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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, 2003
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 000-30277
SERVICEWARE TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 25-1647861
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
333 ALLEGHENY AVENUE, SUITE 301
NORTH OAKMONT, PA 15139
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (412) 826-1158
Indicate by check mark 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 by check mark whether the registrant is an accelerated filer
as defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
The number of shares of the registrant's common stock outstanding as of
the close of business on May 12, 2003 was 24,145,870.
SERVICEWARE TECHNOLOGIES, INC.
FORM 10-Q
MARCH 31, 2003
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
- Consolidated Balance Sheets as of March 31, 2003 and December 31,
2002............................................................. 2
- Consolidated Statements of Operations for the three months
ended March 31, 2003 and 2002................................... 3
- Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 2003..................................... 4
- Consolidated Statements of Cash Flows for the three months ended
March 31, 2003 and 2002......................................... 5
- Notes to Consolidated Financial Statements...................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...... 21
ITEM 4. Controls and Procedures......................................... 21
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders............. 22
ITEM 6. Exhibits and Reports on Form 8-K................................ 22
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
MARCH 31, DECEMBER 31,
2003 2002
---------- ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents ......................................................... $ 579 $ 2,461
Short term investments ............................................................ 500 514
Accounts receivable, less allowance for doubtful accounts of $171 as of March 31,
2003 and $171 as of December 31, 2002 .......................................... 1,856 1,534
Other current assets .............................................................. 284 363
-------- --------
Total current assets ..................................................... 3,219 4,872
Non current assets
Purchased technology, net of amortization of $1,811 as of March 31, 2003 and
$1,798 as of December 31, 2002 ................................................. 71 83
Property and equipment
Office furniture, equipment, and leasehold improvements ........................ 1,947 1,945
Computer equipment and software ................................................ 5,819 5,809
-------- --------
Total property and equipment ............................................. 7,766 7,754
Less accumulated depreciation .................................................. (6,727) (6,495)
-------- --------
Property and equipment, net ....................................................... 1,039 1,259
Intangible assets, net of accumulated amortization of $1,391 as of March 31, 2003
and $1,325 as of December 31, 2002 ............................................. 81 147
Goodwill
2,324 2,324
Other non current assets .......................................................... 50 50
-------- --------
Total long term assets ................................................... 3,565 3,863
-------- --------
Total assets ............................................................. $ 6,784 $ 8,735
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Revolving line of credit .......................................................... -- 800
Accounts payable .................................................................. 969 1,143
Accrued compensation and benefits ................................................. 151 160
Deferred revenue - licenses ....................................................... 259 82
Deferred revenue - services ....................................................... 2,361 2,060
Restructuring reserve ............................................................. 58 116
Convertible debt, net of unamortized discount of $9 as of March 31, 2003
and $1,618 as of December 31, 2002 ............................................. 28 1,768
Other current liabilities ......................................................... 536 427
-------- --------
Total current liabilities ................................................ 4,362 6,556
Non current convertible debt, net of unamortized discount of $1,753 as of March 31,
2003............................................................................ 1,596 --
Non current deferred revenue - services .............................................. 9 13
Other non current liabilities ........................................................ 86 96
-------- --------
Total liabilities ........................................................ 6,053 6,665
Stockholders' equity
Common stock, $0.01 par; 100,000 shares authorized, 24,685 and 24,685 shares issued
and 24,146 and 24,083 shares outstanding as of March 31, 2003 and December 31,
2002, respectively.............................................................. 247 247
Additional paid in capital ........................................................ 75,538 74,184
Treasury stock, 538 and 601 shares as of March 31, 2003 and December 31, 2002,
respectively...................................................................... (200) (223)
Deferred compensation and other ................................................... (2) (9)
Warrants .......................................................................... 639 1,414
Accumulated other comprehensive loss:
Currency translation account ................................................... (42) (37)
Deficit ........................................................................... (75,449) (73,506)
-------- --------
Total stockholders' equity ............................................... 731 2,070
-------- --------
Total liabilities and stockholders' equity ............................... $ 6,784 $ 8,735
======== ========
See accompanying notes to the financial statements.
2
CONSOLIDATED STATEMENTS OF OPERATIONS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------------ -------------
Revenues
Licenses ............................................. $ 531 $ 1,004
Services ............................................. 1,595 1,549
-------- --------
Total revenues .................................... 2,126 2,553
Cost of revenues
Cost of licenses ..................................... 44 304
Cost of services ..................................... 802 1,059
-------- --------
Total cost of revenues ............................ 846 1,363
-------- --------
Gross margin ............................................ 1,280 1,190
Operating expenses
Sales and marketing .................................. 1,384 1,198
Research and development ............................. 649 499
General and administrative ........................... 603 930
Intangible assets amortization ....................... 65 100
Restructuring and other non-recurring (income) charges (20) 25
-------- --------
Total operating expenses .......................... 2,681 2,752
-------- --------
Loss from operations .................................... (1,401) (1,562)
Other income (expense)
Interest expense ..................................... (545) (13)
Other (net) .......................................... 3 27
-------- --------
Other income (expense), net ............................. (542) 14
-------- --------
Net loss ................................................ $ (1,943) $ (1,548)
======== ========
Net loss per common share, basic and diluted ............ $ (0.08) $ (0.06)
======== ========
Shares used in computing per share amounts .............. 24,131 23,856
======== ========
See accompanying notes to the financial statements.
3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
COMMON STOCK ADDITIONAL TREASURY STOCK DEFERRED
------------------- PAID IN -------------------- COMPENSATION
SHARES AMOUNT CAPITAL SHARES AMOUNT AND OTHER WARRANTS
-------- --------- ----------- --------- ---------- ------------- ----------
Balance at December 31, 2002..... 24,083 $ 247 $ 74,184 601 $ (223) $ (9) $ 1,414
Exercise of stock options ....... 63 (8) (63) 23
Amortization of warrants ........ 7
Expiration of warrants .......... 775 (775)
Benefit due to amendment of
convertible notes.............. 587
Comprehensive (loss) gain:
Currency translation
adjustment.....................
Net loss.........................
Total comprehensive loss.........
------ ------ -------- --- ------ ----- --------
Balance at March 31, 2003 ....... 24,146 $ 247 $ 75,538 538 $ (200) $ (2) $ 639
====== ====== ======== === ====== ===== ========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
(LOSS) GAIN DEFICIT EQUITY
-------------- ----------- --------------
Balance at December 31, 2002..... $ (37) $(73,506) $ 2,070
Exercise of stock options ....... 15
Amortization of warrants ........ 7
Expiration of warrants .......... --
Benefit due to amendment of
convertible notes.............. 587
Comprehensive (loss) gain:
Currency translation
adjustment..................... (5) (5)
Net loss ........................ (1,943) (1,943)
-------- -------- --------
Total comprehensive loss ........ (5) (1,943) (1,948)
-------- -------- --------
Balance at March 31, 2003 ....... $ (42) $(75,449) $ 731
======== ======== ========
See accompanying notes to the financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in thousands, except per share amounts
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------------ -------------
Cash flows from operating activities
Net loss ....................................................................... $(1,943) $(1,548)
Adjustments to reconcile net loss to net cash used in operations:
Non cash items:
Depreciation ............................................................. 247 495
Amortization of intangible assets and warrants ........................... 85 257
Amortization of beneficial conversion feature related to convertible notes 397 --
Amortization of discount on convertible notes ............................ 46 --
Stock based compensation and loan forgiveness ............................ -- 78
Other non cash items ..................................................... 14 (5)
Changes in operating assets and liabilities:
Increase in accounts receivable .......................................... (322) (1,180)
Decrease in other assets ................................................. 79 213
(Decrease) increase in accounts payable .................................. (174) 142
Decrease in accrued compensation ......................................... (9) (457)
Increase (decrease) in deferred revenue .................................. 474 (143)
Increase (decrease) in other liabilities ................................. 50 (209)
------- -------
Net cash used in operating activities .......................................... (1,056) (2,357)
------- -------
Cash flows from investing activities
Purchases of short term investments ......................................... -- (1,001)
Property and equipment acquisitions ......................................... (27) (7)
------- -------
Net cash used in investing activities .......................................... (27) (1,008)
------- -------
Cash flows from financing activities
Repayments of principal of capital lease obligations ........................ (9) (8)
Repayments of principal of term loan ........................................ -- (43)
Repayments of principal of revolving line of credit ......................... (800) --
Proceeds from stock option issuances ........................................ 15 13
------- -------
Net cash used in financing activities .......................................... (794) (38)
------- -------
Effect of exchange rate changes on cash ........................................ (5) (6)
Decrease in cash and cash equivalents .......................................... (1,882) (3,409)
Cash and cash equivalents at beginning of period ............................... 2,461 4,790
------- -------
Cash and cash equivalents at end of period ..................................... $ 579 $ 1,381
======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest ...................................................... $ 2 $ 10
======= =======
Supplemental disclosures of non-cash investing and financing activities:
Benefit due to amendment of convertible notes............................... 587 --
Expiration of warrants ..................................................... 775 --
Assets acquired under capital lease obligation ............................. -- 92
See accompanying notes to the financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE 1. ORGANIZATION OF THE COMPANY
ServiceWare Technologies, Inc. is a leading provider of enterprise Knowledge
Management (KM) solutions that enable organizations to deliver superior service
to customers, employees and partners by transforming information into knowledge.
