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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 SEPTEMBER 30, 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 Identification No.)
Incorporation or Organization)
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 November 14, 2003 was 24,226,026.
SERVICEWARE TECHNOLOGIES, INC.
FORM 10-Q
SEPTEMBER 30, 2003
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1. Consolidated Financial Statements
. Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002...... 2
. Consolidated Statement of Operations for the three and nine months
ended September 30, 2003 and 2002 (unaudited)............................................... 3
. Consolidated Statement of Stockholders' Equity (deficit) for the
nine months ended September 30, 2003 (unaudited)............................................ 4
. Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002 (unaudited)..................................................... 5
. Notes to Consolidated Financial Statements (unaudited) ..................................... 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...................................... 22
ITEM 4. Controls and Procedures......................................................................... 22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................................................... 23
ITEM 6. Exhibits and Reports on Form 8-K................................................................ 23
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 1,192 $ 2,461
Short term investments -- 514
Accounts receivable, less allowance for doubtful accounts of $15 as of
September 30, 2003 and $171 as of December 31, 2002 2,711 1,534
Other current assets 515 363
-------- --------
Total current assets 4,418 4,872
Non current assets
Purchased technology, net of amortization of $1,836 as of
September 30, 2003 and $1,798 as of December 31, 2002 46 83
Property and equipment
Office furniture, equipment, and leasehold improvements 1,939 1,945
Computer equipment 5,725 5,809
-------- --------
Total property and equipment 7,664 7,754
Less accumulated depreciation (7,006) (6,495)
-------- --------
Property and equipment, net 658 1,259
Intangible assets, net of accumulated amortization of $2,514 as of
September 30, 2003 and $2,367 as of December 31, 2002 -- 147
Goodwill 2,324 2,324
Other non current assets 50 50
-------- --------
Total non current assets 3,078 3,863
-------- --------
Total assets $ 7,496 $ 8,735
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Revolving line of credit 250 800
Accounts payable 745 1,143
Accrued compensation and benefits 208 160
Deferred revenue 2,737 2,142
Restructuring reserve -- 116
Convertible debt, net of unamortized discount of $1,076 as of
September 30, 2003 and $1,618 as of December 31, 2002 2,479 1,768
Other current liabilities 655 427
-------- --------
Total current liabilities 7,074 6,556
Non current deferred revenue - services 424 13
Other non current liabilities 65 96
-------- --------
Total liabilities 7,563 6,665
Stockholders' equity (deficit)
Common stock, $0.01 par; 100,000 shares authorized, 24,684 and
24,684 shares issued and 24,226 and 24,083 shares outstanding
as of September 30, 2003 and December 31, 2002, respectively 247 247
Additional paid in capital 76,121 74,184
Treasury stock, 458 and 601 shares as of September 30, 2003 and
December 31, 2002, respectively (170) (223)
Deferred compensation and other -- (9)
Warrants 46 1,414
Accumulated other comprehensive loss:
Currency translation account -- (37)
Deficit (76,311) (73,506)
-------- --------
Total stockholders' equity (deficit) (67) 2,070
-------- --------
Total liabilities and stockholders' equity (deficit) $ 7,496 $ 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2003 2002 2003 2002
-------- -------- -------- --------
Revenues
Licenses $ 1,194 $ 712 $ 2,725 $ 3,134
Services 1,537 1,474 5,205 4,549
-------- -------- -------- --------
Total revenues 2,731 2,186 7,930 7,683
Cost of revenues
Cost of licenses 72 192 183 809
Cost of services 750 846 2,295 2,765
-------- -------- -------- --------
Total cost of revenues 822 1,038 2,478 3,574
-------- -------- -------- --------
Gross margin 1,909 1,148 5,452 4,109
Operating expenses
Sales and marketing 1,068 1,439 3,657 3,903
Research and development 339 800 1,417 1,974
General and administrative 537 679 1,625 2,386
Intangible assets amortization 16 79 147 279
Restructuring and other non-recurring charges -- (90) (20) (429)
-------- -------- -------- --------
Total operating expenses 1,960 2,907 6,826 8,113
-------- -------- -------- --------
Loss from operations (51) (1,759) (1,374) (4,004)
Other income (expense)
Interest expense (443) (508) (1,432) (702)
Other (net) -- 24 -- 73
-------- -------- -------- --------
Other expense, net (443) (484) (1,432) (629)
-------- -------- -------- --------
Net loss $ (494) $ (2,243) $ (2,806) $ (4,633)
======== ======== ======== ========
Net loss per common share, basic and diluted: $ (0.02) $ (0.09) $ (0.12) $ (0.19)
Shares used in computing per share amounts 24,226 24,018 24,176 23,928
======== ======== ======== ========
See accompanying notes to the financial statements.
