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 March 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________________to__________________________
Commission file number 000-22327
PSW TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2796054
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6300 Bridgepoint Parkway, Building 3, Suite 200, Austin Texas 78730
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 343-6666
Former name, former address and former fiscal year, if changed since last
report.
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 ________
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 9,977,391 shares
of the Company's Common Stock, $.01 par value, were outstanding as of
April 28, 2000.
<PAGE>
PSW TECHNOLOGIES, INC.
Index to March 31, 2000, Form 10-Q
<TABLE>
<CAPTION>
Page
Part I - Financial Information
<S> <C>
Item 1. Financial Statements..................................................................................3
Condensed Balance Sheets - March 31, 2000 and December 31, 1999.......................................3
Condensed Statements of Operations - Three Months Ended
March 31, 2000 and 1999...............................................................................4
Condensed Statements of Cash Flows - Three Months Ended March 31,
2000 and 1999.........................................................................................5
Notes to Condensed Financial Statements...............................................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................................................8
Item 3. Quantitative and Qualitative Disclosures about Market Risks..........................................16
Part II - Other Information
Item 5. Other Information....................................................................................17
Item 6. Exhibits and Reports on Form 8-K.....................................................................17
Signatures...........................................................................................18
</TABLE>
<PAGE>
Part 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
PSW Technologies, Inc.
Condensed Balance Sheets
(in thousands, except share and per share data)
March 31,
2000 December 31,
(Unaudited) 1999
<S> <C> <C>
Assets
Current assets:
Cash $ 575 $ 2,108
Short-term investments 18,377 18,149
Accounts receivable, net of allowance for doubtful
accounts of $488 at March 31, 2000 and $380
at December 31, 1999 11,675 10,840
Unbilled revenue under customer contracts 1,906 1,150
Income tax receivable 825 -
Net deferred taxes 1,177 447
Prepaid expenses and other current assets 873 445
--- ---
Total current assets 35,408 33,139
Investments 125 -
Property and equipment, net 5,859 4,677
Total assets $ 41,392 $ 37,816
======== ========
Liabilities and stockholders' equity
Current liabilities:
Trade payables 952 925
Accrued expenses and other current liabilities 3,603 2,954
----- -----
Total current liabilities 4,555 3,879
Net deferred taxes 515 515
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, 9,937,158 and 9,666,535 shares
issued and outstanding at March 31, 2000 and
December 31, 1999, respectively 99 97
Additional paid-in capital 32,786 30,491
Accumulated other comprehensive income (20) (39)
Retained earnings 3,457 2,873
----- -----
Total stockholders' equity 36,322 33,422
Total liabilities and stockholders' equity $ 41,392 $ 37,816
======== ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
PSW Technologies, Inc.
Condensed Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Revenue $14,225 $10,394
Operating expenses:
Technical staff 7,396 6,070
Selling and administrative staff 2,605 2,229
Other expenses 3,529 2,093
----- -----
Total operating expenses 13,530 10,392
------ ------
Income from operations 695 2
Interest income (expense), net 234 250
--- ---
Income before provision for income taxes 929 252
--- ---
Provision for income taxes 345 100
--- ---
Net income $ 584 $ 152
====== ======
Basic earnings per share $ 0.06 $ 0.02
====== ======
Diluted earnings per share $ 0.05 $ 0.01
====== ======
Shares used in basic earnings per share calculation 9,802 9,325
===== =====
Shares used in diluted earnings per share calculation 11,462 10,230
====== ======
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
PSW Technologies, Inc.
