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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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 Incorporation or Organization) (I.R.S. Employer Identification No.)
ONE NORTH SHORE CENTRE, 12 FEDERAL STREET, SUITE 503
PITTSBURGH, PA 15212
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (412) 222-4450
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
The number of shares of the registrant's common stock outstanding as of
the close of business on May 12, 2004 was 52,373,724.
SERVICEWARE TECHNOLOGIES, INC.
FORM 10-Q
MARCH 31, 2004
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
. Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003........... 3
. Consolidated Statements of Operations for the three months
ended March 31, 2004 and 2003 (unaudited) ................................................... 4
. Consolidated Statements of Stockholders' Equity (deficit) for the three months ended
March 31, 2004 and 2003 (unaudited).......................................................... 5
. Consolidated Statements of Cash Flows for the three months ended
March 31, 2004 and 2003 (unaudited).......................................................... 7
. Notes to Consolidated Financial Statements (unaudited) ...................................... 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 11
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 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities............ 23
ITEM 6. Exhibits and Reports on Form 8-K............................................................ 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 6,196 $ 1,438
Short term investments 1,824 -
Accounts receivable, less allowance for doubtful accounts of $95 as of March 31,
2004 and $100 as of December 31, 2003 1,968 3,348
Other current assets 312 420
-------- --------
Total current assets 10,300 5,206
Non current assets
Purchased technology, net of amortization of $1,860 as of March 31, 2004 and
$1,848 as of December 31, 2003 21 33
Property and equipment
Office furniture, equipment, and leasehold improvements 1,510 1,510
Computer equipment 5,042 5,013
-------- --------
Total property and equipment 6,552 6,523
Less accumulated depreciation (6,020) (6,002)
-------- --------
Property and equipment, net 532 521
Goodwill 2,324 2,324
-------- --------
Total long term assets 2,877 2,878
-------- --------
Total assets $ 13,177 $ 8,084
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Revolving line of credit - 250
Accounts payable 764 1,089
Accrued compensation and benefits 274 274
Deferred revenue 1,975 2,481
Other current liabilities 508 530
-------- --------
Total current liabilities 3,521 4,624
Convertible debt, net of unamortized discount of $980 as of December 31, 2003 -- 2,753
Non current deferred revenue 503 546
Other non current liabilities 87 54
-------- --------
Total liabilities
Commitments and Contingencies 4,111 7,977
Stockholders' equity
Common stock, $0 01 par; 100,000 shares authorized, 52,583 and 24,684 shares
issued and 52,274 and 24,325 shares outstanding as of March 31, 2004 and
December 31, 2003, respectively 526 247
Additional paid in capital 82,869 76,433
Treasury stock, 309 and 359 shares as of March 31, 2004 and December 31, 2003,
respectively (115) (134)
Deferred compensation (199) -
Warrants 5,180 46
Accumulated deficit (79,195) (76,485)
-------- --------
Total stockholders' equity 9,066 107
-------- --------
Total liabilities and stockholders' equity $ 13,177 $ 8,084
======== ========
See accompanying notes to the financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2004 2003
-------- --------
Revenues
Licenses $ 230 $ 531
Services 1,607 1,595
-------- --------
Total revenues 1,837 2,126
Cost of revenues
Cost of licenses 64 44
Cost of services 772 802
-------- --------
Total cost of revenues 836 846
-------- --------
Gross margin 1,001 1,280
Operating expenses
Sales and marketing 1,001 1,384
Research and development 594 649
General and administrative 853 603
Intangible assets amortization - 65
Restructuring and other special charges - (20)
-------- --------
Total operating expenses 2,448 2,681
-------- --------
Loss from operations (1,447) (1,401)
Other income (expense)
Interest expense (1,272) (545)
Other (net) 9 3
-------- --------
Other expense, net (1,263) (542)
-------- --------
Net loss $ (2,710) $ (1,943)
======== ========
Net loss per common share, basic and diluted: $ (0.06) $ (0.08)
Shares used in computing per share amounts 49,060 24,131
======== ========
See accompanying notes to the financial statements.