3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
ACCUMULATED
ADDITIONAL DEFERRED OTHER TOTAL
COMMON STOCK PAID IN TREASURY STOCK COMPENSATION COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT AND OTHER WARRANTS (LOSS) GAIN DEFICIT EQUITY
(DEFICIT)
------ ------ ---------- ------ ------ --------- -------- ------------- -------- ------------
Balance at December 31,
2002 24,083 $ 247 $74,184 601 $ (223) $(9) $1,414 $ (37) $(73,506) $ 2,070
Exercise of stock options 63 - (8) (63) 23 - - - - 15
Adjustment to beneficial
conversion feature for
amendment to notes - - 587 - - - - - - 587
Amortization of warrants - - - - - 9 - - - 9
Expiration of warrants - - 1,368 - - - (1,368) - - -
Currency translation
adjustment - - - - - - - 37 - 37
Net loss - - - - - - - - (2,805) (2,805)
Issuance of stock for
Employee Stock
Purchase Plan 80 - (10) (80) 30 - - - - 20
------ ----- ------- ---- ------ --- ------ ----- -------- -------
Balance at September 30,
2003 24,226 $ 247 $76,121 458 $ (170) $ - $ 46 $ - $(76,311) $ (67)
------ ----- ------- ---- ------ --- ------ ----- -------- -------
See accompanying notes to the financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
------- -------
Cash flows from operating activities
Net loss $(2,806) $(4,633)
Adjustments to reconcile net loss to net cash used in operations:
Non cash items:
Depreciation 650 1,306
Amortization of intangible assets and warrants 194 713
Amortization of beneficial conversion feature related to convertible notes 1,037 497
Amortization of discount on convertible notes 92 46
Interest expense paid by issuing convertible notes 169 --
Stock based compensation and loan forgiveness -- 78
Write off cumulative translation adjustment 37 --
Other non cash items 14 (15)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,177) 410
(Increase) decrease in other assets (153) 279
(Decrease) increase in accounts payable (399) 225
Increase (decrease) in accrued compensation 48 (541)
Increase (decrease) in deferred revenue 1,005 (954)
Increase (decrease) in other liabilities 112 (1,470)
------- -------
Net cash used in operating activities (1,177) (4,058)
------- -------
Cash flows from investing activities
Purchases of short term investments -- (2,002)
Payment for purchase of InfoImage assets -- (100)
Property and equipment acquisitions (49) (12)
Proceeds from sale of short term investments 500 13
------- -------
Net cash provided by (used in) investing activities 451 (2,101)
------- -------
Cash flows from financing activities
Repayments of principal of capital lease obligations (28) (28)
Repayments of principal of term loans -- (258)
Repayments of principal of revolving line of credit (800) --
Proceeds from issuance of convertible notes, net of debt issuance costs -- 2,993
Proceeds from borrowings under revolving line of credit 250 --
Proceeds from stock option exercises 35 52
------- -------
Net cash (used in) provided by financing activities (543) 2,759
------- -------
Effect of exchange rate changes on cash -- (11)
Decrease in cash and cash equivalents (1,269) (3,411)
Cash and cash equivalents at beginning of period 2,461 4,790
------- -------
Cash and cash equivalents at end of period $ 1,192 $ 1,379
======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest $ 10 $ 18
======= =======
Supplemental disclosures of non-cash investing and financing activities:
Benefit due to amendment of convertible notes 587 --
Expiration of warrants 1,368 --
Assets acquired under capital lease obligation -- 92
See accompanying notes to the financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE 1. ORGANIZATION OF THE COMPANY
ServiceWare is a leading provider of Web-based knowledge-powered support
solutions. ServiceWare software empowers organizations to deliver superior
customer service and support while reducing support costs. Powered by
ServiceWare's Cognitive Processor(R), a patented self-learning search
technology, ServiceWare Enterprise(TM) and ServiceWare Express(TM) enable
businesses to develop and manage a repository of knowledge to effectively answer
inquiries over the Web and in the call center.