Condensed Statements of Cash Flows
(in thousands)
(unaudited)
Three Months
Ended March 31,
-------------------------------------
2000 1999
---- ----
<S> <C> <C>
Operating activities
Net income $584 $152
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 441 292
Bad debt expense, net of recoveries 14 7
Changes in operating assets and liabilities:
Accounts receivable (849) (555)
Unbilled revenue under customer contracts (756) (874)
Prepaid expenses and other current assets (428) (178)
Trade payables 60 (10)
Accrued expenses and other current liabilities 761 695
Income taxes 324 345
--- ---
Net cash provided by (used in) operating activities 151 (126)
--- ----
Investing activities
Purchase of short-term investments, net (334) -
Proceeds from the sale of short-term investments, net - 251
Acquisition of property and equipment (1,672) (444)
------ ----
Net cash used in investing activities (2,006) (193)
------ ----
Financing activities
Proceeds from issuance of common stock, net of issuance cost 322 27
--- --
Net cash provided by financing activities 322 27
--- --
Net decrease in cash (1,533) (292)
Cash, beginning of period 2,108 1,167
----- -----
Cash, end of period $ 575 $ 875
===== =====
Non-cash activities:
Unrealized gain on investments $ 19 $ 91
Reduction of income taxes payable associated with the
exercise of stock options $ 1,975 $ -
</TABLE>
See accompanying notes.
<PAGE>
PSW Technologies, Inc.
Notes to Condensed Financial Statements
March 31, 2000
(unaudited)
1. Basis of Presentation
PSW Technologies, Inc., doing business as Concero 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 ruls 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
accounting principles generally accepted in the United States for complete
financial statements and should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1999 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 accounting
principles generally accepted in the United States requires management to
make estimates and assumptions, including estimates to complete contracts, that
affect the reported amounts in the financial statements and accompanying notes.
Actual results could differ from those estimates.
3. Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. SFAS No. 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income.
The components of comprehensive income for the three month periods ended
March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
------------ -------------
<S> <C> <C>
Net income $ 584 $ 152
Unrealized gain on short-term investments 30 152
Income tax expense related to items of other comprehensive income (11) (61)
------------ -------------
Comprehensive income $ 603 $ 243
============ =============
The components of accumulated other comprehensive income at March 31, 2000 and December 31, 1999 are as follows:
2000 1999
------------ -------------
Unrealized loss on short-term investments $ (20) $ (39)
============ =============
</TABLE>
<PAGE>
PSW Technologies, Inc.
Notes to Condensed Financial Statements (Continued)
(unaudited)
4. Earnings per Share
The following table sets forth the computation of basic and diluted earnings pe
share (in thousands, except per share data) for the three months ended March 31:
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
Numerator:
Net income $ 584 $ 152
=============== ===============
Denominator:
Shares used in basic earnings per
share calculation 9,802 9,325
Effect of dilutive securities:
Employee stock options 1,506 424
Warrants 154 481
--------------- ---------------
Shares used in diluted earnings per
share calculation 11,462 10,230
=============== ===============
Basic earnings per share $ 0.06 $ 0.02
=============== ===============
Diluted earnings per share $ 0.05 $ 0.01
=============== ===============
</TABLE>
<PAGE>
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 th
Securities Exchange Act of 1934, that involve risks and uncertainties, such as
statements for the plans, objectives, expectations and intentions of PSW. Such
forward looking statements are generally accompanied by words such as "plan,"
"estimate," "expect," "believe," "could," "would," "anticipate," "may," or
other words that convey uncertainty of future events or outcomes. These
forward-looking statements and other statements made elsewhere in this report
are made in reliance on the Private Securities Litigation Reform Act of 1995.
The section below entitled "Certain Factors That May Affect Future Results,
Financial Condition and Market Price of Securities" sets forth certain factors
that could cause actual future results of the Company to differ materially from
these statements.
Overview
We are an e-business services firm that offers strategic consulting skills
with deep technology and integration expertise. This combination enables us to
utilize existing and new technologies to provide reliable,flexible and scalable
e-business solutions. Our alliances with leading Internet and interactive
television technology providers allow us to gain a thorough understanding of
their products and perspective on other products as well as next-generation
technologies. Using our technology insight and skills, we assist our clients to
define, design, develop and deploy e-business solutions that enhance their
competitive positions.
We formally began doing business as Concero on April 17, 2000 and our
NASDAQ ticker symbol was changed from PSWT to CERO on April 28, 2000. Our
corporate name will officially become Concero, Inc., after shareholder approval
at the annual stockholders' meeting on May 17, 2000. We believe that our name
change and related advertising and promotional activities will enable us to
communicate our capabilities as an e-business solutions provider to prospective
clients and employees. Moreover, we intend to pursue acquisitions that provide
access to complementary skills or provide additional talented professionals,
allow us to expand ur geographic presence or increase our client base.