4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
TOTAL
ADDITIONAL STOCKHOLDERS'
COMMON STOCK PAID IN TREASURY STOCK DEFERRED EQUITY
SHARES AMOUNT CAPITAL SHARES AMOUNT COMPENSATION WARRANTS DEFICIT (DEFICIT)
------ ------ ---------- ------ ------- ------------ -------- --------- -------------
Balance at December 31, 24,325 $ 247 $76,433 359 $ (134) $ - $ 46 $(76,485) $ 107
2003
Exercise of warrants and
stock options 72 - 24 (50) 19 - - - 43
Beneficial conversion
feature of convertible
notes - - 233 - - - - - 233
Issuance of common stock
and warrants, net of
$574 of issuance costs 12,308 123 2,273 - - - 5,029 - 7,425
Issuance of warrants for
settlement of lawsuit - - - - - - 105 - 105
Issuance of common stock
related to note
conversion 15,354 154 3,685 - - - - - 3,839
Stock based compensation 215 2 221 - - (199) - - 24
Net loss - - - - - - - (2,710) (2,710)
------ ----- ------- ---- ------ ------ ------- -------- -------
Balance at March 31, 2004 52,274 $ 526 $82,869 309 $ (115) $ (199) $ 5,180 $(79,195) $ 9,066
------ ----- ------- ---- ------ ------ ------- -------- -------
See accompanying notes to the financial statements.
5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
ACCUMULATED TOTAL
ADDITIONAL OTHER STOCK-
COMMON STOCK PAID IN TREASURY STOCK DEFERRED COMPREHENSIVE HOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT COMPENSATION WARRANTS (LOSS) GAIN DEFICIT EQUITY
------ ------ ---------- ------ ------- ------------ -------- ------------- --------- -------
Balance at December 31, 24,083 $ 247 $74,184 601 $ (223) $ (9) $1,414 $ (37) $(73,506) $ 2,070
2002
Exercise of stock options 63 (8) (63) 23 15
Amortization of warrants 7 7
Expiration of warrants 775 (775) -
Benefit due to amendment
of convertible notes 587 587
Comprehensive (loss)
gain:
Currency translation
adjustment (5) (5)
Net loss (1,943) (1,943)
-------
Total comprehensive loss (1,948)
------ ----- ------- ---- ------ ---- ------ ----- -------- -------
Balance at March 31, 2003 24,146 $ 247 $75,538 538 $ (200) $ (2) $ 639 $ (42) $(75,449) $ 731
====== ===== ======= ==== ====== ==== ====== ===== ======== =======
See accompanying notes to the financial statements.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2004 2003
-------- --------
Cash flows from operating activities
Net loss $(2,710) $(1,943)
Adjustments to reconcile net loss to net cash used in operations:
Non cash items:
Depreciation 86 247
Amortization of intangible assets and warrants 12 85
Cost of warrants in connection with lease settlement 105 -
Amortization of beneficial conversion feature related to convertible notes 1,162 397
Amortization of discount on convertible notes 50 46
Interest expense paid by issuing common stock 107 -
Stock based compensation 24 -
Gain on disposal of equipment (7) -
Other non cash items - 14
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,380 (322)
Decrease in other assets 108 79
Decrease in accounts payable (325) (174)
Decrease in accrued compensation - (9)
(Decrease) increase in deferred revenue (549) 474
Decrease in other liabilities 10 50
------- -------
Net cash used in operating activities (547) (1,056)
------- -------
Cash flows from investing activities
Purchases of short term investments (1,824) -
Proceeds from sale of assets 1 -
Property and equipment acquisitions (59) (27)
------- -------
Net cash used in investing activities (1,882) (27)
------- -------
Cash flows from financing activities
Repayments of principal of capital lease obligations (8) (9)
Repayments of principal of revolving line of credit (250) (800)
Proceeds from equity funding, net of debt issuance costs 7,425 -
Proceeds from stock option exercises 20 15
------- -------
Net cash provided by (used in) financing activities 7,187 (794)
------- -------
Effect of exchange rate changes on cash - (5)
Increase in cash and cash equivalents 4,758 (1,882)
Cash and cash equivalents at beginning of period 1,438 2,461
------- -------
Cash and cash equivalents at end of period $ 6,196 $ 579
======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest $ 3 $ 2
======= =======
Supplemental disclosures of non-cash investing and financing activities:
Conversion of convertible debt and accrued interest to common stock 3,839 -
Adjustment to beneficial conversion feature for convertible notes 233 587
Expiration of warrants - 775
Exercise of warrants by bank 23 -
Issuance of warrants 5,134 -
Assets acquired under capital lease obligation 32 -
See accompanying notes to the financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
NOTE 1. ORGANIZATION OF THE COMPANY
ServiceWare, Technologies, Inc. (the "Company") is a 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 Pennsylvania, the Company sells
its 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 by way of 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:
- Strengthen relationships with customers, partners, suppliers
and employees
- Decrease operating costs
- Improve creation, dissemination and sharing of enterprise
knowledge
- Integrate seamlessly with existing technology investments
ServiceWare Enterprise(TM) is a software solution that allows the
Company's 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, the Company has created a
solution for mid-market companies. ServiceWare Express(TM) is a comprehensive
product and services package that includes 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.