ServiceWare Enterprise(TM) (formerly named eService Suite), powered by The
Cognitive Processor(R), a patented self-learning search technology, enables
organizations to capture and manage intellectual capital. This repository of
corporate knowledge, known as a knowledge base, can then be easily accessed via
a browser to effectively answer inquiries made either over the Web or through
the telephone to a customer contact center or help desk.
Customers use ServiceWare's Knowledge Management solutions to:
o Strengthen relationships with customers, partners, suppliers and
employees
o Decrease operating costs
o Improve creation, dissemination and sharing of enterprise knowledge
o Integrate seamlessly with existing technology investments
ServiceWare Enterprise(TM) is a software solution that allows ServiceWare
customers to provide personalized, automated Web-based service tailored to the
needs of their users. ServiceWare Enterprise enables businesses to capture
enterprise knowledge, solve customer problems, reuse solutions and share
captured knowledge throughout the extended enterprise. It also enables the
extended enterprise to access this knowledge online. In addition, through the
self-learning features of ServiceWare's patented Cognitive Processor technology,
the solutions generated by these products are intelligent in that they have the
capability to learn from each interaction and automatically update themselves
accordingly. ServiceWare Enterprise includes the software products ServiceWare
Self-Service(TM) (Web-based self-service for customers, partners and employees),
ServiceWare Professional(TM) (for customer service, sales and field service
personnel) and ServiceWare Architect(TM) (for quality assurance managers and
system administrators).
In addition to ServiceWare Enterprise, ServiceWare has created a solution for
mid-market companies. ServiceWare Express(TM), is a comprehensive product and
services package that includes robust browser-based applications, technical
implementation, training services and customer support. ServiceWare Express is
designed to enable midsize enterprises or call center and help desk divisions of
large enterprises to effectively utilize corporate knowledge to improve customer
satisfaction, enhance service quality and reduce operating costs. ServiceWare
also provides a portal solution, ServiceWare Knowledge Portal, based on the
technology acquired from InfoImage in August 2002.
The accompanying financial statements have been prepared on a basis which
assumes that the Company will continue as a going concern and which contemplates
the realization of assets and the satisfaction of liabilities and commitments in
the normal course of business. The Company has an accumulated deficit of
approximately $75,449,000 at March 31, 2003, incurred a net loss of
approximately $1,943,000 and had negative cash flows from operations of
approximately $1,056,000 for first quarter 2003, and expects to incur additional
losses and negative cash flows in 2003. As of May 5, 2003, the Company's common
stock has been delisted from The Nasdaq Stock Market and immediately became
eligible for quotation on the OTC Bulletin Board. As of May 5, 2003, the
Company's securities are trading on the OTC Bulletin Board. The ability of the
Company to continue in its present form is largely dependent on its ability to
generate additional revenues, reduce overall operating expense, and achieve
profitability and positive cash flows or to obtain additional debt or equity
financing. Management believes that the Company has the ability to do so and
plans to fund 2003 operations through product sales, reduced spending and
utilizing the available funding under existing debt facilities. Although
management continues to pursue these plans, there is no assurance that the
Company will be successful in obtaining sufficient license and service fees from
its products or additional financing on terms acceptable to the Company. In
March 2003, the holders of the Company's convertible notes agreed to an
amendment of these notes under which their maturity date was extended until July
15, 2004 and their conversion price was reduced to $0.25 per share. However,
management believes that in order to sustain business operations at the current
levels through 2004, it will be necessary to obtain significant additional
funding.
6
NOTE 2. UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited balance sheet as of March 31, 2003 and related
unaudited consolidated statements of operations for the three months ended March
31, 2003 and 2002, unaudited consolidated statement of cash flows for the three
months ended March 31, 2003 and 2002 and the unaudited consolidated statement of
stockholders' equity for the three months ended March 31, 2003 have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements. Management believes that the
interim financial statements include all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation of the results
of interim periods. Operating results for the three months ended March 31, 2003
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 2002 Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
NOTE 3. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries after elimination of all significant intercompany
accounts and transactions.
STOCK BASED COMPENSATION
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). SFAS No. 123 permits the Company to continue accounting for
stock-based compensation as set forth in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), provided
the Company discloses the pro forma effect on net income and earnings per share
of adopting the full provisions of SFAS No. 123. Accordingly, the Company
continues to account for stock-based compensation under APB Opinion No. 25.
The following proforma disclosure presents the Company's net loss and loss
per share had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS 123.
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2003 2002
--------- ----------
(in thousands, except per share amounts)
Net loss from continuing operations, as reported ....... $ (1,943) $ (1,548)
Add back stock based compensation expense included in
reported net loss ................................ -- 78
Deduct total stock based compensation expense under
SFAS 123 ......................................... (435) (677)
-------- -------
Adjusted net loss ...................................... $ (2,378) $ (2,147)
======== ========
Weighted average shares used to calculate basic and
diluted loss per share ................................. 24,131 23,856
======== ========
Net loss per share ........................................ $ (0.10) $ (0.09)
======== ========
The average fair value of the options granted is estimated at $0.27 during first
quarter 2003 and $0.37 during first quarter 2002, on the date of grant using the
Black-Scholes pricing model with the following assumptions:
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
2003 2002
------- -------
Volatility, annual rate .......... 231% 221%
Dividend yield ................... 0.0% 0.0%
Expected life, in years .......... 3 3
Average risk-free interest rate... 1.95% 3.10%
7
The effects of applying SFAS 123 in this pro forma disclosure are not likely to
be representative of the effects on reported net income for future years. SFAS
123 does not apply to awards prior to 1995 and additional awards in future years
are anticipated.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation expands
the disclosure requirements of guarantee obligations and requires the guarantor
to recognize a liability for the fair value of the obligation assumed under a
guarantee. In general, FIN 45 applies to contracts or indemnification agreements
that contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying instrument that is related to an asset,
liability, or equity security of the guaranteed party. Other guarantees are
subject to the disclosure requirements of FIN 45 but not to the recognition
provisions and include, among others, a guarantee accounted for as a derivative
instrument under SFAS No. 133, "Accounting for Derivatives and Hedging" ("SFAS
No. 133"), a parent's guarantee of debt owed to a third party by its subsidiary
or vice versa, and a guarantee which is based on performance. The disclosure
requirements of FIN 45 were effective as of December 31, 2002. The recognition
requirements of FIN 45 are to be applied prospectively to guarantees issued or
modified after December 31, 2002.
Under the indemnification provisions of the Company's standard product
license agreement, the Company guarantees to defend and indemnify the licensee
against any proceeding based upon infringements of any patent, copyright, trade
secret or other intellectual property right by the products the Company licenses
to its customers. The Company does not expect to incur any infringement
liability as a result of the customer indemnification clauses as of March 31,
2003.
NOTE 4. DEBT
CREDIT FACILITIES
On October 16, 2002, the Company entered into a Loan and Security Agreement (the
"Agreement") with Comerica Bank - California (the "Bank"). The Agreement allows
for a revolving line of credit ("Revolving Facility"). Advances on the Revolving
Facility can be in amounts up to the lesser of $250,000 or 75% of eligible
receivables and mature October 1, 2003. Such amounts will bear interest at a
rate of 1.5% above the Bank's prime rate. Borrowings under the Agreement are
collateralized by essentially all of the Company's tangible and intangible
assets.
The Company is required to maintain all of its primary cash management,
investment and transaction accounts with the Bank. The Company must also comply
with certain monthly reporting and financial covenants. Under the Loan and
Security Agreement, the Company must:
o Maintain a minimum EBITDA calculated on a trailing three month basis in
amounts as further defined in the Agreement.
o Maintain a cash balance of 1.5 times the outstanding borrowings.
