SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
PSW Technologies, Inc.
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: .......
(2) Aggregate number of securities to which transaction applies: ..........
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............
(4) Proposed maximum aggregate value of transaction: ......................
(5) Total fee paid: .......................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
<PAGE>
6300 Bridgepoint Parkway, Building 3, Suite 200
Austin, Texas 78730
April 20, 1999
Dear Stockholder:
You are cordially invited to attend the 1999 annual meeting of stockholders
of PSW Technologies, Inc., which will be held at the River Place Country Club,
4207 River Place Blvd., Austin, Texas on Monday, May 17, 1999 at 9:00 a.m.
(Central Time).
Details of the business to be conducted at the annual meeting are given in
the attached Notice of Annual Meeting of Stockholders and Proxy Statement.
After careful consideration, the Company's Board of Directors has
unanimously approved the proposals set forth in the Proxy Statement and
recommends that you vote for each such proposal.
In order for us to have an efficient meeting, please sign, date and return
the enclosed proxy promptly in the accompanying reply envelope. If you are able
to attend the annual meeting and wish to change your proxy vote, you may do so
simply by voting in person at the annual meeting.
We look forward to seeing you at the annual meeting.
Sincerely,
/s/ Timothy Webb
Timothy D. Webb
President and Chief Executive Officer
<PAGE>
PSW TECHNOLOGIES, INC.
6300 Bridgepoint Parkway, Building 3, Suite 200
Austin, Texas 78730
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 17, 1999
The 1999 annual meeting of stockholders of PSW Technologies, Inc. (the
"Company") will be held at the River Place Country Club, 4207 River Place Blvd.,
Austin, Texas on Monday, May 17, 1999 at 9:00 a.m. (Central Time) for the
following purposes:
1. To elect seven directors to serve until the Annual Stockholders'
Meeting in 2000, or in each case until their respective successors
have been elected and qualified;
2. To approve an amendment to the Company's 1996 Stock Option/Stock
Issuance Plan (the "Plan") to increase the number of shares of Common
Stock authorized to be issued by 500,000 shares resulting in 3,215,000
shares available for issuance under the Plan;
3. To ratify the appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending December 31, 1999; and
4. To act upon such other business as may properly come before the
meeting or any adjournments thereof.
Only stockholders of record at the close of business on March 31, 1999 are
entitled to notice of and to vote at the meeting. A list of stockholders
entitled to vote at the meeting will be available for inspection at the offices
of the Company. Whether or not you plan to attend the meeting in person, please
sign, date and return the enclosed proxy card in the reply envelope provided. If
you attend the meeting and vote by ballot, your proxy will be revoked
automatically and only your vote at the meeting will be counted. The prompt
return of your proxy card will assist us in preparing for the meeting.
By Order of the Board of Directors,
/s/ Nancy Richardson
NANCY A. RICHARDSON
Secretary
<PAGE>
PSW TECHNOLOGIES, INC.
6300 Bridgepoint Parkway, Building 3, Suite 200
Austin, Texas 78730
PROXY STATEMENT
These proxy materials and the enclosed proxy card are being mailed in
connection with the solicitation of proxies by the Board of Directors of PSW
Technologies, Inc., a Delaware corporation (the "Company" or "PSW"), for the
1999 Annual Meeting of Stockholders to be held on Monday, May 17, 1999 at 9:00
a.m. (Central Time), and at any adjournment or postponement thereof (the "Annual
Meeting") at the River Place Country Club, 4207 River Place Blvd., Austin,
Texas. These proxy materials were first mailed to stockholders of record
beginning on approximately April 20, 1999.
Any stockholder executing a proxy pursuant to this solicitation may revoke
it at any time prior to its exercise by delivering written notice of such
revocation to the Secretary of the Company before the Annual Meeting or by
properly executing and delivering a proxy bearing a later date. Any stockholder
present at the Annual Meeting who elects to vote his or her shares in person may
also revoke his or her proxies. The cost of soliciting proxies will be paid by
the Company and may include reimbursement paid to brokerage firms and others for
their expense in forwarding solicitation materials as well as the expense of
preparing, assembling, photocopying and mailing this Proxy Statement.
Solicitation will be made primarily through the use of the mail, however,
regular employees of the Company may, without additional remuneration, solicit
proxies personally by telephone or telegram.
The Company's annual report to stockholders for the year ended December 31,
1998 (the "Annual Report") has been mailed concurrently with the mailing of the
notice of the Annual Meeting and this Proxy Statement to all stockholders
entitled to notice of, and to vote at, the Annual Meeting. The Annual Report is
not incorporated into this Proxy Statement and is not considered
proxy-soliciting material.
PURPOSE OF MEETING
The specific proposals to be considered and acted upon at the Annual
Meeting are summarized in the accompanying Notice of Annual Meeting of
Stockholders. Each proposal is described in more detail in this Proxy Statement.
VOTING RIGHTS AND SOLICITATION
The Company has fixed March 31, 1999 as the record date for determining
those stockholders who are entitled to notice of, and to vote at, the Annual
Meeting. At the close of business on the record date, the Company had 9,354,069
outstanding shares of Common Stock, par value $0.01 per share (the "Common
Stock"). Each stockholder is entitled to one vote for each share of Common Stock
held by such stockholder as of the record date. If a stockholder on the proxy
has specified a choice as to the matters coming before the Annual Meeting, the
shares will be voted accordingly. If no choice is specified on the returned
proxy, the shares will be voted in favor of the approval of the proposals
described in the Notice of Annual Meeting and in this Proxy Statement.
Abstentions and broker non-votes (i.e., the submission of a proxy by a broker or
nominee specifically indicating the lack of discretionary authority to vote on
the matter) are counted for purposes of determining the presence or absence of a
quorum for the transaction of business. Abstentions will be counted towards the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes, whereas broker non-votes will not be
counted for purposes of determining whether or not a proposal has been approved.
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
Vote Required
A Board of seven directors is to be elected at the Annual Meeting to hold
office until their term has expired at the 2000 Annual Meeting or until their
successors are duly elected and qualified. In accordance with the Company's
bylaws, the seven nominees for election as directors receiving the greatest
number of votes will be elected to the Board of Directors. Abstentions will not
be counted towards the tabulation of votes cast for the election of any
directors.
Unless otherwise instructed, the persons named in the accompanying proxy
card will vote the proxies received by them for each of the Company's nominees
named below, each of whom is presently a director of the Company. If any nominee
of the Company is unable or declines to serve as a director at the time of the
Annual Meeting, the proxies will be voted for any nominee who is designated by
the present Board of Directors to fill the vacancy. It is not expected that any
nominee will be unable or will decline to serve as a director.
The Company's Board of Directors unanimously recommends a vote "FOR" the
nominees listed below, and proxies executed and returned will be so voted unless
contrary instructions are indicated thereon.
<TABLE>
<CAPTION>
Nominee Age Position
<S> <C> <C>
Timothy D. Webb 38 President, Chief Executive Officer & Director
Wade E. Saadi (1) 49 Chairman of the Board
Edward C. Ateyeh, Jr. (1) 46 Director
Thomas A. Herring (2) 48 Director
W. Frank King, Ph.D. 59 Director
Kevin B. Kurtzman (2) 51 Director
Michael J. Maples (1) 56 Director
______________________________
<FN>
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
</FN>
</TABLE>
Mr. Webb has served as President, Chief Executive Officer and a Director of
PSW since August 31, 1998. Prior to joining PSW, Mr. Webb was Vice President,
Enterprise Solutions for Syntel, Inc, an applications management company. From
June 1995 through February 1998, Mr. Webb was employed by Oracle Corporation,
last serving as a Regional Vice President for Oracle Corporation's Consulting
Services Division. From 1983 through May 1995, Mr. Webb was employed by Andersen
Consulting rising to the level of Associate Partner before leaving to join
Oracle. Mr. Webb holds a Bachelor of Science in Systems Management Engineering
from Princeton University.
Mr. Saadi has served on the Board of Directors of PSW since October 1996.