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 of approximately $79,195,000 at March 31, 2004, incurred a net loss of
approximately $2,979,000 and $2,710,000 and had negative cash flows from
operations of approximately $953,000 and $547,000 for the year ended December
31, 2003 and three months ended March 31, 2004, respectively, and may incur
additional losses throughout the remainder of 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 and cash balances. 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.
NOTE 2. UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited balance sheet as of March 31, 2004 and
related unaudited consolidated statements of operations for the three months
ended March 31, 2004 and 2003, unaudited consolidated statements of cash flows
for the three months ended March 31, 2004 and 2003 and the unaudited
consolidated statement of stockholders' equity for the three months ended March
31, 2004 and 2003 have been prepared by the Company in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by U.S.
generally accepted accounting principles for complete financial statements.
Management believes that the interim financial statements include all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation of the results of interim periods. Operating results for the
three months ended March 31, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004. These unaudited
consolidated
8
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 2003 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.
INVESTMENTS
The Company considers all investments as available-for-sale.
Accordingly, these investments are carried at fair value and unrealized holding
gains and losses, net of the related tax effect, are excluded from earnings and
are reported as a separate component of other comprehensive income (loss) until
realized. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific identification basis.
The short term investments are held in an account with an investment
firm that is related to a Director of the Company and his affiliated entities.
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 ended March 31,
2004 2003
--------- ---------
(in thousands, except per share amounts)
Net loss from continuing operations, as reported $ (2,710) $ (1,943)
Add back stock based compensation expense included in
reported net loss 24 --
Deduct total stock based compensation expense under SFAS
No. 123 (75) (435)
-------- --------
Adjusted net loss $ (2,761) $ (2,378)
======== ========
Weighted average shares used to calculate basic and
diluted loss per share 49,060 24,131
======== ========
Net loss per share $ (0.06) $ (0.10)
======== ========
The average fair value of the options granted is estimated at $0.75
during first three months of 2004 and $0.27 during first three months of 2003,
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
Effective May 1, 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. On November 7, 2003, the
FASB issued FASB Staff Position No. 150-3, which allows entities, who meet
certain criteria, to defer the effective date for periods beginning after
December 15, 2004. The Company does not expect the adoption of this statement to
have a material impact on its consolidated financial statements.
NOTE 4. DEBT
CREDIT FACILITIES
In October 2002, the Company entered into a $2.5 million loan and
security agreement with Comerica Bank - California (the
9
"Bank"). The agreement provided for a revolving line of credit and a term loan.
The term loan expired on October 16, 2003. Borrowings under the line of credit
accrued interest at the Bank's prime rate plus 1.5%, which was 5.5% at December
31, 2003. Borrowings under the loan agreement were collateralized by essentially
all of the Company's tangible and intangible assets. At December 31, 2003, the
Company had outstanding borrowings of $250,000 under the revolving line of
credit, which were repaid in January 2004, at which time, the agreement
terminated. In conjunction with this agreement, a warrant was issued to the Bank
to purchase 50,000 shares of the Company's Common Stock at an exercise price of
$0.46 per share with a 10-year term. The warrant includes assignability to the
Bank's affiliates, antidilution protection and a net exercise provision. In
addition, the Bank can require the Company to repurchase the warrant for $69,000
after a change of control. The warrant is treated as consideration for the
agreement and was valued at $22,990 on the date of the issuance using the Black
Scholes option valuation model. As such, the warrant value was recorded as a
debt issue cost and has been amortized to interest expense over the life of the
agreement. As the warrant contains a put option, the warrant value was accrued
as a liability and not recorded as equity. The Bank exercised the warrant on a
cashless, net value basis in March 2004 and was issued 21,250 shares of common
stock.
CONVERTIBLE NOTES
On April 1, 2002, the Company signed a binding commitment letter for
the sale of convertible notes. The closing of the transaction took place in two
tranches on May 6 and June 19, 2002 with total proceeds of $2,975,000 being
received, net of transaction costs of $275,000.
Of the total amount of $3,250,000 of convertible notes issued,
convertible notes with an aggregate principal amount of $2,635,000 were acquired
by a director of the Company and his affiliated entities, who collectively owned
approximately 20% of the Company's stock prior to the acquisition of convertible
notes.