We derive our revenues from fees for services that are generated on an
engagement-by-engagement basis. During the first quarter of 2000, we derived
approximately 88% of revenues from time and materials contracts. We recognized
revenues generated under time and materials contracts as the services are
provided. For fixed price contracts, which accounted for the balance of our
first quarter of 2000 revenues, we recognize revenues using the
percentage-of-completion method. Using this method, we recognize revenue
proportionate to the percentage of units of labor incurred to the date of
measurement relative to the estimated total units of labor for completion.
Revenues exclude expenses reimbursed by clients. Software licensing fees do
not constitute a material portion of our revenue base.
<PAGE>
Results of Operations
The following table sets forth the percentage of revenue of certain items
included in our condensed statement of operations for the period indicated:
<TABLE>
<CAPTION>
Three Months ended
March 31,
2000 1999
---- ----
<S> <C> <C>
Revenue................................... 100% 100%
Operating expenses:
Technical staff........................ 52 58
Selling and administrative staff....... 18 22
Other expenses......................... 25 20
-- --
Total operating expense................... 95 100
-- ---
Income from operations.................... 5 -
Interest income (expense), net............ 1 2
Provision for income taxes................ 2 1
- -
Net income................................ 4% 1%
= =
</TABLE>
First Three Months of 2000 Compared to First Three Months of 1999
Revenue
Our revenue consists primarily of fees for software services provided.
Revenue was $14.2 million in the first three months of 2000, an increase of 37%
from $10.4 million for the first three months of 1999. This increase is
principally due to the improvement in our average hourly bill rate. This
improvement in our average hourly bill rate resulted from our shift from
performing primarily software development support services to developing
strategic e-business and eTV solutions. This increase was partially offset by
a decrease in our average technical personnel utilization rate. Our largest
client, IBM, accounted for 13% and 35% of revenue in each of the first three
months of 2000 and 1999, respectively. The IBM revenue consists of revenues
from three different IBM organizations: IBM, Tivoli and Lotus. 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 engagements and unassigned technical staff personnel, and fees paid to
any subcontractors for work performed in connection with a client engagement.
Technical staff expenses were $7.4 million in the first three months of
2000, an increase of 22% over $6.1 million for the first three months of 1999.
The increase in technical staff expenses is primarily due to the addition of
personnel to service the increase in scope and number of client engagements.
Technical staff expenses decreased to 52% of revenue in the first three months
of 2000 from 58% in the first three months of 1999, primarily as a result of
higher revenues.
Selling and Administrative Staff
Selling and administrative staff expenses consist of the cost of salaries,
payroll taxes, health insurance and workers'compensation for selling, marketing
and administrative personnel, and all commissions and bonuses whether paid to
technical or administrative staff. Selling and administrative staff expenses
were $2.6 million in the first three months of 2000, an increase of 17% from
$2.2 million in the first three months of 1999.
<PAGE>
Selling and administrative staff expenses were 18% of revenue in the first
three months of 2000 compared to 22% of revenue in the first three months of
1999, primarily as a result of the increase in revenues.
Other Expenses
Other expenses consist of all non-staff related costs, such as occupancy costs,
travel, business insurance, business development, recruiting, training and
depreciation. Other expenses were $3.5 million in the first three months of
2000, an increase of 69% over other expenses of $2.1 million in the first three
months of 1999. Other expenses were 25% of revenue in the first three months
of 2000 compared to 20% in the first three months of 1999. Other expenses
include a one-time cost of approximately $500,000 during the first quarter of
2000 associated with the change of the company's name to Concero.
Income from Operations
We recorded income from operations of $695,000 in the first three months of
2000, up from $2,000 of income from operations in the first three months of
1999. Income from operations was 5% of revenue in the first three months of
2000, up from less than 1% of revenue in the first three months of 1999.
Income Taxes
The provision for income taxes of $345,000 for the quarter ended March 31,
2000, is computed using an estimated annual effective tax rate of 37%, which
differs from the federal statutory rate of 34% as a result of state taxes,
tax-exempt interest and permanent differences for meals and entertainment
expenses.