He is the founder of Pencom Systems Incorporated, a privately held New York
corporation ("Pencom"), and has served as its President and Chief Executive
Officer since its inception in 1973. In 1996, Mr. Saadi won the Technology
Entrepreneur of the Year Award in New York City. Mr. Saadi is a governor of the
Board of the Collectors Club and a regional vice president of the United States
Philatelic Classics Society. Mr. Saadi attended the Polytechnic Institute of
Brooklyn where he majored in chemical engineering.
Mr. Ateyeh has served on the Board of Directors of PSW since October 1996.
He currently serves as the Executive Vice President of Pencom Systems, Inc.,
where he has been employed since 1977. Mr. Ateyeh served as President of
Pencom's software division, the predecessor to PSW, from 1989 to 1992. In 1994
<PAGE>
Mr. Ateyeh founded Collective Technologies, Pencom's systems management
consulting division where he currently serves as President and Chief Executive
Officer. Mr. Ateyeh co-founded the New York UNIX Users Group in 1982 and chaired
the group until 1987. He also founded the International AIX Users Group in 1989.
In addition, Mr. Ateyeh chaired the UNIX EXPO Advisory Board and Conference
Committee from 1984 to 1990, and is also one of the few members to receive the
prestigious UniForum Pioneers of UNIX Award. A graduate of the University of
Notre Dame, Mr. Ateyeh is a board member of the Economic Development Council of
the Greater Austin chamber of Commerce, a member of the Austin Community College
Software Industry Advisory Council, as well as the Austin Software Council's
President/CEO Peer Group. He is a member of the 1998-1999 360.Alpha Summit
Advisory Board, a member of the Austin Technology Incubator Advisory Board, as
well as a Host Committee Member of the Conservation Council of the Nature
Conservancy of Texas and a guest lecturer at the University of Texas School of
Business.
Mr. Herring has served on the Board of Directors of PSW since January 1997.
He is presently serving as a Venture Partner in Polaris Venture Partners. From
December 1997 to October 1998, Mr. Herring served as Senior Vice President of
Compuware Corp., which recently acquired Numega Technologies, Inc. From May 1996
to December 1997, Mr. Herring had served as Chief Executive Officer of Numega
Technologies, Inc., a developer of automatic error detection and advanced
Windows debugging tools. From July 1995 to May 1996, Mr. Herring was Vice
President of Corporate Marketing of Sybase, Inc., a software company. Prior
thereto, he served as Vice President of Worldwide Marketing, Business
Development and Sales for Powersoft Corporation, a developer of client/server
development tools, from June 1990 to July 1995. Mr. Herring earned a bachelor's
degree in marketing and a master's degree in statistics, economics and
mathematics from Texas Technical University. Mr. Herring was selected as the
1995 Software Industry Sales and Marketing Executive of the Year by Upside
Magazine. He serves on the Steering Committee and is a guest lecturer for the
Information Management Program of the Graduate School of Business of the
University of Texas at Austin, and on the Board of Directors of Incentive
Systems, Allaire Corporation, AlphaBlox Corporation and Yesler Software.
Dr. King has served as a Director of PSW since October 1996. From 1992 to
August 1998, Dr. King served as President and Chief Executive Officer of the
Company. From 1988 to 1992, Dr. King was Senior Vice President of the Software
Business group of Lotus, a software publishing company. Prior to joining Lotus,
Dr. King was with IBM, a technology company, for 19 years, where his last
position was Vice President of Development for the Personal Computing Division.
Dr. King earned a doctorate in electrical engineering from Princeton University,
a master's degree in electrical engineering from Stanford University, and a
bachelor's degree in electrical engineering from the University of Florida. He
serves on the boards of directors of Excalibur Technologies Corporation, Auspex
Systems, Inc., Natural Microsystems, Inc., Best Software and Cortelco Systems.
Mr. Kurtzman has served on the Board of Directors of PSW since
December 1996. He has served as the Chief Financial Officer of Pencom, since
July 1997. Prior thereto, Mr. Kurtzman had been with Margolin, Winer & Evens
LLP, a certified public accounting firm, since 1972 and was a Partner and a
member of its executive committee and an Audit and Business Advisory Partner.
Mr. Kurtzman is a former officer and director of CPA Associates International.
Mr. Kurtzman received a bachelor's degree in accounting from Queens College of
the City University of New York.
Mr. Maples has served on the Board of Directors of PSW since December 1996.
Mr. Maples held several positions with Microsoft Corporation, a technology
company, from April 1988 through July 1995, where his last position was
Executive Vice President of Worldwide Products. Prior thereto, Mr. Maples held
various positions with IBM over the course of 23 years, the last of which was
Director of Software Strategy. Mr. Maples earned a master's degree from Oklahoma
City University and a bachelor's degree in electrical engineering from the
University of Oklahoma. Mr. Maples sits on the Board of Directors of Lexmark
International Inc., and J.D. Edwards and Company.
Board Meetings and Committees
At each annual stockholder meeting the directors are elected to serve from
the time of their election and qualification until the next Annual Meeting of
Stockholders following their election or until a successor has been duly elected
and qualified. There are no family relationships among any of the directors and
executive officers of the Company.
The Company's Board of Directors met nine times during the year ended
December 31, 1998, and acted a number of times by written consent. Each of the
directors nominated for reelection attended at least 75% of the aggregate of (i)
<PAGE>
the total meetings of the Board and (ii) the total number of meetings held by
all committees of the Board on which such directors served.
The Compensation Committee of the Board of Directors determines the
salaries and incentive compensation of the officers of the Company and provides
recommendations for the salaries and incentive compensation of the other
employees and the consultants of the Company. The Compensation Committee also
administers various incentive compensation, stock and benefit plans. The
Compensation Committee had two meetings in 1998.
The Audit Committee of the Board of Directors reviews, acts on and reports
to the Board of Directors with respect to various auditing and accounting
matters, including the selection of the Company's auditors, the scope of the
annual audits, fees to be paid to the auditors, the performance of the Company's
independent auditors and the accounting practices of the Company. The Audit
Committee had four meetings in 1998.
The Company does not have a standing Nominating Committee or any other
committee performing similar functions. Such matters are considered at meetings
of the full Board of Directors. In addition, the Board of Directors may from
time to time establish certain other committees to facilitate the management of
the Company.
Director Compensation
By action of the Company's Board of Directors, Board members who are not
employees of the Company are paid $3,750 per calendar quarter, which may be in
the form of cash or, at the discretion of each eligible director, may be applied
to the acquisition of an option to purchase Common Stock pursuant to the
Director Fee Option Grant Program in effect under the Company's 1996 Stock
Option/Stock Issuance Plan. Both Mr. Maples and Mr. Herring elected to receive
their 1998 compensation in the form of options. In addition, the non-employee
Board members are eligible to receive periodic option grants under the Automatic
Option Grant Program in effect for them under that Plan. Each individual who
first becomes a non-employee Board member after June 5, 1997 will automatically
receive, at the time of such initial election or appointment, a stock option
grant for 10,000 shares of Common Stock. In addition, on the date of each Annual
Stockholders' Meeting, each individual who is re-elected as a non-employee Board
member is eligible to receive an option grant for 4,000 shares of Common Stock,
provided such individual has served on the Board for at least six (6) months.
Each such option grant will have an exercise price equal to the fair market
value of the option shares on the grant date and will have a maximum term of ten
years, subject to earlier termination upon the optionee's cessation of Board
service. Pursuant to this program, Mr. Maples and Mr. Herring each received an
option to purchase 4,000 shares of Common Stock on the date of the 1998 Annual
Stockholder Meeting at a price per share equal to $6.13 per share. Non-employee
Board members are members of the Board of Directors who are not employees of the
Company. Beginning January 1999, Pencom employees who serve on the Company's
Board of Directors are eligible for director compensation.
PROPOSAL 2
APPROVAL OF AMENDMENT TO
1996 STOCK OPTION/STOCK ISSUANCE PLAN
The Company's stockholders are being asked to approve an amendment to the
1996 Stock Option/Stock Issuance Plan (the "Plan") to increase the number of
shares of Common Stock available for issuance under the Plan from 2,715,000
shares to 3,215,000 shares. The Plan became effective upon its adoption by the
Board and approval by the Company's stockholders on October 1, 1996. The Board
adopted the proposed amendment to the Plan on March 24, 1999, subject to
stockholder approval at the Annual Meeting.
