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, 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
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 31, 1999, the Registrant had outstanding 9,543,065 shares
of Common Stock, $.01 par value.
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PSW TECHNOLOGIES, INC.
Index to September 30, 1999 Form 10-Q
Page
Part I - Financial Information
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Item 1. Financial Statements (unaudited)......................................................................3
Condensed Balance Sheets - September 30, 1999 and December 31, 1998...................................3
Condensed Statements of Operations - Three Months and Nine Months Ended
September 30, 1999 and 1998...........................................................................4
Condensed Statements of Cash Flows - Nine Months Ended September 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..........................................17
Part II - Other Information
Item 1. Legal Proceedings....................................................................................18
Item 2. Changes in Securities................................................................................18
Item 3. Defaults upon Senior Securities......................................................................18
Item 4. Submission of Matters to a Vote of Security Holders..................................................18
Item 5. Other Information ...................................................................................18
Item 6. Exhibits and Reports on Form 8-K.....................................................................18
Signatures...........................................................................................19
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2
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<CAPTION>
Part 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
PSW Technologies, Inc.
Condensed Balance Sheets
(in thousands, except share data)
September 30,
1999 December 31,
(Unaudited) 1998
<S> <C> <C>
Assets
Current assets:
Cash $ 978 $ 1,167
Short-term investments 20,682 19,136
Accounts receivable, net of allowance for doubtful
accounts of $355 and $260 at September 30,
1999
and December 31, 1998, respectively 7,178 6,171
Unbilled revenue under customer contracts 2,152 1,070
Income tax receivable - 896
Net deferred taxes 334 334
Prepaid expenses and other current assets 677 572
Total current assets 32,001 29,346
Property and equipment, net 4,187 4,005
Total assets $ 36,188 $ 33,351
Liabilities and stockholders' equity
Current liabilities:
Trade payables 752 460
Accrued expenses and other current liabilities 2,904 1,507
Total current liabilities 3,656 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, 9,501,480 and 9,293,866 shares
issued and outstanding at September 30, 1999 and
December 31, 1998, respectively 95 93
Additional paid-in capital 30,139 29,995
Deferred compensation (16) (44)
Accumulated other comprehensive income (45) (69)
Retained earnings 2,043 1,093
Total stockholders' equity 32,216 31,068
Total liabilities and stockholders' equity $ 36,188 $ 33,351
See accompanying notes.
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PSW Technologies, Inc.
Condensed Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenue $ 11,632 $ 9,255 $ 33,033 $ 28,880
Operating expenses:
Technical staff 6,392 6,009 18,497 17,335
Selling and administrative staff 2,208 2,853 6,741 8,161
Other expenses 2,457 2,772 6,992 6,678
Special compensation expense - 36 118
-
Total operating expenses 11,057 11,670 32,230 32,292
Income (loss) from operations 575 (2,415) 803 (3,412)
Interest income (expense), net 259 215 747 690
Income (loss) before provision (benefit) for
income taxes 834 (2.200) 1,550 (2,722)
Provision (benefit) for income taxes 320 (1,070) 600 (1,170)
Net income (loss) $ 514 $(1,130) $ 950 $(1,552)
Basic earnings (loss) per share $ 0.05 $ (0.12) $ 0.10 $ (0.17)
Diluted earnings (loss) per share $ 0.05 $ (0.12) $ 0.09 $ (0.17)
Shares used in basic earnings (loss) per share
calculation 9,479 9,146 9,406 9,064
Shares used in diluted earnings (loss) per share
calculation 10,549 9,146 10,327 9,064
See accompanying notes.
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<CAPTION>
PSW Technologies, Inc.