The provision for income taxes of $100,000 for the quarter ended March 31,
1999, is computed using an estimated annual effective tax rate of 40%, which
differs from the federal statutory rate of 34% as a result of state taxes and
permanent differences for meals and entertainment expenses.
Liquidity and Capital Resources
Our operating activities provided cash of $151,000 for the first three months
of 2000. Our operating activities used cash of $126,000 for the first three
months of 1999. We purchased approximately $1.7 million and $444,000 of
computer and office equipment in the first three months of 2000 and 1999,
respectively. At March 31, 2000, we had cash and cash equivalents and
short-term investments totaling $19.0 million.
At March 31, 2000, we did not have any material commitments for capital
expenditures. We have budgeted approximately $4 million for capital
expenditures for fiscal 2000. Our capital expenditures normally consist
primarily of purchases of laptop computers, computer servers and furniture,
the amount of which fluctuates based on the number of additional employees we
hire and the number of new offices that we open in any period.
The number of days of revenue in our accounts receivable balance fluctuated
from 84 days to 85 days during the first three months of 2000. We may experience
longer collection periods if the work we perform for smaller companies increases
as a percentage of our total services.
We anticipate that our existing cash and cash equivalents balances and
potential cash flows from operations will be adequate to fund our working
capital and capital expenditure requirements for at least the next 12 months.
However, changes may occur that could consume available capital resources
before such time. Our 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 our
facilities.
We currently do not maintain any committed credit facilities. We cannot assure
you that commercial credit, if necessary, will be available to us on favorable
terms, or at all.
<PAGE>
Certain Factors That May Affect Future Results, Financial Condition
and Market Price of Securities
Risks that Relate to Our Business Strategy
We are subject to a number of risks related to our business strategy. We
describe some of these risks below. If any of these risks materializes, our
business, financial condition and results of operations could be harmed, and our
stock price could fall.
We have refocused our business strategy. This may not be successful.
In August 1998 we began building a new management team. The new management
team has refocused our business strategy. This strategy is described in the
"Business" section of the Form 10-K. Some of the changes to our business
strategy include:
o expansion into new and largely untested business areas such as eTV
and broadband services;
o realignment of our internal corporate structure on a geographic
basis; and
o a shift in focus of our client base from technology vendors
to technology users, and a shift from longer-term
development and maintenance arrangements to specific,
shorter-term e-business project engagements.
Our shift from ongoing development and maintenance engagements to
strategic engagements has favorably affected our average billing rates but
negatively affected our technical staff utilization rates. If we are unable to
offset decreases in our utilization rates through increases in our billing
rates, our profitability will be harmed. Adverse economic conditions, a
lack of consumer acceptance of eTV, broadband and other advanced
technologies, increased competition and other factors could hurt both our
utilization rates and our billing rates. As a result, it is too early to kno
whether the refocusing of our business strategy will help us achieve long-ter
success. Companies that implement major changes in their business strategy can
face more challenging risks and unexpected difficulties. These risks and
difficulties apply particularly to us because the market for our Internet and
e-business consulting services is new and rapidly evolving.
The success of our business strategy depends on our ability to identify
emerging technologies that will gain wide acceptance in future markets.
Our business strategy requires us to:
o identify promising technologies at an early stage in their
development;
o accurately assess their long-term viability; and
o rapidly gain expertise in these technologies.
Our business may suffer if we invest time and resources in technologies
that ultimately do not reach widespread use or commercial success. Even if we
identify the best technologies, their widespread use and deployment may not
occur within a time span that is compatible with our business plans and revenue
expectations.
In particular, some of the technologies that we are focusing on heavily,
such as eTV and broadband, may not achieve business or consumer acceptance in
the near term, or at all. For example, companies promoting eTV and broadband
services may find that consumers are reluctant to use them, for reasons of cost
or complexity. As a result, we may use substantial resources developing
expertise in areas that will not yield substantial revenues or profits for us in
the next few years.
<PAGE>
Our business strategy depends on our ability to create and maintain strategic
alliances with other e-business and technology companies. These alliances may
shift or terminate suddenly.