The Board believes the share increase is necessary to assure that the
Company continues to have a sufficient reserve of Common Stock available under
the Plan to attract and retain the services of key individuals essential to the
Company's long-term success.
The following is a summary of the principal features of the Plan. The
summary, however, does not purport to be a complete description of all the
<PAGE>
provisions of the Plan. Any stockholder of the Company who wishes to obtain a
copy of the actual plan document may do so upon written request to the Corporate
Secretary at the Company's principal executive offices in Austin, Texas.
Share Reserve
A total of 3,215,000 shares of Common Stock (including the share increase
subject to stockholder approval under this proposal) have been reserved for
issuance over the ten-year term of the Plan. In no event may any one participant
in the Plan be granted stock options, separately exercisable stock appreciation
rights and direct stock issuances for more than 750,000 shares per calendar year
beginning with the 1997 calendar year.
In the event any change is made to the outstanding shares of Common Stock
by reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will be
made to the securities issuable (in the aggregate and to each participant) under
the Plan and to the securities and exercise price under each outstanding option.
Eligibility
Officers and other employees of the Company and its parent or subsidiaries
(whether now existing or subsequently established), non-employee members of the
Board or the Board of Directors of its parent or subsidiaries and consultants
and independent advisors of the Company or its parent and subsidiaries will be
eligible to participate in the Discretionary Option Grant and Stock Issuance
Programs described below. Non-employee members of the Board will also be
eligible to participate in the Automatic Option Grant Program and the Director
Fee Option Grant Program described below.
As of March 31, 1999, eight executive officers, 416 other employees and
seven directors who are not executive officers or employees were eligible to
participate in the Plan.
Valuation
The fair market value per share of Common Stock on any relevant date under
the Plan will be the closing price per share on that date on the Nasdaq National
Market. On March 31, 1999, the closing price per share was $3.88.
Equity Incentive Programs
The Plan contains four separate equity incentive programs: (i) a
Discretionary Option Grant Program; (ii) a Stock Issuance Program; (iii) an
Automatic Option Grant Program; and (iv) a Director Fee Option Grant Program.
The principal features of these programs are described below. The Compensation
Committee of the Company's Board of Directors administers the Plan (other than
the Automatic Option Grant Program and the Director Fee Option Grant Program,
which are self-executing). This committee (the "Plan Administrator") has
complete discretion (subject to the provisions of the Plan) to authorize option
grants and direct stock issuances under the Plan. However, all grants under the
Automatic Option Grant Program and the Director Fee Option Grant Program are
made in strict compliance with the provisions of that program and no
administrative discretion may be exercised by the Plan Administrator with
respect to the grants made thereunder.
Discretionary Option Grant Program
Options may be granted under the Discretionary Option Grant Program at an
exercise price per share of not less than 100% of the fair market value per
share of Common Stock on the option grant date unless otherwise determined by
the Plan Administrator. No option will have a term in excess of ten years.
Upon cessation of service, the optionee will have a limited period of time
in which to exercise any outstanding option to the extent such option is
exercisable for vested shares. The Plan Administrator will have complete
discretion to extend the period following the optionee's cessation of service
<PAGE>
during which his or her outstanding options may be exercised and/or to permit
the options to be exercised with respect to one or more installments consisting
of shares that were unvested upon termination but that would have vested if the
optionee's service had continued. Such discretion may be exercised at any time
while the options remain outstanding, whether before or after the optionee's
actual cessation of service.
In addition, the Plan Administrator is authorized to issue two types of
stock appreciation rights in connection with option grants made under the
Discretionary Option Grant Program.
Tandem stock appreciation rights provide the holders with the right to
surrender their options for an appreciation distribution from the Company
equal in amount to the excess of (i) the fair market value of the vested
shares of Common Stock subject to the surrendered option over (ii) the
aggregate exercise price payable for such shares. Such appreciation
distribution may, at the discretion of the Plan Administrator, be made in
cash or in shares of Common Stock.
Limited stock appreciation rights may be granted to officers of the
Company as part of their option grants. Any option with such a limited
stock appreciation right may be surrendered to the Company upon the
successful completion of a hostile take-over of the Company. In return for
the surrendered option, the officer will be entitled to a cash distribution
from the Company in an amount per surrendered option share equal to the
excess of (i) the take-over price per share over (ii) the exercise price
payable for such share.
The Plan Administrator will have the authority to effect the cancellation
of outstanding options under the Discretionary Option Grant Program which have
exercise prices in excess of the then current market price of Common Stock and
to issue replacement options with an exercise price based on the market price of
Common Stock at the time of the new grant.
Stock Issuance Program
Shares may be sold under the Stock Issuance Program at a price per share of
not less than 100% of fair market value per share of Common Stock unless
otherwise determined by the Plan Administrator. Shares are payable in cash or
through a promissory note payable to the Company and may also be issued solely
as a bonus for past services.
The issued shares may either be immediately vested upon issuance or subject
to a vesting schedule tied to the performance of service or the attainment of
performance goals. The Plan Administrator will, however, have the discretionary
authority at any time to accelerate the vesting of any unvested shares.
Automatic Option Grant Program
Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member after June 5, 1997 will automatically be granted an
option for 10,000 shares of Common Stock. In addition, on the date of each
annual stockholders' meeting, each individual who continues to serve as a
non-employee Board member after such meeting will automatically be granted, on
the date of that meeting, an option to purchase 4,000 shares of Common Stock,
provided such individual has served as a non-employee Board member for at least
six (6) months.
Each option will have an exercise price per share equal to 100% of the fair
market value per share of Common Stock on the option grant date and a maximum
term of ten years measured from the option grant date.
Each option will be immediately exercisable for all the option shares, but
any purchased shares will be subject to repurchase by the Company, at the
exercise price paid per share, upon the optionee's cessation of Board service.
Each initial 10,000 option grant will vest (and the Company's repurchase rights
will lapse) in four (4) equal annual installments over the optionee's period of
Board service, with the first such installment to vest one (1) year from the
option grant date. Each additional 4,000-share grant will vest upon the
Optionee's completion of one year of Board service measured from the grant date.
The shares subject to each automatic option grant will immediately vest
upon the optionee's death or permanent disability while serving as a Board
member or an acquisition of the Company by merger or asset sale or a hostile
<PAGE>
change in control of the Company (whether by successful tender offer for more
than 50% of the outstanding voting stock or by proxy contest for the election of
Board members). In addition, upon the successful completion of a hostile
take-over, each automatic option grant may be surrendered to the Company for a
cash distribution per surrendered option share in an amount equal to the excess
of (i) the take-over price per share over (ii) the exercise price payable for
such share.
Director Fee Option Grant Program
Under the Director Fee Option Grant Program, each non-employee Board member
may elect to apply all or a portion of any annual retainer fee otherwise payable
in cash to the acquisition of an option. The option grant will automatically be
made on the first trading day in January for the year for which the election is
to be in effect. The option will have an exercise price per share equal to the
fair market value of the option shares on the grant date, and the number of
shares subject to the option will be such that the value of the option (as
determined by using the Black-Scholes option valuation model) shall be equal to
the amount of the retainer fee applied to the program. The option will become
exercisable for 50% of the option shares upon completion of six (6) months of
service during the calendar year of the option grant and with respect to the
balance of the shares in a series of six (6) successive equal monthly
installments upon the optionee's completion of each additional month of Board
service during the calendar year of the option grant. The option will be subject
to full and immediate vesting upon certain changes in the ownership or control
of the Company.
General Provisions
Acceleration
In the event that the Company is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation or replaced with a comparable option to
purchase shares of the capital stock of the successor corporation will
automatically accelerate in full, and all unvested shares under the Stock
Issuance Program will immediately vest, except to the extent the Company's
repurchase rights with respect to those shares are to be assigned to the
successor corporation. The Plan Administrator will have the discretionary
authority to provide for automatic acceleration of outstanding options under the
Discretionary Grant Program and the automatic vesting of outstanding shares
under the Stock Issuance Program either at the time of a change in control or
upon the involuntary termination of the individual's service within eighteen
(18) months following a change in control or acquisition.
The acceleration of vesting in the event of a change in the ownership or
control of the Company may be viewed as an anti-takeover provision and may have
the effect of discouraging a merger proposal, a takeover attempt or other effort
to gain control of the Company.