Condensed Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months
Ended September 30,
-------------------------------------
<S> <C> <C>
1999 1998
Operating activities
Net income (loss) $ 950 $ (1,552)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Special compensation - 118
Depreciation and amortization 999 765
Bad debt expense 28 114
Changes in operating assets and liabilities:
Accounts receivable (1,035) (513)
Unbilled revenue under customer contracts (1,082) (425)
Prepaid expenses and other current assets (105) (74)
Trade payables 267 (173)
Deferred revenue 35 434
Accrued expenses and other current liabilities 1,255 (188)
Income taxes 1,046 (1,519)
Net cash provided by (used in) operating activities 2,358 (3,013)
Investing activities
Purchase securities (1,522) -
Proceeds from sale of short term investments - 3,544
Acquisition of property and equipment (1,190) (1,442)
Net cash provided by (used in) investing activities (2,712) 2,102
Financing activities
Issuance of common stock 165 374
Net cash provided by financing activities 165 374
Net decrease in cash (189) (537)
Cash, beginning of period 1,167 835
Cash, end of period $ 978 $ 298
Non-cash activities:
Unrealized gain on investments $ 24 $ 73
Reduction of income taxes payable associated with the
exercise of stock options $ 9 $ 153
See accompanying notes.
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PSW Technologies, Inc.
Notes to Condensed Financial Statements
September 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 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.
The components of comprehensive income for the three and nine months
ended September 30, 1999 and 1998 are as follows:
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Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ 514 $(1,130) $ 950 $(1,552)
Unrealized gain (loss) on short term
investments (25) 63 42 128
Income tax expense (benefit) related to items
of other comprehensive income (10) (27) 18 (55)
=========== =========== ========== ==========
Comprehensive income (loss) $ 499 $(1,094) $ 974 $(1,479)
=========== =========== ========== ==========
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PSW Technologies, Inc.
Notes to Condensed Financial Statements (Continued)
(unaudited)
The components of accumulated other comprehensive income at September 30, 1999
and December 31, 1998 are as follows:
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1999 1998
------------ -------------
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Unrealized gain (loss) on short term investments $(45) $(69)
============ =============
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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 nine
months ended September 30:
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Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------- -------------- --------------- --------------
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Numerator:
Net income (loss) $ 514 $ (1,130) $ 950 $ (1,552)
============== ============== =============== ==============
Denominator:
Shares used in basic earnings (loss) per
share calculation 9,479 9,146 9,406 9,064
Effect of dilutive securities:
Employee stock options 638 - 463 -
Warrants 432 - 458 -
-------------- -------------- --------------- --------------
Shares used in diluted earnings (loss) per
share calculation 10,549 9,146 10,327 9,064
============== ============== =============== ==============
Basic earnings (loss) per share $ 0.05 $ (0.12) $ 0.10 $ (0.17)
============== ============== =============== ==============
Diluted earnings (loss) per share $ 0.05 $ (0.12) $ 0.09 $ (0.17)
============== ============== =============== ==============
</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 b
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 repor
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 Nine Months
ended September 30, ended September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenue................ 100% 100% 100% 100%
Operating expenses:
Technical staff................... 55 65 56 60
Selling and administrative staff.....
19 31 21 28
Other expenses............ 21 30 21 23
Special compensation expense..... - - - -
Total operating expense........ 95 126 98 111
Income (loss) from operations...... 5 (26) 2 (11)
Interest income (expense), net............. 2 2 3 2
Provision (benefit) from income taxes.. 3 (12) 2 (4)
Net income (loss)........... 4% (12)% 3% (5)%
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Third Quarter of 1999 Compared with Third Quarter of 1998
Revenue
The Company's revenue consists primarily of fees for software services provided.
Revenue was $11.6 million in the third quarter of 1999, up 26% from $9.3 million
for the third quarter of 1998, principally due to the improvement in the average
hourly bill rate. Revenue attributable to software services rendered to IT
vendors was $7.3 million and $6.3 million in the third quarter of 1999 and the
third quarter of 1998, respectively. Revenue attributable to software services
rendered to IT users was $4.3million and $3.0 million for the third quarter of
1999 and the third quarter of 1998, respectively, an increase of 43% in the
third quarter of 1999 over the third quarter of 1998. One client, including its
wholly-owned subsidiaries, accounted for 21% and 36% of revenue in each of the
third quarters of 1999 and 1998, 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
sub-contractors for work performed in connection with a client project.