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'S TARGET MARKET INCLUDES:
o Call Centers that seek to reduce service costs and improve customer
satisfaction
o Help Desks that seek a problem resolution application
o Enterprises that seek to retain intellectual capital and promote
knowledge sharing
o Mid-Market Companies that need a turnkey solution for customer service
and support
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 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 and
stockholders' deficit of approximately $76,311,000 and $67,000 respectively, at
September 30, 2003, incurred a net loss of approximately $2,806,000 and had
negative cash flows from operations of approximately $1,177,000 for the nine
months ended September 30, 2003, and expects to incur additional losses and
negative cash flows throughout the remainder of 2003 and through 2004. The
ability of the Company to continue in its present form is largely dependent on
its ability to generate additional revenues, 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 2004 operations
through cash the Company expects to generate from operations. 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 alternatively, to obtain additional financing on terms
acceptable to the Company. However, if the holders of the convertible notes do
not elect to convert their notes into stock, it may be necessary to obtain
significant additional funding.
6
NOTE 2. UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited balance sheet as of September 30, 2003 and related
unaudited consolidated statements of operations for the three and nine months
ended September 30, 2003 and 2002, unaudited consolidated statements of cash
flows for the nine months ended September 30, 2003 and 2002 and the unaudited
consolidated statement of stockholders' equity (deficit) for the nine months
ended September 30, 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 and nine months ended September 30, 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 proforma 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 No. 123.
For the three months For the nine months
ended September 30, ended September 30,
2003 2002 2003 2002
------------------------- -------------------------
(in thousands, except (in thousands, except
per share amounts) per share amounts)
Net loss from continuing operations, as reported $ (494) $ (2,243) $ (2,806) $ (4,633)
Add back stock based compensation expense included in
reported net loss 9 78
Deduct total stock based compensation expense under SFAS
No. 123 (450) (599) (1,322) (1,797)
-------- -------- -------- --------
Adjusted net loss $ (944) $ (2,842) $ (4,119) $ (6,352)
======== ======== ======== ========
Weighted average shares used to calculate basic and
diluted loss per share 24,226 24,018 24,176 23,928
======== ======== ======== ========
Net loss per share $ (0.04) $ (0.12) $ (0.17) $ (0.27)
======== ======== ======== ========
The average fair value of the options granted is estimated at $0.36 during first
nine months of 2003 and $0.37 during first nine months of 2002, on the date of
grant using the Black-Scholes pricing model. The effects of applying SFAS 123 in
this proforma disclosure are not likely to be representative of the effects on
reported net income for future years.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which provides guidance on the
accounting for costs associated with exit or disposal activities unrelated to an
acquisition. SFAS No. 146 is effective for exit and disposal activities that are
initiated after December 31, 2002. The implementation of SFAS No. 146 has not
had a material impact on the Company's results of operations.
7
In November 2002, the Emerging Issues Task Force reached a consensus on EITF
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables," which
provides further guidance on accounting for contracts that involve multiple
revenue-generating activities or deliverables and is effective for agreements
entered into in fiscal periods beginning after June 15, 2003. EITF 00-21 has not
had a material impact on the Company's results of operations.