Financial Assistance
The Plan Administrator may permit one or more participants to pay the
exercise price of outstanding options or the purchase price of shares under the
Plan by delivering a promissory note payable in installments. The Plan
Administrator will determine the terms of any such promissory note. However, the
maximum amount of financing provided any participant may not exceed the cash
consideration payable for the issued shares plus all applicable taxes incurred
in connection with the acquisition of the shares. Any such promissory note may
be subject to forgiveness in whole or in part, at the discretion of the Plan
Administrator, over the participant's period of service.
Special Tax Election
The Plan Administrator may provide one or more holders of options or
unvested shares with the right to have the Company withhold a portion of the
shares otherwise issuable to such individuals in satisfaction of the withholding
tax liability incurred by such individuals in connection with the exercise of
those options or the vesting of those shares. Alternatively, the Plan
Administrator may allow such individuals to deliver previously acquired shares
of Common Stock in payment of such tax liability.
<PAGE>
Amendment and Termination
The Board may amend or modify the Plan in any or all respects whatsoever
subject to any required stockholder approval. The Board may terminate the Plan
at any time, and the Plan will in all events terminate on October 1, 2006.
<PAGE>
Stock Awards
The table below shows, as to each of the Company's executive officers named
in the Summary Compensation Table and the various indicated individuals and
groups, the number of shares of Common Stock subject to options granted between
January 1, 1998 and March 31, 1999 under the Plan together with the weighted
average exercise price payable per share.
<TABLE>
<CAPTION>
===========================================================================================================
========================================================== -------------------- =========================
Name Number of Option Weighted
Shares Average
Exercise Price
========================================================== -------------------- =========================
<S> <C> <C>
Timothy D. Webb 500,000 $3.50
President and Chief Executive Officer
========================================================== -------------------- =========================
William C. Cason, 55,000 $1.94
Senior Vice President of Business Development
Chief Technology Officer
========================================================== -------------------- =========================
James T. Kelsey, 244,424 $2.72
Senior Vice President of Enterprise Solutions
========================================================== -------------------- =========================
Michael V. Jaggers 38,954 $3.59
Vice President of SRDS
========================================================== -------------------- =========================
Brent Terry, 59,048 $3.83
Vice President of Embedded Systems
========================================================== -------------------- =========================
All current executive officers as a group 1,034,453 $3.27
(Eight persons)
========================================================== -------------------- =========================
Thomas A. Herring, 4,000 $6.13
Director Nominee
========================================================== -------------------- =========================
Michael J. Maples, 21,857 $3.40
Director Nominee
- ---------------------------------------------------------- -------------------- =========================
Wade E. Saadi 17,857 $2.63
Director Nominee
- ---------------------------------------------------------- -------------------- =========================
Edward C. Ateyeh, Jr. 17,857 $2.63
Director Nominee
- ---------------------------------------------------------- -------------------- =========================
Kevin B. Kurtzman, 17,857 $2.63
Director Nominee
- ---------------------------------------------------------- -------------------- =========================
W. Frank King, Ph.D., _ _
Director Nominee
- ---------------------------------------------------------- -------------------- =========================
Jonathan D. Wallace, Esq., _ _
Current Director
- ---------------------------------------------------------- -------------------- =========================
All current directors who are not executive officers as
a group (Seven persons) 79,428 $2.98
- ---------------------------------------------------------- -------------------- =========================
All employees and consultants, including current 2,542,596 $3.54
officers who are not executive officers as a group
(475 persons)
========================================================== ==================== =========================
</TABLE>
<PAGE>
Federal Income Tax Consequences
Option Grants
Options granted under the Plan may be either incentive stock options which
satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or non-statutory options which are not intended to meet
such requirements. The Federal income tax treatment for the two types of options
differs as follows:
Incentive Options. The optionee recognizes no taxable income at the time of
the option grant, and no taxable income is generally recognized at the time the
option is exercised. However, the amount by which the fair market value (at the
time of exercise) of the purchased shares exceeds the exercise price paid for
those shares will be included in the optionee's alternative minimum taxable
income at the time of exercise. The optionee will recognize taxable income in
the year in which the purchased shares are sold or otherwise disposed of. For
Federal tax purposes, dispositions are divided into two categories: (i)
qualifying and (ii) disqualifying. A qualifying disposition occurs if the sale
or other disposition is made after the optionee has held the shares for more
than two years after the option grant date and more than one year after the
exercise date. If either of these two holding periods is not satisfied, then a
disqualifying disposition will result. If the optionee makes a disqualifying
disposition of the purchased shares, then the Company will be entitled to an
income tax deduction, for the taxable year in which such disposition occurs,
equal to the excess of (i) the fair market value of such shares on the option
exercise date over (ii) the exercise price paid for the shares. In no other
instance will the Company be allowed a deduction with respect to the optionee's
disposition of the purchased shares.
Non-Statutory Options. An optionee upon the grant of a non-statutory option
recognizes no taxable income. The optionee will in general recognize ordinary
income, in the year in which the option is exercised, equal to the excess of the
fair market value of the purchased shares on the exercise date over the exercise
price paid for the shares. Further, the optionee will be required to satisfy the
tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by the Company in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when the Company's repurchase right lapses, an amount
equal to the excess of (i) the fair market value of the shares on the date the
repurchase right lapses over (ii) the exercise price paid for the shares. The
optionee may, however, elect under Section 83(b) of the Code to include as
ordinary income in the year of exercise of the option an amount equal to the
excess of (i) the fair market value of the purchased shares on the exercise date
over (ii) the exercise price paid for such shares. If the Section 83(b) election
is made, the optionee will not recognize any additional income as and when the
repurchase right lapses.
The Company will be entitled to an income tax deduction equal to the amount
of ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of the Company in which such ordinary income is recognized by the optionee.
Stock Appreciation Rights
An optionee who is granted a stock appreciation right will recognize
ordinary income in the year of exercise equal to the amount of the appreciation
distribution. The Company will be entitled to an income tax deduction equal to
the appreciation distribution for the taxable year in which the ordinary income
is recognized by the optionee.
Direct Stock Issuance
The tax principles applicable to direct stock issuances under the Plan will
be substantially the same as those summarized above for the exercise of
non-statutory option grants.
<PAGE>
Deductibility of Executive Compensation
The Company anticipates that any compensation deemed paid by it in
connection with the disqualifying disposition of incentive stock option shares
or the exercise of non-statutory options granted with exercise prices equal to
the fair market value of the shares on the grant date will qualify as
performance-based compensation for purposes of Code Section 162(m) and will not
have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain
executive officers of the Company. Accordingly, all compensation deemed paid
under the 1996 Plan with respect to such dispositions or exercises will remain
deductible by the Company without limitation under Code Section 162(m).
Accounting Treatment
Option grants or stock issuances with exercise or issue prices less than
the fair market value of the shares on the grant or issue date will result in a
compensation expense to the Company's earnings equal to the difference between
the exercise or issue price and the fair market value of the shares on the grant
or issue date. Such expense will be accruable by the Company over the period
that the option shares or issued shares are to vest. Option grants or stock
issuances at 100% of fair market value will not result in any charge to the
Company's earnings. Whether or not granted at a discount, the number of
outstanding options may be a factor in determining the Company's earnings per
share on a fully diluted basis. Under the Financial Accounting Standards Board
No. 123, footnote disclosure is required as to the impact the outstanding
options under the Plan would have upon the Company's reported earnings were
those options appropriately valued as compensation expense.
Under a recently-proposed amendment to the current accounting principles,
option grants made to non-employee Board members or consultants after December
15, 1998 will result in a direct charge to the Company's reported earnings based
upon the fair value of the option measured on the vesting date of each
installment of the underlying option shares. Such charge will accordingly
include the appreciation in the value of the option shares over the period
between the grant date of the option (or, if later, the effective date of the
final amendment) and the vesting date of each installment of the option shares.
In addition, if the proposed amendment is adopted, any options which are
repriced after December 15, 1998 will also trigger a direct charge to the
Company's reported earnings measured by the appreciation in the value of the
underlying shares over the period between the grant date of the option (or, if
later, the effective date of the final amendment) and the date the option is
exercised for the shares.