The convertible notes were originally to mature 18 months from the
closing date, bore interest at 10% per annum, and were originally convertible at
any time at the option of the holder, into shares of the Company's common stock
at a conversion price of $0.30 per share. Interest was to be paid in cash or
additional convertible notes, at the option of the Company. The convertible
notes were senior unsecured obligations that ranked senior to all future
subordinated indebtedness, pari passu to all existing and future senior,
unsecured indebtedness and subordinate to all existing and future senior secured
indebtedness. While the notes were outstanding, the Company was 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 accordance with EITF 00-27, Application of EITF Issue No. 98-5,
`Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios,' to Certain Convertible Instruments,
the Company recognized in 2002 a beneficial conversion feature ("BCF") in the
aggregate amount of $2,225,000 as the difference between the market value of the
Company's common stock on the commitment date and the conversion price of the
convertible notes, reduced for the investors' transaction costs. The BCF was
recorded as an increase in additional paid in capital and a discount on debt in
the 2002 consolidated balance sheet. Additionally, the Company incurred total
legal and other expenses of approximately $54,000 related to the transaction,
which is also recorded as a discount on debt in the 2002 consolidated balance
sheet. The aggregate discount was being amortized as interest expense over the
18 month term of the convertible notes.
On March 31, 2003, the noteholders agreed to an amendment to the
original notes. The amendment reduced the conversion price from $0.30 per share
to $0.25 per share and extended the term of the notes until July 15, 2004.
On October 31, 2003, April 30, 2003 and October 31, 2002, interest
payments were due on the convertible notes and were paid by issuing additional
convertible notes in the amounts of $177,748, $169,284 and $135,681,
respectively. These additional convertible notes had the same terms as the
amended convertible notes. The Company recognized additional BCF of $232,672 and
$906,799 in 2004 and 2003, respectively, as a result of the amendment of the
notes and payment of interest with additional convertible notes.
On February 10, 2004, all of the notes were converted into common stock
as part of the terms of an equity funding. Additional interest of $105,760 was
paid in shares of stock in connection with the conversion.
10
NOTE 5. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED MARCH 31,
2004 2003
--------- ---------
Numerator:
Net loss $ (2,710) $ (1,943)
Denominator:
Denominator for basic and diluted earnings per
share -weighted average shares 49,060 24,131
======== ========
Basic and diluted net loss per share: $ (0.06) $ (0.08)
Dilutive securities include convertible notes, options and warrants as
if converted. Potentially dilutive securities totaling 12,445,965 and 19,448,294
shares as of March 31, 2004 and 2003, respectively, were excluded from
historical basic and diluted loss per share because of their antidilutive
effect.
NOTE 6. COMPREHENSIVE INCOME
Comprehensive income consists of net income adjusted for other
increases and decreases affecting stockholders' equity that are excluded from
the determination of net income. The calculation of comprehensive income follows
(in thousands):
THREE MONTHS ENDED MARCH 31,
2004 2003
-------- --------
Net loss $(2,710) $(1,943)
Foreign Currency Translation gains (losses) - (5)
------- -------
Comprehensive loss $(2,710) $(1,948)
Unrealized gains/losses on short term investments are de minimus.
NOTE 7. SEGMENT INFORMATION
The Company has one business segment.
THREE MONTHS ENDED MARCH 31,
2004 2003
Revenue (a)
United States $ 1,732 $ 1,683
International 105 443
-------- --------
Total $ 1,837 $ 2,126
======== ========
(a) Revenues are attributed to the United States and International based on
customer location.
NOTE 8. CAPITAL STOCK
On January 30, 2004, the Company secured an additional $7.4 million,
net of expenses, in funding to finance its operations and the development of its
business. The funding was raised through a private placement of equity
securities consisting of 12,307,692 shares of common stock and five-year
warrants to purchase 6,153,846 shares of common stock at $0.72 per share.
NOTE 9. CONTINGENCIES
On October 1, 2003, the Company filed suit against Primus Knowledge
Solutions, Inc. ("Primus") 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 its
patents. Primus has denied the Company's allegations and has asserted
counterclaims against the Company. The Company also believes that other
companies, including direct and indirect competitors, may be infringing its
patents. In order to protect or enforce its patent rights, the Company may
initiate additional patent litigation suits against third parties, such as
infringement suits or interference proceedings. The suit against Primus and any
other lawsuits that the Company may file are likely to be expensive, take
significant time and divert management's attention from other business concerns.
Litigation also places the Company's patents at risk of being invalidated or
interpreted narrowly. The Company may also provoke these third parties to assert
claims against the Company. Patent law relating to the scope of claims in the
technology fields in which the Company operates is still evolving and,
consequently, patent positions in the Company's industry are generally
uncertain. The Company may not prevail in any of these suits, the damages or
other remedies that may be awarded to the Company may not be commercially
valuable and the Company could be held liable for damages as a result of
counterclaims.
On January 16, 2004, the Company entered into a release agreement with
its prior landlord, Sibro Enterprises, LP ("Sibro"), pursuant to which the
Company settled all outstanding disputes under the lawsuit Sibro had filed in
the Court of Common Pleas of Allegheny County, Pennsylvania. Pursuant to the
release agreement, the Company paid Sibro Enterprises an agreed upon amount
representing rent due through December 31, 2003, which was recorded in its 2003
consolidated financial statements and issued Sibro Enterprises a warrant to
purchase 125,000 shares of common stock at a purchase price of $0.84 per share.