We currently maintain strategic alliances with other companies that help
us to gain access to new technology and business opportunities. This is one of
the principles of our exponet strategy. Like many in our industry, we
sometimes refer to these companies as our "partners", but they are not partners
in a legal sense. In particular, these companies are under no binding
obligation to remain in relationships with us or to continue to cooperate wit
us, and these relationships are generally not exclusive.
Any of our alliance partners may choose to end the alliance, alter th
terms of the alliance in a way that harms our business or increase the level of
business they conduct with our competitors. Similarly, if one of our alliance
partners undergoes a management or ownership change, we could lose access to
critical technology and business opportunities. In addition to a decrease in
revenue, the publicity that could accompany these kinds of changes could have a
damaging effect on our stock price.
Moreover, our brand may be closely associated with the business success
or failure of some of our high-profile alliance partners, many of whom are
pursuing unproven business models in competitive markets. As a result, the
failure or other difficulties of these companies may damage our brand and hur
our business opportunities.
Some of our clients are emerging companies that have little or no operating
history and may lack the resources to pay our fees.
Because we focus on emerging technologies, we derive some of our revenues
from small companies, particularly start-up companies that have limited
operating histories and resources to pay our fees. Our business model
contemplates increasing the amount of business we do with these companies.
These companies often have little or no earnings or cash flow and are generally
considered to have a greater risk of failing than more established businesses.
As a result, these clients may not be able to pay for our services in a timely
manner, or at all. These effects would lead to an extension of our collection
period, which would harm our liquidity, and an increase in our bad debt expense,
which would harm our profitability.
We may make investments in clients or potential clients that are emerging
companies. These investments are risky, we have limited experience in making
these investments and we could lose all of our investment.
Although not a key part of our strategy, we may make strategic investments
in small, emerging clients or potential clients, either in cash or in kind. We
may also agree to take some or all of our fees in the form of equity securities
issued by these clients as part of our engagement. Investments in such
emerging companies are extremely risky and some or all of our investment
could be lost. We have limited experience in these investments or in managing
these arrangements.
Potential acquisitions could be difficult to integrate, disrupt our business,
dilute stockholder value and hurt our operating results.
As part of our growth strategy, we intend to pursue acquisitions of
businesses and technologies that are complementary to our core businesses.
Our ability to grow through acquisitions will depend on the availability of
attractive acquisition candidates, our ability to successfully compete for
these acquisition candidates and the availability of capital to finance these
acquisitions.
The benefits of an acquisition often may take considerable time to
develop, and the acquisition may never produce the intended benefits.
Factors that could cause an acquisition to be unsuccessful include:
<PAGE>
o the loss of employees or clients of the acquired business, and
thus a loss of one of the key rationales for making the
acquisition;
o our failure to appreciate the dynamics of markets in which we have
limited or no prior experience;
o the diversion of management's attention from our core businesses;
o any difficulties we experience in assimilating the operations
of an acquired business or in realizing projected efficiencies,
cost savings and revenue synergies;
o our failure to assess or discover liabilities;
o the dilution of our stockholders' equity and earnings per share,
particularly if we finance the acquisitions with equity; and
o an increase in our debt and contingent liabilities, which in turn
could restrict our ability to access additional capital when
needed or to pursue other important elements of our business plan.
If we fail to manage our growth, our resources may be strained and our ability
to implement our business strategy will be harmed.
Our growth could place significant demands on our management and other
resources. In order to manage our growth effectively, we must continue to
develop and improve our operational, financial and other internal systems, as
well as our business development capabilities, and we must continue to attract,
train, retain, motivate and manage our employees. We may not succeed in these
efforts.
Risks that Relate to Our Business
We are subject to a number of risks that are particular to our business and
that may or may not affect our competitors. We describe some of these below.
If any of these risks materializes, our business, financial condition and
results of operations could be harmed, and our stock price could fall.
Our key employees are critical to our continued success. The loss of any of
these employees could impair our ability to execute our strategy or grow our
business.
Our future success will depend in part upon the continued services of a
number of key management and technical employees. The loss of any of our key
personnel could hurt our ability to execute our strategy and grow our business.