As of March 31, 2003, the Company was not in compliance with the financial
covenants, but has subsequently received a waiver of these covenants from the
Bank. As a result, the Bank reset the required EBITDA, reduced the Revolving
Facility to the amount indicated above, and cancelled the Company's ability to
secure term advances.
8
At March 31, 2003, no amounts were outstanding on the Revolving Facility. At
December 31, 2002, $800,000 was outstanding on the Revolving Facility and the
weighted average interest rate on these borrowings was 5.75%.
CONVERTIBLE NOTES
In second quarter 2002, the Company issued $3,250,000 of convertible notes. The
convertible notes were originally scheduled to mature 18 months from the closing
date, bear interest at 10% per annum, are convertible at any time at the option
of the holder, into shares of the Company's common stock, and were initially
convertible at a conversion price of $0.30 per share. Interest can be paid in
cash or additional convertible notes, at the option of the Company. In October
2002, additional convertible notes were issued in payment of accrued interest on
the originally issued notes. In March 2003, the holders of the Company's
convertible notes with an aggregate face value of $3,348,979 agreed to an
amendment of these notes under which their maturity date was extended until July
15, 2004 and their conversion price was reduced to $0.25 per share. Accordingly,
these notes are classified as long term on the balance sheet at March 31, 2003.
The remaining convertible notes with an aggregate face value of $36,701 are
classified on the balance sheet as short term on March 31, 2003. The convertible
notes are senior unsecured obligations that will rank senior to all future
subordinated indebtedness, pari passu to all existing and future senior,
unsecured indebtedness and subordinated to all existing and future senior
secured indebtedness. While the notes are outstanding, the Company is restricted
from paying or declaring dividends on common stock, making any other
distribution on common stock, or repurchasing or redeeming any shares of common
stock.
In conjunction with the amendment to the convertible notes, the Company
recorded approximately $587,0000 as an increase to additional paid in capital
and a reduction to the carrying value of the convertible notes to reflect the
benefit to the note holders. This amount along with the unamortized beneficial
conversion feature and discount will be amortized as interest expense through
July 15, 2002.
NOTE 5. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------------ ------------
(in thousands)
Numerator:
Net loss ..................................... $ (1,943) $ (1,548)
======== ========
Denominator:
Denominator for basic and diluted earnings per
share - weighted average shares ........... 24,131 23,856
======== ========
Basic and diluted net (loss) income per share ... $ (0.08) $ (0.06)
======== ========
Dilutive securities include convertible notes, options and warrants as if
converted. Potentially dilutive securities totaling 19,448,294 and 7,099,943 for
the three months ended March 31, 2003 and 2002, respectively, were excluded from
historical basic and diluted loss per share because of their antidilutive
effect.
NOTE 6. SUBSEQUENT EVENTS
As of March 31, 2003, the Company was not in compliance with its financial
covenants under the Loan and Security Agreement with Comerica Bank - California,
but has subsequently received a waiver of these covenants. As a result, the Bank
reset the required EBITDA, reduced the Revolving Facility to $250,000, and
cancelled the Company's ability to secure term advances.
As of May 5, 2003, the Company's common stock has been delisted from The Nasdaq
Stock Market and immediately became eligible for quotation on the OTC Bulletin
Board. As of May 5, 2003, the Company's securities are trading on the OTC
Bulletin Board.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes contained in this Quarterly Report on Form 10-Q
("Form 10-Q").
Certain statements contained in this Form 10-Q that are not historical facts,
including those statements that refer to our plans, prospects, expectations,
strategies, intentions, hopes and beliefs, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. You should not place undue reliance on these forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of activity, performance
or achievements to be materially different from any expressed or implied by
these forward-looking statements. We assume no obligation to update these
forward-looking statements as circumstances change in the future. In some cases,
you can identify forward-looking statements by terminology such as "may",
"will", "should", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential", "continue", or the negative of these terms or other
comparable terminology. For a description of some of the risk factors that could
cause our results to differ materially from our forward looking statements,
please refer to the risk factors set forth in the section entitled "Additional
Factors that May Affect Future Results" on page 18 of this Form 10-Q, as well as
to our other filings with the Securities and Exchange Commission and to other
factors discussed elsewhere in this Form 10-Q.
OVERVIEW
We are a leading provider of enterprise Knowledge Management (KM) solutions
that enable organizations to deliver superior service to customers, employees
and partners by transforming information into knowledge. Founded in 1991 in
Oakmont, Pennsylvania, we sell our products throughout the United States and
have a European subsidiary based in the United Kingdom.
ServiceWare Enterprise(TM) (formerly named eService Suite), powered by The
Cognitive Processor(R) (formerly known as MindSync), a patented self-learning
search technology, enables organizations to capture and manage intellectual
capital. This repository of corporate knowledge, known as a knowledge base, can
then be easily accessed via a browser to effectively answer inquiries made
either over the Web or through the telephone to a customer contact center or
help desk.
Customers use ServiceWare's Knowledge Management solutions to:
o Strengthen relationships with customers, partners, suppliers and
employees
o Decrease operating costs
o Improve creation, dissemination and sharing of enterprise knowledge
o Integrate seamlessly with existing technology investments
ServiceWare Enterprise(TM) is a software solution that allows our customers
to provide personalized, automated Web-based service tailored to the needs of
their users. ServiceWare Enterprise enables businesses to capture enterprise
knowledge, solve customer problems, reuse solutions and share captured knowledge
throughout the extended enterprise. It also enables the extended enterprise to
access this knowledge online. In addition, through the self-learning features of
ServiceWare's patented Cognitive Processor technology, the solutions generated
by these products are intelligent in that they have the capability to learn from
each interaction and automatically update themselves accordingly. ServiceWare
Enterprise includes the software products ServiceWare Self-Service(TM)
(Web-based self-service for customers, partners and employees), ServiceWare
Professional(TM) (for customer service, sales and field service personnel) and
ServiceWare Architect(TM) (for quality assurance managers and system
administrators).
In addition to ServiceWare Enterprise, we have created a solution for
mid-market companies. ServiceWare Express(TM), is a comprehensive product and
services package that includes robust browser-based applications, technical
implementation, training services and customer support. ServiceWare Express is
designed to enable midsize enterprises or call center and help desk divisions of
large enterprises to effectively utilize corporate knowledge to improve customer
satisfaction, enhance service quality and reduce operating costs. We also
provide a portal solution, ServiceWare Knowledge Portal, based on the technology
acquired from InfoImage in August 2002.
As of May 5, 2003, our common stock has been delisted from The Nasdaq Stock
Market and immediately became eligible for quotation on the OTC Bulletin Board.
As of May 5, 2003, our securities are trading on the OTC Bulletin Board.
10
FACTORS AFFECTING FUTURE OPERATIONS
Our operating losses, as well as our negative operating cash flow, have
been significant to date. We expect to have positive operating margins over time
by increasing our customer base without significantly increasing related capital
expenditures and other operating costs. We do not know if we will be able to
achieve these objectives.
DESCRIPTION OF STATEMENT OF OPERATIONS
Revenues
We market and sell our products primarily in North America through our
direct sales force. Internationally, we market our products through value-added
resellers, software vendors and system integrators as well as our direct sales
force. International revenues were 19% and 12% of total revenues in first
quarter 2003 and fiscal 2002. We derive our revenues from licenses for software
products and from providing related services, including installation, training,
consulting, customer support and maintenance contracts. License revenues
primarily represent fees for perpetual licenses. Service revenues contain
variable fees for installation, training and consulting, reimbursements for
travel expenses that are billed to customers, as well as fixed fees for customer
support and maintenance contracts.
Cost of Revenues
Cost of license revenues consists primarily of the expenses related to
royalties, the cost of media on which our product is delivered, product
fulfillment costs, amortization of purchased technology, and salaries, benefits,
direct expenses and allocated overhead costs related to product fulfillment.
Cost of service revenues consists of the salaries, benefits, direct expenses and
allocated overhead costs of customer support and services personnel,
reimbursable expenses for travel that are billed to customers, fees for
sub-contractors, and the costs associated with maintaining our customer support
site.