In exchange, the Company mutually agreed to terminate the lease as of December
31, 2003, dismiss the lawsuit with prejudice, and release each other from any
and all claims as of the date of the release agreement.
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. 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
11
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
We are a provider of knowledge-powered support solutions that enable
organizations to deliver superior service for customers, employees and partners
by transforming information into knowledge. Our solutions allow customers to
capture enterprise knowledge, solve customer problems, reuse solutions and share
captured knowledge throughout the extended enterprise. Customers use our
knowledge-powered support solutions to achieve some or all of the following
benefits:
- Strengthen relationships with customers, partners, suppliers
and employees
- Decrease operating costs
- Improve creation, dissemination and sharing of enterprise
knowledge
- Provide easy access to knowledge online on an enterprise-wide
basis
- Integrate seamlessly with existing technology investments
With ServiceWare Enterprise(TM), our core software product line, our
customers can provide personalized, automated Web-based service tailored to the
needs of their applicable users. ServiceWare Enterprise is based on our patented
self-learning search technology called the Cognitive Processor(R). This
technology enables organizations to capture and manage repositories of
intellectual capital, or corporate knowledge, in a manner that can be easily
accessed by way of a browser to effectively answer inquiries made either over
the Web or through the telephone to a customer contact center or help desk.
Through the self-learning features of the Cognitive Processor, our ServiceWare
Enterprise products provide our customers an intelligent solution in that the
solutions have the capability to learn from each interaction and automatically
update themselves accordingly.
The ServiceWare Enterprise suite is comprised of the following software
products:
ServiceWare Self-Service(TM): This product is a Web-based, self-service
product designed for use by an organization's
customers, partners and employees.
ServiceWare Agent(TM): This product is designed for use by Level-1
agents or for any company that needs to provide
a complete agent workstation knowledge
management center.
ServiceWare Professional(TM): This product is designed for use by customer
service, sales and field service personnel.
ServiceWare Architect(TM): This product is designed for quality assurance
managers and system administrators.
In addition to ServiceWare Enterprise, we have created a solution for
mid-market companies called ServiceWare Express(TM). ServiceWare Express is a
comprehensive product and services package that includes 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.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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
12
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,
2003.
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 three
months of 2004 and 21% in the first three months of 2003. 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 and amortization of purchased technology. 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 special 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 special charges
consist of costs incurred in connection with prior restructurings.
RESULTS OF OPERATIONS
The following table sets forth the consolidated statement of operations data as
a percentage of total revenues for each of the periods indicated:
THREE MONTHS ENDED MARCH 31,
2004 2003
------- -------
Revenues
Licenses 12.5% 25.0%
Services 87.5 75.0
------ ------
Total revenues 100.0 100.0
Cost of revenues
Cost of licenses 3.5 2.1
Cost of services 42.0 37.7
------ ------
Total cost of revenues 45.5 39.8
------ ------
Gross margin 54.5 60.2
Operating expenses
Sales and marketing 54.5 65.1
Research and development 32.4 30.5
General and administrative 46.4 28.3
Intangible assets amortization 0.0 3.1
Restructuring and other special charges 0.0 (0.9)
Total operating expenses 133.3 126.1
------ ------
Loss from operations (78.8) (65.9)
Other expense, net (68.7) (25.5)
------ ------
Net loss (147.5)% (91.4)%
====== ======
13
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
REVENUES
Total revenues decreased 13.6% to $1.8 million in first quarter 2004
from $2.1 million in first quarter 2003. License revenues decreased 56.6% to
$0.2 million in first quarter 2004 from $0.5 million in first quarter 2003; the
decrease resulting primarily from a reduction in the number of new customers
sold. The average license revenue recognized from sales to new customers was
$112,000 down 21.1% from $142,000 in first quarter 2003, and the average license
revenue from existing customers was $38,000 in first quarter 2004 down 28.3%
from $53,000 in first quarter 2003. There was only one new license sale to
customers in first quarter 2004 compared to four in the first quarter 2003, and
the number of sales of additional licenses to existing customers increased to
three in first quarter 2004 from two in first quarter 2003.
Service revenues remained consistent at $1.6 million in first quarter 2004 and
first quarter 2003.
COST OF REVENUES
Cost of revenues remained consistent at $0.8 million in first quarter
2004 and first quarter 2003. Cost of revenues as a percentage of revenues
increased to 45.5% from 39.8% as a consequence of our lower revenues, resulting
in a gross margin of 54.5% for the first quarter 2004 compared to 60.2% for
first quarter 2003.
