term of the vesting schedule. All exercised shares shall
be subject to repurchase rights in favor of the Company until the options
pursuant to which the shares were issued have otherwise vested pursuant to the
terms of Section 1.5.1. Subject to Section-1.7.2, in the event Executive's
employment is terminated, with or without cause, other than a termination
arising out of a Change in Control as defined in Section 1.5.3 of this
Agreement, the Company shall have fifteen (15) days after the last date of
Executive's employment to notify Executive of its intention to repurchase
Executive's unvested shares. Executive shall deliver all of the unvested shares
purchased by the Company, free of all encumbrances, within thirty (30) days of
receipt of notice of the Company's intention to repurchase the unvested shares.
The Company shall pay Executive the exercise price (subject to adjustments for
stock splits, reclassifications and the like) for the unvested shares.
1.5.3 In the event the Company is acquired by merger or asset sale or there
should be certain other changes in control or ownership of the Company, the
following provisions shall govern any accelerated vesting of the Option either
at the time of such acquisition or change in control or upon the subsequent
termination of Executive's employment under certain circumstances.
(i) To the extent that Option is, in connection with a Change in Control, to be
assumed or replaced with a comparable option, the Option shall not accelerate
(and repurchase rights will not lapse) upon the occurrence of that Change in
Control, and the Option shall accordingly continue, over Executive's period of
Service after the Change in Control, to become exercisable for the Option Shares
in one or more installments in accordance with Section 1.5.1. However,
immediately upon an Involuntary Termination of Executive's employment within
twelve (12) months following such Change in Control, the Option (or any
replacement grant), to the extent outstanding at the time but not otherwise
fully vested, shall automatically accelerate and become immediately exercisable
(or repurchase rights shall lapse) according to the vesting schedule set forth
in Section-1.5.1 to the same extent as if Executive had remained employed under
the Agreement for three (3) years following the date of the Involuntary
Termination. The Option shall remain exercisable until the earlier of (a) the
Option Term or (b) the expiration of the one (1) year period measured from the
date of such Involuntary Termination. The determination of option comparability
shall be made by the Plan Administrator, and its determination shall be final,
binding, and conclusive.
(ii) To the extent the Option is not assumed or replaced with a comparable
option in connection with a Change in Control, all vesting of the Option shall
be deemed to have accelerated and all repurchase rights for unvested, exercised
shares shall be deemed to have lapsed in full immediately prior to such Change
in Control. (iii) For purposes of this Section, the following definitions shall
be in effect:
(a) An Involuntary Termination shall mean the termination of Executive's Service
by reason of:
1. Involuntary dismissal or discharge by the Company (or Parent or Subsidiary
employing Executive) for reasons other than for Cause, or
2. Executive's voluntary resignation following (a) a change in Executive's
position with the Company (or Parent or Subsidiary employing Executive)
which materially reduces Executive's level of responsibility, (b) a
reduction in Executive's level of compensation (including base salary,
fringe benefits and participation in any corporate-performance based bonus
or incentive programs) or (c) a relocation of Executive's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected by the Company without Executive's
consent, and
(b) a Change in Control shall be deemed to occur in the event of a change in
ownership or control of the Company effected through any of the following
transactions:
1. the acquisition, directly or indirectly, by any person or related group of
persons (other than the Company or a person that directly or indirectly
controls, or is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Company's outstanding securities pursuant to a tender or exchange offer
made directly to the Company's stockholders; or
2. the sale, transfer or other disposition of all or substantially all of the
Company's assets; or
3. a change in the composition of the Board over a period of thirty-six (36)
consecutive months or less such that a majority of the Board members
ceases, by reason of one or more contested elections for Board membership,
to be comprised of individuals who either (i) have been Board members
continuously since the beginning of such period or (ii) have been elected
or nominated for election as Board members during such period by at least a
majority of the Board members described in clause (i) who were still in
office at the time such election or nomination was approved by the Board;
or
4. the consummation of a merger or consolidation of the Company with or into
another entity or any other corporate reorganization, if more than fifty
percent (50%) of the combined voting power of the continuing or surviving
entity's securities outstanding immediately after such merger,
consolidation or other reorganization is owned by persons who were not
stockholders of the Company immediately prior to such merger, consolidation
or other reorganization.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.
(iv) The provisions of Section 1.5.3(i) shall govern the period for which the
Option is to remain exercisable following the Involuntary Termination of
Executive's Service within twelve (12) months after a Change in Control and
shall supersede any provisions to the contrary in the Plan.