Operating Costs
We classify our core operating costs into four general categories: sales
and marketing, research and development, general and administrative, and
intangible assets amortization based upon the nature of the costs. Special one
time charges, including restructuring costs, are presented separately as
restructuring and other non-recurring charges to enable the reader to determine
core operating costs. We allocate the total costs for overhead and facilities,
based upon headcount, to each of the functional areas that benefit from these
services. Allocated charges include general overhead items such as building
rent, equipment-leasing costs, telecommunications charges and depreciation
expense. Sales and marketing expenses consist primarily of employee compensation
for direct sales and marketing personnel, travel, public relations, sales and
other promotional materials, trade shows, advertising and other sales and
marketing programs. Research and development expenses consist primarily of
expenses related to the development and upgrade of our proprietary software and
other technologies. These expenses include employee compensation for software
developers and quality assurance personnel and third-party contract development
costs. General and administrative expenses consist primarily of compensation for
personnel and fees for outside professional advisors. Intangible assets
amortization expense consists primarily of the amortization of intangible assets
acquired through our acquisition of the Molloy Group in 1999. These assets
(other than goodwill) are amortized on a straight line basis over their
respective estimated useful lives. Restructuring and other non-recurring charges
consist of costs incurred for restructuring plans and other costs related to the
separation of senior executives.
RESULTS OF OPERATIONS
The following table sets forth the consolidated statement of operations data as
a percentage of total revenues for each of the periods indicated:
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---------- ----------
Revenues
Licenses ............................ 25.0% 39.3%
Services ............................ 75.0 60.7
----- -----
Total revenues ................... 100.0 100.0
Cost of revenues
Cost of licenses .................... 2.1 11.9
Cost of services .................... 37.7 41.5
----- -----
Total cost of revenues ........... 39.8 53.4
----- -----
11
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---------- ----------
Gross margin ........................... 60.2 46.6
Operating expenses
Sales and marketing ................. 65.1 46.9
Research and development ............ 30.5 19.5
General and administrative .......... 28.3 36.4
Intangible assets amortization ...... 3.1 3.9
Restructuring and other non-recurring
(income) charges .................. (0.9) 1.0
----- -----
Total operating expenses ......... 126.1 107.8
----- -----
Loss from operations ................... (65.9) (61.2)
Other income (expense), net ............ (25.5) 0.5
----- -----
Net loss ............................... (91.4)% (60.6)%
===== =====
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
REVENUES
Total revenues decreased 16.7% to $2.1 million in first quarter 2003 from $2.6
million in first quarter 2002 caused by a variety of factors. The biggest factor
was and continues to be the poor economic climate. This has translated into
significant cuts in enterprise software purchases and stagnant IT purchasing for
our traditional target market, Fortune 1000 companies. We anticipate a stagnant
IT purchasing environment to continue in our traditional target market in the
near future. As a result, we are experiencing price compression and a slowdown
in overall demand for our products and services.
License revenues decreased 47.2% to $0.5 million in first quarter 2003 from $1.0
million in first quarter 2002. While revenue recognized from sales of licenses
to new customers remained steady, the decrease in license revenues was primarily
attributable to decreases in the number of sales of additional licenses to
existing customers. Although the average license revenue recognized from sales
to existing customers increased 13.2% to $53,000 in first quarter 2003 from
$46,000 in first quarter 2002, the number of sales decreased to two in first
quarter 2003 from 12 in first quarter 2002.
Service revenues increased 3.0% to $1.6 million in first quarter 2003 from $1.5
million in first quarter 2002. The net increase is the result of a 7.6% increase
in maintenance revenue offset by a 2.1% decrease in professional services
revenue. The increase in maintenance revenue is primarily the result of a 17.4%
increase in customers currently on maintenance agreements.
COST OF REVENUES
Cost of revenues decreased to $0.8 million in first quarter 2003 from $1.4
million in first quarter 2002. Cost of revenues as a percentage of revenues
decreased to 39.8% from 53.4%, resulting in gross margin of 60.2% for the first
quarter 2003 compared to 46.6% for first quarter 2002.
Cost of license revenues decreased to $44,000 in first quarter 2003 from $0.3
million in first quarter 2002. Cost of license revenues as a percentage of
revenues decreased to 2.1% from 11.9%. The decrease in the cost of license
revenues was primarily attributable to prepaid product royalties to third
parties being fully amortized in 2002 and a decrease in purchased technology
amortization.
Cost of service revenues decreased to $0.8 million in first quarter 2003 from
$1.1 million in first quarter 2002, and as a percentage of revenues decreased to
37.7% from 41.5%. Decreases in bonuses and reimbursable expenses as well as
costs allocated to other expense line items as a result of professional services
personnel working on sales and development activities were partially offset by
an increase in the use of third parties to perform services. Additionally,
overhead allocated to cost of services revenues decreased as a result of a
decrease in the percentage of services personnel to the total company headcount.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased to $1.4 million, or
65.1% of revenues, in first quarter 2003 from $1.2 million, or 46.9% of
revenues, in first quarter 2002. The increase is primarily attributable to an
increase in sales and marketing staff of 42.1% to 27 in first quarter 2003 from
19 in first quarter 2002 as well as an increase in professional services
personnel working on sales activities.
12
Research and Development. Research and development expenses increased to $0.6
million, or 30.5% of revenues, in first quarter 2003 from $0.5 million, or 19.5%
of revenues, in first quarter 2002. The increase is principally the result of an
increased use of third parties and services personnel to perform development
work.
General and Administrative. General and administrative expenses decreased to
$0.6 million, or 28.3% of revenues in first quarter 2003 from $0.9 million, or
36.4% of revenues in first quarter 2002. The decrease is primarily the result of
a 27.3% reduction in staff to eight in first quarter 2003 from 11 in first
quarter 2002 and decreases in allocated overhead costs, legal expenses and stock
based compensation expense.
Intangible Assets Amortization. Intangible assets amortization decreased
slightly as a result of components of our intangible assets becoming fully
amortized.
Restructuring and other non-recurring charges. Restructuring charges in first
quarter 2003 of negative $20,000 represent a change in the estimate of the
termination costs for certain service contracts resulting in a reduction to the
restructuring expense. No other non-recurring charges were recorded in first
quarter 2003.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest income on short-term
investments, offset by interest expense and other fees related to our
convertible notes entered into in second quarter 2002 and bank borrowings. First
quarter 2003 results reflect a net other expense of $0.5 million compared to a
net other income of $14,000 in first quarter 2002. The decrease was primarily
the result of increased interest expense incurred in conjunction with our
convertible notes as well as a decrease in interest earned on investments. The
interest expense primarily represents amortization of the beneficial conversion
feature recognized in conjunction with the issuance of the convertible notes, in
addition to the 10% interest, amortization of the discount, and debt issue costs
on the convertible notes.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our cash requirements primarily through
private placements of convertible preferred stock and common stock, our initial
public offering, and incurrence of debt.
In second quarter 2002, we issued $3,250,000 of convertible notes. The
convertible notes were originally scheduled to mature 18 months from the closing
date, bear interest at 10% per annum, are convertible at any time at the option
of the holder, into shares of our common stock, and were initially convertible
at a conversion price of $0.30 per share. In October 2002, we issued $135,681 of
additional convertible notes in payment of accrued interest on the originally
issued notes. In March 2003, the holders of our convertible notes with an
aggregate face value of $3,348,979 agreed to an amendment of these notes under
which the maturity date of the convertible notes has been extended until July
15, 2004 and the conversion price has been reduced to $0.25 per share.
Accordingly, these notes are classified as long term on the balance sheet at
March 31, 2003. The remaining convertible notes with an aggregate face value of
$36,701 are classified on the balance sheet as short term on March 31, 2003.
On October 16, 2002, we entered into a loan and security agreement with
Comerica Bank - California (the "Bank"). The agreement allows for a revolving
line of credit. Borrowings on the revolving line can be in amounts up to the
lesser of $250,000 or 75% of eligible receivables and mature October 1, 2003.
Such amounts will bear interest at a rate of 1.5% above the Bank's prime rate.
Borrowings under the loan agreement are collateralized by essentially all of our
tangible and intangible assets.
We are required to maintain all of our primary cash management, investment
and transaction accounts with the Bank. We must also comply with certain monthly
reporting and financial covenants. In the event of default of the covenants, the
Bank may declare any outstanding amounts to be immediately due and payable,
cease future borrowings or credit, and/or exercise its rights under the loan
agreement.
13
We incurred a net loss of $1.9 million in first quarter 2003. We have taken
substantial measures to reduce our costs and improve our chances to achieve
profitability in 2003, however we may continue to incur net losses for the
foreseeable future.
Net cash used for operating activities in first quarter 2003 is principally
the result of our net losses reduced by depreciation and amortization.