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 September 30, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. The Company does
not have any variable interest entities.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 has not had a material impact on the Company's results of operations.
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 as
amended allowed 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 December 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.
At September 30, 2003, $250,000 was outstanding on the Revolving Facility and
the interest rate on these borrowings was 5.5%. At December 31, 2002, $800,000
was outstanding on the Revolving Facility and the weighted average interest rate
on these borrowings was 5.75% in 2002.
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.
In May 2003, the Company was not in compliance with one of its covenants, but
has subsequently received a waiver from the Bank.
8
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 and April 2003, 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. The remaining convertible notes with an aggregate face value of $38,536
are due to mature November 6, 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 in March 2003, the
Company recorded approximately $587,000 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. The benefit to the note holder
represents the difference between the market price and the noteholders'
conversion price. Since the conversion price was lower than the market price as
of the date of the amendment to the notes, an additional benefit to the
noteholder is created. This amount along with the unamortized beneficial
conversion feature and discount will be amortized as interest expense through
July 15, 2004.
NOTE 5. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands)
Numerator:
Net loss $ (494) $ (2,243) $ (2,806) $ (4,633)
Denominator:
Denominator for basic and diluted earnings per
share -weighted average shares 24,226 24,018 24,176 23,928
======== ======== ======== ========
Basic and diluted net loss per share: $ (0.02) $ (0.09) $ (0.12) $ (0.19)
Dilutive securities include convertible notes, options and warrants as if
converted. Potentially dilutive securities totaling 19,996,127 and 17,183,204
shares as of September 30, 2003 and 2002, respectively, were excluded from
historical basic and diluted loss per share because of their antidilutive
effect.
NOTE 6. COMPREHENSIVE INCOME
Comprehensive income (loss) consists of net income (loss) adjusted for other
increases and decreases affecting stockholders' equity (deficit) that are
excluded from the determination of net income (loss). The calculation of
comprehensive income (loss) follows (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2003 2002 2003 2002
------- ------- ------- -------
(in thousands)
Net loss $ (494) $(2,243) $(2,806) $(4,633)
Foreign Currency Translation gains (losses) (42) 5 (37) 13
------- ------- ------- -------
Comprehensive loss $ (536) $(2,238) $(2,843) $(4,620)
NOTE 7. SUBSEQUENT EVENTS
On October 1, 2003, the Company filed suit against Primus Knowledge Solutions in
the United States District Court for the Western District of Pennsylvania. It is
the Company's position that Primus has infringed, contributed to the
infringement of and induced infringement of the Company's patents. The Company
is seeking the following relief: (1) a judgment that Primus has infringed the
Company's patents; (2) preliminary and permanent injunctions enjoining and
restraining Primus, its officers, directors, agents, servants, employees,
attorneys, and all others in active concert or participation with them from
directly infringing or inducing or contributing to the infringement of the
Company's patents; and (3) a judgment requiring Primus to pay damages, together
with interest, costs, and attorneys' fees. The Company is not able to predict
the outcome of this lawsuit.
On October 22, 2003, the landlord of our main office in Oakmont, Pennsylvania
filed suit against the Company in the Court of Common Pleas of Allegheny County,
Pennsylvania alleging that the Company is in default of the lease. The landlord
is seeking acceleration of all rent that would become due for the remaining
balance of the lease, which would otherwise expire in March 2006. The Company
denies that it is in default of the lease and, prior to the filing of the
lawsuit, the Company sought to exercise an option to terminate the lease early
in accordance with its terms. Although the Company intends to vigorously defend
this lawsuit and believes that it has valid defenses to the claims of the
landlord, the Company is not able to predict the final outcome of this suit.
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" beginning on page 16 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
ServiceWare is a leading provider of knowledge-powered support solutions that
enable organizations to deliver superior service for customers, employees and
partners by transforming information into knowledge. Founded in 1991 in Oakmont,
Pennsylvania, we sell our products throughout the United States and Europe.
SERVICEWARE ENTERPRISE(TM), 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 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.