1.6 Termination. The Executive's employment and this Agreement (except as
otherwise provided hereunder) shall terminate upon the occurrence of any of the
following, at the time set forth therefor (the"Termination Date"):
1.6.1 Death or Disability. Immediately upon the death of the Executive or the
determination by the Board that the Executive has ceased to be able to perform
the essential functions of his duties, with or without reasonable accommodation,
for a period of not less than ninety (90) days, due to a mental or physical
illness or incapacity ("Disability") (termination pursuant to this Section 1.6.1
being referred to herein as termination for"Death or Disability"); or
1.6.2 Voluntary Termination. Thirty (30) days following the Executive's written
notice to the Company of termination of employment; provided, however, that the
Company may waive all or a portion of the thirty (30) days' notice and
accelerate the effective date of such termination (and the Termination Date)
(termination pursuant to this Section 1.6.2 being referred to herein as
"Voluntary" termination); or
1.6.3 Termination For Cause. Immediately following notice of termination for
"Cause" (as defined below), specifying such Cause, given by the Company
(termination pursuant to this Section 1.6.3 being referred to herein as
termination for"Cause"). As used herein,"Cause" means termination based on (i)
the Executive's material breach of this Agreement after receiving written
notification from the Board and following a reasonable cure period, (ii)-the
Executive's conviction or plea of "guilty" or"no contest" to (x) any crime
constituting a felony in the jurisdiction in which committed, (y) any crime
involving moral turpitude (whether or not a felony), or (z) any other violation
of criminal law involving dishonesty or willful misconduct that materially
injures the Company (whether or not a felony), (iii) substance abuse by the
Executive that in any manner materially interferes with the performance of his
duties under this Agreement, (iv) the failure or refusal of the Executive to
follow the lawful and proper directives of the Board that are within the scope
of thc Executive's duties set forth in Section 1.2 above and that is not
corrected within fifteen (15) days after written notice from the Board to the
Executive identifying such failure or refusal, (v) willful malfeasance or gross
misconduct by the Executive that discredits or damages the Company including,
without limitation, any breach of his obligations under Section 2 or Section 3
below, (vi) indictment of the Executive for a felony violation of the federal
securities laws or (vii) the Executive's chronic absence from work for reasons
other than illness; or
1.6.4 Termination Without Cause. Thirty (30) days following notice of
termination without Cause given by the Company; provided, however, that during
any such thirty (30) day notice period, the Company may suspend, with no
reduction in pay or benefits, the Executive from his duties as set forth herein
(including, without limitation, the Executive's position as a representative and
agent of the Company) (termination pursuant to this Section 1.6.4 being referred
to herein as termination "Without Cause"). 1.6.5 Other Remedies. Termination
pursuant to Section 1.6.3 above shall be in addition to and without prejudice to
any other right or remedy to which the Company may be entitled at law, in
equity, or under this Agreement.
1.7 Severance and Termination.
1.7.1 Voluntary Termination, Termination for Cause, Termination for Death or
Disability. In the case of a termination of Executive's employment hereunder for
Death or Disability in accordance with Section 1.6.1 above, or Executive's
Voluntary termination of employment hereunder in accordance with Section 1.6.2
above, or a termination of the Executive's employment hereunder for Cause in
accordance with Section 1.6.3 above, (i) the Executive shall not be entitled to
receive payment of, and the Company shall have no obligation to pay, any
severance or similar compensation attributable to such termination, other than
Base Salary earned but unpaid, accrued but unused vacation to the extent allowed
by the Company's policies, vested benefits under any employee benefit plan, and
any unreimbursed expenses pursuant to Section 1.4.5 hereof incurred by the
Executive as of the termination date, and (ii) the Company's obligations under
this Agreement shall immediately cease.
1.7.2 Termination Without Cause. In the case of a termination of the Executive's
employment hereunder Without Cause in accordance with Section 1.6.4 above, the
Company shall pay the Executive (i) an amount equal to twelve (12) months'
salary if the termination occurs during the first eighteen (18) months of the
Initial Term; (ii) an amount equal to three (3) months' salary if the
termination occurs after the first eighteen (18) months of employment but prior
to the expiration of the Initial Term (hereinafter the"Severance Payment"), in
each case payable at the times and subject to the tax withholding specified in
Section 1.4.1 above; and (iii)-unvested shares due to vest on the next scheduled
vesting date shall accelerate and shall become fully vested and any repurchase
rights in such shares (up to the next vesting date), shall immediately lapse in
full. The Company shall provide Executive with health and welfare benefits equal
to and under the same terms as such benefits were provided to Executive
immediately prior to the Termination Date, or pay premiums for such benefits
required of Executive under COBRA, 29 U.S.C. S 1161, et seq. (hereinafter
"Benefit Continuation"), throughout any period in which Executive receives
Severance Payment under this Section or until Executive receives comparable
benefits from any other source, whichever occurs first. Nothing contained herein
shall interfere with Executive's right to purchase continuation coverage under
COBRA. In the event of an Involuntary Termination under Section 1.5.3(iii)(a) of
this Agreement, Executive shall be entitled to the Severance Payment and Benefit
Continuation set forth in this paragraph in addition to the accelerated vesting
described in Section 1.5.3(i). The Company's obligation to pay and the
Executive's right to receive the Severance Payment shall cease in the event of
the Executive's breach of his obligations under Section 2 or Section 3 below.