Net cash used in financing activities in first quarter 2003 is primarily
due to repayment of loans, primarily our revolving line of credit.
As of March 31, 2003, we had $1.1 million in cash and cash equivalents and
short term investments. Our ability to continue as a business in our present
form is largely dependent on our ability to generate additional revenues, reduce
overall operating expense, and achieve profitability and obtain positive cash
flows or to obtain additional debt or equity financing. We believe that we have
the ability to do so and plan to fund 2003 operations through product sales,
reduced spending and utilizing the available funding under our existing debt
facilities of which we have $250,000 available at March 31, 2003. We also expect
to pursue additional funding to finance our operations and the development of
our business. We have taken steps to reduce our recurring costs to approximate
our anticipated level of revenues. Our future capital needs will be highly
dependent on market demand for our products and services as well as our ability
to control expenses and to manage the restructuring of operations. Although we
continue to pursue these plans, there is no assurance that we will be successful
in obtaining sufficient license and service fees from our products or additional
financing on terms acceptable to us. Further, we believe that in order to
sustain business operations at the current levels through 2004, it will be
necessary to obtain significant additional funding.
Our short term investments are held in an account with an investment firm
that is related to a director of ours and his affiliated entities, who
collectively owned approximately 20% of our stock prior to the acquisition of
convertible notes and would collectively own approximately 45% of our stock if
all of their notes were converted. Also, as investments are purchased and sold,
a cash balance may be held by this firm.
There can be no assurance that additional capital will be available to us
on reasonable terms, if at all, when needed or desired. If we raise additional
funds through the issuance of equity, equity-related or debt securities, such
securities may have rights, preferences or privileges senior to those of the
rights of our common stock. Furthermore, because of the low trading price of our
common stock, the number of shares of new equity or equity-related securities
that we may be required to issue may be greater than it otherwise would be. As a
result, our stockholders may suffer significant additional dilution. Further,
the issuance of debt securities could increase the risk or perceived risk of our
company.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation expands
the disclosure requirements of guarantee obligations and requires the guarantor
to recognize a liability for the fair value of the obligation assumed under a
guarantee. In general, FIN 45 applies to contracts or indemnification agreements
that contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying instrument that is related to an asset,
liability, or equity security of the guaranteed party. Other guarantees are
subject to the disclosure requirements of FIN 45 but not to the recognition
provisions and include, among others, a guarantee accounted for as a derivative
instrument under SFAS No. 133, "Accounting for Derivatives and Hedging" ("SFAS
No. 133"), a parent's guarantee of debt owed to a third party by its subsidiary
or vice versa, and a guarantee which is based on performance. The disclosure
requirements of FIN 45 were effective as of December 31, 2002. The recognition
requirements of FIN 45 are to be applied prospectively to guarantees issued or
modified after December 31, 2002.
Under the indemnification provisions of our standard product license
agreement, we guarantee to defend and indemnify the licensee against any
proceeding based upon infringements of any patent, copyright, trade secret or
other intellectual property right by the products we license to our customers.
We do not expect to incur any infringement liability as a result of the customer
indemnification clauses as of March 31, 2003.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Set forth below and elsewhere in this Form 10-Q and in other documents we file
with the Securities and Exchange Commission are risks and uncertainties that
could cause actual results to differ materially from the results contemplated by
the forward-looking statements contained in this Form 10-Q or the results
indicated or projected by
14
our historical results.
WE MAY NEED ADDITIONAL CAPITAL TO FUND CONTINUED BUSINESS OPERATIONS AND WE
CANNOT BE SURE THAT ADDITIONAL FINANCING WILL BE AVAILABLE.
We have historically required substantial amounts of capital to fund our
business operations. Despite efforts to reduce our cost structure, we expect to
continue to experience negative cash flow from operations in 2003. We cannot
assure investors that we will attain break-even cash flow from operations at any
particular time in the future, or at all.
We continue to evaluate alternative means of financing to meet our needs on
terms that are attractive to us. Our ability to continue as a business in our
present form is largely dependent on our ability to generate additional
revenues, reduce overall operating expense, and achieve profitability and
positive cash flows or to obtain additional debt or equity financing. We believe
that we have the ability to do so and plan to fund 2003 operations through
product sales, reduced spending and utilizing the available funding under our
existing debt facilities. From time to time, we have considered and discussed
various financing alternatives and expect to continue such efforts to raise
additional funds to support our operational plan. However, we cannot be certain
that additional financing will be available to us on favorable terms when
required, or at all. Further, we believe that in order to sustain business
operations at the current level through 2004, we will need to obtain significant
additional funding.
IF WE ARE NOT ABLE TO OBTAIN NECESSARY CAPITAL, WE MAY NEED TO DRAMATICALLY
CHANGE OUR BUSINESS STRATEGY AND DIRECTION, INCLUDING PURSUING OPTIONS TO SELL
OR MERGE OUR BUSINESS, OR LIQUIDATE.
In the past, we have funded our operating losses and capital expenditures
through proceeds from equity offerings and debt. Changes in equity markets in
the recent past have adversely affected our ability to raise equity financing
and have adversely affected the markets for debt financing for companies with a
history of losses such as ours. If we raise additional funds through the
issuance of equity, equity-linked or debt securities, those securities may have
rights, preferences or privileges senior to those of the rights of our common
stock and, in light of our current market capitalization, our stockholders may
experience substantial dilution. Further, the issuance of debt securities could
increase the risk or perceived risk of our company. If we are not able to obtain
necessary capital, we may need to dramatically change our business strategy and
direction, including pursuing options to sell or merge our business, or
liquidate.
WE HAVE A HISTORY OF LOSSES, ANTICIPATE THAT WE WILL CONTINUE TO INCUR LOSSES IN
2003 AND MAY NEVER ACHIEVE PROFITABILITY.
Our limited operating history in our current line of business and the uncertain
nature of the markets in which we compete make it difficult or impossible to
predict future results of operations. As of March 31, 2003, we had an
accumulated deficit of $75.4 million. We have not achieved profitability on a
quarterly or annual basis to date. In first quarter 2003 and fiscal 2002, we
incurred net losses of $1.9 million and $6.8 million, respectively. We expect to
have decreased operating expenses as a result of our restructuring activities.
However, if revenues do not significantly increase, our losses will continue. In
addition, our history of losses may cause some of our potential customers to
question our viability, which might hamper our ability to make sales.
OUR CASH FLOW MAY NOT BE SUFFICIENT TO PERMIT REPAYMENT OF OUR DEBT WHEN DUE.
The $3.25 million of convertible notes we issued in second quarter 2002 plus
accrued interest will be due no later than July 15, 2004. To the extent the note
purchasers do not elect to convert the notes into common stock, we will be
required to retire or refinance that debt at that time. In addition, any
borrowings that we make under our revolving debt facility will be due in October
2003. Our ability to retire or to refinance our indebtedness will depend on our
ability to generate cash flow in the future. Our cash flow from operations will
likely be insufficient to repay this indebtedness at scheduled maturity and some
or all of our indebtedness, which is not converted to equity, will likely have
to be refinanced. If we are unable to refinance our debt or if additional
financing is not available on acceptable terms, or at all, we could be forced to
dispose of assets under circumstances that might not be favorable to realizing
the highest price for the assets or to default on our obligations with respect
to this indebtedness.
WE MAY NOT SUCCEED IN ATTRACTING AND RETAINING THE PERSONNEL WE NEED FOR OUR
BUSINESS AND THE INTEGRATION OF NEW MANAGEMENT AND PERSONNEL MAY STRAIN OUR
RESOURCES.
Our business requires the employment of highly skilled personnel, especially
experienced software developers. The inability to recruit and retain experienced
software developers in the future could result in delays in developing new
versions of our software products or could result in the release of deficient
software products. Any such delays or
15
defective products would likely result in lower sales. We may also experience
difficulty in hiring and retaining sales personnel, product managers and
professional services employees. The average tenure of our current employees is
2.8 years.
Our senior management team consists of only two individuals, neither of whom has
been with us for more than three years. The loss of either of these officers
could have an adverse effect on our operations, business, and prospects and our
ability to carry out our business plan. We do not maintain key man insurance on
our officers.
A SIGNIFICANT PERCENTAGE OF OUR PRODUCT DEVELOPMENT IS PERFORMED BY A THIRD
PARTY INTERNATIONALLY, THE LOSS OF WHICH COULD SUBSTANTIALLY HARM OUR PRODUCT
DEVELOPMENT EFFORTS.