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.
10
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. We believe the
following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial statements: (i)
revenue recognition on license fees, (ii) estimates of doubtful accounts
receivable, and (iii) the valuation of intangible assets and goodwill. For
additional discussion of our critical accounting estimates, see our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our annual report on Form 10-K for the year ended December 31,
2002.
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 6% of total revenues in the first nine months
of 2003 and in the first nine months of 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 the 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.
11
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2003 2002 2003 2002
----- ------ ----- -----
Revenues
Licenses 43.7% 32.6% 34.4% 40.8%
Services 56.3 67.4 65.6 59.2
----- ------ ----- -----
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues
Cost of licenses 2.6 8.8 2.3 10.5
Cost of services 27.5 38.7 28.9 36.0
----- ------ ----- -----
Total cost of revenues 30.1 47.5 31.2 46.5
----- ------ ----- -----
Gross margin 69.9 52.5 68.8 53.5
Operating expenses
Sales and marketing 39.2 65.8 46.1 50.8
Research and development 12.4 36.6 17.9 25.7
General and administrative 19.6 31.0 20.5 31.1
Intangible assets amortization 0.6 3.6 1.9 3.6
Restructuring and other non-recurring charges -- (4.1) (0.3) (5.6)
----- ------ ----- -----
Total operating expenses 71.8 133.0 86.1 105.6
----- ------ ----- -----
Loss from operations (1.9) (80.5) (17.3) (52.1)
Other expense, net (16.2) (22.2) (18.1) (8.2)
----- ------ ----- -----
Net loss (18.1)% (102.6)% (35.4)% (60.3)%
===== ====== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
REVENUES
Total revenues increased 24.9% to $2.7 million in third quarter 2003 from $2.2
million in third quarter 2002. License revenues increased 67.7% to $1.2 million
in third quarter 2003 from $0.7 million in third quarter 2002, the increase
resulting primarily from an increase in number of new customers sold and a
significant increase in the average license revenue from new customers. The
average license revenue recognized from sales to new customers was $137,000 up
61.2% from $85,000 in third quarter 2002, and the average license revenue from
existing customers was $81,000 in third quarter 2003 down 20.6% from $102,000 in
third quarter 2002. The number of new license sales to customers was 5 in third
quarter 2003 and 4 in the third quarter 2002, and the number of sales of
additional licenses to existing customers increased to 5 in third quarter 2003
from 4 in third quarter 2002.
Service revenues remained consistent at $1.5 million in third quarter 2003 and
third quarter 2002.
COST OF REVENUES
Cost of revenues decreased to $0.8 million in third quarter 2003 from $1.0
million in third quarter 2002. Cost of revenues as a percentage of revenues
decreased to 30.1% from 47.5%, resulting in a gross margin of 69.9% for the
third quarter 2003 compared to 52.5% for third quarter 2002.
Cost of license revenues decreased to $0.1 million in third quarter 2003 from
$0.2 million in third quarter 2002. Cost of license revenues as a percentage of
revenues decreased to 2.6% from 8.8%. 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 $750,000 in third quarter 2003 from
$846,000 in third quarter 2002. The decrease is primarily attributable to a 20%
reduction in staff. Cost of service revenues as a percentage of revenues
decreased to 27.5% from 38.7%.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses decreased to $1.1 million, or
39.2% of revenues, in third quarter 2003 from $1.4 million, or 65.8% of
revenues, in third quarter 2002. The decrease is primarily attributable to the
closing of an office in the United Kingdom in July 2003 as well as a reduction
in travel expenses and discretionary marketing spending. In addition, allocated
overhead expenses were significantly less as a result of an overall reduction in
overhead spending across the board.
Research and Development. Research and development expenses decreased to $0.3
million, or 12.4% of revenues, in third quarter 2003 from $0.8 million, or 36.6%
of revenues, in third quarter 2002. The decrease is primarily attributable to
the reduced use of a third party for development as a major product release was
issued in February 2003. The development resources have been redeployed as
services contractors whose cost is not included in this expense category. In
addition, allocated overhead expenses were significantly less as a result of an
overall reduction in overhead spending across the board.