1.7.3 Offset Against Severance. During the period in which the Executive is
receiving Severance Payments from the Company (the"Severance Period"), such
Severance Payments to be provided to the Executive shall be reduced on a
dollar-for-dollar basis by any wages or other compensation actually received by
the Executive during the Severance Period, regardless of whether such wages or
compensation are from employment, consulting, or other gainful activities. The
Executive promises and agrees to promptly advise the Company of the amount and
source of any wages or other compensation received by him, from any source,
during the Severance Period. 1.8 Location. Unless Executive otherwise consents
in writing, the principle place of employment of Executive will be the Austin,
Texas metropolitan area ("Austin") in office space to be provided by the
Company. The Executive's failure to relocate shall constitute a termination
Without Cause as defined in Section-1.6.4 hereof and entitle Executive to the
Severance Pay and vesting as described in Section-1.7.2.
2. CONFIDENTIAL INFORMATION - NON-DISCLOSURE
2.1 Recognition of the Company's Rights: Nondisclosure. Executive understands
that the Company possesses Proprietary Information.
2.1.1 "Proprietary Information" shall mean Information (as defined below) of
value to the Company that is created, invented, developed, prepared, conceived,
reduced to practice, made, suggested, discovered, received, or learned by the
Company including, for example, but not limited to, any trade secret, know-how,
show-how and other proprietary information, irrespective of (a) whether in
tangible or non-tangible form, (b) whether patentable or copyrighted or subject
to confidentiality, (c) its media, (d) whether solely or jointly created,
invented, developed, prepared, conceived, reduced to practice, made, suggested,
discovered, received, or learned by Executive and/or one or more other persons,
or (e) whether created, invented, developed, prepared, conceived, reduced to
practice, made, suggested, discovered, received, or learned before, during, or
after the term of this Agreement. Proprietary Information does not include
Information (as defined below) that Executive develops entirely on his own time
without using the Company's equipment, supplies, facilities, Proprietary
Information, or trade secret information except for such Information that either
relates at the time of conception or reduction to practice of the Information to
the Company's business, or actual or demonstrably anticipated research or
development of the Company, or results from any work performed by the Executive
for the Company.
2.1.2 "Information" shall mean any list, schematic, diagram, circuitry,
technology, inventory, invention, idea, discovery, improvement, design, concept,
technique, algorithm, formula, method, process, configuration, tooling,
mechanism, manufacture, assembly, installation, model, apparatus, product,
device, system, network, data, plan, library, work of authorship, file, media,
record, report, copy, pictorial work, graphic work, audiovisual work, hardware,
firmware, computer interface (including for example but not limited to
programming interfaces), computer language, computer protocol, computer software
program or application (irrespective of whether source code or object code),
flow chart, blueprint, drawing, photograph, chart, graph, notebook, book,
computer disk, tape, storage media, printout, sound recording, note, memorandum,
specification, paper, document (irrespective of whether printed, typewritten,
handwritten or otherwise), information, material, account, business plan,
business operation, business method, business practice, business strategy,
research, development, marketing, revenue, sale, forecast, budget, finance,
license, price, cost, salary, compensation, knowledge about suppliers, knowledge
about available skills, and knowledge about actual and/or prospective employees,
clients, and/or customers (including for example but not limited to their names,
addresses, and telephone numbers). 2.1.3"Non-party Information" shall mean
Information discovered, received, or learned by the Company from non-parties
with respect to which the Company is subject to a duty to maintain
confidentiality or to use only for certain limited purposes.
