FORM 10-Q
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 June 30, 1999
OR
0 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 (I.R.S. Employer Identification No.)
incorporation or organization)
6300 Bridgepoint Parkway, Building 3, Suite 200, Austin Texas 78730
(Address of principal executive offices) (Zip Code)
(512) 343-6666
Registrant's telephone number, including area code
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 July 31, 1999, the Registrant had outstanding 9,464,890 shares of
Common Stock, $.01 par value.
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<CAPTION>
PSW TECHNOLOGIES, INC.
Index to June 30, 1999 Form 10-Q
Page
Part I -- Financial Information
<S> <C> <C>
Item 1. Financial Statements (unaudited) .....................................................................3
Condensed Balance Sheets -- June 30, 1999 and December 31, 1998.......................................3
Condensed Statements of Operations -- Three Months and Six Months Ended
June 30, 1999 and 1998................................................................................4
Condensed Statements of Cash Flows -- Six Months Ended June 30,
1999 and 1998.........................................................................................5
Notes to Condensed Financial Statements...............................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risks..........................................16
Part II -- Other Information
Item 1. Legal Proceedings....................................................................................17
Item 2. Changes in Securities................................................................................17
Item 3. Defaults upon Senior Securities......................................................................17
Item 4. Submission of Matters to a Vote of Security Holders..................................................17
Item 5. Other Information ...................................................................................17
Item 6. Exhibits and Reports on Form 8-K.....................................................................17
Signatures...........................................................................................18
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2
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<TABLE>
<CAPTION>
Part 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
PSW Technologies, Inc.
Condensed Balance Sheets
(in thousands, except share data)
June 30,
1999 December 31,
(Unaudited) 1998
<S> <C> <C>
Assets
Current assets:
Cash $ 780 $ 1,167
Short-term investments 19,351 19,136
Accounts receivable, net of allowance for doubtful
accounts of $325 and $260 at June 30, 1999
and December 31, 1998, respectively 7,630 6,171
Unbilled revenue under customer contracts 2,025 1,070
Income tax receivable 377 896
Net deferred taxes 334 334
Prepaid expenses and other current assets 602 572
--------- ---------
Total current assets 31,099 29,346
Property and equipment, net 4,187 4,005
--------- ---------
Total assets $ 35,286 $ 33,351
======== ========
Liabilities and stockholders' equity
Current liabilities:
Trade payables 594 460
Accrued expenses and other current liabilities 2,690 1,507
-------- --------
Total current liabilities 3,284 1,967
Net deferred taxes 316 316
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, 9,456,878 and 9,293,866 shares
issued and outstanding at June 30, 1999 and
December 31, 1998, respectively 95 93
Additional paid-in capital 30,110 29,995
Deferred compensation (18) (44)
Accumulated other comprehensive income (30) (69)
Retained earnings 1,529 1,093
-------- --------
Total stockholders' equity 31,686 31,068
-------- --------
Total liabilities and stockholders' equity $ 35,286 $ 33,351
======== ========
See accompanying notes.
</TABLE>
3
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<CAPTION>
PSW Technologies, Inc.
Condensed Statements of Operations
(in thousands, except per share data)
(unaudited
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $11,006 $ 9,867 $ 21,401 $ 19,625
Operating expenses:
Technical staff 6,035 5,523 12,105 11,326
Selling and administrative staff 2,304 2,759 4,533 5,308
Other expenses 2,440 1,980 4,535 3,906
Special compensation expense - 38 - 82
-------- -------- ------- -------
Total operating expenses 10,779 10,300 21,173 20,622
-------- -------- ------- -------
Income (loss) from operations 227 (433) 228 (997)
Interest income (expense), net 237 223 488 475
--------- ------- ------- -------
Income (loss) before provision (benefit) for
income taxes 464 (210) 716 (522)
-------- ------- ------- -------
Provision (benefit) for income taxes 180 - 280 (100)
-------- ------- ------- -------
Net income (loss) $ 284 $ (210) $ 436 $ (422)
======== ======== ======= =======
Basic earnings (loss) per share $ 0.03 $ (0.02) $ 0.05 $(0.05)
======== ======== ======= =======
Diluted earnings (loss) per share $ 0.03 $ (0.02) $ 0.04 $(0.05)
======== ======== ======= =======
Shares used in basic earnings (loss) per share
calculation 9,414 9,057 9,369 9,023
======== ======== ======= =======
Shares used in diluted earnings (loss) per share
calculation 10,202 9,057 10,216 9,023
======== ======== ======= =======
See accompanying notes.
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4
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<CAPTION>
PSW Technologies, Inc.