Technical staff expenses were $6.4 million in the third quarter of 1999, an
increase of 6% over $6.0 million for the third quarter of 1998. Technical staff
expenses decreased to 55% of revenue in the third quarter of 1999 from 65% in
the third quarter of 1998, primarily as a result of improved utilization of
technical staff and higher revenues associated with the improvement in the
average hourly bill rate.
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Selling and Administrative Staff
Selling and administrative staff expenses consist of the cost of salaries,
payroll taxes, health insurance and worke' compensation for selling, marketing
and administrative personnel and all commissions and bonuses. Selling and
administrative staff expenses were $2.2 million in the third quarter of 1999,
a decrease of 23% from $2.9 million in the third quarter of 1998. The
decrease in selling and administrative staff expenses was primarily due to
higher efficiency as a result of the reorganization which combined marketing,
sales and service delivery into each of the Company's three business units.
Selling and administrative staff expenses were 19% of revenue in the third
quarter of 1999 compared to 31% of revenue in the third quarter of 1998,
primarily as a result of higher efficiencies, as noted above, and higher
revenues.
Other Expenses
Other expenses consist of all non-staff related costs, such as occupancy cos
depreciation. Other expenses were $2.5 million in the third quarter of 1999
and $2.8 million in the third quarter of 1998. The decrease is principally due
to the addition of a facility, severance costs due to an overall reduction in
headcount, meeting costs, and an increase to the bad debt reserves all of whic
occurred during the third quarter of 1998. Other expenses were 21% of revenue
in the third quarter of 1999 compared to 30% in the third quarter of 1998 due to
the previously mentioned expenses for the third quarter of 1998 and higher
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 $36,000, or less than 1% of revenue, in the third
quarter of 1998.
Income (Loss) from Operations
The Company recorded income from operations of $575,000 in the third quarter
of 1999, up from a loss of $2.4 million from operations in the third quarter of
1998. Income from operations was 5% of revenue in the third quarter of 1999, up
from a loss from operations of 26% of revenue in the third quarter of 1998.
First Nine Months of 1999 Compared with First Nine Months of 1998
Revenue
Revenue was $33.0 million in the first nine months of 1999, up 14% from $28.9
million for the first nine months of 1998, principally due to the improvement
in the average hourly bill rate. Revenue attributable to software services
rendered to IT vendors was $20.8 million and $19.1 million in the first nine
months of 1999 and the first nine months of 1998, respectively.
Revenue attributable to software services rendered to IT users was $12.2
million and $9.8 million for the first nine months of 1999 and the first nin
months of 1998, respectively, an increase of 24% in the first nine months of
1999 over the first nine months of 1998.
One client, including its wholly owned subsidiaries, accounted for 29% and
36% of revenue in each of the first nine months of 1999 and 1998, respectively.
Another client accounted for 11% of revenue for the first nine months of 1999.
No other client accounted for more than 10% of revenue for either period.
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Technical Staff
Technical staff expenses were $18.5 million in the first nine months of
1999, an increase of 7% over $17.3 million for the first nine months of
1998. Technical staff expenses decreased to 56% of revenue in the first nine
months of 1999 from 60% in the first nine months of 1998, primarily as a result
of improved utilization of technical staff and higher revenues.
Selling and Administrative Staff
Selling and administrative staff expenses were $6.7 million in the first nine
months of 1999, a decrease of 17% from $8.2 million in the first nine months of
1998. The decrease in selling and administrative staff expenses was primarily
due to higher efficiency as a result of the reorganization which combined
marketing, sales and service delivery into three business units. Selling and
administrative staff expenses were 21% of revenue in the first nine months of
1999 compared to 28% of revenue in the first nine months of 1998, primarily as a
result of higher efficiencies, as noted above, and higher revenues.
Other Expenses
Other expenses were $7.0 million in the first nine months of 1999, an increase
of 5% from $6.7 million in the first nine months of 1998, principally due to
facility additions, higher recruiting, legal and travel costs. Other expenses
were 21% of revenue in the first nine months of 1999 compared to 23% in the
first nine months of 1998.