2.2 The Executive Covenant. In consideration of the Company's entering into this
Agreement, and providing the Base Salary and other benefits to the Executive,
the receipt and sufficiency of which is hereby acknowledged by the Executive,
the Executive covenants as follows:
2.2.1 Non-Disclosure of Proprietary Information and Non-Party Information. At
all times during the term of this Agreement and for three (3) years following
the Termination Date, Executive shall hold all Proprietary Information and
Non-party Information in strictest trust and confidence and shall neither
disclose (to anyone other than the Company personnel having a need to know such
Information in connection with their activities for the Company) nor use (except
insofar as required by Executive's activities for the Company under this
Agreement) any Proprietary Information or any Non-party Information, unless: (a)
Executive is expressly authorized in writing to the contrary by a duly
authorized officer of the Company; (b) absent breach or violation of this
Agreement, such Information is or becomes generally known to the public or
available to the public, as evidenced by a printed publication or other equally
conclusive evidence; (c) absent breach or violation of this Agreement, such
Information is rightfully received absent any confidentiality obligation by
Executive from a non-party outside of the Company, as evidenced by a dated and
witnessed writing prepared in the normal course of business or other equally
conclusive evidence; or (d) is required to be disclosed pursuant to a valid
order by a court or other governmental body or otherwise required by law,
provided that Executive informs the Company immediately upon Executive's receipt
of notice, in any form, that disclosure pursuant to this section may be required
so that the Company may oppose any compelled disclosure of its Proprietary
Information. Executive further agrees not to disclose any Proprietary
Information pursuant to this section unless and until he is informed that the
Company will not oppose such disclosure or that the Company's attempt to oppose
such disclosure has been denied.
2.2.2 Trade Secrets. All trade secrets of the Company will be entitled to all of
the protection and benefits under all applicable federal and state trade secrets
law. If any information that the Company deems to be a trade secret is found by
a court of competent jurisdiction not to be a trade secret for purposes of this
Agreement, such information will, nevertheless, be considered Proprietary
Information for purposes of this Agreement. The Executive hereby waives any
requirement that the Company submit proof of the economic value of any trade
secret or post a bond or other security.
2.3 Assignment of Inventions.
2.3.1 Definitions.
(i)"Moral Rights" shall mean (a) any right of paternity or integrity, (b) any
right to claim authorship or require authorship identification, (c) any right to
object to distortion, mutilation, or other modification of, or other derogatory
action in relation to, a work of authorship, and (d) any similar right existing
under judicial or statutory law of any country or under any treaty, irrespective
of whether such right is generally referred to as a"moral right."
(ii)"Proprietary Right" shall mean any patent, trade secret, confidentiality
protection, know-how right, show-how right, mask work right, copyright (e.g.,
including but not limited to any Moral Right), and any other intellectual
property protection and intangible interests and legal rights of exclusion, of
any and all countries, including for example but not limited to (a) any person's
publicity or privacy right, (b) any utility model or application therefor, (c)
any industrial model or application therefor, (d) any certificate of invention
or application therefor, (e) any application for patent, including, for example,
but not limited to, any provisional, divisional, reissue, reexamination or
continuation application, (f) any substitute, renewal or extension of any such
application, and (g) any right of priority resulting from the filing of any such
application.
(iii) "The Company Inventions" shall mean (a) any and all Proprietary
Information that is created, invented, developed, prepared, conceived, reduced
to practice, made, suggested, discovered, received, or learned by Executive,
either alone or jointly with one or more other persons, during the term of this
Agreement, and (b) any and all Proprietary Rights that may be available in such
Proprietary Information or result therefrom. (iv) Executive may develop and/or
review business plans, provided (a) he does so entirely on his own time and
without using the Company's equipment, supplies, facilities, Proprietary
Information, or trade secret information, and (b) that any such business plans
do not conflict with any of Executive's obligations under Section 3. Business
plans developed or reviewed by Executive in a manner consistent with this
Section shall be excluded from the definition of Company Inventions.