Condensed Statements of Cash Flows
(in thousands)
(unaudited)
Six Months
Ended June 30,
-------------------------------------
1999 1998
<S> <C> <C>
Operating activities
Net income $ 436 $ (422)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Special compensation - 82
Depreciation and amortization 667 491
Bad debt expense 15 20
Changes in operating assets and liabilities:
Accounts receivable (1,474) 707
Unbilled revenue under customer contracts (955) (446)
Prepaid expenses and other current assets (30) (178)
Income tax receivable 520 (321)
Trade payables 162 191
Accrued expenses and other current liabilities 1,192 (719)
------- ------
Net cash provided by (used in) operating activities 533 (595)
------- ------
Investing activities
Purchase securities (176) -
Proceeds from sale of short term investments - 1,549
Acquisition of property and equipment (886) (829)
------- ------
Net cash provided by (used in) investing activities (1,062) 720
------- ------
Financing activities
Issuance of common stock 142 361
------- -----
Net cash provided by financing activities 142 361
------- -----
Net increase (decrease) in cash (387) 486
Cash, beginning of period 1,167 835
------- -----
Cash, end of period $ 780 $ 1,321
======= =======
Non-cash activities:
Unrealized gain on investments $ 39 $ 37
Reduction of income taxes payable associated with the
exercise of stock options $ 1 $ 87
</TABLE>
See accompanying notes.
5
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PSW Technologies, Inc.
Notes to Condensed Financial Statements
June 30, 1999
(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, 1998
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. 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 shareholders' 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.
The components of comprehensive income for the three and six months
ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
----------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $284 $(210) $436 $(422)
Unrealized gain (loss) on short term
investments (85) (2) 66 37
Income tax expense (benefit) related to items
of other comprehensive income (33) - 27 7
----------- ----------- -------- ----------
Comprehensive income (loss) $232 $(212) $475 $(392)
=========== =========== ======== ==========
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6
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PSW Technologies, Inc.
Notes to Condensed Financial Statements (Continued)
(unaudited)
The components of accumulated other comprehensive income at June 30,
1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Unrealized loss on short term investments $(30) $(69)
============ =============
</TABLE>
4. 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 six months
ended June 30:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 284 $ (210) $ 436 $ (422)
============== ============== =============== ==============
Denominator:
Shares used in basic earnings (loss) per
share calculation 9,414 9,057 9,369 9,023
Effect of dilutive securities:
Employee stock options 328 - 376 -
Warrants 460 - 471 -
-------------- -------------- --------------- --------------
Shares used in diluted earnings (loss) per
share calculation 10,202 9,057 10,216 9,023
============== ============== =============== ==============
Basic earnings (loss) per share $ 0.03 $ (0.02) $ 0.05 $ (0.05)
============== ============== =============== ==============
Diluted earnings (loss) per share $ 0.03 $ (0.02) $ 0.04 $ (0.05)
============== ============== =============== ==============
</TABLE>
Options to purchase 1.74 million shares of Common Stock at an average exercise
price of $2.73 per share were outstanding at December 31, 1998 but were not
included in the computation of diluted loss per share as its effect would be
anti-dilutive.
7
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion and analysis below 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 for the plans, objectives, expectations and intentions of PSW. 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 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 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 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 used at
completion. The cumulative impact of revisions in percentage of completion
estimates is reflected in the period in which the revisions are made. Provisions
for estimated losses on uncompleted contracts are made on a contract-by-contract
basis and are recognized in the period in which such losses are determined.
There can be no assurance of the accuracy of the Company's future work
completion estimates, and operating results may be adversely affected by
inaccurate estimates of contract related labor.
8
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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:
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Three Months Six Months
ended June 30, ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenue............................................ 100% 100% 100% 100%
Operating expenses:
Technical staff................................. 55 56 57 58
Selling and administrative staff................ 21 28 21 27
Other expenses.................................. 22 20 21 20
Special compensation expense.................... - - - -
---- ---- ---- ----
Total operating expense........................... 98 104 99 105
---- ---- ---- ----
Income (loss) from operations..................... 2 (4) 1 (5)
Interest income (expense), net.................... 2 2 2 2
Provision (benefit) from income taxes.... 1 - 1 (1)
---- ---- ---- ----
Net income (loss)................................. 3% (2)% 2% (2)%
==== ==== ==== ====
</TABLE>
First Six Months of 1999 Compared with First Six Months of 1998
The following discussion of operations and trends also relates to the comparison
of the three month period ended June 30, 1999 with the three month period ended
June 30, 1998.
Revenue
The Company's revenue consists primarily of fees for software services provided.
Revenue was $21.4 million in the first six months of 1999, up 9% from $19.6
million for the first six months of 1998, principally due to the growth in our
end-user revenue and higher average revenue per client offset slightly by a
decline in the number of clients served during the six month period. Revenue
attributable to software services rendered to IT vendors was $13.4 million and
$12.7 million in the first six months of 1999 and in the first six months of
1998, respectively, an increase of 6% in the first six months of 1999 over the
first six months of 1998. Revenue attributable to software services rendered to
IT users was $8.0 million and $6.9 million for the first six months of 1999 and
the first six months of 1998, respectively, an increase of 16% in the first six
months of 1999 over the first six months of 1998.