We do not maintain key-person life insurance on any of our employees. In
addition, if one or more of our key employees resigns to join a competitor or
to form a competing business, we could lose existing or potential clients.
In the event we lose any of these employees, we may not be able to prevent
the disclosure or use of our proprietary technical knowledge, practices and
procedures.
We need to recruit, train and retain qualified employees to successfully
grow our business.
Our success depends on our ability to recruit, train, retain, motivate
and manage highly skilled employees. Qualified project managers, software
architects and senior technical and professional staff with the skills we need
are in great demand worldwide and are likely to remain a limited resource for
the foreseeable future. We may not be able to hire a sufficient number
of highly skilled employees. In addition, the highly competitive labor
market may require us to raise salaries faster than we have in the past, and
faster than we raise our billing rates.
<PAGE>
We have experienced a high rate of attrition in the past, particularly
around the time of our management change. If we continue to experience high
rates of attrition, it will be even more difficult to execute our growth
strategy.
We may also be unsuccessful in training, retaining and motivating our
employees. If our employees do not achieve the required levels of performance,
our ability to manage and staff existing projects and to obtain new projects
might suffer.
We are changing our name.
We are changing our name to Concero Incorporated. Although we have filed a
trademark application for this name, we may be unable to protect our name or
prevent others from using our name. Other parties may claim that our use of
Concero violates their intellectual property rights. If we are prevented from
using the Concero name, it may become more difficult for us to carry out our
business plans. In addition, our planned advertisement of the change and
promotion of our new brand may fail to reach important segments of our potential
customer base, and our marketing campaign may yield little results.
We may not be able to protect our intellectual property and proprietary
rights.
Our proprietary intellectual property consists of the business processes
and software that we develop to assist clients. Our efforts to protect our
proprietary rights may not be adequate to deter theft or misuse of our
intellectual property. We may not be able to detect unauthorized use of our
intellectual property and take appropriate steps to enforce our rights.
If third parties infringe, misappropriate or copy our trade secrets,
proprietary processes, copyrights, trademarks or other proprietary information,
we could lose important competitive advantages.
We could be subject to claims that we infringe the intellectual property
rights of others.
There has been a marked increase in patent and intellectual property
litigation in recent months, particularly involving competitors in the
technology sector. Although we are not aware that any of our activities
infringe the patent or other intellectual property rights of others, we have
not sought any formal assurances that this is the case. Other parties may assert
infringement claims against us or claim that we have violated their
intellectual property rights. These claims, even if not true, could result
in significant legal and other costs and may distract our management. If we
are required to stop using a particular methodology or technology because of an
infringement lawsuit, it could become extremely difficult to carry out our
business plans.
We depend on a small number of clients for a significant portion of our
revenues.
During the first three months of 2000, we derived 41% of our revenue from
our five largest clients. Our largest client accounted for 13% of our revenue
in the first three months of 2000. The volume of work performed for specific
clients is likely to vary from year to year, and a major client in one year may
not use our services in another year. The loss or reduction of our revenue
due to a decline in services performed for any large client could harm our
business.
Our lack of long-term contracts with clients makes our revenues difficult
to predict.
Our clients retain us on an engagement-by-engagement basis, rather
than under long-term contracts. As a result, the size and number of client
engagements are difficult to predict, and vary markedly from quarter to quarter.
At the same time, our operating expenses are relatively fixed and cannot be
reduced on short notice for unanticipated shortfalls in our revenue. This is
because our most significant operating expense is employee salaries.
<PAGE>
Moreover, our clients can generally reduce the scope of our services or
cancel our engagements without penalty and with little or no notice. If a client
postpones, modifies or cancels an engagement or chooses not to retain us for
additional phases of a project, we might not be able to redeploy our employees
quickly to other engagements.
Some of our client contracts are on a fixed-price basis. If we fail to
accurately estimate the resources required for a fixed-price project, our
profitability could be harmed.
During the first three months of 1999 and 2000, we generated
approximately 23% and 12%, respectively, of our revenue on a fixed-price,
fixed-delivery-schedule basis, rather than on a time-and-materials basis.