2.3.2 Executive's Covenant. Executive does hereby, without reservation,
irrevocably:
(i) sell, assign, grant, transfer, and convey to the Company (and the Company's
successors and assigns): Executive's entire right, title, and interest (present
and future and throughout the world) in and to all Company Inventions; provided
however that, to the extent that any one or more of the Company Inventions
includes a work of authorship created by Executive (solely or jointly with
others), each such work of authorship shall automatically be deemed to be
created as a"work made for hire" (as that term is defined in the United States
Copyright Act (17 U.S.C. Section S-101)) that is owned solely by the Company (as
between Executive and the Company);
(ii) acknowledge and agree that, as between the Company and Executive, (i) all
the Company Inventions shall be the sole and exclusive property of the Company,
its successors and assigns, and (ii) the Company, its successors and assigns
shall be the sole and exclusive owner of all the Company Inventions throughout
the world;
(iii) waive and quitclaim to the Company any and all claims, of any nature
whatsoever, that Executive has now or may hereafter have for infringement or
violation of any one or more of the Company Inventions;
(iv) consent to any and all use of names, likenesses, voices, and similar
aspects of all the Company Inventions or related to or associated with all the
Company Inventions;
(v) authorize the Company (and its successors, assigns, nominees,
representatives, and designees) to apply (in the Company's own name) for any and
all patents (and similar non-U.S. rights) that may be available in (or result
from) all the Company Inventions, and to claim any and all rights of priority
without further authorization from Executive so that such patents issue in the
name of the Company (or its successors or assigns);
(vi) represent, warrant, and covenant that Executive shall never assert any
Moral Right in any one or more of the Company Inventions;
(vii) forever waive all Moral Rights in the Company Inventions; (viii)
represent, warrant, and covenant that Executive shall disclose and deliver,
fully and in writing, to the Company, each and every Company Invention promptly
after such Company Invention is created, invented, developed, prepared,
conceived, reduced to practice, made, suggested, discovered, received, or
learned by Executive; and
(ix) represent, warrant, and covenant that Executive shall (at the request of
the Company, or any of its successors, assigns, nominees, representatives, or
designees) in every proper way cooperate and do everything (at the Company's
sole expense for Executive's reasonable actual costs, but without additional
charge to the Company) that the Company (or any one or more of its successors,
assigns, nominees, representatives, or designees) may reasonably consider
necessary or appropriate to assist the Company (and its successors, assigns,
nominees, representatives, and designees) to prepare and make filings in any and
all countries to apply for, prosecute, register, evidence, defend, obtain, hold,
secure, vest title to, protect, perfect, maintain, uphold, and enforce any and
all Proprietary Rights that may be available in (or result from) the Company
Inventions, including for example but not limited to: communicating to the
Company (and its successors, assigns, nominees, representatives, and designees)
any Information relating to conception or reduction to practice or prosecution
of any one or more of such Proprietary Rights; testifying and rendering prompt
assistance and cooperation in any and all legal proceedings (e.g., including but
not limited to any opposition, cancellation proceeding, interference proceeding,
priority contest, public use proceeding, reexamination proceeding, and court
proceeding) involving any one or more of such Proprietary Rights; and executing,
verifying and delivering any and all assignments, oaths, declarations, powers of
attorney, and other instruments and documents. If Executive fails or refuses to
execute any such assignment, oath, declaration, power of attorney, instrument,
or document, Executive hereby designates and appoints the Company (and its
successors and assigns) as Executive's true and lawful agent and
attorney-in-fact (such agency and power of attorney being irrevocable by
Executive and coupled with an interest in favor of the Company and its
successors and assigns), with full power of substitution, to act for Executive
and in Executive's behalf to do any lawfully permitted act in furtherance of the
purposes of the immediately preceding sentence (e.g., including but not limited
to executing, verifying, and filing such assignments, oaths, declarations,
powers of attorney, and other instruments and documents) in Executive's name and
stead and on behalf of and for the benefit of the Company and its successors and
assigns, with the same legal force and effect as if Executive performed such
act, irrespective of whether in Executive's name or the Company's name or
otherwise.
3. NON-COMPETITION AND NON-INTERFERENCE
3.1 Covenant of the Executive. In consideration of the Company's entering into
this Agreement, and providing the Base Salary, Option, and other benefits to the
Executive, and in consideration of the Executive's receipt of and/or continued
exposure to the Company's Proprietary Information, and the Executive's receipt
of specialized training, the receipt and sufficiency of which are hereby
acknowledged by Executive, the Executive covenants as follows:
3.1.1 Non-Competition. Executive hereby agrees that during the Employment Term
and for a period of one (1) year following the Termination Date, for any reason,
Executive will not, directly or indirectly (i)-engage in Restricted Activities
in the State of Texas or in any other State of the United States, or in any
other country in the world, where the Company engages in business, or proposes
to engage in business on the Termination Date, or (ii) participate in the
ownership, management, operation, financing, or control of, or be employed by or
consult for or otherwise render services to, a Restricted Business located in
the State of Texas or in any other State of the United States or in any other
country in the world, where the Company conducts or proposes to conduct business
on the Termination Date. Notwithstanding the foregoing, Executive is permitted
to own up to 5% of any class of securities of any corporation which is traded on
a national securities exchange or through Nasdaq.
(i) Restricted Activities shall mean shall mean (A)-the Company's
business as of the date of termination and/or (B)-designing,
developing, manufacturing, marketing, or selling products or
services which directly compete with business, products and/or
services of the Company and/or its subsidiaries as of the
Termination Date.