A significant percentage of our product development work, and some of our
implementation services, are performed by a third-party development organization
in Minsk, Belarus. Unpredictable developments in the political, economic and
social conditions in Belarus, or our failure to maintain or renew our business
relationship with this organization on terms similar to those which exist
currently, could reduce or eliminate product development and implementation
services. If access to these services were to be unexpectedly eliminated or
significantly reduced, our ability to meet development objectives vital to our
ongoing strategy would be hindered, and our business could be seriously harmed.
IT IS DIFFICULT TO DRAW CONCLUSIONS ABOUT OUR FUTURE PERFORMANCE BASED ON OUR
PAST PERFORMANCE DUE TO SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING
RESULTS.
Our projected expense levels are based on our expectations regarding future
revenues and are relatively fixed in the short term. Therefore, if revenue
levels are below expectations in a particular quarter, operating results and net
income are likely to be disproportionately adversely affected because our
expenses are relatively fixed. In addition, a significant percentage of our
revenues is typically derived from relatively large orders from a limited number
of customers, so it is difficult to estimate accurately the timing of future
revenues.
Our quarterly results are also impacted by our revenue recognition policies. Our
revenues are unpredictable and in our last six quarters have fluctuated from a
low of $2.1 million in first quarter 2003 to a high of $4.4 million in fourth
quarter 2001. Because we generally recognize license revenues upon installation
and training, sales orders from new customers in a quarter might not be
recognized during that quarter. Delays in the implementation and installation of
our software near the end of a quarter could also cause recognized quarterly
revenues and, to a greater degree, results of operations to fall substantially
short of anticipated levels. We often recognize revenues for existing customers
in a shorter time frame because installation and training can generally be
completed in significantly less time than for new customers. However, we may not
be able to recognize expected revenues at the end of a quarter due to delays in
the receipt of expected orders from existing customers.
Revenues in any one quarter are not indicative of revenues in any future period
because of these and other factors and, accordingly, we believe that certain
period-to-period comparisons of our results of operations are not necessarily
meaningful and should not be relied upon as indicators of future performance.
THE KNOWLEDGE MANAGEMENT MARKET IS EVOLVING AND, IF IT DOES NOT GROW RAPIDLY,
OUR BUSINESS WILL BE ADVERSELY AFFECTED.
The Knowledge Management solutions market is an emerging industry, and it is
difficult to predict how large or how quickly it will grow, if at all. Customer
service historically has been provided primarily in person or over the telephone
with limited reference materials available for the customer service
representative. Our business model assumes that companies which provide customer
service over the telephone will find value in aggregating institutional
knowledge by using our software and will be willing to access our content over
the Internet. Our business model also assumes that companies will find value in
providing some of their customer service over the Internet rather than by
telephone. Our success will depend on the broad commercial acceptance of, and
demand for, these Knowledge Management solutions.
WE CURRENTLY HAVE ONE PRODUCT FAMILY. IF THE DEMAND FOR THIS LINE OF PRODUCTS
DECLINES, OUR BUSINESS WILL BE ADVERSELY AFFECTED
ServiceWare's Knowledge Management solution, ServiceWare Enterprise, includes
our ServiceWare Self-Service, ServiceWare Professional and ServiceWare Architect
software products. Our past and expected future revenues consist primarily of
license fees for these software solutions and fees for related services. Factors
adversely affecting the demand for these products and our products in general,
such as competition, pricing or technological change, could materially adversely
affect our business, financial condition, operating results and the value of our
stock price. Our
16
future financial performance will substantially depend on our ability to sell
current versions of our entire suite of products and our ability to develop and
sell enhanced versions of our products.
DUE TO THE LENGTHY SALES CYCLES OF OUR PRODUCTS AND SERVICES, THE TIMING OF OUR
SALES IS DIFFICULT TO PREDICT AND MAY CAUSE US TO MISS OUR REVENUE EXPECTATIONS.
Our products and services are typically intended for use in applications that
may be critical to a customer's business. In certain instances, the purchase of
our products and services involves a significant commitment of resources by
prospective customers. As a result, our sales process is often subject to delays
associated with lengthy approval processes that accompany the commitment of
significant resources. These delays may worsen in the future as a significant
amount of our total revenues will be derived from our ServiceWare Enterprise
solutions, for which contracts have a higher average dollar value. For these and
other reasons, the sales cycle associated with the licensing of our products and
subscription for our services typically ranges between six and eighteen months
and is subject to a number of significant delays over which we have little or no
control. While our customers are evaluating whether our products and services
suit their needs, we may incur substantial sales and marketing expenses and
expend significant management effort. We may not realize forecasted revenues
from a specific customer in the quarter in which we expend these significant
resources because of the lengthy sales cycle for our products and services.
WE MAY NOT BE ABLE TO EXPAND OUR BUSINESS INTERNATIONALLY, AND, IF WE DO, WE
FACE RISKS RELATING TO INTERNATIONAL OPERATIONS.
Our business strategy includes efforts to attract more international customers.
We are currently exploring business opportunities in the United Kingdom and
continental Europe. To date, we have only limited experience in providing our
products and services internationally. If we are not able to market our products
and services successfully in international markets, our expenses may exceed our
revenues. By doing business in international markets we face risks, such as
unexpected changes in tariffs and other trade barriers, fluctuations in currency
exchange rates, difficulties in staffing and managing foreign operations,
political instability, reduced protection for intellectual property rights in
some countries, seasonal reductions in business activity during the summer
months in Europe and certain other parts of the world, and potentially adverse
tax consequences, any of which could adversely impact our international
operations and may contribute further to our net losses.
IF WE ARE NOT ABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE, SALES OF OUR
PRODUCTS MAY DECREASE.
The software industry is characterized by rapid technological change, including
changes in customer requirements, frequent new product and service introductions
and enhancements and evolving industry standards. If we fail to keep pace with
the technological progress of our competitors, sales of our products may
decrease.
WE DEPEND ON TECHNOLOGY LICENSED TO US BY THIRD PARTIES, AND THE LOSS OF THIS
TECHNOLOGY COULD DELAY IMPLEMENTATION OF OUR PRODUCTS, INJURE OUR REPUTATION OR
FORCE US TO PAY HIGHER ROYALTIES.
We rely, in part, on technology that we license from a small number of software
providers for use with our products. After the expiration of these licenses,
this technology may not continue to be available on commercially reasonable
terms, if at all, and may be difficult to replace. The loss of any of these
technology licenses could result in delays in introducing or maintaining our
products until equivalent technology, if available, is identified, licensed and
integrated. In addition, any defects in the technology we may license in the
future could prevent the implementation or impair the functionality of our
products, delay new product introductions or injure our reputation. If we are
required to enter into license agreements with third parties for replacement
technology, we could be subject to higher royalty payments.
PROBLEMS ARISING FROM THE USE OF OUR PRODUCTS WITH OTHER VENDORS' PRODUCTS COULD
CAUSE US TO INCUR SIGNIFICANT COSTS, DIVERT ATTENTION FROM OUR PRODUCT
DEVELOPMENT EFFORTS AND CAUSE CUSTOMER RELATIONS PROBLEMS.
Our customers generally use our products together with products from other
companies. As a result, when problems occur in a customer's systems, it may be
difficult to identify the source of the problem. Even when these problems are
not caused by our products, they may cause us to incur significant warranty and
repair costs, divert the attention of our technical personnel from our product
development efforts and cause significant customer relations problems.
IF CERTAIN COMPANIES CEASE TO PROVIDE OPEN PROGRAM INTERFACES FOR THEIR CUSTOMER
RELATIONSHIP MANAGEMENT SOFTWARE, IT WILL BE DIFFICULT TO INTEGRATE OUR SOFTWARE
WITH THEIRS. THIS WILL DECREASE THE ATTRACTIVENESS OF OUR PRODUCTS.
Our ability to compete successfully also depends on the continued compatibility
and interoperability of our products
17
with products and systems sold by various third parties, specifically including
CRM software sold by Clarify/Amdocs, Remedy, and Siebel Systems. Currently,
these vendors have open applications program interfaces, which facilitate our
ability to integrate with their systems. If any one of them should close their
programs' interface or if they should acquire one of our competitors, our
ability to provide a close integration of our products could become more
difficult, or impossible, and could delay or prevent our products' integration
with future systems. Inadequate integration with other vendors' products would
make our products less desirable and could lead to lower sales.