Should one or more optionees be granted stock appreciation rights which
have no conditions upon exercisability other than a service or employment
requirement, then such rights will result in a compensation expense to the
Company's earnings.
Stockholder Approval
The affirmative vote of a majority of the outstanding voting shares of the
Company present or represented and entitled to vote at the Annual Meeting is
required for approval of the amendment to the Plan. The Plan will terminate once
the balance of the share reserve as last approved by the stockholders has been
issued pursuant to outstanding option grants and stock issuances under the Plan.
Should such stockholder approval not be obtained, then the share reserve
will not be increased, and all options previously granted under the 1996 Plan on
the basis of the share increase will terminate without becoming exercisable for
any of the shares of Common Stock subject to those options. The 1996 Plan will,
however, continue to remain in effect, and option grants and stock issuances may
continue to be made pursuant to the provisions of the Plan prior to its
amendment until the available reserve of Common Stock under such plan is issued.
The Board of Directors recommends that the stockholders vote "FOR" the
approval of the amendment to the Plan, and proxies executed and returned will be
so voted unless contrary instructions are indicated thereon. The Board believes
<PAGE>
that it is in the best interests of the Company to continue to have a
comprehensive equity incentive program for the Company which will provide a
meaningful opportunity for officers, employees and non-employee Board members to
acquire a substantial proprietary interest in the enterprise and thereby
encourage such individuals to remain in the Company's service and more closely
align their interests with those of the stockholders.
New Plan Benefits
As of April 20, 1999, no options have been granted, and no direct stock
issuances have been made, on the basis of the 500,000-share increase, which
forms part of this Proposal No. 2. At the 1999 Annual Meeting, each individual
who will continue to serve as a non-employee Board member will be eligible to
receive an option grant under the Automatic Option Grant Program to purchase
4,000 shares of Common Stock at an exercise price per share equal to the fair
market value per share of Common Stock on the grant date.
PROPOSAL 3
APPROVAL OF SELECTION OF INDEPENDENT AUDITORS
The Company is asking the stockholders to ratify the selection of Ernst &
Young LLP as the Company's independent auditors for the year ending December 31,
1999. In the event that the stockholders fail to ratify the appointment, the
Board of Directors will reconsider its selection. Even if the selection is
ratified, the Board of Directors, in its discretion, may direct the appointment
of a different independent accounting firm at any time during the year if the
Board of Directors believes that such change would be in the Company's and the
stockholders' best interests.
Representatives of Ernst & Young LLP are expected to be present at the
Annual Meeting to respond to your questions and will have the opportunity to
make a statement if they desire to do so.
The affirmative vote of a majority of the outstanding voting shares of the
Company present or represented and entitled to vote at the Annual Meeting is
required to ratify the selection of Ernst & Young LLP.
The Board of Directors unanimously recommends a vote "FOR" the ratification
and approval of the selection of Ernst & Young LLP as the Company's independent
auditors, and proxies executed and returned will be so voted unless contrary
instructions are indicated thereon.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 26, 1999 by (i) each
person who is known by the Company to own beneficially more than five percent of
the Company's Common Stock; (ii) each of the Company's directors; (iii) each of
the Company's officers named in the Summary Compensation Table below; and
(iv) all current executive officers and directors as a group.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address Of Beneficial Percent of
of Beneficial Owner Ownership (1) Class
<S> <C> <C> <C>
Wade E. Saadi (2) 1,667,590 17.8
c/o Pencom Systems Incorporated,
40 Fulton Street
New York, New York 10038
Edgar G. Saadi (2) 1,667,590 17.8
c/o Pencom Systems Incorporated,
40 Fulton Street
New York, New York 10038
Edward C. Ateyeh, Jr. (2) 1,667,590 17.8
c/o Pencom Systems Incorporated,
40 Fulton Street
New York, New York 10038
Technology Crossover Ventures and affiliated 692,200 7.3
entities
575 High Street, Suite 400
Palo Alto, California 94301
W. Frank King, Ph.D. (3) 633,846 6.8
c/o PSW Technologies, Inc.,
6300 Bridgepoint Parkway,
Building 3, Suite 200,
Austin, Texas 78730
Jonathan D. Wallace, Esq. 138,462 1.5
Timothy D. Webb (4) 125,000 1.3
William C. Cason (5) 47,693 *
Michael J. Maples (6) 20,036 *
Thomas A. Herring(7) 20,036 *
Kevin B. Kurtzman(8) 10,768 *
Brent R. Terry (9) 7,692 *
James T. Kelsey _ _
Michael V. Jaggers _ _
All directors and executive officers as a group
(thirteen persons) (10) 5,372,457 57.5
________________________________
<FN>
* Indicates less than 1%
<PAGE>
(1) Beneficial ownership is calculated in accordance with the rules of the
Securities and Exchange Commission in accordance with Rule 13d-3(d)(i). In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options held by that person that are currently exercisable or become
exercisable within 60 days following February 26, 1999 are deemed
outstanding. However, such shares are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. Unless
otherwise indicated in the footnotes to this table, the persons and
entities named in this table have sole voting and sole investment power
with respect to all shares beneficially owned, subject to community
property laws where applicable.
(2) Includes 52,205 shares issuable upon exercise of warrants held by each of
Messrs. Wade E. Saadi, Edgar G. Saadi and Edward C. Ateyeh.
(3) Includes 80,000 shares issuable upon exercise of options that are
exercisable within the 60-day period following February 26, 1999.
(4) Includes 100,000 shares issuable upon exercise of options that are
exercisable within the 60-day period following February 26, 1999.
(5) Represents 47,693 shares issuable upon exercise of options that are
exercisable within the 60-day period following February 26, 1999.
(6) Represents 20,036 shares issuable upon exercise of options that are
exercisable within the 60-day period following February 26, 1999.
(7) Represents 20,036 shares issuable upon exercise of options that are
exercisable within the 60-day period following February 26, 1999.
(8) Represents 10,768 shares issuable upon exercise of options that are
exercisable within the 60-day period following February 26, 1999.
(9) Represents 7,692 shares issuable upon exercise of options that are
exercisable within the 60-day period following February 26, 1999
(10) See notes 2-9 above.
</FN>
</TABLE>
<PAGE>
EXECUTIVE COMPENSATION
Executive Officers
Set forth below is certain information concerning the executive officers of
the Company:
<TABLE>
<CAPTION>
Name Age Position Held
<S> <C> <C>
Timothy D. Webb 38 President and Chief Executive Officer
Keith D. Thatcher 41 Chief Financial Officer, Treasurer & Vice President of Finance
Kenneth L. Drake, Ph.D. 47 Vice President of Software Research and Development Services
Pedro A. Fernandez 33 Vice President of Corporate Strategy and Marketing
Julie M. Kirk 48 Vice President of Human Resources
Nancy A. Richardson, Esq. 39 General Counsel, Secretary and Vice President
Brent R. Terry 34 Vice President of Embedded Systems
John M. Velasquez 33 Vice President of Enterprise Solutions
</TABLE>
Certain biographical information concerning Mr. Webb is set forth under
"PROPOSAL 1 - Election of Directors".
Mr. Thatcher has served as the Chief Financial Officer of PSW since May
1998 and Vice President of Finance and Treasurer of PSW since October 1996. From
October 1994 to June 1996, Mr. Thatcher was Chief Financial Officer, Secretary
and Treasurer of Tanisys Technology, Inc., a technology start-up company
involved in developing commercial applications for capacitive touch technology.
Prior thereto, Mr. Thatcher served as Vice President and Treasurer for Kinetic
Concepts, Inc., a medical services and products company, from 1987 to 1994. From
1985 to 1987, Mr. Thatcher was employed by Peat Marwick Main & Co. as an audit
manager. Mr. Thatcher earned a bachelor's degree in accountancy from Northern
Arizona University.
Mr. Drake was named Vice President of Software Research and Development
Services in February 1999, having previously served as Vice President of
Enterprise Solutions Migration Services since May 1998. Prior to joining PSW,
Mr. Drake served as President of Technology Business Ventures and Savantage,
Inc., both of which were start up companies in the software industry. From 1991
to 1994, Mr. Drake was a Manager of Business Development for Microelectronics
and Computer Technology Corp. Mr. Drake has a Ph.D. in electrical engineering
from the University of Michigan.