(ii) Restricted Business shall mean any person, corporation, firm,
company (or a division or group thereof), partnership,
proprietorship, or other business entity which designs, develops,
manufactures, markets, or sells products or services which
directly compete with the business, products, and/or services of
the Company and/or its subsidiaries as of the Termination Date.
3.1.2 No Diversion of Others. During the Employment Term and for a period of two
(2) years following the Termination Date, for any reason, the Executive shall
not, either for himself or for any other person, firm, corporation, or other
entity, directly or indirectly, or by action in concert with others:
(i) individually or on behalf of any other person, corporation, firm,
or other entity, solicit or encourage any employee of the Company
or any subsidiary or affiliate of the Company to terminate his or
her employment with the Company or such subsidiary or affiliate,
without the express prior written consent of the Company
(Executive's employment by a company or other entity that
recruits and/or hires Company employees will not constitute a
breach of this Section provided (a) Executive's employment is
permitted under Section 3.1.1, (b) Executive does not breach the
obligations set forth in this Section, and (c) Executive is
completely sealed off from and has no involvement whatsoever in
the recruitment or hiring process); or
(ii) take away or attempt to take away, or solicit or attempt to
solicit, any existing or Potential Customer (defined below) of
the Company (whether or not such customer is actually a customer
of the Company as of the date hereof, including without
limitation any customer solicited by the Executive or which
became known by the Executive prior to the date hereof) with the
purpose of obtaining such person as an employee or customer for a
business competitive with the Company's business. For purposes of
this Section, Potential Customer means any company or entity
actually solicited by the Company as of the Termination Date.
For purposes of this Agreement, "affiliate" shall mean a corporation or other
legal entity in common control with the Company.
3.1.3 Organizing Competitive Business. Without limiting any of the other
provisions contained in this Section 3, during the Employment Term and any
period during which Executive receives any Severance Payment, the Executive
shall not undertake planning for or organization of any business activity
competitive with the business of the Company, or conspire with agents,
employees, consultants, or other representatives of the Company for the purpose
of organizing any such competitive business activity.
4. INJUNCTIVE RELIEF AND ADDITIONAL REMEDY
The Executive acknowledges and agrees that any breach of the terms of Sections 2
or 3 above would result in irreparable injury and damage to the Company for
which the Company would have no adequate remedy at law; the Executive therefore
also acknowledges and agrees that in the event of such breach or any threat of
breach, the Company shall be entitled to an immediate injunction and restraining
order to prevent such breach and/or threatened breach and/or continued breach by
the Executive and/or any and all persons and/or entities acting for and/or with
the Executive, without having to prove damages, in addition to any other
remedies to which the Company may be entitled at law or in equity. The terms of
this paragraph shall not prevent the Company from pursuing any other available
remedies for any breach or threatened breach hereof, including but not limited
to the recovery of damages from the Executive.
5. REPRESENTATIONS AND WARRANTIES BY THE EMPLOYEE
The Executive represents and warrants to the Company that (i) this Agreement is
valid and binding upon and enforceable against him in accordance with its terms,
(ii) the Executive is not bound by or subject to any contractual or other
obligation that would be violated by his execution or performance of this
Agreement, including, but not limited to, any non-competition agreement
presently in effect, and (iii) the Executive is not subject to any pending or,
to the Executive's knowledge, threatened claim, action, judgment, order, or
investigation that could adversely affect his ability to perform his obligations
under this Agreement or the business reputation of the Company.
6. SURVIVAL OF CERTAIN RIGHTS AND OBLIGATIONS
Sections 1.7, 2 and 3 above shall survive any termination of this Agreement and
continue in full force and effect as is necessary or appropriate to enforce the
covenants and agreements of each party. The existence of any claim or cause of
action by the Executive against the Company, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement by the
Company of the covenants and agreements of Sections 2 and 3 above.
7. CHANGE IN CONTROL BENEFIT LIMIT
7.1 Benefit Limit. The aggregate Present Value (measured as of the Change in
Control) of the benefits to which Executive becomes entitled under this
Agreement either at the time of the Change in Control or at the time of his
subsequent termination of employment (namely, the salary continuation payments
under Section 1.6 and the Option Parachute Payment attributable to his
accelerated options) will in all events be limited to the amount (the"Benefit
Limit") which yields Executive the greatest after-tax amount payable to him
under this Agreement after taking into account the excise tax (if any) imposed
under Code Section 4999 ) on the payments and benefits which are provided
Executive under this Agreement or which constitute Other Parachute Payments.