WE FACE INTENSE COMPETITION FROM BOTH ESTABLISHED AND RECENTLY FORMED ENTITIES,
AND THIS COMPETITION MAY ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY BECAUSE
WE COMPETE IN THE EMERGING MARKET FOR KNOWLEDGE MANAGEMENT SOLUTIONS.
We compete in the emerging market for Knowledge Management solutions and changes
in the Knowledge Management solutions market could adversely affect our revenues
and profitability. We face competition from many firms offering a variety of
products and services. In the future, because there are relatively low barriers
to entry in the software industry, we expect to experience additional
competition from new entrants into the Knowledge Management solutions market. It
is also possible that alliances or mergers may occur among our competitors and
that these newly consolidated companies could rapidly acquire significant market
share. Greater competition may result in price erosion for our products and
services, which may significantly affect our future operating margins.
IF OUR SOFTWARE PRODUCTS CONTAIN ERRORS OR FAILURES, SALES OF THESE PRODUCTS
COULD DECREASE.
Software products frequently contain errors or failures, especially when first
introduced or when new versions are released. In the past, we have released
products that contained defects, including software errors in certain new
versions of existing products and in new products after their introduction. In
the event the information contained in our products is inaccurate or perceived
to be incomplete or out-of-date, our customers could purchase our competitors'
products or decide they do not need Knowledge Management solutions at all. In
either case, our sales would decrease. Our products are typically intended for
use in applications that may be critical to a customer's business. As a result,
we believe that our customers and potential customers have a great sensitivity
to product defects.
WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF PRODUCT LIABILITY CLAIMS BECAUSE
OUR PRODUCTS ARE CRITICAL TO THE OPERATIONS OF OUR CUSTOMERS' BUSINESSES.
Our products are critical to the operations of our customers' businesses. Any
defects or alleged defects in our products entail the risk of product liability
claims for substantial damages, regardless of our responsibility for the
failure. Although our license agreements with our customers typically contain
provisions designed to limit our exposure to potential product liability claims,
these provisions may not be effective under the laws of certain jurisdictions.
In addition, product liability claims, even if unsuccessful, may be costly and
divert management's attention from our operations. Software defects and product
liability claims may result in a loss of future revenue, a delay in market
acceptance, the diversion of development resources, damage to our reputation or
increased service and warranty costs.
IF OUR CUSTOMERS' SYSTEM SECURITY IS BREACHED AND CONFIDENTIAL INFORMATION IS
STOLEN, OUR BUSINESS AND REPUTATION COULD SUFFER.
Users of our products transmit their and their customers' confidential
information, such as names, addresses, social security numbers and credit card
information, over the Internet. In our license agreements with our customers, we
typically disclaim responsibility for the security of confidential data and have
contractual indemnities for any damages claimed against us. However, if
unauthorized third parties are successful in illegally obtaining confidential
information from users of our products, our reputation and business may be
damaged, and if our contractual disclaimers and indemnities are not enforceable,
we may be subject to liability.
WE MAY ACQUIRE OR MAKE INVESTMENTS IN COMPANIES OR TECHNOLOGIES THAT COULD CAUSE
DISRUPTIONS TO OUR BUSINESS.
We intend to explore opportunities to acquire companies or technologies in the
future. Entering into an acquisition entails many risks, any of which could
adversely affect our business, including:
o failure to integrate the acquired assets and/or companies with our
current business
o the price we pay may exceed the value we eventually realize
o potential loss of share value to our existing stockholders as a result
of issuing equity securities as part or all of the purchase price
o potential loss of key employees from either our current business or the
acquired business
o entering into markets in which we have little or no prior experience
18
o diversion of management's attention from other business concerns
o assumption of unanticipated liabilities related to the acquired assets
o the business or technologies we acquire or in which we invest may have
limited operating histories and may be subject to many of the same
risks we are.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH MAY CAUSE
US TO INCUR SIGNIFICANT COSTS IN LITIGATION AND AN EROSION IN THE VALUE OF OUR
BRANDS AND PRODUCTS.
Our business is dependent on proprietary technology and the value of our brands.
We rely primarily on patent, copyright, trade secret and trademark laws to
protect our technology and brands. Our patents may not survive a legal challenge
to their validity or provide meaningful protection to us. Litigation to protect
our patents would be expensive and the loss of our patents would decrease the
value of our products. Defending against claims of patent infringement would
also be expensive and, if successful, we could be forced to redesign our
products, pay royalties, or cease selling them. In addition, effective trademark
protection may not be available for our trademarks. The use by other parties of
our trademarks would dilute the value of our brands.
Notwithstanding the precautions we have taken, a third party may copy or
otherwise obtain and use our software or other proprietary information without
authorization or may develop similar software independently. Policing
unauthorized use of our technology is difficult, particularly because the global
nature of the Internet makes it difficult to control the ultimate destination or
security of software or other transmitted data. Further, we have granted certain
third parties limited contractual rights to use proprietary information which
they may improperly use or disclose. The laws of other countries may afford us
little or no effective protection of our intellectual property. The steps we
have taken may not prevent misappropriation of our technology, and the
agreements entered into for that purpose may not be enforceable. The
unauthorized use of our proprietary technologies could also decrease the value
of our products.
THE SUCCESS OF OUR SOFTWARE PRODUCTS DEPENDS ON THEIR ADOPTION BY OUR CUSTOMERS'
EMPLOYEES. IF THESE EMPLOYEES DO NOT ACCEPT THE IMPLEMENTATION OF OUR PRODUCTS,
OUR CUSTOMERS MAY FAIL TO RENEW THEIR SERVICE CONTRACTS AND WE MAY HAVE
DIFFICULTY ATTRACTING NEW CUSTOMERS.
The effectiveness of our ServiceWare Enterprise depends in part on widespread
adoption and use of our software by our customers' customer service personnel
and on the quality of the solutions they generate. Resistance to our software by
customer service personnel and an inadequate development of the knowledge base
may make it more difficult to attract new customers and retain old ones.
Some of our customers have found that customer service personnel productivity
initially drops while customer service personnel become accustomed to using our
software. If an enterprise deploying our software has not adequately planned for
and communicated its expectations regarding that initial productivity decline,
customer service personnel may resist adoption of our software.
The knowledge base depends in part on solutions generated by customer service
personnel and, sometimes, on the importation of our customers' legacy solutions.
If customer service personnel do not adopt and use our products effectively,
necessary solutions will not be added to the knowledge base, and the knowledge
base will not adequately address service needs. In addition, if
less-than-adequate solutions are created and left uncorrected by a user's
quality-assurance processes or if the legacy solutions are inadequate, the
knowledge base will similarly be inadequate, and the value of our solutions to
end-users will be impaired. Thus, successful deployment and broad acceptance of
ServiceWare Enterprise will depend in part on whether our customers effectively
roll-out and use our software products and the quality of the customers'
existing knowledge base of solutions.
WE DEPEND ON INCREASED BUSINESS FROM OUR NEW CUSTOMERS AND, IF WE FAIL TO GROW
OUR CLIENT BASE OR GENERATE REPEAT BUSINESS, OUR OPERATING RESULTS COULD BE
ADVERSELY AFFECTED.
If we fail to grow our customer base or generate repeat and expanded business
from our current and future customers, our business and operating results will
be seriously harmed. Some of our customers initially make a limited purchase of
our products and services for pilot programs. If these customers do not
successfully develop and deploy such initial applications, they may choose not
to purchase complete deployment or development licenses. Some of our customers
who have made initial purchases of our software have deferred or suspended
implementation of our products due to slower than expected rates of internal
adoption by customer service personnel. If more customers decide to defer or
suspend implementation of our products in the future, we will be unable to
increase our revenue from these customers from additional licenses or
maintenance agreements, and our financial position will be seriously harmed.
In addition, as we introduce new versions of our products or new products, our
current customers may not need our
19
new products and may not ultimately license these products. Any downturn in our
software licenses revenues would negatively impact our future service revenues
because the total amount of maintenance and service fees we receive in any
period depends in large part on the size and number of licenses that we have
previously sold. In addition, if customers elect not to renew their maintenance
agreements, our service revenues could be significantly adversely affected.
A DECLINE IN INFORMATION TECHNOLOGY SPENDING COULD REDUCE THE SALE OF OUR
PRODUCTS.
The license fees for our products often represent a significant expenditure of
Information Technology ("IT") capital for our customers. Due to the slowdown in
the national and global economy and the uncertainties resulting from recent acts
of terrorism and the war in Iraq, we believe that many existing and potential
customers are reducing or reassessing their planned IT expenditures. Such
reductions in or eliminations of IT spending could cause us to be unable to
maintain or increase our sales volumes, and therefore, have a material adverse
effect on our revenues, operating results and stock price.