Mr. Fernandez joined PSW in January 1999 as Vice President of Corporate
Strategy and Marketing. Mr. Fernandez began his career at Andersen Consulting in
1988. In 1994 he joined Cambridge Technology Partners and held a Director
position. After leaving Cambridge in April 1998, Mr. Fernandez was briefly
employed by Syntel, Inc. as Vice President, People Soft Solutions. Mr. Fernandez
holds a Bachelor of Science in Computer Engineering from the University of
Miami.
Ms. Kirk was named Vice President of Human Resources for PSW in January
1997 after serving as Director of Human Resources for the Company since October
1994. Prior to that, Ms. Kirk acted as a human resources consultant for Pencom,
Inc. Before joining Pencom, Ms. Kirk was employed by Union Pacific Corporation
for 17 years.
Ms. Richardson was named General Counsel, Secretary, and Vice President of
PSW in May 1998 after providing legal services to the Company since May 1997.
Ms. Richardson had previously been a sole practitioner. Ms. Richardson began her
career as a Certified Public Accountant with Ernst & Young from 1981 through
1986. Ms. Richardson holds a JD and MBA from the University of Texas.
<PAGE>
Mr. Terry was named Vice President of Embedded Systems in October 1998
after serving as Vice President of Business Systems and Vice President of
Enterprise Systems Management for PSW. Mr. Terry has been employed by the
Company since 1987 after graduating from the University of Southwestern
Louisiana with a degree in Computer Science.
Mr. Velasquez joined PSW in January 1999 as Vice President of Enterprise
Solutions. Mr. Velasquez was briefly employed by Syntel, Inc. as Vice President,
Data Warehousing from April 1998 until January 1999. From 1994 to 1998, Mr.
Velasquez was president of a consulting firm specializing in systems design and
management. Mr. Velasquez began his career with Andersen Consulting. Mr.
Velasquez has a Bachelor of Science in Industrial Engineering from Stanford
University.
Summary Compensation Information
The following table provides certain summary information concerning the
compensation earned by the Company's Chief Executive Officer, the Company's
former Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company whose salary and bonus for 1998
was in excess of $100,000. Dr. W. Frank King retired from the position of Chief
Executive Officer on September 1, 1998. Messrs. Cason, Kelsey and Jaggers have
all left the employment of the Company subsequent to December 31, 1999. The
listed individuals shall be hereafter referred to as the "Named Executive
Officers".
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
--------------------------------------------- --------
Name and Principal Position Other Annual
Year Salary($) Bonus($) Compensation($) Stock Options(#)
<S> <C> <C> <C> <C> <C>
Timothy D. Webb 1998 109,567 _ _ 500,000
President and Chief Executive Officer................... 1997 _ _ _ _
W. Frank King, Ph.D. 1998 312,494 _ _ _
President and Chief Executive Officer................... 1997 357,155 _ _ _
William C. Cason 1998 175,000 _ _ (1) 55,000
Senior Vice President of Business Development........... 1997 153,438 47,393 _ 55,000
James T. Kelsey 1998 128,788 _ _ (2) 244,424
Senior Vice President of Enterprise Solutions........... 1997 _ _ _ _
Michael V. Jaggers 1998 133,750 _ 3,125 (3) 38,954
Vice President of Software Research & Development 1997 110,109 12,939 _ 8,154
Services................................................
Brent R. Terry 1998 131,667 _ _ (4) 21,700
Vice President of Embedded Solutions ................... 1997 100,108 11,913 _ 4,000
__________
<FN>
(1) Includes 55,000 stock options repriced on September 29, 1998.
(2) Includes 122,212 stock options repriced on September 29, 1998.
(3) Includes 23,554 stock options repriced on September 29, 1998.
(4) Includes 21,700 stock options repriced on September 29, 1998.
</FN>
</TABLE>
<PAGE>
Stock Option Information
The following table sets forth certain information regarding option grants
made pursuant to the Company's 1996 Stock Option/Stock Issuance Plan during 1998
to each of the Named Executive Officers. No stock appreciation rights were
granted during 1998.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants Potential Realizable Value at
Percentage Assumed Annual Rates of
Number of Of Total Stock Price Appreciation
Securities Options for Option Term(2)
Underlying Granted Exercise --------------------------------------
Options to Employees Price Expiration
Name Granted (#) In 1998(1) ($/Sh) Date 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C> <C>
Timothy D. Webb 500,000 28.14% 3.50 8/28/08 1,100,565 2,789,049
W. Frank King, Ph.D. _ _ _
William C. Cason 55,000 3.09% 1.94 9/28/08 (3) 67,017 169,833
James T. Kelsey 122,212 13.75% 6.13 5/18/08 470,518 1,192,994
122,212 13.75% 1.94 9/28/08 (3) 148,913 377,376
Michael V. Jaggers 15,400 0.86% 6.13 5/18/08 59,320 150,330
23,554 1.32% 1.94 9/28/08 (3) 28,700 72,731
Brent R. Terry 17,700 0.99% 6.13 5/18/08 68,180 172,782
21,700 1.22% 1.94 9/28/08 (3) 26,441 67,007
___________
<FN>
(1) Based on an aggregate of 1,776,627 options granted to employees in fiscal
1998, including options granted to the Named Executive Officers, and
including 737,495 of repriced options.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options at the end of the 10-year option term. The assumed 5%
and 10% rates of stock appreciation are mandated by rules of the Securities
and Exchange Commission and do not represent the Company's estimate of the
future market price of the Common Stock. These amounts do not take into
account any other appreciation in the price of the Common Stock from the
date of grant to the current date.
(3) These options represent amounts repriced on September 29, 1998.
</FN>
</TABLE>
<PAGE>
No options or stock appreciation rights were exercised by the Named
Executive Officers in 1998. No stock appreciation rights were outstanding on
December 31, 1998. The following table sets forth for each of the Named
Executive Officers certain information concerning the value of unexercised
options at the end of 1998:
<TABLE>
<CAPTION>
Fiscal Year-End Option Values
Number of Securities
Underlying Value of Unexercised
Unexercised Options in-the-Money Options
at December 31, 1998 (#) at December 31, 1998(1)($)
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Timothy D. Webb...................................... 100,000 400,000 0 0
Dr. W. Frank King.................................... 80,000 0 0 0
William C. Cason..................................... 47,693 68,847 103,017 64,962
James T. Kelsey...................................... 0 122,212 0 129,850
Michael V. Jaggers................................... 0 23,554 0 25,026
Brent R. Terry....................................... 7,692 42,887 17,477 23,056
___________
<FN>
(1) Based on an estimated fair value of the Company's Common Stock at
December 31, 1998 ($3.00 per share) less the exercise price payable for
such shares.
</FN>
</TABLE>
Employment Contracts and Change of Control Arrangements
The Company has entered into an employment agreement with Timothy D. Webb
dated August 28, 1998 (the "Webb Agreement"). Pursuant to the Webb Agreement,
the Company agreed to pay Mr. Webb an annual base salary of $325,000 and to
provide customary fringe benefits. In addition, the Company agreed to issue to
Mr. Webb options under the Plan to purchase an aggregate of 500,000 shares of
Common Stock at $3.50 per share. The options vest over six (6) years with
100,000 vesting upon Mr. Webb's completion of six months of employment, an
additional 100,000 vesting upon the completion of two (2) years of employment,
an additional 100,000 vesting upon the completion of three (3) years of
employment, 25,000 vesting upon the completion of four (4) years of employment,
75,000 vesting upon the completion of five (5) years of employment, and 100,000
vesting upon the completion of six (6) years of service. The options shall be
Incentive Stock Options up to the permitted limitation as of the hire date.
Accordingly, 199,997 options were classified as Incentive Stock Options. The
Webb Agreement terminates August 28, 2004.
The Company has entered into employment agreements with no defined
termination dates with each of Messrs. Cason, Kelsey, Jaggers and Terry dated
September 27, 1993; May 18, 1998; March 10, 1998; and June 24, 1992,
respectively (the "Executive Agreements"). Pursuant to the Executive Agreements,
the Company agreed to pay Messrs. Cason, Kelsey, Jaggers, and Terry annual base
salaries of $175,000, $150,000, $140,000 and $140,000, respectively, and to
provide customary fringe benefits. In addition, Mr. Kelsey was eligible for a
$50,000 bonus.