7.2 Definitions For purposes of applying Code Sections 280(G) and 4999 and the
Treasury Regulations thereunder to determine the Benefit Limit in effect under
this Section 7.1, the following definitions shall be in effect:
Code means the Internal Revenue Code of 1986, as amended from time to time.
Option Parachute Payment means, with respect to any of Executive's options
accelerated pursuant to this Agreement, the portion of that option deemed to be
a parachute payment under Code Section 280G and the Treasury Regulations issued
thereunder. The portion of such Option which is categorized as an Option
Parachute Payment will be calculated in accordance with the valuation provisions
established under Code Section 280G and the applicable Treasury Regulations and
will include an appropriate dollar adjustment to reflect the lapse of
Executive's obligation to remain in the Company's employ as a condition to the
vesting of the accelerated installment. In no event, however, will the Option
Parachute Payment attributable to any accelerated option (or accelerated
installment) exceed the spread (the excess of the fair market value of the
accelerated option shares over the option exercise price payable for those
shares) existing at the time of acceleration.
Other Parachute Payment means any payment in the nature of compensation (other
than the benefits to which Executive becomes entitled under this Agreement)
which are made to him in connection with the Change in Control and which
accordingly qualify as parachute payments within the meaning of Code Section
280G(b)(2) and the Treasury Regulations issued thereunder.
Parachute Payment means any payment or benefit provided Executive under this
Agreement (other than the Option Parachute Payment) which is deemed to
constitute a parachute payment within the meaning of Code Section 280G(b)(2) and
the Treasury Regulations issued thereunder.
Present Value means the value, determined as of the date of the Change in
Control, of any payment in the nature of compensation to which Executive becomes
entitled in connection with the Change in Control or the subsequent termination
of his employment, including (without limitation) the Option Parachute Payment
attributable to the accelerated vesting of his options and any additional
benefits to which Executive becomes entitled under this Agreement. The Present
Value of each such payment shall be determined in accordance with the provisions
of Code Section 280G(d)(4), utilizing a discount rate equal to one hundred
twenty percent (120%) of the applicable Federal rate in effect at the time of
such determination, compounded semi-annually to the effective date of the Change
in Control.
7.3 Resolution Procedure. In the event there is any disagreement between
Executive and the Company as to whether one or more payments to which Executive
becomes entitled in connection with either the Change in Control or his
subsequent termination of employment constitute Parachute Payments, Option
Parachute Payments or Other Parachute Payments or as to the determination of the
Present Value thereof, such dispute will be resolved as follows:
(i) In the event temporary, proposed or final Treasury Regulations in
effect at the time under Code Section 280G (or applicable
judicial decisions) specifically address the status of any such
payment or the method of valuation therefor, the characterization
afforded to such payment by the Regulations (or such decisions)
will, together with the applicable valuation methodology, be
controlling.
(ii) In the event Treasury Regulations (or applicable judicial
decisions) do not address the status of any payment in dispute,
the matter will be submitted for resolution to the Company's
independent auditors ("Independent Auditors"). The resolution
reached by the Independent Auditors will be final and
controlling. All expenses incurred in connection with the
retention of the Independent Auditors to resolve the dispute
shall be shared equally by Executive and the Company.
(iii)In the event Treasury Regulations (or applicable judicial
decisions) do not address the appropriate valuation methodology
for any payment in dispute, the Present Value thereof will, at
the Independent Auditor's election, be determined through an
independent third-party appraisal, and the expenses incurred in
obtaining such appraisal shall be shared equally by Executive and
the Company.
7.4 Status of Benefits.
(i) No salary continuation payments will be made to Executive under
this Agreement and none of his options shall vest and become
exercisable on an accelerated basis hereunder, until the Present
Value of the Option Parachute Payment attributable to the
accelerated vesting of such options has been determined and the
status of any payments in dispute under Paragraph 7.3 has been
resolved in accordance therewith. The post-termination exercise
period for any options which cannot be exercised by reason of the
foregoing limitation shall automatically be stayed and shall not
be deemed to run during any period the option remains so
unexercisable.
(ii) Once the requisite determinations under Paragraph 7.3 have been
made, then to the extent the aggregate Present Value, measured as
of the Change in Control, of (1) the Option Parachute Payment
attributable to the accelerated options (or installments thereof)
plus (2) the Parachute Payment attributable to the Executive's
salary continuation benefits under this Agreement would, when
added to the Present Value of all of the Executive's Other
Parachute Payments, exceed the Benefit Limit, the Executive's
salary continuation payments will first be reduced and then the
number of option shares subject to accelerated vesting shall be
reduced (based on their Option Parachute Value) to the extent
necessary to assure the Benefit Limit is not exceeded. 8.