Cost of license revenues increased to $64,000 in first quarter 2004
from $44,000 in first quarter 2003. Cost of license revenues as a percentage of
revenues increased to 3.5% from 2.1%. The increase in the cost of license
revenues was primarily attributable to prepaid product royalties to third
parties being fully utilized in 2003.
Cost of service revenues decreased 3.7% in first quarter 2004 from
first quarter 2003. Cost of service revenues as a percentage of revenues
increased to 42.1% from 37.7% as a consequence of our lower revenues.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses decreased 27.7% to $1.0
million, or 54.5% of revenues, in first quarter 2004 from $1.4 million, or 65.1%
of revenues, in first quarter 2003. The decrease is primarily attributable to
the closing of an office in the United Kingdom in July 2003 as well as a
reduction in sales commission expense.
Research and Development. Research and development expenses decreased 8.4% in
first quarter 2004 from first quarter 2003. Research and development expenses as
a percentage of revenues increased to 32.4% from 30.5% as a consequence of our
lower revenues.
General and Administrative. General and administrative expenses increased 41.6%
to $0.9 million, or 46.4% of revenues in first quarter 2004 from $0.6 million,
or 28.3% of revenues in first quarter 2003. Increases resulted from the accrual
of an executive bonus plan put into place for 2004 and warrants granted as part
of the rent settlement discussed in the Legal Proceedings item in this 10-Q.
Intangible Assets Amortization. There was no intangible assets amortization
recorded in first quarter 2004 compared to $65,000 or 3.1% of revenues in first
quarter 2003 as a result of components of our intangible assets becoming fully
amortized.
Restructuring and other special charges. There were no special charges recorded
in first quarter 2004. The $20,000 credit in the first quarter 2003 was due to
changes in estimates related to 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. First quarter 2004 results reflect a net expense of $1.3
million or 68.7% of revenues compared to a net expense of $0.5 million or 25.5%
of revenues in first quarter 2003. The interest expense primarily represents
amortization of the beneficial conversion feature recognized in conjunction with
the issuance and amendment of the convertible
14
notes, in addition to the 10% interest, amortization of the debt discount, and
debt issue costs on the convertible notes. The beneficial conversion feature was
fully amortized in first quarter 2004 as a result of terms of the equity funding
obtained in first quarter 2004. With no current debt, we do not expect any
significant amount of interest expense in the near future.
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.
We incurred a net loss of $2.7 million in first three months of 2004.
Over the past three years, we have taken substantial measures to reduce our
costs and we believe that we have improved our chances of achieving
profitability in 2004 if we are able to increase our revenues.
Net cash used for operating activities in the first three months of
2004 is principally the result of our net loss reduced by non-cash expense
items. The net cash used for operating activities was only $547,000 due to the
large amount of non-cash items.
Net cash used in investing activities in the first three months of 2004
is primarily due to the purchase of short term investments.
Net cash provided by financing activities was $7,187,000 in the first
three months of 2004, which is primarily due to the proceeds from the equity
funding reduced by the repayment of a borrowing under our revolving line of
credit, which is now terminated.
As of March 31, 2004, we had $8.0 million in cash and cash equivalents.
In January 2004, we received proceeds of $7.4 million, net of expenses, to
finance our operations and the development of our business. The additional
funding was raised through a private placement of equity securities consisting
of 12,307,692 shares of common stock and five-year warrants to purchase
6,153,846 shares of common stock at $0.72 per share. In February 2004, our
convertible notes were converted into common stock as part of terms of the
equity funding.
Our ability to continue as a business in our present form is largely
dependent on our ability to generate additional revenues, reduce overall
operating expenses, and achieve profitability and positive cash flows . We
believe that we have the ability to do so and plan to fund 2004 operations
through operating revenue and cash balances.
If we require additional financing, 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 one of our directors and his affiliated entities, who
collectively own more than 40% of our stock. Also, as investments are purchased
and sold, a cash balance may be held by this investment firm. At March 31, 2004,
the cash balance with this investment firm was $7,849,000.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective May 1, 2003, the FASB issued SFAS No. 150 Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. On November 7, 2003, the
FASB issued FASB Staff Position No. 150-3, which allows entities, who meet
certain criteria, to defer the effective date for periods beginning after
December 15, 2004. We do not expect the adoption of this statement to have a
material impact on our consolidated financial statements.
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 any forward-looking statements contained in this Form 10-Q or
the results indicated or projected by our historical results.
15
WE HAVE A HISTORY OF LOSSES AND MAY NEVER ACHIEVE PROFITABILITY.
Our limited operating history in our current line of business and the
uncertain nature of the markets in which we compete make it difficult or
impossible to predict future results of operations. As of March 31, 2004, we had
an accumulated deficit of $79.2 million. We have not achieved profitability on a
quarterly or annual basis to date and incurred a net loss of $2.7 million in
first quarter 2004. 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.