IBM, including its wholly owned subsidiaries, accounted for 33% and 36% of
revenue in each of the first six months of 1999 and 1998, respectively. Another
client accounted for 12% of revenue for the first six months of 1999. 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 $12.1 million in the first six months of 1999, an increase
of 7% over $11.3 million for the first six months of 1998. The increase in
technical staff expenses was primarily due to higher average salaries offset
slightly by a lower headcount. Technical staff expenses decreased to 57% of
revenue in the first six months of 1999 from 58% in the first six months of
1998, primarily as a result of higher revenue.
9
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Selling and Administrative Staff
Selling and administrative staff expenses consist of the cost of salaries,
payroll taxes, health insurance and workers' compensation for selling and
administrative personnel, all commissions and bonuses. Selling and
administrative staff expenses were $4.5 million in the first six months of 1999,
a decrease of 15% from $5.3 million in the first six months of 1998. The
decrease in selling and administrative staff expenses was primarily due to the
higher efficiency which resulted from hiring a dedicated sales staff. Selling
and administrative staff expenses were 21% of revenue in the first six months of
1999 compared to 27% of revenue in the first six months of 1998, primarily as a
result of increases in revenue and less technical staff involvement in sales.
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 $4.5 million in the first six months of 1999,
an increase of 16% from $3.9 million in the first six months of 1998,
principally due to facility additions and higher recruiting and travel costs.
Other expenses were 21% of revenue in the first six months of 1999 compared to
20% in the first six months of 1998.
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 $82,000, or less than 1% of revenue, in the first six
months of 1998.
Income (Loss) from Operations
The Company recorded income from operations of $228,000 in the first six months
of 1999, an increase from a loss of operations of $997,000 in the first six
months of 1998. Income from operations was 1% of revenue in the first six months
of 1999, an increase from a loss from operations of 5% of revenue in the first
six months of 1998.
Income Taxes
The provision for income taxes of $280,000 for the six months ended June 30,
1999, is computed using an estimated annual effective tax rate of 39%, which
differs from the federal statutory rate of 34% as a result of state taxes and
permanent differences for non-deductible portions of meals and entertainment
expenses included in other expenses.
The benefit for income taxes of $100,000 for the six months ended June 30, 1998,
is computed using an estimated annual effective tax rate of 19%, which differs
from the federal statutory rate of 34% as a result of state taxes and tax-exempt
income.
Net Income (Loss)
Net income was $436,000 in the first six months of 1999 and net loss was
$422,000 in the first six months of 1998. Net income was 2% of revenue in the
first six months of 1999 and net loss was 2% of revenue in the first six months
of 1998.
10
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Liquidity and Capital Resources
At June 30, 1999, the Company had cash and short term investments totaling $20.1
million, a decrease from $20.3 million at December 31, 1998, primarily as a
result of funding working capital requirements.
The Company anticipates that its existing capital resources and potential cash
flows from operations will be adequate to fund the Company's working capital and
capital expenditure requirements 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, 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
the 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.
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 and non-IT
systems. The program consists of the following phases: identifying Year 2000
application issues, updating applications, identifying Year 2000 systems and
operating systems issues, collecting manufacturer's compliance statements,
verifying solutions to Year 2000 issues (such phases are complete), updating
firmware and phasing out unsupported hardware, and updating and/or patching
operating systems, (such phases are in process and scheduled to be completed in
the third quarter of fiscal 1999). As of July 1, 1999, the Company has spent
approximately $29,000 of the currently estimated $45,000 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.
The Company has completed its survey of third parties with which it has a
material relationship and it appears that the supply chain has competent Year
2000 plans in place. 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 own technical personnel and internal IT systems,
rather than third party suppliers. The Company has not formulated a most
reasonably likely worst case scenario or formulated a contingency plan.
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
11
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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
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.
Fixed-Price Contracts and Other Project Risks. During 1998 and the
first six months of 1999, approximately 16% and 20%, 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.
12
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Management of Growth. The Company's growth has placed significant
demands on its management and other resources. 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.
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. 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.
13
<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 and internet systems. The
client/server and internet 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. The Company has recently announced
several additions and changes in its senior management team. The Company's Chief
Executive Officer, Timothy D. Webb, joined the Company during 1998 and John M.
Velasquez, Vice President of Enterprise Solutions, and Pedro A. Fernandez, Vice
President of Corporate Strategy and Marketing joined the Company in the first
quarter of 1999. With recently named Vice President of Software Research and
Development Solutions, Kenneth L. Drake and the Vice President of Embedded
Systems Solutions, Brent R. Terry, the above team comprises the senior
management for operations. 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, Kenneth L. Drake, Pedro A.