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General and Administrative. General and administrative expenses decreased to
$0.5 million, or 19.6% of revenues in third quarter 2003 from $0.7 million, or
31.0% of revenues in third quarter 2002. Decreases resulted primarily from a
reduction of depreciation expense due to a reduction in capital spending as well
as a reduction in legal and telecom expense. Additionally, there was a 33%
reduction in staff in third quarter of 2003 from third quarter 2002.
Intangible Assets Amortization. Intangible assets amortization decreased to
$16,000, or 0.6% of revenues in third quarter 2003 from $0.1 million or 3.6% of
revenues in third quarter 2002 as a result of components of our intangible
assets becoming fully amortized.
Restructuring and other non-recurring charges. There were no non-recurring
charges recorded in third quarter 2003. The $90,000 credit in the third quarter
2002 was due to changes in estimates related to the restructuring charges taken
in 2001.
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 bank
borrowings. Third quarter 2003 results reflect a net expense of $443,000 or
16.2% of revenues compared to a net expense of $485,000 or 22.2% of revenues in
third quarter 2002. The interest expense primarily represents amortization of
the beneficial conversion feature recognized in conjunction with the issuance
and amendment of the convertible notes, in addition to the 10% interest,
amortization of the debt discount, and debt issue costs on the convertible
notes.
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
REVENUES
Total revenues increased 3.2% to $7.9 million in the first nine months of 2003
from $7.7 million in the first nine months of 2002. License revenues decreased
13.0% to $2.7 million in the first nine months of 2003 from $3.1 million in the
first nine months of 2002. The decrease was primarily due to a fewer number of
sales as potential customers decided to postpone IT spending and as a result of
the soft economy and the slow sales cycle. The average license revenue
recognized from sales to existing customers increased 61.2% to $137,000 in the
first nine months of 2003 from $85,000 in the first nine months of 2002.
Service revenues in total increased 14.4% to $5.2 million in the first nine
months of 2003 from $4.5 million in the first nine months of 2002. The net
increase is primarily the result of closing an additional major services deal in
the first nine months of 2003.
One customer accounted for 13% of total revenues for the nine months ended
September 30, 2003. No single customer accounted for greater than 10% of total
revenues for the nine months ending September 30, 2002.
COST OF REVENUES
Cost of revenues decreased to $2.5 million in the first nine months of 2003 from
$3.6 million in the first nine months of 2002. Cost of revenues as a percentage
of revenues decreased to 31.2% from 46.5%, resulting in gross margin of 68.8%
for the first nine months of 2003 compared to 53.5% for the first nine months of
2002.
Cost of license revenues decreased to $0.2 million in the first nine months of
2003 from $0.8 million in the first nine months of 2002. Cost of license
revenues as a percentage of revenues decreased to 2.3% from 10.5%. 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 $2.3 million in the first nine months of
2003 from $2.8 million in the first nine months of 2002, and as a percentage of
revenues decreased to 28.9% from 36.0%. The decrease in the cost of service
revenues was primarily attributable to a 27% decrease in staff to 16 in third
quarter 2003 from 22 in third quarter 2002. Additionally, cost of service
revenues declined due to decreases in bonuses as well as the effect of costs
being allocated to other expense line items as a result of professional services
personnel working on sales and development activities, offset by an increase in
the use of third parties to perform services.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses decreased to $3.7 million, or
46.1% of revenues in the first nine months of 2003, from $3.9 million or 50.8%
of revenues, in the first nine months of 2002. The decrease is primary due to
the closing of an office in the United Kingdom in July 2003.
13
Research and Development. Research and development expenses decreased to $1.4
million, or 17.9% of revenues, in the first nine months of 2003 from $2.0
million, or 25.7% of revenues, in the first nine months of 2002. The decrease is
primarily attributable to the reduced use of a third party for development as a
major product release was issued in February 2003. The development resources
have been redeployed as services contractors whose cost is not included in this
expense category. Additionally, there was a 40% reduction in staff in 2003 from
2002.