Special Compensation Expense
Special compensation expense was $118,000, or less than 1% of revenue, in the
first nine months of 1998.
Income (Loss) from Operations
The Company recorded income from operations of $803,000 in the first nine months
of 1999, up from a loss of $3.4 million from operations in the first nine months
of 1998. Income from operations was 2% of revenue in the first nine months of
1999, up from a loss from operations of 11% of revenue in the first nine months
of 1998.
Income Taxes
The provision for income taxes of $600,000 for the nine months ended September
30, 1999 is computed using an estimated annual effective tax rate of 39%, which
differs form the federal statutory rate of 34% primarily due to state taxes.
The 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.
Net Income (Loss)
Net income was $950,000 in the first nine months of 1999 and net loss was $1.6
million in the first nine months of 1998. Net income was 3% of revenue in the
first nine months of 1999 and net loss was 5% of revenue in the first nine
months of 1998.
11
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Liquidity and Capital Resources
At September 30, 1999, the Company had cash and short term investments totaling
$21.7 million, an increase from $20.3 million at December 31, 1998, primaril
as a result of cash provided by operations.
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 requirement 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 Yea
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, hardware, and operating systems issues, collecting manufacturer's
compliance statements, verifying solutions to Year 2000 issues (such phases are
complete), updating applications, updating firmware, phasing out unsupported
hardware, and updating and/or patching operating systems, (such phases are in
process and scheduled to be completed during the fourth quarter of fiscal 1999).
As of September 30, 1999, the Company has spent approximately $36,000 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 being 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.
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The Company has completed its survey of third parties with which it has a
material relationship and it appears that the supply chain has competen 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 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 and several large projects for such
customers. 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 spendin
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 nine months of 1999, approximately 16% and 22%, 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 befor
the project design specifications are finalized, which could result in a
fixed price that proves to be too low and therefore adversely affects th
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
13
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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. 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 skille 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.
14
<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'
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 Researc
and Development Solutions, Kenneth L. Drake and the Vice President of
Embedded Systems Solutions, Brent R. Terry, the above team comprises the senio
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 ar
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
15
<PAGE>
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.
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 adversel
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" or 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 o
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 two 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 Yea
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.
16
<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 September 30, 1999 September 30, Interest September 30,
(in thousands, except interest rates) 2000 Rate 1999
- ---------------------------------------------- ------------------ ------------ -------------------
<S> <C> <C> <C>
Money market funds $ 1,033 4.72% $ 1,033
Government issues 1,040 6.07% 1,040
Corporate issues 17,754 5.92% 18,609
================== ============ ===================
$ 19,827 5.87% $ 20,682
================== ============ ===================
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>
17
<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 July 1 through September 30, 1999, the Company issued
approximately 21,000 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
None.
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.
18
<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: November 15, 1999 /s/ Timothy D. Webb________
Timothy D. Webb
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 15, 1999 /s/ Keith D. Thatcher_________
Keith D. Thatcher
Vice President of Finance, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
Date: November 15, 1999 /s/ Kasaundra L. Smith_______
Kasaundra L. Smith
Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 978
<SECURITIES> 20,682
<RECEIVABLES> 7,533
<ALLOWANCES> 355
<INVENTORY> 0
<CURRENT-ASSETS> 32,001
<PP&E> 6,940
<DEPRECIATION> 2,753
<TOTAL-ASSETS> 36,188
<CURRENT-LIABILITIES> 3,656
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 32,121
<TOTAL-LIABILITY-AND-EQUITY> 36,188
<SALES> 0
<TOTAL-REVENUES> 33,033
<CGS> 0
<TOTAL-COSTS> 18,497
<OTHER-EXPENSES> 13,733
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (747)
<INCOME-PRETAX> 1,550
<INCOME-TAX> 600
<INCOME-CONTINUING> 950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 950
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.09
</TABLE>