Fernandez, John M. Velasquez and Brent R. Terry, 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. 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
14
<PAGE>
interruptions in the Company's operations 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 nine 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.
15
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risks
The Company does not use derivative financial instruments in its
non-trading investment portfolio. The Company places its investments in
instruments that meet high credit quality standards, as specified by the
Company's investment policy.
The Company is exposed to cash flow and fair value risk from changes in
interest rates, which may affect its financial position, results of operations
and cash flows. In seeking to minimize the risks from interest rate
fluctuations, the Company manages exposures through ongoing evaluation of its
investment portfolio. The Company does not use financial instruments for trading
or other speculative purposes.
The table below provides information about the Company's non-trading
investment portfolio. For investment securities, the table presents principal
cash flows and related weighted average fixed interest rates by expected
maturity dates.
<TABLE>
<CAPTION>
Investments
Maturing Weighted Fair Value
Before Average At
At June 30, 1999 June 30, Interest June 30,
(in thousands, except interest rates) 2000 Rate 1999
- ----------------------------------------------- ----------------- ------------ -------------------
<S> <C> <C> <C>
Money market funds $ 5,290 4.74% $ 5,290
Government issues 4,173 4.80% 4,175
Corporate issues 7,900 6.22% 9,886
================= ============ ===================
$ 17,363 5.43% $ 19,351
================= ============ ===================
Investments Weighted Fair Value
Maturing Average At
At December 31, 1998 During Interest December 31,
(in thousands, except interest rates) 1999 Rate 1998
- ----------------------------------------------- ----------------- ------------ -------------------
Money market funds $ 1,571 4.70% $ 1,571
Government issues 2,723 4.79% 2,710
Corporate issues 13,411 5.42% 13,234
Commercial paper 1,635 5.14% 1,621
================= ============ ===================
$ 19,340 5.25% $ 19,136
================= ============ ===================
</TABLE>
16
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 2. Changes in Securities
From April 1 through June 30, 1999, the Company issued approximately
9,500 shares of its common stock pursuant to exercises of stock
purchase warrants issued in connection with the transfer of assets to
the Company from Pencom Systems Incorporated in October 1996. The
warrants have an exercise price of $0.04 per share. The issuances were
deemed exempt from registration under Section 5 of the Securities Act
of 1933 in reliance upon Section 4(2) thereof or Rule 701 thereunder
and appropriate restrictive transfer legends were affixed to the share
certificates issued in such transaction.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 17,
1999, the following proposals were adopted by the vote specified
below.
<TABLE>
<CAPTION>
AGAINST OR
FOR WITHHELD ABSTAIN
------------ ------------------ -------------
1. Election of Seven Directors All directors proposed by
Management were elected.
<S> <C> <C> <C> <C>
Edward C. Ateyeh, Jr. 8,533,558 361,835 -
Thomas A. Herring 8,538,789 356,604 -
W. Frank King, Ph.D. 8,533,625 361,768 -
Kevin B. Kurtzman 8,536,789 358,604 -
Michael J. Maples 8,536,789 358,604 -
Wade E. Saadi 8,533,558 361,835 -
Timothy D. Webb 8,538,450 356,943 -
2. Approval of an amendment to 1996 6,045,033 580,518 12,500
Stock Option/Stock Issuance Plan to
increase the number of shares of
Common Stock available for
issuance thereunder from 2,715,000
to 3,215,000
3. Ratification of Ernst & Young LLP 8,874,432 4,866 16,095
as independent auditors
</TABLE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
Number Description
27.1 Financial Data Schedule
- ---------
(b) Reports on Form 8-K
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PSW TECHNOLOGIES, INC.
(Registrant)
Date: August 16, 1999 /s/ Timothy D. Webb_____________________
Timothy D. Webb
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 16, 1999 /s/ Keith D. Thatcher___________________
Keith D. Thatcher
Vice President of Finance, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
Date: August 16, 1999 /s/ Kasaundra L. Smith__________________
Kasaundra L. Smith
Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 780
<SECURITIES> 19,351
<RECEIVABLES> 7,630
<ALLOWANCES> 325
<INVENTORY> 0
<CURRENT-ASSETS> 31,099
<PP&E> 6,674
<DEPRECIATION> 2,487
<TOTAL-ASSETS> 35,286
<CURRENT-LIABILITIES> 3,284
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 31,591
<TOTAL-LIABILITY-AND-EQUITY> 35,286
<SALES> 0
<TOTAL-REVENUES> 21,401
<CGS> 0
<TOTAL-COSTS> 12,105
<OTHER-EXPENSES> 9,068
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (488)
<INCOME-PRETAX> 716
<INCOME-TAX> 280
<INCOME-CONTINUING> 436
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 436
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.04
</TABLE>