MISCELLANEOUS
8.1 Notices. All notices, requests, and other communications hereunder must be
in writing and will be deemed to have been duly given only if delivered
personally against written receipt or by facsimile transmission with answer back
confirmation or mailed (postage prepaid by certified or registered mail, return
receipt requested) or by overnight courier to the parties at the following
addresses or facsimile numbers:
If to the Executive, to:
Mr. Timothy Webb
7012 Quill Leaf Cove
Austin, Texas 78750
Facsimile No: (512) 795-8432
If to the Company, to:
PSW Technologies, Inc.
Attention: Chairman of the Board
6300 Bridgepoint Parkway, Bldg. 3, Suite 200
Austin, Texas 78730
Facsimile No: (512) 342-3200
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section 7.1, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number as
provided in this Section 7.1, be deemed given upon receipt, and (iii) if
delivered by mail in the manner described above to the address as provided in
this Section 7.1, be deemed given upon receipt (in each case regardless of
whether such notice, request, or other communication is received by any other
Person to whom a copy of such notice, request or other communication is to be
delivered pursuant to this Section). Any party from time to time may change its
address, facsimile number, or other information for the purpose of notices to
that parry by giving written notice specifying such change to the other parties
hereto.
8.2 Entire Agreement. This Agreement supersedes all prior discussions and
agreements among the parties with respect to the subject matter hereof and
contain the sole and entire agreement between the parties hereto with respect
thereto.
8.3 Waiver. Any term or condition of this Agreement may be waived at any time by
the party that is entitled to the benefit thereof, but no such waiver shall be
effective unless set forth in a written instrument duly executed by or on behalf
of the party waiving such term or condition. No waiver by any party hereto of
any term or condition of this Agreement, in any one or more instances, shall be
deemed to be or construed as a waiver of the same or any other term or condition
of this Agreement on any future occasion. All remedies, either under this
Agreement or by law or otherwise afforded, will be cumulative and not
alternative. 8.4 Amendment. This Agreement may be amended, supplemented, or
modified only by a written instrument duly executed by or on behalf of each
party hereto. 8.5 No Third Party Beneficiary. The terms and provisions of this
Agreement are intended solely for the benefit of each party hereto and the
Company's successors or assigns, and it is not the intention of the parties to
confer third-party beneficiary rights upon any other Person. 8.6 No Assignment;
Binding Effect. This Agreement shall inure to the benefit of any successors or
assigns of the Company. The Executive shall not be entitled to assign his
obligations under this Agreement. 8.7 Headings. The headings used in this
Agreement have been inserted for convenience of reference only and do not define
or limit the provisions hereof. 8.8 Severability. The Company and the Executive
intend all provisions of this Agreement to be enforced to the fullest extent
permitted by law. Accordingly, if a court of competent jurisdiction determines
that the scope and/or operation of any provision of this Agreement is too broad
to be enforced as written, the Company and the Executive intend that the court
should reform such provision to such narrower scope and/or operation as it
determines to be enforceable. If, however, any provision of this Agreement is
held to be illegal, invalid, or unenforceable under present or future law, and
not subject to reformation, then (i) such provision shall be fully severable,
(ii) this Agreement shall be construed and enforced as if such provision was
never a part of this Agreement, and (iii) the remaining provisions of this
Agreement shall remain in full force and effect and shall not be affected by
illegal, invalid, or unenforceable provisions or by their severance. 8.9
Governing Law. This Agreement shall be governed by and construed in accordance
with the laws of the State of Texas applicable to contracts executed and
performed in such State without giving effect to conflicts of laws principles.
8.10 Jurisdiction. With respect to any suit, action, or other proceeding arising
from (or relating to) this Agreement, the Company and the Executive hereby
irrevocably agree to the non-exclusive personal jurisdiction and venue of the
United States District Court for the Western District of Texas (and any Texas
State Court within Travis County, Texas). 8.11 Counterparts. This Agreement may
be executed in any number of counterparts and by facsimile, each of which will
be deemed an original, but all of which together will constitute one and the
same instrument. IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed on the date first written above.
[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT FOLLOWS]
"COMPANY"
PSW TECHNOLOGIES, INC.
a Delaware corporation
By: /s/ Keith Thatcher
Name: Keith Thatcher
Title: Chief Financial Officer
"EXECUTIVE"
TIMOTHY WEBB
/s/ Timothy Webb
Timothy Webb
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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