If we fail to accurately estimate the resources required for a fixed-price
project or fail to complete our obligations on time, our revenues could be
harmed and our expenses could increase. We sometimes must revise project
plans after beginning a project because we failed to accurately estimate the
resources required.
Risks that Relate to Our Industry
We are subject to a number of risks that are inherent in the technology
industry. We describe some of these below. If any of these risks materializes,
our business, financial condition and results of operations could be harmed,
and our stock price could fall.
Our industry is intensely competitive.
We expect competition to persist and intensify in the future. We cannot
be certain that we will be able to compete successfully with existing or new
competitors. If we fail to compete successfully, our business would be seriously
harmed.
Competition can make it more difficult for us to:
o attract and retain customers;
o expand our sales and marketing activities;
o create and maintain the strategic relationships that are vital
to success in the Internet and e-business marketplace, and thus
develop and acquire knowledge of leading-edge technologies; and
o recruit and maintain the highly skilled technical staff that our
business model demands.
We compete against numerous companies that offer Internet services,
software engineering, systems integration, or management consulting, as well
as the consulting divisions of large accounting firms. Because relatively low
barriers to entry characterize the market, we expect other companies to enter
our market. Some large information technology firms have announced that they
will focus more resources on e-business opportunities.
Many of our current competitors have longer operating histories, larger
client bases, larger professional staffs, greater brand recognition and greater
financial, technical, marketing and other resources than we do. This may place
us at a disadvantage in responding to our competitors' pricing strategies,
technological advances, advertising campaigns, strategic partnerships and other
initiatives. In addition, many of our competitors have well established
relationships with our current and potential clients and have extensive
knowledge of our industry. As a result, our competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, and they may also be able to devote more resources to the
development, promotion and sale of their services than we can. Competitors that
offer more
<PAGE>
standardized or less customized services than we do may have a substantial cost
advantage, which could force us to lower our prices, adversely affecting our
operating margins.
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. In addition, some of our competitors may develop
services that are superior to, or have greater market acceptance than, the
services that we offer.
Our success depends on the continued growth and acceptance of advanced
technologies.
Our future success depends heavily on the further widespread use of the
Internet as a means for commerce, and consumer and commercial acceptance of
eTV and broadband. Despite the large amount of investor and media attention
these technologies have received, they are in early stages of development and
it is difficult to predict whether or how they will continue to develop.
Development of these technologies could be hindered by a number of factors,
such as government regulation, taxation, general economic conditions and lack of
consumer acceptance. If these new technologies fail to gain widespread
acceptance or grow more slowly than expected, our business opportunities will
diminish.
Risks that Relate to Our Stock
Our stock price is subject to a number of risks. We describe some of thes
below. If any of these risks materializes, our stock price could fall.
Our quarterly operating results will vary, which may affect the market price
of our common stock in a manner unrelated to our long-term performance.
Our quarterly operating results have varied in the past and we expect
that they will continue to vary in the future depending on a number of factors,
many of which are outside of our control. Factors that may cause our quarterly
operating results to vary include:
o the number, size and scope of projects in which we are engaged;
o the contractual terms and degree of completion of these projects;
o any delays incurred in connection with a project;
o our success in earning bonuses or other contingent payments;
o our employee hiring and utilization rates;
o the adequacy of provisions for losses;
o the accuracy of our estimates of resources required to complete
ongoing projects;
o customer budget cycles and spending priorities; and
o general economic conditions.
A high percentage of our operating expenses, particularly personnel and
rent, are fixed in advance of any particular quarter. As a result, unanticipated
variations in the number of our projects, in our progress on
<PAGE>
projects or in our employee utilization rates may cause significant variations
in operating results in any particular quarter. Given the possibility of these
quarterly fluctuations, we believe that comparisons of our quarterly results
are not necessarily meaningful and that results for one quarter should not be
relied upon to predict our future performance.
Nevertheless, any quarterly shortfall in revenue or earnings from
expected levels, or other short-term failures to meet the expectations of
securities analysts or the market in general, can have an immediate and
damaging effect on the market price of our common stock.
Our common stock may experience extreme price and volume fluctuations.