The Company has entered into written agreements with its officers whereby
in the event of the officer's involuntary termination within 18 months following
an acquisition of the Company or change in control of the Company's Board of
Directors, any unvested options assumed or replaced in connection with the
acquisition or otherwise outstanding will automatically accelerate so that the
option shall become immediately exercisable.
<PAGE>
The Executive Agreements contain provisions which, among others, prohibit
the employee from disclosing or otherwise using certain confidential
information, assign to the Company inventions or ideas conceived by the employee
during his employment, prohibit solicitation by the employee of clients and
other employees of the Company and prohibit the employee from accepting any
opportunity (whether by contract or full-time employment) with the Company's
clients. Pursuant to the terms of the Executive Agreements, either party may
terminate the employment relationship without cause upon two weeks' prior
written notice to the other party.
The Compensation Committee as Plan Administrator of the Plan will have the
authority to provide for the accelerated vesting of outstanding options held by
the Chief Executive Officer and any other executive officer or the shares of
Common Stock subject to direct issuances held by such individual, in connection
with certain changes in control of the Company or the subsequent termination of
the officer's employment following the change in control event.
Compensation Committee Interlocks and Insider Participation
Executive compensation decisions are made by the Compensation Committee of
the Board of Directors, which consists of Messrs. Saadi, Ateyeh and Maples. None
of these individuals was an officer or employee of the Company at any time
during 1998 or at any other time. During 1998, no current executive officer of
the Company served as a member of the Board of Directors or compensation
committee of any other entity that has or has had one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee.
Compensation Committee Report on Executive Compensation
It is the duty of the Compensation Committee to review and determine the
salaries and incentive compensation of the officers of the Company, including
the President and Chief Executive Officer, and provide recommendations for the
salaries and incentive compensation of the other employees and the consultants
of the Company. The Compensation Committee also administers various incentive
compensation, stock and benefit plans.
The Compensation Committee believes that the compensation programs for the
Company's executive officers should reflect the Company's performance and the
value created for the Company's stockholders. In addition, the compensation
programs should support the short-term and long-term strategic goals and values
of the Company and should reward individual contribution to the Company's
success. The market for system integration and software development services is
very competitive, and the Company's success depends upon its ability to attract
and retain qualified executives through the competitive compensation packages it
offers to such individuals.
General Compensation Policy. The Compensation Committee's policy is to
provide the Company's executive officers with compensation opportunities which
are based upon their personal performance, the financial performance of the
Company and their contribution to that performance and which are competitive
enough to attract and retain highly skilled individuals. Each executive
officer's compensation package is comprised of three elements: (i) base salary
that is competitive with the market and reflects individual performance, (ii)
annual variable performance awards payable in cash or stock options and tied to
the Company's achievement of annual financial performance goals and (iii)
long-term stock based incentive awards designed to strengthen the mutuality of
interests between the executive officers and the Company's stockholders. As an
officer's level of responsibility increases, a greater proportion of his or her
total compensation will be dependent upon the Company's financial performance
and stock price appreciation rather than base salary.
Compensation decisions for 1998 were made by the Compensation Committee.
The principal factors that were taken into account in establishing each
executive officer's compensation package for 1998 are described below. However,
the Compensation Committee may in its discretion apply entirely different
factors, such as different measures of financial performance, for future fiscal
years.
<PAGE>
Base Salary. The base salary for each officer reflects the salary levels
for comparable positions in similar companies, such as systems integrators and
software companies, as well as the individual's personal performance and
internal alignment considerations. The relative weight given to each factor
varies with each individual in the sole discretion of the Compensation
Committee. Each executive officer's base salary is subject to minimums set forth
in their respective employment agreements and is adjusted each year on the basis
of (i) the Compensation Committee's evaluation of the officer's personal
performance for the year and (ii) the competitive marketplace for persons in
comparable positions. The Company's performance and profitability may also be a
factor in determining the base salaries of executive officers.
Annual Incentives. The Company maintains a cash incentive to reward
executive officers and other key employees for attaining defined performance
targets. For most executive officers and other key employees, bonuses are based
primarily on Company-wide performance targets. For some management personnel,
Company-wide performance is a factor, however, significant weight is also given
to individual performance and performance of an operating group within the
Company. Upon achievement of a performance target, an employee is entitled to a
cash payment.
In setting performance targets, the Company considered its historical
performance and underlying business model, and external as well as internal
expectations related to 1998 revenue and operating profits. The financial
factors were derived directly from the Company's 1998 operating plan.
Long-Term Incentives. Generally, stock option grants for the Company's
executive officers are reviewed twice annually by the Compensation Committee.
Each grant is designed to maintain a significant unvested position to provide
incentives to create stockholder value and allows the officer to acquire shares
of the Company's Common Stock at a fixed price per share (the fair value on the
grant date) over a specified period of time (up to ten years). Options are
immediately exercisable, but option shares that are purchased subject to vesting
restrictions are repurchasable by the Company at the exercise price if the
officer's employment is terminated prior to the vesting date.
The size of the option grant to each executive officer, including the Chief
Executive Officer, is set by the Compensation Committee at a level that is
intended to create a meaningful opportunity for stock ownership based upon the
individual's current position with the Company, the individual's personal
performance in recent periods and his or her potential for future responsibility
and promotion over the option term. The relevant weight given to each of these
factors varies from individual to individual. The Compensation Committee has
established certain guidelines with respect to the option grants made to the
executive officers, but has the flexibility to make adjustments to those
guidelines at its discretion.
CEO Compensation. In setting the total compensation payable to Mr. Webb,
the Company's President and Chief Executive Officer, for the 1998 fiscal year,
the Compensation Committee sought to make that compensation competitive with the
chief executive officers of other comparable companies, while at the same time
assuring that a significant percentage of compensation was incentive-based,
primarily tied to Company performance and stock price appreciation.
The Compensation Committee sets Mr. Webb's base salary with the objective
of maintaining his base salary at a competitive level when compared with the
base salary levels in effect for similarly situated Chief Executive Officers.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the
Internal Revenue Code disallows a tax deduction to publicly held companies for
compensation paid to certain of their executive officers, to the extent that
such compensation exceeds $1 million per covered officer in any fiscal year. The
limitation applies only to the compensation, which is not considered to be
performance-based. Non-performance based compensation paid to the Company's
executive officers for 1998 did not exceed the $1 million limit per officer, and
the Compensation Committee does not anticipate that the non-performance based
compensation to be paid to the Company's executive officers for 1999 will exceed
that limit. The Plan has been structured so that any compensation deemed paid in
<PAGE>
connection with the exercise of option grants made under the Plan with an
exercise price equal to the fair market value of the option shares on the grant
date will qualify as performance-based compensation which will not be subject to
the $1 million limitation. Because it is unlikely that the cash compensation
payable to any of the Company's executive officers in the foreseeable future
will approach the $1 million limit, the Compensation Committee has decided at
this time not to take any action to limit or restructure the elements of cash
compensation payable to the Company's executive officers. The Compensation
Committee will reconsider this decision should the individual cash compensation
of any executive officer ever approach the $1 million level.
It is the opinion of the Compensation Committee that the executive
compensation policies and plans provide the necessary total remuneration program
to properly align the Company's performance and the interests of the Company's
stockholders through the use of competitive and equitable executive compensation
in a balanced and reasonable manner, for both the short- and long-term.
Special Report on the Fiscal Year 1998 Repricing of Options
In fiscal year 1998, the Compensation Committee determined that factors
affecting the stock price of the Company's shares made it necessary to consider
a program to reprice certain options to purchase Common Stock of the Company.
Stock options are intended to incentivize employees, and they form a major
component of an employee's compensation package. The Committee believes that
stock options strengthen the Company's ability to attract and retain key
employees who contribute to the Company's success. The Committee deemed it
necessary to reprice stock options held by employees, including the Company's
executive officers but excluding the Chief Executive Officer and President.
Prior to this action, the Company's stock had been depressed. In order to retain
key employees, the Committee concluded it was important that out-of-the-money
options be repriced to reflect the current market value. Option grants to
directors were not eligible for participation in this program.