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 2004. We may not
attain break-even cash flow from operations at any particular time in the
future, or at all.
Although we presently have adequate cash resources for our near term
needs, our ability to continue as a business in our present form will ultimately
depend on our ability to generate additional revenues, achieve profitability and
positive cash flows or to obtain additional debt or equity financing. From time
to time, we consider and discuss various financing alternatives and expect to
continue such efforts to raise additional funds to support our operational plan
as needed. However, we cannot be certain that additional financing will be
available to us on favorable terms when required, or at all.
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.
OUR CASH FLOW MAY NOT BE SUFFICIENT TO PERMIT REPAYMENT OF ANY FUTURE DEBT WHEN
DUE.
Although we do not have any outstanding debt other than trade debt
incurred in the ordinary course of business, we may need to, in the future,
raise additional money through bank financing or debt instruments. Our ability
to retire or to refinance any future 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 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.
WE MAY NOT SUCCEED IN ATTRACTING AND RETAINING THE PERSONNEL WE NEED FOR OUR
BUSINESS AND WE HAVE A SMALL SENIOR MANAGEMENT TEAM.
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.
Our senior management team consists of only two individuals. 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
16
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.
We manage our expense levels based on our expectations regarding future
revenues and our expenses 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 revenues are unpredictable and in our last eight quarters have
fluctuated up and down between a low of $1.8 million in first quarter 2004 and a
high of $3.6 million in fourth quarter 2003.
Our quarterly results are also impacted by our revenue recognition
policies. 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.
ServiceWare's knowledge management solution, ServiceWare Enterprise and
ServiceWare Express, include our ServiceWare Self-Service, ServiceWare
Professional, ServiceWare Agent 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, or at all, because of the lengthy sales
cycle for our products and services.
17
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 THIRD PARTIES CEASE TO PROVIDE OPEN PROGRAM INTERFACES FOR THEIR CUSTOMER
RELATIONSHIP MANAGEMENT SOFTWARE, IT WILL BE DIFFICULT TO INTEGRATE OUR SOFTWARE
WITH THEIRS. THIS WILL DECREASE THE ATTRACTIVENESS OF OUR PRODUCTS.
Our ability to compete successfully also depends on the continued
compatibility and interoperability of our products 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
18
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:
- - failure to integrate the acquired assets and/or companies with our
current business
- - the price we pay may exceed the value we eventually realize
- - potential loss of share value to our existing stockholders as a result
of issuing equity securities as part or all of the purchase price
- - potential loss of key employees from either our current business or the
acquired business
- - entering into markets in which we have little or no prior experience
- - diversion of management's attention from other business concerns
- - assumption of unanticipated liabilities related to the acquired assets
- - 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 could 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.
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WE HAVE INITIATED A PATENT INFRINGEMENT LAWSUIT AGAINST ONE OF OUR COMPETITORS,
PRIMUS KNOWLEDGE SOLUTIONS, INC., AND WE MAY INITIATE ADDITIONAL LAWSUITS TO
PROTECT OR ENFORCE OUR PATENTS, WHICH MAY BE EXPENSIVE AND, IF WE LOSE, MAY
CAUSE US TO LOSE SOME, IF NOT ALL, OF OUR INTELLECTUAL PROPERTY RIGHTS, AND
THEREBY IMPAIR OUR ABILITY TO COMPETE IN THE MARKET.
On October 1, 2003, we filed suit against Primus Knowledge Solutions,
Inc. ("Primus") 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. Primus has denied our
allegations and has asserted counterclaims against us. We also believe that
other companies, including direct and indirect competitors, may be infringing
our patents. In order to protect or enforce our patent rights, we may initiate
additional patent litigation suits against third parties, such as infringement
suits or interference proceedings. The suit against Primus and any other
lawsuits that we may file are likely to be expensive, take significant time and
divert management's attention from other business concerns. Litigation also
places our patents at risk of being invalidated or interpreted narrowly. We may
also provoke these third parties to assert claims against us. Patent law
relating to the scope of claims in the technology fields in which we operate is
still evolving and, consequently, patent positions in our industry are generally
uncertain. We may not prevail in any of these suits, the damages or other
remedies that may be awarded to us may not be commercially valuable and we could
be held liable for damages as a result of counterclaims.
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.
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.
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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 maintained by the National
Association of Securities Dealers.
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.
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 control more than 40% of our outstanding common stock and
voting power. 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
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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 three months of 2004 and 7% in fiscal
2003, 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. Exchange rate fluctuations may
harm our business in the future. We do not currently utilize any derivative
financial instruments or derivative commodity instruments.