General and Administrative. General and administrative expenses decreased to
$1.6 million, or 20.5% of revenues in the first nine months of 2003 from $2.4
million, or 31.1% of revenues in the first nine months of 2002. The decrease is
primarily due to a reduction in depreciation due to reduced capital spending,
rent reductions due to the closing and subletting of office space, reduction in
executive personnel, and reductions in legal expense and stock based
compensation.
Intangible Assets Amortization. Intangible assets amortization decreased to $0.1
million, or 1.9% of revenues in the first nine months of 2003 from $0.3 million,
or 3.6% of revenues in the first nine months of 2002 due to components of our
intangible assets becoming fully amortized.
Restructuring and other non-recurring charges. The restructuring or other
non-recurring charges recorded in the first nine months of 2003 was a credit of
$20,000 as compared to a credit of $429,000 in 2002. These amounts represent
changes in estimates to the restructuring charge recorded in 2001.
OTHER INCOME (EXPENSE), NET
The results from the first nine months of 2003 reflect a net other expense of
$1.4 million or 18.1% of revenues compared to a net other expense of $0.6
million or 8.2% of revenues in the first nine months of 2002. The increase was
primarily the result of an increased interest expense related to the convertible
notes, including a non-cash charge of approximately $1,039,000 during the first
nine months for the amortization of beneficial conversion feature recognized
upon the issuance and amendment of our convertible notes and a decrease in
interest earned on investments.
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 and April 2003, we issued
$136,000 and $169,000, respectively 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 those convertible
notes has been extended until July 15, 2004 and the conversion price has been
reduced to $0.25 per share.
On October 16, 2002, we entered into a loan and security agreement with Comerica
Bank - California (the "Bank") 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 December 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. At
September 30, 2003, $250,000 was outstanding on the line of credit.
In May 2003, we were not in compliance with one of the covenants, but we have
subsequently received a waiver from the Bank.
We incurred a net loss of $2.8 million in first nine months of 2003. We have
taken substantial measures to reduce our costs and improve our chances to
achieve profitability in the near future. However, we may continue to incur net
losses for the foreseeable future.
Net cash used for operating activities in the first nine months of 2003 is
principally the result of our net losses reduced by non-cash expense items.
Net cash used in financing activities in the first nine months of 2003 is
primarily due to repayment of loans, primarily our revolving line of credit.
14
As of September 30, 2003, we had $1.2 million in cash and cash equivalents. Our
ability to continue as a business in our present form is largely dependent on
our ability to generate additional revenues, 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 2004 operations through cash
we expect to generate through operations. 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 achieve positive cash
flow. 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, if the
holders of our convertible notes do not elect to convert their notes into stock,
it may be necessary to obtain significant additional funding.
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.
RELATED PARTY TRANSACTIONS
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 46% 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which provides guidance on the
accounting for costs associated with exit or disposal activities unrelated to an
acquisition. SFAS No. 146 is effective for exit and disposal activities that are
initiated after December 31, 2002. The implementation of SFAS No. 146 has not
had a material impact on our results of operations.
In November 2002, the Emerging Issues Task Force reached a consensus on EITF
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables," which
provides further guidance on accounting for contracts that involve multiple
revenue-generating activities or deliverables and is effective for agreements
entered into in fiscal periods beginning after June 15, 2003. EITF 00-21 has not
had a material impact on our results of operations.
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 September 30, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. We do not have any
variable interest entities.
15
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
149 has not had a material impact on our results of operations.
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 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 have
continued 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, 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 2004 operations through cash we expect to generate from operations. 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, if the
holders of our convertible notes do not elect to convert their notes into stock,
we may need to obtain significant additional funding.