The stock market, from time to time, has experienced extreme price and
volume fluctuations. The market prices of the securities of Internet and
technology companies have been especially volatile, including fluctuations
that often are unrelated to the operating performance of the affected
companies. Broad market fluctuations of this type may adversely affect the
market price of our common stock.
The market price of our common stock has fluctuated since we became a
public company. Our stock price could continue to fluctuate significantly due
to a variety of factors, including:
o public announcements concerning us, our competitors or the
technology industry;
o fluctuations in our operating results;
o introductions of new products or services by us or our
competitors;
o changes in analysts' revenue or earnings estimates; and
o announcements of technological innovations.
In the past, companies that have experienced volatility in the market
price of their stock have been the target of securities class action litigation.
If we were sued in a securities class action, we could incur substantial costs
and suffer from a diversion of our management's attention and resources.
<PAGE>
Item 3.
Quantitative and Qualitative Disclosures about Market Risks
We do not use derivative inancial instruments in our non-trading
investment portfolio. We place our investments in instruments that meet high
credit quality standards, as specified by our investment policy.
We are exposed to cash flow and fair value risk from changes in interest
rates, which may affect our financial position, results of operations and
cash flows. In seeking to minimize the risks from interest rate fluctuations,
we manage exposures through ongoing evaluation of our investment portfolio.
We do not use financial instruments for trading or other speculative purposes.
The table below provides information about our 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 March 31, 2000 March 31, Interest March 31,
(in thousands, except interest rates) 2001 Rate 2000
- ----------------------------------------------- ----------------- ------------ -------------------
<S> <C> <C> <C>
Money market funds $ 2,603 4.45% $ 2,603
Government issues 8,500 5.71% 8,552
Corporate issues 7,235 5.75% 7,222
----------------- ------------ -------------------
$ 18,338 5.54% $ 18,377
================= ============ ===================
Investments Weighted Fair Value
Maturing Average At
At December 31, 1999 During Interest December 31,
(in thousands, except interest rates) 2000 Rate 1999
- ----------------------------------------------- ----------------- ------------ -------------------
Money market funds $ 2,292 5.58% $ 2,292
Corporate issues 15,857 5.89% 15,857
----------------- ------------ -------------------
$ 18,149 5.85% $ 18,149
================= ============ ===================
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
On March 15, 2000, we filed a registration statement on Form S-3 for
the offering of up to 1.25 million shares of our common stock and 1.25 million
shares of common stock of selling stockholders.
On April 27, 2000, we filed a Withdrawal of Registration Statement on
Form RW to withdraw the registration statement on the grounds that we did not
intend to consummate the offering contemplated therein due to prevailing market
conditions.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
Number Description
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 2000, we filed the following Current Reports
on Form 8-K;
On April 18, 2000, we filed a Form 8-K (Item 5) reporting our results
for the first quarter ended March 31, 2000.
On April 20, 2000, we filed a Form 8-K (Item 5) discussing previously
released statements related to the strength of our revenue pipeline.
<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: May 15, 2000 /s/ Timothy D. Webb
Timothy D. Webb
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2000 /s/ Keith D. Thatcher
Keith D. Thatcher
Vice President of Finance, Treasurer
and Chief Financial Officer
(Principal Financial Officer)
Date: May 15, 2000 /s/ Kasaundra L. Smith
Kasaundra L. Smith
Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 575
<SECURITIES> 18,377
<RECEIVABLES> 12,163
<ALLOWANCES> 488
<INVENTORY> 0
<CURRENT-ASSETS> 35,408
<PP&E> 9,362
<DEPRECIATION> 3,503
<TOTAL-ASSETS> 41,392
<CURRENT-LIABILITIES> 4,555
<BONDS> 0
0
0
<COMMON> 99
<OTHER-SE> 36,223
<TOTAL-LIABILITY-AND-EQUITY> 41,392
<SALES> 0
<TOTAL-REVENUES> 14,225
<CGS> 0
<TOTAL-COSTS> 7,396
<OTHER-EXPENSES> 6,134
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (234)
<INCOME-PRETAX> 929
<INCOME-TAX> 345
<INCOME-CONTINUING> 584
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 584
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.05
</TABLE>