Our interest income is sensitive to changes in the general level of
United States interest rates, particularly because the majority of our
investments are in short-term instruments. Since we no longer have any debt, we
are not 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
March 31, 2004, 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 a lawsuit against Primus Knowledge
Solutions, Inc. ("Primus") 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 damages: (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
and order requiring Primus to pay damages, together with interest, costs, and
reasonable attorneys' fees. In February 2004, Primus filed an answer to our
complaint denying our allegations that they infringed our patents. Along with
its answer, Primus filed a counterclaim against us claiming, among other things,
that our patents are invalid and unenforceable. In addition, Primus's
counterclaim asserts claims against us alleging that we, and/or certain of our
employees, performed acts constituting unfair competition, tortious
interference, breach of non-disclosure promises, misappropriation of trade
secrets, disparagement, defamation, a consumer protection act violation, and a
Lanham Act violation. We believe that the counterclaim is without merit, we deny
any liability to Primus and we intend to vigorously defend against their
counterclaims. We are not able to predict the outcome of this lawsuit.
On January 16, 2004, we entered into a release agreement with our prior
landlord, Sibro Enterprises, LP ("Sibro"), pursuant to which we settled all
outstanding disputes under the lawsuit Sibro had filed in the Court of Common
Pleas of Allegheny County, Pennsylvania. Pursuant to the release agreement, we
paid Sibro Enterprises an agreed upon amount representing rent due through
December 31, 2003, which was recorded in our 2003 consolidated financial
statements and issued Sibro Enterprises a warrant to purchase 125,000 shares of
common stock at a purchase price of $0.84 per share. In exchange, we mutually
agreed to terminate the lease as of December 31, 2003, dismiss the lawsuit with
prejudice, and release each other from any and all claims as of the date of the
release agreement.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
On January 30, 2004, we issued 12,307,692 shares of common stock
resulting in aggregate proceeds of $8.0 million before costs of the transaction.
In addition to the shares of common stock received by the purchasers, the
purchasers received warrants to purchase an additional 6,153,846 shares of
common stock at $.72 per share, subject to adjustment from time to time for
stock splits, stock dividends, distributions or similar transactions. The
warrants are exercisable at any time before January 30, 2009. The shares of
common stock were issued to 50 accredited investors in a private placement
exempt from registration under Section 4(2) of the Securities Act of 1933 and
Rule 506 under Regulation D thereunder. In connection with the transaction, we
paid compensation of $480,000 and issued warrants to purchase 369,230 units at
$.65 per unit (each unit consisting of one share of our common stock and a
warrant to purchase one-half of an additional share of common stock at $.72 per
share). The compensation was divided equally between C.E. Unterberg, Towbin, LLC
and Emerging Growth Equities, Ltd., who served as our agents in connection with
the private placement.
As of February 10, 2004, the 12 holders of our previously issued
convertible notes converted their notes into 15,353,868 shares of our common
stock as a requirement of the private placement of equity securities described
above. The conversion price was $.25 per share based on the terms of the
convertible notes as amended. The exchange of convertible notes for shares of
common stock was exempt from registration under Section 3(a)(9) of the
Securities Act of 1933 as no commission or other remuneration was paid or given
directly or indirectly for soliciting the exchange.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Form of Warrant issued to equity investors as of January 30, 2004 (1)
10.1 Securities Purchase Agreement dated January 30, 2004 (2)
10.2 Employment Agreement dated January 26, 2004, between Kent Heyman and
the Company (1)
10.3 Employment Agreement dated January 26, 2004, between Scott Schwartzman
and the Company (1)
10.4 Restricted Stock Agreement dated January 26, 2004, between Kent Heyman
and the Company (1)
10.5 Restricted Stock Agreement dated January 26, 2004, between Scott
Schwartzman and the Company (1)
10.6 2004 Executive Compensation Plan for Kent Heyman (1)
10.7 2004 Executive Compensation Plan for Scott Schwartzman (1)
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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
(1) Incorporated by reference to our Annual Report on Form 10-K for the
year ended December 31, 2003.
(2) Incorporated by reference to our Current Report on Form 8-K filed on
February 2, 2004.
(b) Reports on Form 8-K
We filed a Form 8-K on January 21, 2004 to report the Company's projected
results of operations for the year ended December 31, 2004.
We filed a Form 8-K on January 28, 2004 to report the Company's results of
operations for the quarter and year ended December 31, 2003.
We filed a Form 8-K on February 2, 2004 to report the Company's private
placement of equity securities on January 30, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SERVICEWARE TECHNOLOGIES, INC.
Date: May 13, 2004 By: /s/ SCOTT SCHWARTZMAN
----------------------------
Scott Schwartzman
Principal Financial Officer
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