IF WE ARE NOT ABLE TO OBTAIN NEEDED 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 September 30, 2003, we had an
accumulated deficit of $76.3 million. We have not achieved profitability on a
quarterly or annual basis to date. In the first nine months of 2003 and 2002, we
incurred net losses of $2.8 million and $4.6 million, respectively. 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
December 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 may be insufficient to repay this indebtedness at scheduled maturity
and some or all of our indebtedness, which is not converted to equity, may 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.
16
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 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 3.0 years. Our senior management team
consists of only two individuals, neither of whom have 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 life 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
located 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 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 eight quarters have fluctuated up and
down from a low of $2.1 million in first quarter 2003 and 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 CORE PRODUCT FAMILY. IF THE DEMAND FOR THIS LINE OF
PRODUCTS DECLINES, OUR BUSINESS WILL BE ADVERSELY AFFECTED.
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ServiceWare's Knowledge Management solution, ServiceWare Enterprise and
ServiceWare Express, include 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 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 greater
proportion 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.
By doing business in international markets we face risks, such as unexpected
changes in tariffs and other trade barriers, fluctuations in currency exchange
rates, 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.
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.
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Our ability to compete successfully also depends on the continued compatibility
and interoperability of our products 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 that 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
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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 ITS 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.
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In addition, as we introduce new versions of our products or new products, our
current customers may not need our 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, ability to generate positive cash
flow and stock price.
INCREASING GOVERNMENT REGULATION OF THE INTERNET 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 was delisted from The Nasdaq Stock Market
and began 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.
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.
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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 distributor located in London, England. Revenues from international
clients were 6% in the first nine months of 2003 and 12% in fiscal 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. 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. As of the end of the
period covered by this report, under the supervision and with the participation
of our management, including our chief executive officer (CEO) and chief
financial officer (CFO), an evaluation of the effectiveness of our disclosure
controls and procedures was performed. Based on this evaluation, the CEO and CFO
have concluded that our disclosure controls and procedures are effective to
ensure that material information is recorded, processed, summarized and reported
by our management on a timely basis in order to comply with our disclosure
obligations under the Securities Exchange Act of 1934 and the SEC rules
thereunder.
(b) Changes in internal control. There were no changes in our internal control
over financial reporting that occurred during our quarter ended September 30,
2003, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 1, 2003, we filed suit against Primus Knowledge Solutions in the
United States District Court for the Western District of Pennsylvania. It is our
position that Primus has infringed, contributed to the infringement of and
induced infringement of our patents. We are seeking the following relief; (1) a
judgment that Primus has infringed our patents; (2) preliminary and permanent
injunctions enjoining and restraining Primus, its officers, directors, agents,
servants, employees, attorneys, and all others in active concert or
participation with them from directly infringing or inducing or contributing to
the infringement of our patents; and (3) a judgment requiring Primus to pay
damages, together with interest, costs, and attorneys' fees. We are not able to
predict the outcome of this lawsuit.
On October 22, 2003, the landlord of our main office in Oakmont, Pennsylvania
filed suit against us in the Court of Common Pleas of Allegheny County,
Pennsylvania alleging that we are in default of the lease. The landlord is
seeking acceleration of all rent that would become due for the remaining balance
of the lease, which would otherwise expire in March 2006. We deny that we are in
default of the lease and, prior to the filing of the lawsuit, we sought to
exercise an option to terminate the lease early in accordance with its terms.
Although we intend to vigorously defend this lawsuit and believe that we have
valid defenses to the claims of the landlord, we are not able to predict the
final outcome of this suit.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Rule 13a - 14(a) / 15d - 14(a) Certification of Principal Executive Officer
31.2 Rule 13a - 14(a) / 15d - 14(a) Certification of Principal Financial Officer
32. Section 1350 Certifications
(b) Reports on Form 8-K
We filed a Form 8-K on August 4, 2003 to report our results of operations for
the quarter ended June 30, 2003.
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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: November 14, 2003 By: /s/ SCOTT SCHWARTZMAN
------------------------------
Scott Schwartzman
Chief Financial Officer and
Principal Financial Officer
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