INCREASING GOVERNMENT REGULATION OF THE INTERNET AND INTERNET SECURITY ISSUES
COULD HARM OUR BUSINESS.
As Knowledge Management and the Internet continue to evolve, we expect that
federal, state and foreign governments will adopt laws and regulations tailored
to the Internet covering issues like user privacy, taxation of goods and
services provided over the Internet, pricing, content and quality of products
and services. If enacted, these laws and regulations could limit the market for
Knowledge Management services and, therefore, the market for our products and
services. Additionally, Internet security issues could deter customers from
using the Internet for certain transactions or from implementing customer
support websites.
The Telecommunications Act of 1996 prohibits certain types of information and
content from being transmitted over the Internet. The prohibition's scope and
the liability associated with a violation of the Telecommunications Act's
information and content provisions are currently unsettled. The imposition upon
us and other software and service providers of potential liability for
information carried on or disseminated through our applications could require us
to implement measures to reduce our exposure to this liability. These measures
could require us to expend substantial resources or discontinue certain
services. In addition, although substantial portions of the Communications
Decency Act, the act through which the Telecommunications Act of 1996 imposes
criminal penalties, were held to be unconstitutional, similar legislation may be
enacted and upheld in the future. It is possible that this new legislation and
the Communications Decency Act could expose companies involved in Internet
liability, which could limit the growth of Internet usage and, therefore, the
demand for Knowledge Management solutions. In addition, similar or more
restrictive laws in other countries could have a similar effect and hamper our
plans to expand overseas.
WE MAY BECOME INVOLVED IN SECURITIES CLASS ACTION LITIGATION WHICH COULD DIVERT
MANAGEMENT'S ATTENTION AND HARM OUR BUSINESS.
In recent years, the common stocks of technology companies have experienced
significant price and volume fluctuations. These broad market fluctuations may
cause the market price of our common stock to decline. In the past, following
periods of volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against that company.
We may become involved in that type of litigation in the future. Litigation is
often expensive and diverts management's attention and resources, which could
harm our business and operating results.
OUR COMMON STOCK HAS BEEN DELISTED FROM THE NASDAQ STOCK MARKET.
As of May 5, 2003, our common stock has been delisted from The Nasdaq Stock
Market and became immediately eligible for quotation on the OTC Bulletin Board.
As of May 5, 2003, our securities are trading on the OTC Bulletin Board.
As a result of our trading on the OTC Bulletin Board, investors may find it more
difficult to dispose of or obtain accurate quotations as to the market value of
the securities. In addition, we are subject to a Rule promulgated by the
Securities and Exchange Commission that, if we fail to meet criteria set forth
in such Rule, various practice requirements are imposed on broker-dealers who
sell securities governed by the Rule to persons other than established customers
and accredited investors. For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transactions prior to sale.
Consequently, the Rule may deter broker-dealers from recommending or selling our
common stock, which may further affect the liquidity of our common stock.
20
Delisting from Nasdaq makes trading our shares more difficult for investors,
potentially leading to further declines in our share price. It may also make it
more difficult for us to raise additional capital. Further, we may also incur
additional costs under state blue sky laws in connection with any sales of our
securities.
OUR MANAGEMENT OWNS A SIGNIFICANT PERCENTAGE OF OUR COMPANY AND WILL BE ABLE TO
EXERCISE SIGNIFICANT INFLUENCE OVER OUR ACTIONS.
We are controlled by our officers and directors, who in the aggregate directly
or indirectly could control more than 50% of our outstanding common stock and
voting power, assuming conversion of all of our convertible notes. These
stockholders collectively will likely be able to control our management policy,
decide all fundamental corporate actions, including mergers, substantial
acquisitions and dispositions, and elect our board of directors.
TERRORIST ATTACKS SUCH AS THE ATTACKS THAT OCCURRED IN NEW YORK AND WASHINGTON,
D.C. ON SEPTEMBER 11, 2001 AND OTHER ATTACKS OR ACTS OF WAR MAY ADVERSELY AFFECT
THE MARKETS ON WHICH OUR COMMON STOCK TRADES, OUR FINANCIAL CONDITION AND OUR
RESULTS OF OPERATIONS.
On September 11, 2001, the United States was the target of terrorist attacks of
unprecedented scope. In March 2003, the United States and allied nations
commenced a war in Iraq. These attacks and the war in Iraq have caused major
instability in the United States and other financial markets. There could be
further acts of terrorism in the United States or elsewhere that could have a
similar impact. Armed hostilities or further acts of terrorism could cause
further instability in financial markets and could directly impact our financial
condition and our results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Nearly all of our revenues recognized to date have been denominated in
United States dollars and are primarily from customers in the United States. We
have a European subsidiary located in London, England. Revenues from
international clients were 19% in first quarter 2003 and 12% in 2002, and nearly
all of these revenues have been denominated in United States dollars. In the
future, a portion of the revenues we derive from international operations may be
denominated in foreign currencies. We incur costs for our overseas office in the
local currency of that office for staffing, rent, telecommunications and other
services. As a result, our operating results could become subject to significant
fluctuations based upon changes in the exchange rates of those currencies in
relation to the United States dollar. Furthermore, to the extent that we engage
in international sales denominated in United States dollars, an increase in the
value of the United States dollar relative to foreign currencies could make our
services less competitive in international markets. Although currency
fluctuations are currently not a material risk to our operating results, we will
continue to monitor our exposure to currency fluctuations and when appropriate,
consider the use of financial hedging techniques to minimize the effect of these
fluctuations in the future. We cannot assure you that exchange rate fluctuations
will not harm our business in the future. We do not currently utilize any
derivative financial instruments or derivative commodity instruments.
With respect to market risk relating to interest expense, our convertible
notes bear interest at a fixed rate, but mature in July 2004. As a result, we do
not believe that we are currently subject to material interest rate risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our principal executive
officer and our principal financial officer, after evaluating the effectiveness
of our disclosure controls and procedures (as defined in Exchange Act Rules
13a-14(c) and 15d-14(c)) on May 12, 2003, have concluded that, as of such date,
our disclosure controls and procedures were adequate and effective to ensure
that material information relating to our company and our consolidated
subsidiaries would be made known to them by others within those entities.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect our
disclosure controls and procedures subsequent to the date of their evaluation,
nor were there any significant deficiencies or material weaknesses in our
internal controls. As a result, no corrective actions were required or
undertaken.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held a special meeting of stockholders on February 10, 2003. Two matters
were considered and voted upon at the special meeting:
o the approval of an amendment to our Certificate of Incorporation to
effect a reverse stock split of our common stock and to grant our board
of directors the authority to set the ratio for the reverse split or to
not complete the reverse split
o the approval of an amendment to our Certificate of Incorporation to
decrease the number of authorized shares of common stock to 50,000,000
shares subject to completion of the reverse stock split
The votes on the matters presented to our stockholders were as follows:
VOTES VOTES VOTES
FOR AGAINST ABSTAINED
------------ ----------- -------------
Approval of an amendment to our Certificate of
Incorporation to effect a reverse stock split
of our common stock ............................ 13,593,574 98,205 1,510
Approval of an amendment to our Certificate of
Incorporation to decrease the number of
authorized shares of common stock .............. 13,663,259 26,030 4,000
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Form of Amendment to 10% Convertible Note dated March 31, 2003.
10.2 Letter from Comerica Bank - California dated March 10, 2003 regarding
Covenant Amendment.
99.1 Certification Pursuant to 18 U.S.C.ss.1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for Kent Heyman,
President and Chief Executive Officer.
99.2 Certification Pursuant to 18 U.S.C.ss.1350, as adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for Scott Schwartzman,
Chief Financial Officer.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SERVICEWARE TECHNOLOGIES, INC.
Date: May 15, 2003 By: /s/ SCOTT SCHWARTZMAN
----------------------------
Scott Schwartzman
Chief Financial Officer and Principal
Financial Officer
23
CERTIFICATIONS
I, Kent Heyman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ServiceWare
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls, which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 By: /s/ Kent Heyman
---------------
Kent Heyman
Principal Executive Officer
24
CERTIFICATIONS
I, Scott Schwartzman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ServiceWare
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls, which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15, 2003 By: /s/ Scott Schwartzman
---------------------
Scott Schwartzman
Principal Financial Officer
25