After consideration and upon recommendation of the Compensation Committee,
on September 29, 1998, the Board of Directors approved the repricing of all
outstanding options for employees except the CEO and President and directed
management to convey the information to the employees. A repricing program was
implemented and communicated to the affected employees. Under the program,
employees holding outstanding options with an exercise price higher than the
closing price of a share of Common Stock on the repricing date of September 29,
1998 were eligible to participate in the repricing program. Each optionee
holding an out-of-the-money option was offered the opportunity to either retain
the existing option or to accept a repricing of the affected option at an
exercise price of $1.9375 per share. No change was made in the number of shares
subject to repriced options, but employees who accepted the repricing offer
agreed to a new vesting schedule. Under the new vesting schedule, options vest
over a four-year period at the rate of 25% per annum commencing on the first
anniversary of the date of repricing.
The Compensation Committee and the Board of Directors believe with the
repricing program employees will continue to view their options as a valuable
part of their total compensation. The Company believes that this will aid in
retaining critical employees. It will, however, be necessary for the employees
who elected to participate in the repricing program to continue employment with
the Company for another four years in order to receive the maximum benefit from
the repriced options, and then only if the market value of the stock rises above
the stated option price.
Submitted by the Compensation Committee of the Company's Board of
Directors:
Wade E. Saadi, Chairman
Edward C. Ateyeh, Jr.
Michael J. Maples
<PAGE>
Information Regarding Repricing, Cancellation or Regrant of Options
As set out above in the Special Report on the Fiscal 1998 Repricing of
Options, the Company implemented an option repricing program for executive
officers and other employees holding out-of-the-money options. The repricing was
effective September 29, 1998 as to all employees and executive officers,
excluding the Chief Executive Officer and President. At the employee's election,
each option was repriced to the fair market value of the Common Stock as of the
date of repricing ($1.9375) and became subject to a new vesting schedule.
The following table sets forth (i) information with respect to each of the
Named Executive Officers who participated in the option repricing program
effected September 29, 1998 and (ii) information with respect to all former or
current executive officers of the Company concerning their participation in any
option repricing program implemented by the Company during the last ten fiscal
years.
<TABLE>
<CAPTION>
Market
Number of Price of Exercise
Securities Stock at Price at Length of Original
Underlying Time of Time of Option Term
Options/SARS Repricing Repricing New Remaining at Date
Repriced or or Exercise of Repricing or
Name and Position Date or Amended(#) Amendment Amendment Price Amendment
<S> <C> <C> <C> <C> <C> <C>
William C. Cason, 9/29/98 30,000 $ 1.9375 $ 11.63 $ 1.9375 34 of 48 months
Senior Vice President of 25,000 9.00 33 of 48 months
Business Development
Kenneth L. Drake, 9/29/98 2,500 1.9375 6.06 1.9375 44 of 48 months
Vice President of Software Research 15,000 6.13 44 of 48 months
and Development Services
Michael V. Jaggers, 9/29/98 2,462 1.9375 7.96 1.9375 27 of 48 months
President of Software Research 2,000 9.00 33 of 48 months
& Development Services 3,692 9.00 30 of 48 months
15,400 6.13 44 of 48 months
James T. Kelsey, 9/29/98 122,212 1.9375 6.13 1.9375 44 of 48 months
Senior Vice President of
Enterprise Solutions
Julie M. Kirk, 9/29/98 4,000 1.9375 9.00 1.9375 33 of 48 months
Vice President of Human 16,600 6.13 44 of 48 months
Resources
Nancy A. Richardson, 9/29/98 4,800 1.9375 9.00 1.9375 33 of 48 months
General Counsel, Secretary, 15,200 6.13 44 of 48 months
Vice President
Keith D.
Thatcher, 9/29/98 4,000 1.9375 9.00 1.9375 33 of 48 months
Chief Financial Officer & Vice 40,000 6.13 44 of 48 months
President
Brent R. Terry, 9/29/98 4,000 1.9375 9.00 1.9375 33 of 48 months
Vice President of Embedded 17,700 6.13 44 of 48 months
Systems
</TABLE>
<PAGE>
Stock Performance Graph
The graph below depicts the price of the Common Stock as an index assuming
$100 invested on June 5, 1997 (the date of the Company's initial public
offering), along with the composite prices of companies listed in the S & P
Software & Services Companies Index and Nasdaq Stock Market (U.S. Companies)
Index. This information has been provided to the Company by the Standard &
Poor's Computers Index and the Nasdaq Stock Market. The comparisons in the graph
are required by regulations of the Securities Exchange Commission and are not
intended to forecast or to be indicative of the possible future performance of
the Common Stock.
<TABLE>
<CAPTION>
Cumulative Total Return
6/5/97 12/97 12/98
<S> <C> <C> <C>
PSW TECHNOLOGIES, INC. 100 161 33
NASDAQ STOCK MARKET (U.S.) 100 113 159
S & P COMPUTERS (SOFTWARE & SERVICES) 100 104 189
</TABLE>
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, which might incorporate future filings made by
the Company under those statutes, the preceding Compensation Committee Report on
Executive Compensation and the Stock Performance Graph will not be incorporated
by reference into any of those prior filings, nor will such report or graph be
incorporated by reference into any future filings made by the Company under
those acts.
<PAGE>
Certain Transactions with Management
Pencom Relationship
Contractual Arrangements.
The Company entered into an agreement with Pencom effective as of
January 31, 1997 whereby the Company guaranteed obligations of Tivoli Systems,
Inc., a Texas corporation and wholly-owned subsidiary of IBM ("Tivoli") under
Pencom's sublease agreement with Tivoli. Such sublease agreement expires on
September 30, 2000 and provided for annual rent of approximately $333,000 in
1998.
Registration Rights Agreement.
The Company has entered into an agreement with each of its existing
stockholders and the warrantholders pursuant to which such stockholders and
warrantholders were granted certain registration rights.
Employment Agreements.
The Company has entered into employment agreements with all of its
executive officers. See "Employment Contracts and Change of Control Agreements".
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who own more than 10% of the
Common Stock, to file reports of ownership and changes in ownership of Common
Stock and Company securities with the Securities and Exchange Commission and the
Nasdaq Stock Market. Officers, directors and greater than 10% beneficial owners
are required by the Securities and Exchange Commission regulations to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of Forms 3, 4 and 5 and amendments
thereto furnished to the Company or written representations from certain
reporting persons that no Forms 5 were required, the following individuals
inadvertently filed late a Form 3 for their initial statement of beneficial
ownership upon employment with the Company: Timothy D. Webb. The Company
believes that during 1998 all other applicable Section 16(a) reporting
requirements were complied with.
STOCKHOLDER PROPOSALS
Under the present rules of the Securities and Exchange Commission and the
Bylaws of the Company, the deadline for stockholders to submit proposals to be
considered for inclusion in the Company's Proxy Statement for the 2000 Annual
Meeting of Stockholders is December 21, 1999. Such proposals may be included in
next year's Proxy Statement if they comply with certain rules and regulations
promulgated by the Securities and Exchange Commission and the procedure set
forth in the Bylaws of the Company.
FORM 10-K
THE COMPANY WILL MAIL WITHOUT CHARGE, UPON WRITTEN REQUEST, A COPY OF ITS
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998, INCLUDING THE
FINANCIAL STATEMENTS, SCHEDULES AND LIST OF EXHIBITS. REQUESTS SHOULD BE SENT TO
THE ATTENTION OF CHIEF FINANCIAL OFFICER, AT THE COMPANY'S EXECUTIVE OFFICES
LOCATED AT 6300 BRIDGEPOINT PARKWAY, BUILDING 3, SUITE 200, AUSTIN, TEXAS 78730.
<PAGE>
OTHER MATTERS
The Board of Directors is not aware of any matter to be presented for
action at the Annual Meeting other than the matters set forth in this Proxy
Statement. Should any other matter requiring a vote of the stockholders arise,
the persons named as proxies on the enclosed proxy card will vote the shares
represented thereby in accordance with their best judgment in the interest of
the Company. Discretionary authority with respect to such other matters is
granted by the execution of the enclosed proxy card.
By Order of the Board of Directors,
/s/ Nancy Richardson
NANCY A. RICHARDSON
Secretary
April 20, 1999
